Worthless Stock Deductions: Valuation, Transfer Pricing And Technical Considerations

When a multinational enterprise (MNE) has affiliates that have become insolvent, the overall tax planning objective frequently is to secure a U.S. tax deduction (often ordinary) for worthless stock or debt.  The essential requirement to qualify for such treatment is that the owner of the stock receive no assets on a hypothetical liquidation.  There are a number of transfer pricing and valuation issues that should be taken into account to ensure a full and consistent determination, and to mitigate potential exposure upon examination.

When a multinational enterprise (MNE) has affiliates that have become insolvent for one reason or another, the overall tax planning objective frequently is to secure a U.S. tax deduction (often ordinary) for worthless stock or debt under Section 165(g)(3).  (If the requirements of this section cannot be satisfied, a liquidation of a subsidiary corporation would be a capital transaction under Section 331 or the potential stock loss would