Edwin A. Helwig - Page 15

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          should be claimed.  Snacks had a negative net worth for its 1991             
          and 1992 years of $2,107,158 and $2,571,348, respectively.                   
          Snacks’ negative net worth was steadily increasing throughout the            
          period under consideration.  The remaining $650,000 in                       
          outstanding notes was sold to the accountant, in a transaction               
          for convenience, for $1,000 during the 1993 year.  Also in 1993,             
          petitioner sold his stock holdings in Snacks for $5,000 to the               
          accountant and claimed a $100,000 capital loss deduction.  At                
          that time, petitioner owned about 80 percent of Snacks.                      
               Respondent’s focus with respect to the worthlessness                    
          question concerns the fact that K&H continued to make advances               
          during the 1991 and 1992 period for which bad debt loss                      
          deductions were claimed.  Relying on two memorandum opinions of              
          this Court, respondent argues that continued extension of credit             
          is not consistent with the claim of worthlessness.  One of those             
          opinions involved a taxpayer who was reselling a substantial                 
          percentage of its purchases to an insolvent customer.  In that               
          case, the holding that the taxpayer was not entitled to claim                
          partial worthlessness was based on the fact that the customer was            
          deeply insolvent and that its situation did “worsen markedly,”               
          and the taxpayer continued to sell a significant amount of                   
          merchandise (extend credit) to the customer.  See Veego Foods,               
          Inc. v. Commissioner, T.C. Memo. 1958-203.  The other opinion                


Last modified: May 25, 2011