                          T.C. Memo. 1998-162



                      UNITED STATES TAX COURT



    EMHART CORPORATION & DOMESTIC SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20025-95.                        Filed May 5, 1998.



     Herbert Odell, Joel C. Weiss, Samuel M. Maruca, and Philip

Karter, for petitioner.

     Richard H. Gannon and Linda A. Love, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   Respondent determined a $369,046 deficiency

in petitioner's 1984 Federal income tax.    The issue for decision

is whether petitioner's stock in United Shoe Machinery Portugal

(USMP) became worthless in 1984.    We hold that it did.   All
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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.

                         FINDINGS OF FACT

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

the time it filed its petition, petitioner's principal place of

business was in Towson, Maryland.

     Petitioner filed a consolidated Federal income tax return

for 1984, on which it claimed an ordinary loss of $802,273

relating to the sale of its USMP stock.     During and prior to

1984, USMP imported, manufactured, and marketed shoe materials;

imported, refurbished, marketed, and serviced shoe machinery; and

manufactured cutting dies for footwear and textile industries.

USMP resold machinery and materials produced by petitioner and

its subsidiaries, and consequently, USMP's costs of goods sold

consisted largely of purchases from such entities.

     From 1980 through 1983, USMP's sales rapidly declined, while

its operating expenses rose.   USMP's inability to reduce expenses

largely was due to labor costs.    Approximately 75 to 80 percent

of the company's expenses were attributable to wages and

salaries.   Under Portuguese law, employers who terminated

employees without cause were required to pay such employees at

least 3 months' severance pay for each year they had worked for

their employer.   USMP attempted to reduce its labor costs by
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offering its employees up to 3 years' severance pay if they left

the company.   No employees accepted the offer, however, because

no other jobs were available.

     In 1982, petitioner contributed to USMP $261,000 of

additional capital by converting into equity a comparable amount

of payables that USMP owed petitioner.      Despite this cash

infusion, USMP continued to fall behind in paying for goods

purchased from petitioner and its subsidiaries.      Although

petitioner was unwilling to advance additional cash, it agreed to

extend USMP's payables beyond the 60 days in which members of the

consolidated group generally paid one another for merchandise.

Petitioner extended the payables again in 1983.

     Despite these remedial measures, USMP's financial condition

worsened and such deterioration was exacerbated by an unstable

political climate and extreme inflation.      USMP's net income or

loss, converted from Portuguese escudos to U.S. dollars, was a

follows:

       1980            1981                1982          1983

     $40,207         $52,107            ($113,917)    ($117,278)

As of December 31, 1983, USMP had a net worth (i.e., assets minus

liabilities) of negative $35,371.

     As a result of USMP's decline in sales revenue, petitioner's

inability to reduce USMP's expenses, and USMP's substantial

losses in 1982 and 1983, petitioner concluded in early 1984 that
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it should either liquidate or sell USMP.    Petitioner estimated

that its losses upon liquidation would be $495,000, including

$148,000 as the estimated cost of discharging employees under

Portuguese labor laws.   Faced with these costs, petitioner

decided to sell USMP even if USMP had to be sold for nominal or

no consideration.

     On October 24, 1984, petitioner sold all of its USMP stock

to a group of Portuguese businessmen in exchange for 1,000

escudos ($6.17) and petitioner's waiver of $110,000 in payables

that USMP owed petitioner.   The buyers personally guaranteed

payment of the remaining payables that USMP owed petitioner.

These liabilities were valued at approximately $220,000.    At the

time of the sale, petitioner's basis in the USMP stock was

$802,273.

     On its balance sheet dated October 25, 1984, USMP reported a

net worth of 4,743,000 escudos ($29,501).    The balance sheet

included a reduction in current liabilities of 17,685,000 escudos

to reflect petitioner's forgiveness of the $110,000 payables.

Without this reduction, USMP's net worth was negative 12,942,000

escudos ($80,499).

                              OPINION

     The sole issue is whether petitioner's USMP stock became

worthless in 1984.   If so, both parties agree that section 165

entitles petitioner to an ordinary loss equal to its adjusted
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basis in its USMP stock.   Sec. 165(g)(3).    To prevail, petitioner

must establish that its USMP stock ceased to have both

"liquidating value" and "potential value" during the year in

which the worthlessness is claimed.      Austin Co. v. Commissioner,

71 T.C. 955, 970 (1979); Steadman v. Commissioner, 50 T.C. 369,

376 (1968), affd. 424 F.2d 1 (6th Cir. 1970); Morton v.

Commissioner, 38 B.T.A. 1270, 1278 (1938), affd. 112 F.2d 320

(7th Cir. 1940).

     A corporation does not have a liquidation value if the value

of its liabilities exceeds the value of its assets.      Steadman v.

Commissioner, supra at 376-377.    On the day after the sale, USMP

reported a net worth of $29,501.    This figure, however, included

a reduction for petitioner's waiver of $110,000 in current

liabilities.   Thus, before the sale, USMP had a negative net

worth of $80,499.   Therefore, we conclude that in 1984 when

petitioner sold and claimed a deduction relating to its USMP

stock, such stock had no liquidating value.

     A loss of potential value is ordinarily established by the

occurrence of an "identifiable event" that destroys any

reasonable expectation that the assets will exceed the

liabilities in the future.   Id. at 376.     An identifiable event

includes the sale of property.    See, e.g., United States v. S.S.

White Dental Manufacturing Co., 274 U.S. 398, 401 (1927); Proesel

v. Commissioner, 77 T.C. 992, 1005 (1981).     Respondent contends

that at the time of the sale USMP had potential value because the
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buyers personally guaranteed $220,000 in payables that USMP owed

petitioner.   Respondent ignores, however, that the buyers

received assets that were nearly equivalent to the liabilities

that they guaranteed.   Moreover, the buyers guaranteed

liabilities that were already owed petitioners, and USMP would

have been insolvent in the buyers' hands but for petitioner's

waiver of $110,000 in payables.    After USMP experienced declining

sales revenue, high and uncontrollable labor costs, and 2

consecutive years of net losses, petitioner accepted the nominal

sum of $6.17 and relinquished its right to $110,000 in payables

for which USMP was liable.   In essence, petitioner paid the

buyers to take USMP.

     Respondent also contends USMP had potential value, because

the buyers continued to operate the company.    The continued

operation of a corporation, however, does not by itself establish

value in stock.    Steadman v. Commissioner, supra at 378.

Therefore, we conclude that in the year of sale, the stock had no

potential value.   Accordingly, we hold that petitioner's USMP

stock became worthless in 1984.

     All other contentions made by the parties are either

irrelevant or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioner.
