                              In the

United States Court of Appeals
               For the Seventh Circuit

No. 07-3593

A LAN B ILTHOUSE and P ATRICIA B ILTHOUSE,

                                                Plaintiffs-Appellants,
                                  v.


U NITED S TATES OF A MERICA,
                                                 Defendant-Appellee.


             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
             No. 05 C 4442—Virginia M. Kendall, Judge.



     A RGUED M AY 15, 2008—D ECIDED JANUARY 15, 2009




 Before R IPPLE, K ANNE, and W ILLIAMS, Circuit Judges.
  W ILLIAMS, Circuit Judge. Alan and Patricia Bilthouse
seek to recover a tax refund on the basis that their shares
of stock in a construction company became “worthless”
in 1997 and were therefore “dispose[d] of” under 26 U.S.C.
§ 469(g). The government denied the refund on the basis
that the company became worthless in 1995 rather than
1997. The Bilthouses do not dispute that the company
2                                               No. 07-3593

had no liquidating value in or after 1995 but contend
that the company expected a large financial recovery
from a lawsuit that would have allowed it to stay in
business. Because the record does not demonstrate that
the lawsuit represented a reasonable possibility that the
company would remain in business after 1995, we affirm
the district court’s decision granting the government
summary judgment.


                   I. BACKGROUND
  In March 1993, the Bilthouses bought stock in a con-
struction company called S&E Contractors, Inc. (“S&E”) for
$500,000. S&E was a heavy construction contractor that
performed public works projects for the State of Florida
and its cities and towns. In order to bid on these public
construction projects, S&E was required to obtain con-
struction bonds. S&E obtained bonding through two
sureties: Fireman’s Fund Insurance Company and Safeco
Insurance Company.
  From April 1994 through June 1995, S&E suffered
millions of dollars in losses as a result of cost overruns on
a large construction project for the City of Jacksonville
called the North Landfill Project. In 1995, S&E became
financially insolvent and defaulted on its bonds, which
meant it had to seek the assistance of its bonding compa-
nies to complete its bonded contracts. S&E’s open
projects were completed under the terms of its agree-
ments with the bonding companies, which collected the
revenue from the projects. As a result, S&E had little to
no cash flow.
No. 07-3593                                                3

  Also in 1995, S&E decided not to bid on any more
bonded work, and both of its bonding companies stopped
issuing bonds to S&E for new public construction projects.
Dean Akers, who was engaged by S&E as a consultant
in the spring of 1995, and who became its president
later that year, testified that this was a temporary measure;
S&E intended to stop seeking new government projects
only until it could obtain new bonding. However, there
is no evidence that S&E tried to obtain new bonding
after 1995.
  In the fall of 1995, S&E filed a lawsuit against the City
of Jacksonville to recover its financial losses from the
North Landfill Project. The suit was settled in 1997 with
neither S&E nor either bonding company receiving any
money.
  S&E had elected to be taxed as a subchapter S corpora-
tion, which means its income flows through and is taxed
as income to the corporation’s shareholders individually.
See 26 U.S.C. § 469; see generally St. Charles Inv. Co. v.
Comm’r, 232 F.3d 773, 775 (10th Cir. 2000). In 2001, Alan
Bilthouse and his wife Patricia Bilthouse filed for a
refund of paid income taxes with the Internal Revenue
Service based on their claim that their shares in S&E
became worthless in 1997 and therefore were “dispose[d]
of” at that time. The IRS denied the Bilthouses’ refund and
the Bilthouses sued to recover the refund in federal court.
  The district court granted summary judgment to the
government, holding that the Bilthouses had failed to meet
their burden of demonstrating that S&E became “worth-
less” in 1997 rather than in 1995. The Bilthouses appeal
that decision.
4                                               No. 07-3593

