IRS Rules On Bad Debt Deduction

In a private letter ruling (PLR 201450011), released on Dec. 12, the IRS said that a corporation could take a bad debt deduction under Section 166 related to payments made to a disputed ownership fund under Treas. Reg. Sec. 1.468B-9.

Under the facts of the letter ruling, a foreign corporation (Foreign 1) owned all the stock of another foreign corporation (Foreign 2), and Foreign 2 owned all the stock of a domestic U.S. corporation. Foreign 2 had outstanding debt for which the corporation had an obligation as guarantor.

The corporation filed for voluntary bankruptcy relief under Chapter 11 the U.S. Bankruptcy Code. Foreign 2 also filed for protection from creditors in its jurisdiction, which resulted in Foreign 2's default on the outstanding debt. Because Foreign 2 defaulted on the debt, the corporation's guarantor obligation was invoked, and the debt-holders asserted a claim against the corporation through the bankruptcy code.