                        T.C. Memo. 2006-195



                      UNITED STATES TAX COURT



      ABC BEVERAGE CORP., f.k.a. BEVERAGE AMERICA, INC.,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14868-02.            Filed September 11, 2006.



     Ronald G. Dewaard and Kaplin S. Jones, for petitioner.

     Lawrence C. Letkewicz and David Flassing, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     KROUPA, Judge:   Respondent determined a $5,169,946

deficiency in petitioner’s Federal income tax for 1995 by denying

petitioner a $10 million partial bad debt deduction under section
                                   - 2 -

166.1       After concessions,2 we must determine whether $10 million

of an $18 million debt became worthless in 1995.

                              FINDINGS OF FACT

        Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.       Petitioner’s principal place of

business was Northlake, Illinois, at the time it filed the

petition.

        The issue in this case arose as a management group attempted

to respond quickly to a changing business environment in the

bottling industry.       As background, we explain the bottling

industry in general and the economic environment in which it

existed.

Bottling Industry

        The soft drink bottling business around 1986 consisted of

the "big three."       There were two well-known titans, Coke and

Pepsi, and a third quasi-independent network that encompassed all

other beverages.       Independent beverage labels at that time

included drinks like Squirt, Dr. Pepper, 7-Up, Burns, and certain

"new age" drinks.       The independent bottling network was also


        1
      All section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
        2
      The parties have resolved all other issues raised in the
deficiency notice and the petition.
                                - 3 -

two-tiered in the sense that there were independent concentrate

makers and independent bottling facilities, each usually owned

separately yet dependent upon one another.

Economic Landscape

     The bottling industry began to realign fundamentally around

1986 as Coke and Pepsi vertically integrated their bottling

businesses by buying their bottling facilities.   Coke and Pepsi

could then produce, bottle, and distribute their own beverages

without independent bottlers.

     This marked an important departure from the bottling

business of the past when bottling facilities could contract with

Coke or Pepsi to exclusively bottle and distribute their drinks

in a given geographic region.   Independent bottling companies

lost that resource after Coke and Pepsi vertically integrated and

pressured the independent bottling companies to sell their

franchise rights to Coke or Pepsi.

     In addition, 1986 was the heyday of the leveraged buyout

(LBO) era, in which investors were scouring the country for high

cashflow industries.   The bottling industry with its fairly high

cashflow business was an attractive industry for an LBO.

Bottlers

     One LBO opportunity in the bottling industry arose when

Philip Morris, Inc. chose to exit the soft drink bottling

business.   The managers of this bottling business (the management
                                 - 4 -

group) saw an opportunity to buy the business they had been

managing in an LBO.    Although several other competing groups also

sought to buy the bottling business, the management group

assembled its financing sooner than the competitors and purchased

the company, Mid-Continent Bottlers, Inc. (Bottlers), a

subsidiary of Philip Morris, Inc., in 1986.

     Bottlers was an independent soft drink bottling business in

the Midwest, operating primarily in Iowa, Nebraska, and portions

of Illinois, Kansas, and Missouri.       Bottlers bottled mainly for

Cadbury.    In fact, Cadbury was about 90 percent of Bottlers’

business.    Cadbury maintained considerable control over Bottlers’

ability to transfer its franchise agreements to bottle for

Cadbury to other parties.    These franchise agreements were key to

Bottlers’ business and among its most valuable assets.

Financing the Leveraged Buyout

     The management group used an LBO to finance the purchase of

Bottlers from Philip Morris, Inc.    Once the LBO was completed,

the management group, consisting of seven executives, owned less

than 40 percent of Bottlers.

     The financing for the transaction took several forms.      Not

all of the financing was on the most advantageous terms because

of certain business exigencies.    For example, the management

group was anxious to acquire an ownership interest in Bottlers

rather than remain employees, and the management group was under
                               - 5 -

a tight timetable to complete their financing before competing

bidders could.

