## Facts

- Halliburton Company, an oilfield services company, acquired a 25% equity interest in an Iranian barite-mining venture (Doreen/IMCO) in 1976 for $955,000.
- From 1977 through early 1979, Halliburton advanced additional funds to Doreen/IMCO as loans totaling $6,952,875.
- During the Iranian Revolution, Doreen/IMCO’s facilities were expropriated in May 1979.
- In November 1979, after the U.S. embassy hostage crisis, the United States froze Iranian assets; some U.S. businesses sought prejudgment attachments against frozen assets, but Halliburton did not.
- At the end of 1979, sovereign immunity and the act of state doctrine foreclosed U.S. expropriation litigation against Iran, and there was no effective foreign forum for such a claim.
- On its 1979 federal return, Halliburton claimed a $955,000 capital loss for the stock and a $6,913,116 bad-debt deduction for the Doreen/IMCO loans.
- In 1981, the Algiers Accords created the Iran–United States Claims Tribunal; Halliburton filed a Tribunal claim in 1981.
- In 1984, Halliburton recovered $2,955,000 through the Tribunal and reported it as income.
- The Commissioner disallowed the 1979 deductions, asserting Halliburton had a claim for reimbursement with a reasonable prospect of recovery at the end of 1979 under Treas. Reg. § 1.165-1(d)(2)(i).

## Issues

1. Whether the Tax Court improperly shifted the burden of proof from the taxpayer to the Commissioner.
2. Whether the Tax Court clearly erred in finding that, as of December 31, 1979, Halliburton had no reasonable prospect of recovery for purposes of I.R.C. § 165 and Treas. Reg. § 1.165-1(d)(2)(i).

## Decision

- The Fifth Circuit affirmed the Tax Court’s judgment allowing the 1979 deductions.
- The Tax Court did not shift the burden of proof; Halliburton bore, and was treated as bearing, the burden.
- The finding that Halliburton lacked a reasonable prospect of recovery at year-end 1979 was not clearly erroneous.

## Legal Principles

- Under Treas. Reg. § 1.165-1(d)(2)(i), a loss is not sustained in the taxable year to the extent the taxpayer has a claim for reimbursement with a reasonable prospect of recovery at the close of that year.
- Whether a reasonable prospect of recovery exists is a question of fact evaluated from year-end based on facts known or reasonably knowable then, not by later events.
- A reasonable prospect requires more than remote possibility; it requires a bona fide, legally viable claim with a substantial possibility of recovery.
- Tax Court fact findings on reasonable prospect are reviewed for clear error; an appellate court will not reweigh evidence absent a definite and firm conviction of mistake.
- Later creation of a claims mechanism and later recovery do not, by themselves, establish a reasonable prospect of recovery in the earlier deduction year.

## Conclusion

The Fifth Circuit held that Halliburton could deduct its Iran expropriation-related losses in 1979 because, as of the end of that year, legal and practical barriers left it without a bona fide claim offering a substantial possibility of recovery; the later establishment of the Tribunal and Halliburton’s 1984 recovery could not be used to retroactively deny the 1979 deductions.


Halliburton Co. v. Commissioner, 946 F.2d 395 (5th Cir. 1991)