Rev. Rul. 59-296: Insolvent sub's upstream merger; bad debt deduction

In Rev. Rul. 59-296, IRS holds that insolvent subsidiary's upstream merger is not § 332 distribution or § 368(a)(1)(A) reorganization; parent is permitted a § 166 bad debt deduction with respect to bona fide debt.
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Citations: Rev. Rul. 59-296; 1959-2 C.B. 87

Amplified by Rev. Rul. 2003-125 Amplified by Rev. Rul. 70-489

Rev. Rul. 59-296

Where a fully solvent parent corporation owns all the stock of a subsidiary and is also the subsidiary's bona fide creditor for cash advances in an amount greater than the fair market value of all the subsidiary's assets, the transfer of all the debtor-subsidiary's assets to the creditor-parent in a transaction which is a merger or consolidation under the applicable state statutes is a transfer made in satisfaction of indebtedness. Since all of the property of the subsidiary is worth less than the debt, no part of the transfer is attributable to the stock interest of the parent. The transaction is therefore neither a nontaxable distribution under section 332 of the Internal Revenue Code of 1954 nor a tax-free `reorganization' under section 368(a)(1)(A) of the Code. See section 1.332-2(b) of the Income Tax Regulations; Ferdinand W. Roebling, III , v. Commissioner , 143 Fed.(2d) 810, certiorari denied, 323 U.S. 773. Accordingly, the parent corporation is entitled to a bad debt deduction to the extent provided in section 166 of the Code. See H. G. Hill Stores, Incorporated v. Commissioner , 44 B.T.A. 1182, acquiescence, C.B. 1942-2, 9.

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