                      II. ANALYSIS
  This case comes to us on appeal from a grant of sum-
mary judgment, which we review de novo, drawing all
inferences in favor of the nonmoving parties. Breneisen v.
Motorola, Inc., 512 F.3d 972, 977 (7th Cir. 2008). Summary
judgment is appropriate where there are no genuine
issues of material fact and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex
Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
  The Bilthouses are “passive investors” in S&E, which
means they invested in a business in which they did not
materially participate. 26 U.S.C. § 469(c). S&E Contractors
is an S corporation so pursuant to section 469, the
Bilthouses could deduct losses stemming from their
investment in S&E but only to the extent of their passive
income. 26 U.S.C. § 469(d); see also 5 Mertens Law of
Federal Income Taxation § 24C:3 (2008) (“[A] taxpayer
cannot deduct losses from business activities in which
he or she does not materially participate . . . unless he
or she reports passive income on the tax return
against which to offset the losses.”).
  However, surplus losses from passive activity are
suspended and carried over from year to year. Previously
suspended losses may be available to offset other
income without regard to the passive loss rules if the
taxpayer’s “entire interest in any passive activity” is
“dispose[d] of” in a taxable transaction. 26 U.S.C. § 469(g);
see also St. Charles Inv. Co., 232 F.3d at 776. Here, the
Bilthouses seek to take advantage of section 469(g) to
deduct previously suspended passive activity losses
No. 07-3593                                                5

arising from their investment in S&E. The parties agree
that the Bilthouses’ entire interest in S&E was “dispose[d]
of” for purposes of section 469(g) whenever their stock
in the corporation became “worthless.” See 26 U.S.C.
§ 165(g) (“If any security which is a capital asset becomes
worthless during the taxable year, the loss resulting
therefrom shall, for purposes of this subtitle, be treated
as a loss from the sale or exchange, on the last day of
the taxable year, of a capital asset.”). But the parties
disagree as to when the stock became worthless. The
Bilthouses contend their stock became worthless in 1997
(which, due to a number of circumstances not relevant
to this case, would result in a large tax deduction) while
the government contends the stock became worthless
two years prior, in 1995.
  So the crucial question in this case is when exactly
S&E (and therefore its stock) became worthless. The
worthlessness of a stock as of a particular year is a
factual inquiry, varying according to the circumstances of
each case. Boehm v. Comm’r, 326 U.S. 287, 293 (1945); see
United States v. Davenport, 412 F. Supp. 2d 1201, 1207 (W.D.
Okla. 2005). Although section 165(g) does not define
“worthless,” most courts consider both the liquidating
value and the potential value of the company to determine
the year of worthlessness. See Morton v. Comm’r, 38 B.T.A.
1270, 1278 (B.T.A. 1938), aff’d 112 F.2d 320 (7th Cir. 1940)
(worthlessness of stock depends on current liquidating
value and potential value); see also Delk v. Comm’r., 113
F.3d 984, 986 (9th Cir. 1997); Figgie Int’l, Inc. v. Comm’r.,
807 F.2d 59, 62 (6th Cir. 1986).
6                                               No. 07-3593

  Even where a company has no liquidating value, evi-
dence of potential value can be used to demonstrate that
a company is not yet worthless during a particular year. If
a company’s 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 potential
value” and cannot be said to be “worthless.” Morton,
38 B.T.A. at 1278; Delk, 113 F.3d at 986.
  However, a taxpayer relying on the potential value of
a company to put off the year of worthlessness must
provide objective evidence of this value; merely asserting
his self-serving hopes will not do. See Boehm, 326 U.S. at
293; Davenport, 412 F. Supp. 2d at 1207. In Boehm, the
Supreme Court held that “a determination of whether a
loss was in fact sustained in a particular year cannot
fairly be made by confining the trier of facts to an exam-
ination of the taxpayer’s beliefs and actions.” 326 U.S. at
292; see also Keeney v. Comm’r, 116 F.2d 401, 403 (2d Cir.
1940) (a taxpayer cannot “postpone his claim of loss
until only an ‘incorrigible optimist’ would fail to know
that the stock had become worthless at an earlier date.”).
   We are mindful that the Bilthouses bear the burden of
establishing that S&E was not worthless until 1997. See
Boehm, 326 U.S. at 293 (taxpayer bore the burden of estab-
lishing the fact that there was a deductible loss in 1937
rather than in the prior year). This means that the
Bilthouses must demonstrate that S&E retained some
value, either present or potential, until 1997.
No. 07-3593                                            7

