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loss. If the assets of the corporation exceed its
liabilities, the stock has a liquidating value. If its
assets are less than its liabilities but there is a
reasonable hope and expectation that the assets will
exceed the liabilities of the corporation in the
future, its stock, while having no liquidating value,
has a potential value and can not be said to be
worthless. The loss of potential value, if it exists,
can be established ordinarily with satisfaction only by
some “identifiable event” in the corporation’s life
which puts an end to such hope and expectation.
There are, however, exceptional cases where the
liabilities of a corporation are so greatly in excess
of its assets and the nature of its assets and business
is such that there is no reasonable hope and
expectation that a continuation of the business will
result in any profit to its stockholders. In such
cases the stock, obviously, has no liquidating value,
and since the limits of the corporation’s future are
fixed, the stock, likewise, can presently be said to
have no potential value. Where both these factors are
established, the occurrence in a later year of an
“identifiable event” in the corporation’s life, such as
liquidation or receivership, will not, therefore,
determine the worthlessness of the stock, for already
“its value had become finally extinct.” [Citations
omitted.]
Thus, as in the case of a bad debt deduction due to the
worthlessness of a debt, the taxpayer must show an absence of
potential as well as liquid value by yearend in order to sustain
a worthless stock loss.
B. Analysis
In support of their entitlement to a 1997 worthless stock
loss, petitioners point to the same “identifiable events” that
they relied upon in support of their claimed bad debt deduction:
the joint bankruptcies, the alleged insolvency as of December 31,
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