                         T.C. Memo. 2002-154



                       UNITED STATES TAX COURT



                    JOHN FAVIA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9585-00.              Filed June 18, 2002.



     Lawrence A. Chez and Edward B. Chez, for petitioner.

     Patricia Pierce Davis, for respondent.



                         MEMORANDUM OPINION


     SWIFT, Judge:    For 1994, respondent determined a deficiency

in petitioner’s Federal income tax and an accuracy-related

penalty as follows:


                                  Accuracy-Related Penalty
       Year    Deficiency                Sec. 6662(a)
       1994     $105,336                   $21,067
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the issue for decision is whether

petitioner has established that a $100,000 promissory note became

worthless as of the end of 1994.


                            Background

     This case was submitted under Rule 122 on stipulated

exhibits and without a trial.

     At the time the petition was filed, petitioner resided in

Chicago, Illinois.

     On December 31, 1993, petitioner, a securities broker,

entered into a note purchase agreement with Thinking Machines

Corp. (TMC).   In connection with the note purchase agreement,

petitioner provided TMC with $100,000 in cash in exchange for a

$100,000 promissory note from TMC.      Under the terms of the

promissory note, TMC was obligated to pay petitioner interest at

12 percent per year until the $100,000 principal amount of the

promissory note becomes due on the earlier of March 31, 1995, or

on the date of the closing of a public or private stock offering

by TMC.

     TMC was engaged in the design, development, manufacture, and

marketing of high performance supercomputers and related
                               - 3 -

software.   Between 1991 and 1994, TMC had cumulative total

revenues in excess of $289 million.

     On August 17, 1994, however, TMC filed a voluntary petition

for chapter 11 reorganization in the U.S. Bankruptcy Court for

the District of Massachusetts (Bankruptcy Court).

     On TMC’s financial statements filed with the Bankruptcy

Court, TMC listed total outstanding debts of approximately $34

million and total assets of approximately $56 million.

     In July of 1995, petitioner and other creditors of TMC

sought a declaration from the Bankruptcy Court that those

creditors of TMC holding promissory notes from TMC accruing

interest at 6 percent per year should be subordinated to those

creditors of TMC holding promissory notes from TMC accruing

interest at 12 percent per year.

     For its year ending September 30, 1995, TMC reported on its

financial statements $32.9 million in total revenues and $3.3

million in operating profit.

     On February 8, 1996, the Bankruptcy Court confirmed a plan

of reorganization for TMC, and, as part of TMC’s reorganization

plan, a Delaware corporation named OTM was organized as the

successor to TMC.

     As a result of TMC’s plan of reorganization, petitioner

received 2,284 shares of OTM common stock, 914 shares of OTM

series A convertible preferred stock, and 326 OTM warrants for
                                 - 4 -

additional shares of OTM stock.    The $100,000 promissory note

from TMC held by petitioner was canceled.

       As of February 8, 1996, the effective date of TMC’s

reorganization plan, OTM common stock had a per share par value

of $.001, and OTM series A convertible preferred stock had a per

share par value of $10.

       Set forth below is a summary of the securities petitioner

received in cancellation of the $100,000 promissory note from

TMC:


     Securities Received       Shares Received     Par Value
  OTM common stock                  2,284           $     2
  OTM convertible preferred           914             9,140
  OTM stock warrants                  326              --


       With the assistance of a certified public accountant in the

preparation of his 1994 Federal income tax return, petitioner

claimed thereon a $100,000 short-term capital loss relating to

the $100,000 TMC promissory note.

       On audit, respondent determined that the $100,000 TMC

promissory note was not worthless as of the end of 1994, and

respondent disallowed petitioner’s claimed $100,000 short-term

capital loss relating thereto.


                            Discussion

       Generally, a taxpayer owning a security, such as a corporate

promissory note, which constitutes a capital asset is entitled to
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a capital loss in the year in which the security becomes

worthless.    Sec. 165(g).

     A mere shrinkage, however, in the value of a security does

not give rise to a loss deduction for the taxpayer under section

165(a) if, on the date of the claimed loss, the security has any

recognizable value.    Sec. 1.165-4(a), Income Tax Regs.

     The worthlessness and the taxable year in which a security

becomes worthless constitute questions of fact on which

petitioner has the burden of proof.1     Boehm v. Commissioner, 326

U.S. 287, 294 (1945).

     In order for a security to be treated as worthless, the

security is required to have no present or foreseeable value.     In

Morton v. Commissioner, 38 B.T.A. 1270, 1278-1279 (1938), affd.

112 F.2d 320 (7th Cir. 1940), we stated as follows:


                    The ultimate value of stock, and
             conversely its worthlessness, will depend not
             only on its current liquidating value, but
             also on what value it may acquire in the
             future through the foreseeable operations of
             the corporation. Both factors of value must
             be wiped out before we can definitely fix the
             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

1
      The Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added sec.
7491, which in certain circumstances places the burden of proof
on respondent. Sec. 7491 is applicable, however, to court
proceedings arising in connection with examinations commencing
after July 22, 1998. Accordingly, sec. 7491 is inapplicable to
the instant case.
                                - 6 -

            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. [Id.]


       Petitioner claims that by December 31, 1994, the $100,000

TMC promissory note had become worthless.

       The financial statements filed by TMC with the Bankruptcy

Court on August 17, 1994, indicated that as of August 17, 1994,

TMC’s assets exceeded its liabilities.    As of September 30, 1995,

TMC’s financial statements indicated that TMC would have had

sufficient revenues to pay some of its liabilities as they became

due.

       Petitioner has not provided any credible evidence to

establish that the value of TMC’s stated assets was less than

what was reported on TMC’s financial statements or that TMC would

not be able to pay any part of TMC’s liabilities, specifically

the $100,000 promissory note held by petitioner.

       The OTM common stock, the convertible preferred stock, and

the stock warrants that petitioner received had a par value of

approximately $9,000 in February of 1996, indicating some

continuing value as of early 1996 to the $100,000 TMC promissory

note.
                                - 7 -

     Furthermore, the participation by petitioner and by other

creditors of TMC in the bankruptcy litigation in 1995 with regard

to the status of the promissory notes from TMC is indicative that

the $100,000 TMC promissory note did not become worthless at the

end of 1994.

     The evidence before us fails to establish that the $100,000

TMC promissory note was worthless as of the end of 1994.

     Under section 6662, an accuracy-related penalty of 20

percent is imposed on any portion of an understatement of tax

attributable to negligence or to disregard of Federal rules or

regulations.    For purposes of section 6662(a), negligence

constitutes a failure to make a reasonable attempt to comply with

the Internal Revenue Code.    Sec. 6662(c).

     The penalty under section 6662(a) does not apply to any part

of an underpayment if the taxpayer shows reasonable cause and if

the taxpayer acted in good faith with regard to the items giving

rise to the underpayment.    Sec. 6664(c)(1).   Reasonable cause may

be indicated by reliance in good faith on the advice of a tax

professional.    United States v. Boyle, 469 U.S. 241, 250 (1985).

     Based on the limited facts before us in this case, we

conclude that petitioner is not liable for the accuracy-related

penalty under section 6662.
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To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