  The Bilthouses do not present any evidence that might
demonstrate that S&E had liquidating value after 1995.
In contrast, the government presents evidence that in
1995, S&E became financially insolvent, defaulted on its
bonds, and turned to the bonding companies to finance
the completion of its bonded work, at which point the
bonding companies stopped issuing bonds to S&E for
new projects. Because of S&E’s default, the bonding
companies took control over the revenue from S&E’s
open projects. S&E reported a loss of $18,377,151 on its
tax returns for that year.
   Instead, the Bilthouses maintain that S&E retained
potential value through 1995 and up until 1997 because
during that time, the company expected an award of $15
to 27 million from the Jacksonville lawsuit. Had such
an award been given, the Bilthouses contend that S&E
would have been able to resume its operations after
1995. Of course, the lawsuit ultimately was resolved
unfavorably for S&E in 1997, and it received no money
from the litigation. But according to the Bilthouses, the
death knell did not sound for S&E until that particular
event occurred, and therefore S&E did not become worth-
less until 1997. They also argue that S&E maintained
its worth by pursuing private construction projects
through 1996 and 1997. We address each argument in turn.


 A. The Jacksonville lawsuit does not demonstrate
    that S&E retained potential value after 1995.
 The linchpin of the Bilthouses’ argument is that two
S&E presidents, S&E’s bonding companies, and its bank all
8                                             No. 07-3593

expected a recovery from the lawsuit, and they expected
the recovery to be sufficient to repay the bonding compa-
nies and allow S&E to again obtain bonding for new
government projects. In other words, they believed the
lawsuit would save S&E. However, as the Supreme Court
has already noted, a determination of when a particular
loss was sustained cannot be made based on subjective
beliefs alone. See Boehm, 326 U.S. at 292. As discussed
further below, the Bilthouses present no objective evi-
dence to demonstrate the reasonableness of the belief that
the lawsuit represented potential value for S&E, and
without that, they cannot meet their burden. See, e.g.,
Morton, 38 B.T.A. at 1278 (taxpayer must demonstrate
a “reasonable hope and expectation that the assets will
exceed the liabilities of the corporation in the future”)
(emphasis added).
   In their affidavits, Douglas Ebbers (former president
of S&E) and Dean Akers (consultant and president of
S&E from 1995 through 1997) state that had the lawsuit
been successful, S&E would have been able to resume
bidding on contracts. Akers further states that S&E and
its bonding companies operated on the premise that a
favorable resolution of the litigation would provide a
cash infusion “sufficient to repay the sureties and keep
S&E a viable company.” The Bilthouses also submitted
evidence that an outside consultant valued the lawsuit
to be worth over $20 million.
  But neither Ebbers nor Akers provides a basis for why
anyone thought the lawsuit would be successful. We
know nothing about the merits of the lawsuit or whether
No. 07-3593                                                    9

S&E’s damages estimate was reasonable. Indeed, we do
not even know how the estimated damages were calcu-
lated. 1 Evidence that S&E’s two presidents believed
the lawsuit would prevail and that it would save S&E
does not by itself demonstrate that their belief was rea-
sonable. For all we know, they could have been
unusually optimistic. See, e.g., Boehm, 326 U.S. at 294-95
(upholding tax court’s determination that stockholders’
suit had no value where there was no evidence re-
garding “the merits of the suit, the probability of recovery
or any assurance of collection of an amount sufficient to
pay the creditors’ claim of more than $630,000 and to
provide a sufficient surplus for stockholders so as to
give any real value to their stock.”).
  The actions of the bonding companies and S&E’s bank
are no more probative of the potential value of S&E. The
Bilthouses point out that although the bonding companies
and the bank “could have” stopped dealing with S&E in
1995, they chose to work with S&E until 1997. The
Bilthouses contend that this was because they were
waiting to see what happened with S&E’s lawsuit, and
that a jury could infer from this show of support that S&E
had a viable case and a reasonable expectation of recovery.
But there are several possible explanations for the
behavior of the bank and the bonding companies that
have nothing to do with the value of the company or even
the value of the lawsuit. And even if they were motivated