The Lease

     One portion of the LBO financing was both a capital

contribution and asset financing from a sale-leaseback entity

called Corporate Property Associates 7 (CPA7).   In this LBO

financing arrangement, CPA7 agreed to purchase the bottling

facilities Bottlers used to bottle its products (located in seven

locations in three States) and lease them to Bottlers on terms

favorable to CPA7.   The lease had a 25-year term and contained

significant rent escalators.   As a result, the lease offered a

premium to CPA7 because it would eventually rent at premium or

above-market rates as the rent escalated.

     Because of the onerous lease provisions, the management

group knew Bottlers eventually had to renegotiate or buy out the

lease to avoid the rent escalators.    Six years after the LBO, the

management group was considering buying the bottling facilities

from CPA7 to avoid further rent escalators, but the prospect of

Bottlers owning the bottling facilities posed three problems.

     First, the management group wanted Bottlers to be salable to

Coke or Pepsi.   Neither Coke nor Pepsi, however, would buy

Bottlers if it owned bottling facilities because Coke and Pepsi

already had bottling facilities.
                               - 6 -

     Second, Cadbury had the contractual right to disapprove any

sale of Bottlers’ franchise rights.    Cadbury insisted the

franchise rights be sold only to Coke or Pepsi so that Cadbury

products would be placed in Coke or Pepsi vending machines.

     Third, buying the bottling facilities would cause friction

with Bottlers’ limited partners.   Around 1989, Bottlers replaced

some of its original LBO financing by selling equity interests in

a limited partnership to approximately 50 independent investors.

The limited partners and the management group had different views

on how to run Bottlers.   The limited partners wanted an early

high return, while the management group emphasized long-term

growth.   These divergent views led to many heated communications,

threats, and a proxy fight.

     The management group decided, given these internal and

external business reasons, that it was best to lease the

facilities rather than own them outright.    The management group

wanted a third party to buy the bottling facilities from CPA7,

assume the lease, and then renegotiate the lease to remove the

rent escalators.

A Buyer

     Bottlers identified G&K Properties, Inc. (G&K) as a

potential buyer that would lease the facilities to Bottlers on

renegotiated (and more favorable) terms.    G&K was an unrelated

Iowa real estate development company with which Bottlers had
                                 - 7 -

previously worked.   G&K was interested in expanding its real

estate holdings by buying the facilities.    G&K and Bottlers

drafted a letter of intent formalizing G&K’s intent to purchase

the bottling facilities for approximately $18 million.    G&K had

identified a life insurance company in Davenport, Iowa, as a

potential source of financing but needed time to work out the

details.

     While G&K was obtaining the necessary financing, the

management group worked on avoiding the rent escalators in the

CPA7 lease and approached CPA7 regarding a sale.    Initially CPA7

requested $22 million for the bottling facilities, but Bottlers

and CPA7 ultimately agreed on a $17.8 million price.    To lock in

the $17.8 million price tag and avoid further rent escalators,

the management group found a short-term, interim solution to give

G&K the time it needed to obtain the financing.    The management

group decided to create a third-party company to own the assets

temporarily until G&K’s financing came through.

     Neither Bottlers nor CPA7 appraised the underlying

facilities during their negotiations.    Instead, the lease

payments drove the price, which was based on the present value of

the future stream of payments.    Bottlers recognized that this

price included a premium over fair market value because of the

unfavorable lease terms.   The management group knew it needed to
                                - 8 -

act quickly to complete the deal and to avoid further escalations

of rent.

The Purchase

     The management group formed an unrelated entity called

Mid-Con Properties, Inc. (Properties) as a short-term solution to

buy the bottling facilities from CPA7 in 1994.     The management

group owned 100 percent of Properties.

     To fund the purchase, Bottlers obtained a loan from one of

its original LBO investors, the Prudential Life Insurance Company

(Prudential).   Bottlers lent the loan proceeds to Properties (the

Properties loan) on the same terms Bottlers had with Prudential.

Properties then used the proceeds to buy the facilities from CPA7

and assumed the lease.    The bottling facilities collateralized

the loan from Bottlers.

