Practical Issues for Worthless Share Deductions Within a Consolidated Return

[...]the IRS stated that the deemed liquidation resulting from the entity's change in classification is an identifiable event that fixes the shareholder's loss with respect to the subsidiary corporation's stock because it destroys the potential for the shareholder, in its capacity as...

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Bibliographic Details
Published in:Journal of Taxation 2017-08, Vol.127 (2), p.65
Main Author: Vari, Frank J
Format: Article
Language:English
Subjects:
Accounting
Balance sheets
Capital assets
Capital losses
Cash surrender value
Consolidated tax returns
Corporate owned life insurance
Fair market value
Financial statements
Insolvency
Liability
Limited liability companies
Stockholders
Subsidiaries
Tax deductions
Underfunded pension plans
Valuation
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Summary:[...]the IRS stated that the deemed liquidation resulting from the entity's change in classification is an identifiable event that fixes the shareholder's loss with respect to the subsidiary corporation's stock because it destroys the potential for the shareholder, in its capacity as such, to obtain any future value from its stock investment. [...]there are no mechanics in the intercompany transaction rules to determine when to take into account a worthless stock deduction assuming deferral beyond the time when the Reg. 1.1502-80(c) requirements are satisfied. Because the intercompany transaction regulations rely on the existence of a corresponding item in the hands of the other party to the transaction and, in the absence of one, as here with subsidiary shares that go away, the intercompany item should be taken into account immediately because matching is not possible.32 In any event, Reg. 1.1502-80(c) already provides a deferral regime and, given its specific mandate, the "context" would not seem to require that the intercompany transaction rules step in to create a supplemental deferral regime. [...]the Regulations provide that deferred losses between members of a controlled group are taken into account only on the occurrence of either of two events: (1) to the extent of any corresponding gain that the member acquiring the property recognizes with respect to the property; or (2) when the parties to the transaction cease to be in a controlled group relationship. [...]in order for the selling member to take into account any deferred loss for seller's loss on the sold 20% or more of loss subsidiary's stock, the buying member must recognize gain on the liquidation of the sold subsidiary or the selling member and the buying member must cease to be related. P's sale of more than 20% of LS's common shares to FOR would cause P to lose that 80% control, but this reverses that sale. [...]P will meet the control test and may claim a Section 165(g)(3) ordinary loss for both the LS common stock it kept and the common stock it sold.
ISSN:0022-4863