1
  We note that the damages estimate seems a bit high given
that the original contract amount on the project was $12 million.
10                                            No. 07-3593

by the prospect of recovery from the lawsuit, we do not
know the basis for their putative belief that the lawsuit
would be resolved favorably or that the expected recovery
would be sufficient to allow S&E to resume its prior
operations.
   Contrary to the Bilthouses’ assertion, a company’s
hope that it will prevail in a lawsuit is not the same for
purposes of this analysis as a company’s reasonable
expectation that its future operations will succeed. Cf.
Miami Beach Bay Shore Co. v. Comm’r, 136 F.2d 408 (5th
Cir. 1943) (stock in company was not “worthless” in 1936
because there was a reasonable prospect of reorganiza-
tion until 1937 when the stockholders resolved to
liquidate the company instead); Benjamin v. Comm’r, 70
F.2d 719 (2d Cir. 1934) (stock in soapstone company not
“worthless” in 1926 because it continued to take options
and explore and drill for new sources of soapstone
into 1927). That is because no reasonable investor would
buy stock in an otherwise worthless company based on
such an inherently speculative endeavor. At minimum,
an investor would need to know more about the lawsuit
before investing in such a company. For example, if
the president of S&E had bought lottery tickets from
1995 until 1997 with the belief that a winning ticket
would save S&E, that would not demonstrate that S&E
had potential value during those two years because it
is purely speculative that he would win the lottery.
  By 1995, S&E knew there would be no foreseeable
future operations unless it could pay off its bonding
companies. Although S&E may have hoped the Jackson-
ville lawsuit would enable it to recover, there is no rea-
No. 07-3593                                            11

sonable ground (as far as we can tell) for that hope. To
allow a jury to make a determination of worth based on
the subjective beliefs of S&E insiders and entities con-
nected to it would subject this tax provision to endless
manipulation. Cf. Boehm, 326 U.S. at 293 (“The taxpayer’s
attitude and conduct are not to be ignored, but to
codify them as the decisive factor in every case is to
surround the clear language of [28 U.S.C. § 23(e)] and the
Treasury interpretations with an atmosphere of unreality
and to impose grave obstacles to efficient tax admin-
istration.”).


 B. The private construction projects do not demon-
    strate that S&E retained potential value after 1995.
  The Bilthouses also contend that S&E continued
business operations through 1995 and 1996 by pursuing
and working on private construction projects through SCI,
a division of S&E. (Recall that S&E could not work on
public projects because the bonding companies stopped
issuing bonds for new projects in 1995.) This is a closer
issue because continued operations of a company might
indicate that there was a reasonable hope and possibility
of success. See Benjamin, 70 F.2d at 719-20 (soapstone
company that continued to take options and explore
for soapstone even after shutting down its mill in 1926
did not become worthless for tax purposes until 1927).
  However, there is no objective evidence in the record
that would allow us to ascertain whether SCI could have
saved S&E. The Bilthouses provide no evidence of how
much work SCI was doing, whether it was viable, or
whether it reasonably could have generated enough
12                                                 No. 07-3593

money at some point to allow S&E to pay off the bonding
companies and resume its public projects. Indeed, by the
Bilthouses’ own admission, the mainstay of S&E’s
business was its public work, for which it needed to
obtain construction bonds. In other words, the Bilthouses
have not demonstrated that SCI represented “a reasonable
hope and expectation” that the assets of S&E would exceed
its liabilities in the future. Morton, 38 B.T.A. at 1278-79; see
also Keeney, 116 F.2d at 403 (while a taxpayer may have
“hoped” to make money by holding races, there was “no
reasonable ground for hoping by that [this would] liqui-
date that enormous debt; and only so would the stock
become of any value.”).
  We acknowledge that there was no definitive event in
this case that might have signaled to investors in 1995
that their shares in S&E had become worthless. But our
examination of the facts and circumstances in this case
leads us to conclude that the Bilthouses have not met
their burden of demonstrating that S&E became worthless
in 1997 rather than 1995. To the extent there was some
possibility that S&E could have pulled itself out of the
mess it found itself in by 1995, the record does not demon-
strate that the possibility was reasonable rather than
remote. As a result, we need not reach the Bilthouses’
argument regarding damages.


                    III. CONCLUSION
  The judgment of the district court is AFFIRMED.

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