IRS Concludes That Gain On Debt Sale Was Ordinary

In a Nov. 28 field attorney advice memorandum (FAA 20144801F), the IRS concluded that a taxpayer's gain from the sale of a debt instrument was characterized as ordinary because it was a recovery of a prior bad debt deduction under Section 166.

Under the facts of the FAA, the taxpayer, which was an insurance company, had claimed a partial- worthlessness bad debt deduction under Section 166(a)(2) related to certain debt instruments it held. The taxpayer accordingly adjusted its basis in that Section 166 debt. The partial bad debt deduction also decreased the taxpayer's taxable income and tax liability in certain taxable years.

Subsequently, the taxpayer sold some of the debt that was subject to the partial bad debt deduction, some of which the taxpayer recognized for a gain.