     Properties and Bottlers amended the lease to remove the rent

escalators and implemented a rent payment structure equaling the

amounts due on the Properties loan.     Accordingly, Bottlers

periodically paid Properties rent payments, and Properties paid

Bottlers loan payments at the same times.     Bottlers’ rent

payments equaled Properties’ loan payments.     No cash needed to be

transferred between Properties and Bottlers for them to satisfy

their respective loan and lease obligations to each other.      This

zero net cashflow effect was an essential part of the deal to

satisfy Prudential that the payments Bottlers made to Properties
                                - 9 -

(of rent) would return to Bottlers when Properties made payments

to Bottlers (of loan repayment), and Properties could not divert

any cash to other uses.    Prudential approved the loan on these

terms.

     Petitioner and respondent stipulated that Properties’

purchase of the bottling facilities from CPA7 was not motivated

in any significant way by tax considerations and that Bottlers

and Properties were not related parties under the Code.

     The management group had a reasonable expectation that G&K

would acquire the necessary financing to purchase the facilities

to satisfy the loan or that the loan would be repaid through

rental income.    They expected that once the transaction with G&K

closed and G&K paid the $18 million purchase price to Properties,

Properties would pay Bottlers the balance due on the Properties

loan, and Bottlers would pay Prudential the balance due on its

loan.    The parties intended that Properties would be liquidated

once G&K bought the facilities.

     The management group continued working with G&K through the

end of 1994, when the first full payment of principal and

interest on the Properties loan was due.    Given the short-term

solution that creating Properties was intended to be, the

management group decided Bottlers should not make full lease

payments to Properties.    Bottlers paid only enough so that

Properties could pay interest on the Properties loan, not the
                               - 10 -

principal.   Properties’ bookkeeping entries reflected Bottlers’

failure to pay the full amount of rent and Properties’

corresponding failure to repay principal on the loan.

     The management group had not anticipated that it would take

G&K so long to obtain the financing.    Given this delay, the

management group decided not to pay the full amount of rent for

two reasons.   First, they were concerned that paying the portion

of the rent corresponding to the principal Properties owed would

enable Properties, which was owned by the management group, to

build equity in the facilities, which might alarm the limited

partners.    Second, the important net zero cashflow effect of the

transaction would be destroyed if Bottlers paid Properties the

rent corresponding to the principal.    Properties would have an

interest deduction for the portion of the rent corresponding to

the interest but no deduction for the portion of the rent

corresponding to the principal.   Properties would therefore have

net income and would be exposed to income tax.

Buyer Financing Collapses

     Unexpectedly, G&K’s purchase of the bottling facilities fell

through in early 1995.   The insurance company G&K expected to

provide the bulk of the financing was unable to complete the

deal.   Bottlers searched fruitlessly for alternate buyers.
                               - 11 -

Brooks Beverage Transaction

     Brooks Beverage approached Bottlers regarding a business

combination shortly after the G&K financing fell through.    Brooks

Beverage was interested in combining with Bottlers for several

reasons.   Brooks Beverage wanted to consolidate its position as a

large independent bottler.    It also preferred that Bottlers not

be sold piecemeal to Coke or Pepsi, which might fragment the

independent bottling network further.    In addition, unbeknownst

to Bottlers, Cadbury had already approved Brooks Beverage’s

proposed combination with Bottlers.     Combining the companies made

logistical sense as well because Bottlers served a different

geographic region than Brooks Beverage, and Brooks Beverage,

therefore, could reach a larger geographic region by combining

with Bottlers.    Moreover, Bottlers was the third largest

independent bottling company in the country, and Brooks Beverage

was the second.    The two companies, when combined, would offer

synergies and economies of scale and would help fortify the

entire independent bottling industry.    Bottlers agreed to the

proposed transaction.

