S Corporation Cannot Take An Ordinary Worthless Stock Deduction

The IRS recently concluded in a Chief Counsel Advice memorandum (CCA 201552026) that an S corporation (the taxpayer) couldn’t claim and pass through to its shareholders a worthless stock deduction under Section 165(g)(3).  

In general, Section 165(g)(1) provides for the recognition of a capital loss for any security that is a capital asset that becomes worthless. In certain instances, however, taxpayers can claim an ordinary loss under Section 165(g)(3) on worthless securities. Section 165(g)(3) allows an ordinary loss for a worthless security to be recognized by a domestic corporation if the security is from a corporation that is affiliated within the meaning of Section 1504(a)(2), with the domestic corporation claiming the loss.