case (N.D. Ind. 1975, 36 AFTR 2d 75-6367, 75-2 USTC par. 9832), insofar as they hold that, in a situation described in section 304(a)(2) and (b)(2)(B), the 'issuing' or parent corporation realizes a taxable dividend." Accord Virginia Materials Corp. v. Commissioner, 67 T.C. 372, 377-379 (1976), affd. without published opinion 577 F.2d 739 (4th Cir. 1978). This decision was grounded in section 304(b)(2)(B) which provides that "the determination of the amount which is a dividend shall be made as if the property were distributed by the acquiring [subsidiary] corporation to the issuing [parent] corporation and immediately thereafter distributed by the issuing corporation [to its controlling shareholder(s)]." (Emphasis added.) The purpose of section 304(b)(2)(B) is simply to increase the earnings and profits of the issuing corporation to prevent the avoidance of dividend treatment by the selling shareholder(s). 67 T.C. at 305. The Seventh Circuit Court of Appeals later reversed the District Court decision in Broadview Lumber on this issue, agreeing with our decision in Webb. Broadview Lumber Co. v. United States, 561 F.2d 698 (7th Cir. 1977).

Neither Webb, Virginia Materials, or Broadview Lumber involved life insurance companies and consequently the interplay between sections 304 and 815. We made this point clear in Webb as follows:

involved a substan

The case of Union Bankers Insurance Co. tially different factual situation and a different set of related statutes. In that case all the parties, the parent and subsidiary corporations as well as the redeeming shareholder, were corporations, and there was no determination of personal holding company tax liability. Nor was section 303 involved. The issue there presented required the meshing of section 304 with another set of directions in section 815 on how distributions to shareholders are to be charged in computing the phase III tax of life insurance companies. That case must be read in the context of the language and purposes of section 815. *** [Webb v. Commissioner, supra at 309.]

In her dissenting opinion in Webb, Judge Scott questioned the continued vitality of the holding in Union Bankers that there was a distribution from the subsidiary to the parent within the meaning of section 815. See Webb v. Commissioner, supra at 314-315 (Scott, J., dissenting). Despite petitioner's argument to the contrary, we need not face this question in the instant case.

Neither Webb, Virginia Materials, or Broadview Lumber called into question the validity of the holding in Union Bankers that a constructive distribution under section 304(a)(2) from the parent to the controlling shareholder constituted a distribution to shareholders within the meaning of section 815. In this case, petitioner is on equal footing with the parent (not the subsidiary) corporation in Union Bankers, since both were "redeeming" corporations after applying sections 304(a)(1) and (a)(2), respectively. Under both sections 304(a)(1) and (a)(2), a constructive distribution in redemption by a redeeming corporation results in a distribution under section 815.5

Further, we reject petitioner's argument that a distribution under section 815 can only be to an actual stockholder. The application of the section 318(a) attribution rules in the context of section 304(a)(1) may result in a controlling person other than an actual stockholder of the redeeming (acquiring) corporation. Indeed, after applying these sections to petitioner's acquisition of Capitol's stock in CBN, Capitol is treated as controlling petitioner, even though Capitol actually owns no stock in petitioner. However, the fact that Capitol does not actually own stock in petitioner, and may

"We note that the Deficit Reduction Act of 1984 amended sec. 815 to expressly provide that a distribution from policyholders' surplus includes both "direct and indirect distributions" to shareholders. Sec. 211, Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 747. The House Committee Report on this amendment provides in relevant part:

The bill provides that any direct or indirect distribution to shareholders from an existing policyholders surplus account of a stock life insurance company will be subject to tax at the corporate rate in the taxable year of the distribution. For these purposes, the term distribution is intended to include actual and constructive distributions. See Union Bankers Insurance Co., 64 T.C. 807 (1975). *** (H. Rept. 432, 98th Cong., 1st Sess. (1983) at 114.]

The Report of the Joint Committee on Taxation repeats this language and provides further: The statutory emphasis on taxing both direct and indirect distributions from the policyholders surplus account was intended to be construed broadly, whether or not there is a distribution specifically within the meaning of section 301 or 302. There would be a direct distribution from the policyholders surplus account whenever there is a distribution to shareholders within the meaning of section 301 or 302. There would be an indirect distribution therefrom whenever policyholders surplus account funds are used to benefit the shareholders indirectly (for example, by having the stock life insurance company purchase the parent's stock either from the parent or a shareholder of the parent, or by having the company make loans to the parent whether or not for adequate consideration). *** [Joint Committee on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 594 (1984).]

This amendment applies only to taxable years beginning after Dec. 31, 1983, and thus clearly has no direct application to the case at bar. However, insofar as we follow the holding in Union Bankers that a distribution under sec. 815 may be actual or constructive, this amendment and legislative history seems to indicate later Congressional approval of such holding.

not in fact exercise control over petitioner, does not affect the applicability of section 304(a)(1). See Coyle v. United States, 415 F.2d 488, 490 (4th Cir. 1968), revg. 268 F. Supp. 233 (S.D. W.Va. 1967); Fehrs Finance Co. v. Commissioner, 58 T.C. 174, 187 (1972), affd. 487 F.2d 184 (8th Cir. 1973), cert. denied 416 U.S. 938 (1974); Niedermeyer v. Commissioner, 62 T.C. 280, 285 (1974), affd. 535 F.2d 500 (9th Cir. 1976), cert. denied 429 U.S. 1000 (1976); Rev. Rul. 70-496, 1970-2 C.B. 74. We see no reason to treat a distribution in redemption under section 304(a)(1) differently for life insurance companies than for other corporations.