     Brooks Beverage acquired all the stock of Bottlers for $48.5

million in 1995.    The resulting new company was called Beverage

America, Inc. (BevAm) (now ABC Beverage Corp.).    The management

group received stock in BevAm and accepted executive positions

with BevAm in the transaction.
                               - 12 -

Post-Combination

     After the entities combined, BevAm conducted appraisals of

all the bottling facilities.   The facilities were appraised for

approximately $8 million based on their fee-simple (not

lease-fee) value.    BevAm’s accounting firm advised BevAm that it

had a potential worthless debt because the collateral securing

the debt was worth less than the debt.   In addition, the

accounting firm noted that Properties had not been making full

loan payments to Bottlers (because Bottlers had not been making

full rent payments to Properties), and Properties was therefore

in default.

     In addition, BevAm preferred to own the facilities outright

for three reasons.   First, BevAm wanted the flexibility to make

certain changes to the facilities without lease restrictions.

Second, BevAm did not want certain members of the management

group owning equity in Properties while others did not.     Third,

the rationale for not owning the bottling facilities (i.e.,

keeping Bottlers salable to Coke or Pepsi) no longer existed

after the BevAm transaction.   For these reasons, BevAm declared

Properties in default, seized the bottling facilities and some

cash in exchange for releasing Properties from the loan, and

deducted the difference between the value of the assets ($8

million) and the unpaid principal on the Properties loan ($18

million) on its consolidated return for 1995.
                              - 13 -

     Respondent issued petitioner a deficiency notice denying the

$10 million partial bad debt deduction for 1995.     Petitioner

timely filed a petition.

                              OPINION

     The issue in this case arose in the context of a fast-paced

and changing business environment.     While the management group

made the best business decisions under the circumstances at the

time, exigent circumstances beyond the management group’s control

caused the management group not to be able to achieve their

goals.   We are now called upon, more than 10 years later, to

decide the tax consequences of these business decisions.

     The parties stipulated that the parties were not related

under the Code and that there was no tax motivation underlying

the transaction between Bottlers and Properties.     The parties

also stipulated that Bottlers had a reasonable expectation that

the Properties loan would be repaid.     Respondent does not

challenge the substance of the transaction.

     The issue before us, put simply, is whether petitioner is

entitled to deduct a portion of the debt, $10 million, because it

was partially worthless.3   More broadly speaking, we are asked to




     3
      Petitioner has the burden of proof because the examination
commenced before July 22, 1998, the effective date of sec. 7491.
See Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
                               - 14 -

decide whether a creditor may deduct a bad debt where the

creditor’s actions contributed to the debtor’s default.

     We proceed by explaining the general legal principles

surrounding partial bad debt deductions under section 166(a)(2).

We then analyze and distinguish a Court of Federal Claims case

concerning a similar issue.

General Rules Under Section 166

     Whether a debt has become partially worthless is a facts and

circumstances determination.   Sec. 166(a)(2); sec. 1.166-2(a),

Income Tax Regs.   A taxpayer can establish worthlessness by

showing that a debt has neither current nor potential value.

Dustin v. Commissioner, 53 T.C. 491, 501 (1969), affd. 467 F.2d

47 (9th Cir. 1972).

     Though the Commissioner’s determination is generally

presumed correct, the Commissioner must reasonably exercise his

discretion.   Brimberry v. Commissioner, 588 F.2d 975, 977 (5th

Cir. 1979), affg. T.C. Memo. 1976-209; Portland Mfg. Co. v.

Commissioner, 56 T.C. 58, 72 (1971), affd. on other grounds 35

AFTR 2d 75-1439, 75-1 USTC par. 9449 (9th Cir. 1975).   The

Commissioner’s exercise of discretion regarding a bad debt should

not be reversed unless it is plainly arbitrary and unreasonable.

Ark. Best Corp. & Subs. v. Commissioner, 800 F.2d 215, 221 (8th

Cir. 1986), affg. in part and revg. in part 83 T.C. 640 (1984),

affd. on other grounds 485 U.S. 212 (1988); Brimberry v.
                              - 15 -

Commissioner, supra; Findley v. Commissioner, 25 T.C. 311, 318

(1955), affd. 236 F.2d 959 (3rd Cir. 1956).

     Whether a bad debt deduction is proper must be analyzed

according to "reasonableness, commonsense and economic reality."

