We also agree with the court's observation in Ramsay Scarlett that determination of a reasonable prospect of recovery is a question of foresight. See also Parmelee Transportation Co. v. United States, 351 F.2d 619, 628 (Ct.Cl. 1965) (the court must assess if a reasonable person would have entertained a reasonable chance of recovery during the year of the discovered loss). Therefore, in accord with the Ramsay Scarlett decision, we hold that neither the IRS nor the tax court may consider in this context facts not reasonably foreseeable as of the close of the pertinent tax year.

The answer is in the affirmative for it is clear that the intangible value of a business is divisible into its identifiable constituent elements. E.g., Parmelee Transportation Co. v. United States, 351 F.2d 619, 625, 173 Ct.Cl. 139, 148 (1965); Indiana Broadcasting Corp., 41 T.C. 793, 807 (1964), rev'd on other grounds, 350 F.2d 580 (7th Cir. 1965), cert. denied, 382 U.S. 1027, 86 S.Ct. 645, 15 L.Ed.2d 539 (1966); Maurice A. Mittelman, 7 T.C. 1162, 1170 (1946); Strauss v. United States, 199 F. Supp. 845, 850-851 (W.D.La. 1961); Webster Investors, Inc. v. Commissioner of Internal Revenue, 291 F.2d 192 (2d Cir. 1961). It is to be noted that considerable confusion has arisen in this area because of the shifting meaning of the term "goodwill."

See note 2 supra. The problem presented by this case must be viewed in the context of the choices made by McCrory and Green to acquire the companies for stock rather than for cash. The case before us would be an easier one if the companies had been purchased for cash. Accepting as we do the principles enunciated in Parmelee Transportation Co. v. United States, 351 F.2d 619, 625-26 (Ct.Cl. 1965) (dictum); Metropolitan Laundry Co. v. United States, 100 F.Supp. 803, 806-07 (N.D.Cal. 1951); and Massey-Ferguson, Inc., 59 T.C. 220, 225 (1972), any expenses incurred by McCrory in acquiring Olen and National for cash could be deducted at the time the acquired corporations were liquidated, if the "clearly identifiable and severable" lines of business of the acquired companies were sold or abandoned.Id. If, however, McCrory had issued its own stock to raise the cash it needed to acquire the two companies, the expenses of obtaining that capital would not have been deductible when incurred or when Olen and National were liquidated. James I. Van Keuren, supra. McCrory apparently sought to deduct these capitalized acquisition expenses from ordinary income as a loss pursuant to I.R.C. § 165, 26 U.S.C. § 165.

Although petitioner's argument is not entirely clear, petitioner appears to contend that we erred in analyzing whether petitioner had a reasonable prospect of recovery. Citing only one case, Parmelee Transp. Co. v. United States, 173 Ct. Cl. 139, 154, 351 F.2d 619, 628 (1965), petitioner states that "The courts hold that in order for a taxpayer to have a reasonable prospect of recovery, the chance of recovery should be 40 percent or better." Petitioner asserts that he did not have a reasonable prospect of recovery because he did not have a 40-percent-or-better chance of recovering his theft loss under the amended judgments.

For example, in United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927), and Post v. Commissioner, 12 B.T.A. 510 (1928), the taxpayers were allowed a deduction in the year of loss despite a later gratuitous payment by another party. In Parmelee Transportation Co. v. United States, 351 F.2d 619, 173 Ct.Cl. 139 (1965), where the taxpayer was denied a deduction because of a possible recovery through litigation, the court in so holding rejected an argument similar to defendant's contention here. The taxpayer had lost the value of goodwill relating to one of several businesses in which it engaged.

Case law indicates that a business' intangible value is divisible into its identifiable constituent elements for tax purposes. Parmelee Transp. Co. v. United States, 351 F.2d 619, 625, 173 Ct.Cl. 139, 148 (1965); Indiana Broadcasting Corp., 41 T.C. 793, 807 (1964), rev'd on other grounds, 350 F.2d 580 (7th Cir. 1965), cert. denied, 382 U.S. 1027, 86 S.Ct. 645, 15 L.Ed.2d 539 (1966); Strauss v. United States, 199 F. Supp. 845 (W.D.La. 1961). Thus, these contracts can certainly be divided from the other intangible assets of KFOX so long as they are distinct and identifiable.

The determination of whether a reasonable prospect of recovery exists as of the end of the tax year is a question of foresight, not hindsight. See id. at 1416 (citing Parmelee Transportation Co. v. United States, 351 F.2d 619, 628 (1965)). As such, the Court cannot consider facts not reasonably foreseeable as of the close of the tax year at issue.

We recognize that the decided cases generally take the position that the fact that a taxpayer goes to the trouble and expense of pursuing litigation after the claimed year of loss is an indication that there was a reasonable prospect of recovery. E.g., Dawn v. Commissioner, 675 F.2d 1077 (9th Cir. 1982), affg. a Memorandum Opinion of this Court; Ramsey Scarlett Co. v. Commissioner, 521 F.2d 786 (4th Cir. 1975), affg. 61 T.C. 795 (1974); Parmalee Transportation Co. v. United States, 173 Ct. Cl. 139, 351 F.2d 619 (1965); Estate of Scofield v. Commissioner, 266 F.2d 154, 159 (6th Cir. 1959), revg. and remanding 25 T.C. 774 (1956). But none of these cases lay down any hard and fast rule and some of the opinions clearly recognize that the subsequent pursuit of litigation is not determinative.

We recognize that the decided cases generally take the position that the fact that a taxpayer goes to the trouble and expense of pursuing litigation after the claimed year of loss is an indication that there was a reasonable prospect of recovery. E.g., Dawn v. Commissioner, 675 F.2d 1077 (9th Cir. 1982), affg. a Memorandum Opinion of this Court; Ramsey Scarlett & Co. v. Commissioner, 521 F.2d 786 (4th Cir. 1975), affg. 61 T.C. 795 (1974); Parmalee Transportation Co. v. United States, 173 Ct. Cl. 139, 351 F.2d 619 (1965); Estate of Scofield v. Commissioner, 266 F.2d 154, 159 (6th Cir. 1959), revg. and remanding 25 T.C. 774 (1956). But none of these cases lay down any hard and fast rule and some of the opinions clearly recognize that the subsequent pursuit of litigation is not determinative.

In light of the absence of such "weighty reasons" for disregarding section 1.165-1(d)(3), Income Tax Regs., we find such regulation to be valid under the statute. In accord with this holding to Rainbow Inn, Inc. v. Commissioner, 433 F.2d 640, 642-643 (C.A. 3, 1970), reversing on another issue a Memorandum Opinion of this Court; cf. Parmelee Transportation Co. v. United States, 351 F.2d 619, 629 (Ct.Cl. 1965). Having found that section 1.165-1(d)(3), Income Tax Regs., prescribes the standard under which we must determine petitioners' claims for a loss deduction in 1965, our next and final inquiry is whether, at the close of 1965, there existed a "claim for reimbursement with respect to which there * * * [was] a reasonable prospect of recovery."