Court Defers Loss Deduction on Redemption of Intercompany Debt.

• Jurisdiction: United States
• Date: 01 January 2001
• Author: Weinberger, Mark

The Tax Court has ruled under prior consolidated return regulations that a consolidated group member may not take a capital loss deduction on a redemption of an intercompany note (Textron Inc., 115 TC No. 6). The case is a conspicuous departure from the literal approach recently taken by the Tax Court in interpreting the consolidated return regulations.

In 1977, AVCO, then the common parent of a consolidated group, redeemed its own stock held by one of its subsidiaries (S) in exchange for an AVCO note. S's loss on the transaction was not recognized; under Regs. Sec. 1.1502-31(b)(2) (ii), as then in effect, S's basis in the AVCO stock became its basis in the AVCO note. As a result, S had an unrealized loss in the note. In 1985, Textron acquired the AVCO group. In 1987, AVCO redeemed the AVCO note and S claimed a $15 million capital loss on the redemption.

The IRS argued that the loss should be deferred under former Kegs. Sec. 1.1502-14(d)(4), which applied if...