Scovill Mfg. Co. v. Fitzpatrick, 215 F.2d 567, 570 (2d Cir. 1954)

(quoting Belser v. Commissioner, 174 F.2d 386, 390 (4th Cir.

1949), affg. 10 T.C. 1031 (1948)).     In addition, the

Commissioner’s discretion is not absolute, and the Commissioner

cannot ignore the sound business judgment of a corporation’s

officers.   Portland Mfg. v. Commissioner, supra at 73 (upholding

a partially worthless debt deduction where corporate officers

concluded that the debtor had no value as a going concern, and

corporation could recover only the value of the debtor’s assets).

     All pertinent evidence is considered in determining

worthlessness.   See sec. 1.166-2, Income Tax Regs.    The evidence

to be considered includes the value of the collateral securing

the debt and the financial condition of the debtor.       Sec. 1.166-

2(a), Income Tax Regs.   Legal action to enforce payment is not

required where the surrounding circumstances indicate that a debt

is worthless and legal action would likely not result in

satisfactory relief.   Sec. 1.166-2(b), Income Tax Regs.     A debt

has been found not to be worthless where the debtor is a going

concern with the potential to earn a future profit.       Liggett’s
                              - 16 -

Estate v. Commissioner, 216 F.2d 548, 549-50 (10th Cir. 1954),

affg. a Memorandum Opinion of this Court.

     A taxpayer must generally show that identifiable events

occurred to render the debt worthless during the year in which

the taxpayer claimed the deduction.      Am. Offshore, Inc. v.

Commissioner, 97 T.C. 579, 593 (1991).     Some objective factors

include declines in the value of property securing the debt, the

debtor’s earning capacity, events of default, the obligor’s

refusal to pay, actions the obligee took to pursue collection,

subsequent dealings between the obligee and obligor, and the

debtor’s lack of assets.   Id. at 594.    No single factor is

conclusive.   Id.

     Petitioner has shown that a series of specific, identifiable

events occurred during 1995 that, when taken together, rendered

the Properties loan worthless.   See id. at 593.     The most

important of these events was the failure of the expected source

for repayment of the Properties loan, the G&K purchase.     Bottlers

anticipated that Properties would own the bottling facilities for

only a short time while G&K prepared to buy them.     When G&K could

no longer buy the facilities, the structure became untenable.

     Another event that contributed to the worthlessness of the

Properties loan was that Bottlers opted not to pay Properties a

portion of the rent for valid business reasons, rendering it

impossible for Properties to pay Bottlers the principal on the
                              - 17 -

loan because it did not have the cashflow.4   Third, soon after

Bottlers learned that G&K would not be able to purchase the

facilities, Bottlers combined with Brooks Beverage to become

BevAm, and the Properties structure no longer was necessary.

Finally, an appraisal revealed the bottling facilities were worth

just under $8 million.   These specific, identifiable events

combined to result in the worthlessness of the Properties loan in

1995.

     Respondent argues that Properties was a going concern with

potential value in 1995 and that therefore, the Properties loan

was not partially worthless during that year.   See Crown v.

Commissioner, 77 T.C. 582 (1981); Findley v. Commissioner, 25

T.C. at 318.   Respondent argues that Properties had sufficient

income and/or sufficient assets to satisfy its loan obligations.

Respondent sets forth several ways in which Properties could have

met its obligations.   For example, respondent argues that


     4
      Respondent argues that there is no evidence that Bottlers
failed to pay Properties the full amount of rent due on the
lease. We disagree. We found the testimony of Mr. Trebilcock,
the chairman and president of Bottlers, to be credible on this
point. Petitioner also introduced Properties’ accounting records
as evidence that Bottlers did not pay the full amount of rent for
1994 and 1995. Moreover, had Bottlers paid Properties the full
amount of rent, Properties eventually might have not had the cash
to pay Bottlers the principal on the Properties loan anyway
because Properties might be required to pay taxes on the rental
income it received from Bottlers, depleting its cash. This cash
depletion was precisely what the management group was attempting
to avoid by having Bottlers pay Properties only a portion of the
rent due.
                                - 18 -

Properties could have exercised its rights under the lease to

cause Bottlers to buy the facilities when Bottlers failed to pay

the full amount of rent.     Respondent further argues that

Properties could have found another third party to buy the

facilities.

