In This Issue:
IRS Advisory Memo Finds Parent Cannot Claim Subsidiary’s Stock is Worthless While Tax Refund is Pending; Tax Court Recharacterizes Preferred Equity as Debt in Hewlett Packard Case; NA General Partnership v. Commissioner Addresses Debt-Equity Characterization of Related-Party Advances; IRS Rules that Money Market Fund Shares are “Cash” for REIT Asset Test Purposes; Redemption of Trust Preferreds Following New Federal Reserve; Draft Form W-8 Released for FATCA; IRS Issues Guidance on When COD Income Is “Qualifying Income” For Purposes of the Publicly Traded Partnership Provisions mplementation Capital Rules; U.S. Treasury and Japan/Switzerland Announce They Will Negotiate Toward a “Third Way” for FATCA Compliance; Press Corner; and MoFo in the News.
Excerpt from IRS Advisory Memo Finds Parent Cannot Claim Subsidiary’s Stock is Worthless While Tax Refund is Pending
In May 2012, the IRS released an advisory memo addressing whether the parent of a consolidated group can claim a deduction for a subsidiary’s worthless stock when the subsidiary continues to hold tax refund claims. In the memo, the taxpayer (“Taxpayer”) is the common parent of a consolidated group that included an insolvent subsidiary. During the taxable year, Taxpayer’s consolidated group incurred a large consolidated net operating loss (“NOL”), all of which was attributable to the subsidiary. By the end of the tax year, the subsidiary ceased its business operations, disposed of its operating assets, and used the proceeds to pay some of its creditors. The subsidiary continued to hold some assets, including legal claims against its directors and officers, as well as the right to a share of the tax refund attributable to the carryback of the NOL. The retained assets were worth less than the amount of the subsidiary’s unpaid liabilities. At first blush, the stock of the subsidiary held by the Taxpayer was worthless under Section 165(g), which allows holders of worthless stock to treat the stock as disposed of in a sale or exchange in the year in which the stock becomes worthless.
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