Accordingly, we hold that petitioner's acquisitions from Financial and Capitol of 56.32 percent and 20 percent, respectively, of their stock in CBN are to be treated as distributions in redemption of petitioner's stock under section 304(a)(1). We hold further that such distributions in redemption were also distributions within the meaning of section 815, resulting in phase III taxable income to petitioner under section 302(b)(3) to the extent made out of policyholders' surplus.

Bad Debt Deduction

The second and final issue for decision is whether petitioner is entitled to an operations loss carryover deduction in 1976 attributable to $126,049.26 in bad debts.

Petitioner originally claimed this amount as a bad debt deduction on its 1973 return, which was disallowed by respondent upon examination of such return. Petitioner now contends that the receivable balances making up the bad debt deduction became worthless in 1974, or, alternatively, in some later year. In contrast, respondent contends that petitioner has failed to show that the balances became worthless in 1974 or in any other year.

A life insurance company is allowed to deduct an operations loss carryback or carryover in a taxable year to the extent it reduces life insurance company taxable income (computed without regard to section 802(b)(3)) for such year to zero. Sec. 812; sec. 809(d)(4). In general, a loss from operations for any taxable year is carried back to each of the 3 preceding taxable years and is carried over to each of the 5 following taxable years. Sec. 812(b)(1).

Under section 809(d), a life insurance company is allowed certain specified deductions in computing its gain or loss from operations (sections 809(b)(1) and (b)(2)). Section 809(d)(11) provides that, subject to certain modifications provided in section 809(e), a life insurance company shall be allowed all other deductions allowed under subtitle A for purposes of computing taxable income to the extent not allowed as deductions in computing "investment yield" under section 804. Section 809(e)(2) provides that the reserve method for computing bad debts under section 166(c) shall not apply. Section 804(c)(5)(B) provides that in computing investment yield, no trade or business deduction shall be allowed to the extent attributable to the carrying on of the insurance business. The claimed bad debt deductions in this case were attributable to the insurance business, and (if allowed) are thus deductible in computing gain or loss from operations.

Section 166(a) provides that there shall be allowed as a deduction any debt which becomes wholly or partially worthless within the taxable year. The amount of the deduction is limited to the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. Sec. 166(b). The taxpayer bears the burden of proving entitlement to a claimed bad debt deduction. Crown v. Commissioner, 77 T.C. 582, 598 (1981); Rule 142(a), Tax Court Rules of Practice and Procedure.

The indebtedness must be bona fide and in a proven amount. Holderness v. Commissioner, T.C. Memo. 1977-5, affd. per curiam 615 F.2d 401 (6th Cir. 1980); sec. 1.166-1(c), Income Tax Regs. The determination of whether and when a debt is worthless is a question of fact. Dallmeyer v. Commissioner, 14 T.C. 1282, 1291 (1950). However, it is generally accepted that the year of worthlessness is to be fixed by identifiable events which form the basis of reasonable grounds for abandoning any hope of recovery. Crown v. Commissioner, supra at 598.

We conclude that petitioner has failed to prove the year in which the indebtedness became worthless. See Cole v. Commissioner, 871 F.2d 64 (7th Cir. 1989), affg. T.C. Memo. 1987-228. Mr. Houser testified that he sent letters in 1974 demanding payment to those listed debtors he could locate.

However, he could not, through documentation or testimony, sufficiently show what efforts were taken as to specific debtors. Also, petitioner took no legal action, nor used a collection agency, to collect any of the balances. A taxpayer does not have to take legal action to enforce payment in order to show a debt is worthless and uncollectible where a judgment would in all probability not result in satisfaction upon execution. Sec. 1.166-2(b), Income Tax Regs. However, petitioner has also failed to prove that any individual debtors were insolvent or otherwise judgmentproof. Finally, petitioner contends generally that the cost of legal action was not justified in the circumstances. While this explanation may be plausible as to some of the relatively small balances, we find it inadequate as to the larger amounts.

Accordingly, we hold that petitioner is not entitled to an operations loss carryover deduction in 1976 attributable to a $126,049.26 bad deduction originally claimed on petitioner's 1973 Federal income tax return.

To reflect the foregoing,

Decisions will be entered under Rule 155.

NATIONAL STARCH AND CHEMICAL CORP., PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 31669-84.

Filed July 24, 1989.

P, the acquired firm in a friendly takeover, incurred legal, investment banking, and other fees incident to the takeover. Held, the fees are capital expenditures rather than current expenses and, thus, are not deductible under sec. 162(a).

Richard J. Hiegel, Leonard E. Kust, Richard H. Walker, and Geoffrey R.S. Brown, for the petitioner.

Richard J. Sapinski, Daniel Morman, Paul J. Sude, and Janet A. Engel, for the respondent.

CLAPP, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year ended August 15, 1978, in the amount of $1,068,281. The only