        Respondent’s focus on the theoretical possibilities of what

might occur does not give sufficient credence to the realities of

the business environment.     See Portland Mfg. Co. v. Commissioner,

56 T.C. at 72.     One of respondent’s theoretical suggestions, for

example, is that Properties should have caused Bottlers to buy

the facilities once Bottlers failed to pay the full amount of

rent.     This decision would not have been in the best interests of

Bottlers, and the management group, owing fiduciary duties to

Bottlers, would not have made it.    There were also no other

third-party buyers for the bottling facilities, although

respondent suggests other actions Bottlers should have taken to

seek them.     The management group searched fruitlessly for other

third parties when the G&K deal collapsed.

      While the management group may have made other choices if

they had the benefit of hindsight, they did what they thought was

best for Bottlers based on the circumstances at the time.     See

id.     Properties was unable to repay the loan once G&K’s financing

fell through and G&K became unable to purchase the facilities.

Cf. Crown v. Commissioner, supra; Findley v. Commissioner, supra.
                                - 19 -

The structure of the transactions ensured that there was no

source of funds for Properties.     Respondent’s hypothesizing over

what could or should have been done ignores the realities of the

business and is unreasonable.     Respondent’s determination that

the Properties loan was not worthless in 1995 therefore was

arbitrary, unreasonable, and an abuse of discretion.

     We find that the Properties loan was partially worthless in

1995.

Bad Debt Deduction Where Creditor’s Actions Contribute to
Worthlessness

        We next consider whether petitioner may deduct the

Properties loan as partially worthless although the legitimate

business decisions of petitioner’s predecessor, Bottlers,

contributed to the worthlessness of the Properties loan.

Respondent argues that Bottlers failed to pay the full amount of

rent, which, in turn, caused Properties to be unable to repay the

loan.     Respondent argues that petitioner is therefore not

entitled to the deduction.     We disagree.   Petitioner’s legitimate

business decisions contributing to the worthlessness of the

Properties loan do not preclude the bad debt deduction.

        It is well settled that certain actions of a creditor do

preclude bad debt deductions.     For example, a taxpayer may not

voluntarily release a solvent debtor and then claim a deduction

for a worthless debt.     Roth Steel Tube Co. v. Commissioner, 620

F.2d 1176 (6th Cir. 1980), affg. 68 T.C. 213 (1977); Am. Felt Co.
                                - 20 -

v. Burnet, 58 F.2d 530, 532 (D.C. Cir. 1932), affg. 18 B.T.A. 504

(1929).    A creditor who voluntarily relinquishes valuable

collateral provided by a solvent debtor also may not deduct the

debt as worthless.     O’Bryan Bros. v. Commissioner, 127 F.2d 645,

646 (6th Cir. 1942), affg. 42 B.T.A. 18 (1940).

     Neither party was able to point us to a case directly on

point.    Respondent relies on a recent Court of Federal Claims

decision indicating that a taxpayer may not deduct a worthless

debt where the taxpayer’s actions, standing alone, have made the

debt uncollectible.    PepsiAmericas, Inc. v. United States, 52

Fed. Cl. 41 (2002).    Respondent argues that we should extend the

reasoning of PepsiAmericas to this case to hold that petitioner

may not deduct a portion of the Properties loan as a worthless

debt because Bottlers contributed to its worthlessness by failing

to pay Properties the full amount of rent.

