Judge John Curtin
LPCiminelli’s subsidiary Cowper Construction Co. ceased operations before Dec. 31, 2003. Its 2004 tax return reported Cowper insolvent, inactive, and had negative equity as of Dec. 31, 2003, and that LPCiminelli’s retained earnings were adjusted to reflect Cowper’s removal from consolidated filings. LPCiminelli sought refund of some $1.2 million in taxes paid for 2004, which it claimed was incorrectly assessed by the IRS—as excess loss account (ELA)—on income arising from the purported cancellation of Cowper’s indebtedness. The court held LPCiminelli entitled to refund of its 2004 tax overpayment. Trial record evidence overcame the presumption of correctness accorded the IRS commissioner’s assessment of tax on LPCiminelli’s income arising from an ELA relating to Cowper. Preponderant evidence showed Cowper’s stock to be worthless as of Dec. 31, 2003, a tax year foreclosed from assessment liability by the tax code’s three-year statute of limitation. In finding Cowper’s ELA not subject to inclusion under the anti-avoidance rule of Treasure Regulation §1.1502-19(e) the court found no rational basis to conclude that LPCiminelli ever acted contrary to, or designed to avoid the purpose or effect of, the consolidated return regulations.