## Facts

- A railroad (the taxpayer) acquired substantial stock in Wisconsin Central and operated Wisconsin Central’s lines as part of an integrated rail system.
- When Wisconsin Central’s operating income was insufficient, the taxpayer advanced funds to cover expenses; the advances accumulated as a large unsecured indebtedness owed by Wisconsin Central to the taxpayer.
- Wisconsin Central’s finances deteriorated for years and, by the early 1950s, it could not satisfy secured creditors, making recovery for unsecured creditors doubtful.
- In 1952, the taxpayer entered an agreement that capped the maximum amount of Wisconsin Central debt the taxpayer could recover.
- In 1954, a court-approved reorganization plan specified creditor treatment and further fixed what portion of claims would be satisfied.
- The taxpayer sought income-tax refunds based on bad-debt deductions, asserting (a) unsecured advances became wholly worthless in 1952 (or alternatively 1954) and (b) secured claims represented by bond-interest coupons became wholly or partially worthless in 1952 (or alternatively 1954).
- The government contested both the timing and the extent of claimed worthlessness.

## Issues

1. Whether, and in which year (1952 or 1954), the taxpayer’s unsecured advances became wholly worthless and deductible as a bad debt.
2. Whether, and in which year, the taxpayer’s secured bond-coupon claims became wholly or partially worthless and deductible to the extent of unrecoverability.
3. What evidentiary showing and “identifiable events” are required to establish that there is no longer a reasonable expectation of recovery in a reorganization setting.

## Decision

- The court applied a practical “reasonable expectation of recovery” test, evaluated through sound business judgment based on available information.
- The court treated concrete developments in the reorganization process—particularly the 1952 recovery cap and the later court-approved reorganization plan—as key events for fixing when worthlessness (and any partial worthlessness) became sufficiently certain for deduction.
- The court distinguished between unsecured advances and secured coupon claims, determining deductibility by the year in which each claim (or portion) lost any reasonable prospect of recovery.
- The court allowed bad-debt deductions to the extent and in the year that the unrecoverable amounts became objectively fixed, rather than merely suggested by ongoing financial deterioration.

## Legal Principles

- A bad-debt deduction is allowable only in the taxable year the debt (or an identifiable portion) becomes worthless.
- Worthlessness is established when, based on all available facts, there is no longer any reasonable expectation of recovery; severe financial distress alone is insufficient.
- Courts look for objective, identifiable events (e.g., binding caps on recovery, court-approved reorganization plans, and fixed creditor priorities) that convert uncertainty into a determinable loss.
- The taxpayer’s determination is tested by sound business judgment, including consistency with its own conduct, use of available information, and reasonable inferences from financial and legal realities.
- Secured and unsecured claims may become worthless at different times; partial worthlessness may be recognized when recovery is fixed only in part.

## Conclusion

The court held that bad-debt worthlessness in a reorganization must be anchored to objective events showing that recovery is no longer reasonably expected, applying a business-judgment standard and differentiating the timing and extent of loss for unsecured advances versus secured coupon claims.


Minneapolis, St. Paul & Sault Ste. Marie R.R. Co. v. United States, 164 Ct. Cl. 226 (Ct. Cl. 1964)