     In PepsiAmericas, the taxpayer made a loan to its ESOP,

terminated the ESOP, and tried to deduct the amount the ESOP owed

as a worthless debt.    Id.   The court held the taxpayer could not

deduct the amount lent to the ESOP as a worthless debt because

the taxpayer’s own conduct caused the worthlessness.     Id. at 48

(citing Roth Steel Tube Co. v. Commissioner, supra at 1181,
                               - 21 -

O’Bryan Bros., Inc. v. Commissioner, supra at 646, and Am. Felt

Co. v. Burnet, supra at 532).5

     PepsiAmericas is not controlling.     There are significant

differences between the facts of PepsiAmericas and the facts

here.    Control is the first major difference.   PepsiAmericas

controlled the entity whose debt it caused to become worthless.

PepsiAmericas, Inc. v. United States, supra.      In contrast,

Bottlers did not control Properties.    While the management group

had some ownership of both entities, the parties stipulated that

the entities themselves were not related.    Bottlers itself could

not control the decisions of Properties, alter the ownership of

Properties, or cause Properties to take any actions whatsoever

other than under the lease and the loan.

     The cause of the worthlessness is the second major

difference.    While PepsiAmericas terminated its ESOP and thus

unilaterally caused the ESOP to be unable to pay its debts,

several factors contributed to the worthlessness of the


     5
      The PepsiAmericas and O’Bryan cases broadly interpret other
cases involving this issue. See PepsiAmericas, Inc. v. United
States, 52 Fed. Cl. 41, 48 (2002) (citing Roth Steel Tube Co. v.
Commissioner, 620 F.2d 1176, 1181 (6th Cir. 1980), affg. 68 T.C.
213 (1977); O’Bryan Bros. v. Commissioner, 127 F.2d 645, 646 (6th
Cir. 1942), affg. 42 B.T.A. 18 (1940); and Am. Felt Co. v.
Burnet, 58 F.2d 530, 532 (D.C. Cir. 1932), affg. 18 B.T.A. 504
(1929)). A narrower interpretation is that a creditor cannot
release a solvent debtor and then claim a deduction for a
worthless debt. Roth Steel Tube Co. v. Commissioner, supra;
O’Bryan Bros. v. Commissioner, supra; Am. Felt Co. v. Burnet,
supra.
                              - 22 -

Properties loan.   See id. at 45.   The key contributing factor to

Properties’ inability to repay the loan was G&K’s failure to

obtain financing, wholly out of the control of Bottlers.

Properties anticipated that G&K would purchase the bottling

facilities, but ultimately G&K could not.   While Bottlers’

failure to pay the full amount of rent due contributed to the

worthlessness of the loan,6 other factors contributed as well.

These two significant differences convince us that it would be

inappropriate to follow PepsiAmericas here.

     We also decline respondent’s invitation to articulate an

absolute rule that a taxpayer may never deduct a debt as

worthless if the taxpayer contributed to the worthlessness.     We

find that legitimate business decisions contributing to the

worthlessness of a debt do not preclude a bad debt deduction in

these circumstances.   Cf. PepsiAmericas, Inc. v. United States,

supra at 48.   Accordingly, we find that petitioner may deduct the

worthless portion of the Properties loan notwithstanding that

Bottlers’ actions contributed to its worthlessness.




     6
      Even if Bottlers had paid the full amount of the rent due
under the lease, Properties still might have been unable to
satisfy its obligations under the loan without a third party
purchasing the bottling facilities. Properties would not be able
to deduct principal payments it paid Bottlers on the loan and
would thus have more income than deductions, giving rise to
income tax liability. This liability would ruin the net zero
cashflow effect of the deal and would cause Properties to be
unable to repay the loan.
                              - 23 -

Conclusion

     Petitioner may deduct $10 million as a worthless debt in

1995.   The Properties loan was partially worthless in 1995

because identifiable events occurred during that year that made

it certain that Properties would be unable to repay it.

Respondent’s determination to the contrary was unreasonable and

an abuse of discretion.   Although petitioner’s predecessor,

Bottlers, may have contributed to the worthlessness of the

Properties loan, this action does not preclude petitioner from a

bad debt deduction where other major business factors contributed

to the worthlessness.

     In reaching our holding, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing and the concessions of the parties,


                                          Decision will be entered

                                      under Rule 155.
