Section 108

Technical topics regarding tax preparation.
#1
Taxctfl  
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I have a lot of questions about Section 108.

The first is: does/can Section 108 apply to a foreign corporation filing an 1120-F? Specifically for insolvency exclusions.

Another: are there any related party provisions? For example - company A & B are both owned by the same person. if company A owes company B $10mil and company B wants to take the bad debt write off but company A doesn’t want to take it into income then - can section 108 income exclusion apply due to insolvency if all the boxes are ticked…even though these are related parties? Both are US S corps in this instance.
 

#2
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108 can be difficult to understand.

I don't see a special rule for foreign corporations in 108.

The related party rule in 108 concerns acquisition of third party debt. But there is also a rule that treats stock in the debtor received by a creditor in exchange for a contribution of the debt as 1245 property.

Your question re 108 and loans between related S corporations made me think about whether there could be a planning tool here. Nothing jumped to mind, primarily because one could get a better result by simply distributing the money and contributing it to the other corporation -- the difference being stock basis.
Steve
 

#3
Andrew  
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Taxctfl wrote:I have a lot of questions about Section 108.

The first is: does/can Section 108 apply to a foreign corporation filing an 1120-F? Specifically for insolvency exclusions.

Another: are there any related party provisions? For example - company A & B are both owned by the same person. if company A owes company B $10mil and company B wants to take the bad debt write off but company A doesn’t want to take it into income then - can section 108 income exclusion apply due to insolvency if all the boxes are ticked…even though these are related parties? Both are US S corps in this instance.


You seem to say that company A, owned by your client, owes company B, which is also owned by your client, 10 million. Are there any loan papers for the 10 million loan and subsequent interest payments on the 10 million that company A loaned to company B?

If one person has 2 companies and loans 10 million from company A to company B ... where did the 10 million go? Are there records of payments for equipment or anything else that used up the 10 million dollar loan company A granted to company B?

Do you have proof that company A had 10 millions in their bank account which could be loaned out? I assume you do.
 

#4
Taxctfl  
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gatortaxguy wrote:108 can be difficult to understand.

I don't see a special rule for foreign corporations in 108.

The related party rule in 108 concerns acquisition of third party debt. But there is also a rule that treats stock in the debtor received by a creditor in exchange for a contribution of the debt as 1245 property.

Your question re 108 and loans between related S corporations made me think about whether there could be a planning tool here. Nothing jumped to mind, primarily because one could get a better result by simply distributing the money and contributing it to the other corporation -- the difference being stock basis.


Both companies ned
Andrew wrote:
Taxctfl wrote:I have a lot of questions about Section 108.

The first is: does/can Section 108 apply to a foreign corporation filing an 1120-F? Specifically for insolvency exclusions.

Another: are there any related party provisions? For example - company A & B are both owned by the same person. if company A owes company B $10mil and company B wants to take the bad debt write off but company A doesn’t want to take it into income then - can section 108 income exclusion apply due to insolvency if all the boxes are ticked…even though these are related parties? Both are US S corps in this instance.


You seem to say that company A, owned by your client, owes company B, which is also owned by your client, 10 million. Are there any loan papers for the 10 million loan and subsequent interest payments on the 10 million that company A loaned to company B?

If one person has 2 companies and loans 10 million from company A to company B ... where did the 10 million go? Are there records of payments for equipment or anything else that used up the 10 million dollar loan company A granted to company B?

Do you have proof that company A had 10 millions in their bank account which could be loaned out? I assume you do.


Yes there are loan papers. Interest has been calculated according to the papers.

Was spent on expenses. Yes, there are documents to support.

Yes, there is documentation to support the amount.
 

#5
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I say the answer to your question is that 108 is available for loans between related parties.
Steve
 

#6
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The more significant question is whether there is a deduction available for bad debt by the lender. I'd venture to guess it's not.

I'm just as curious if Steve has any authority to support his assertion. I don't have time to dig into §108 at the moment, but, generally, it's nice to share the support or, at least, reasoning behind conclusions shared with folks.
If he doesn't offer any, I'd dig in later.
Check out https://fogelcpa.com/tax-articles...there's a real handy debt cancellation flowchart Dave put together. He used to visit here. Real knowlegeable guy.
~Captcook
 

#7
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My authority my reading of 108 itself. There is nothing in there about loans from related parties not being eligible for relief from CODI.

And my reading of 166 (and 267) is such that a loan to a related party can be deducted as a bad debt the same as a loan to an unrelated party. (Of course, there is the risk of reclassification as a gift.)

https://www.thetaxadviser.com/issues/20 ... debts.html
Steve
 

#8
Nilodop  
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Other than ownership by the same person, is there a business reason (to B) why the loan was made by B to A? If not, there is a risk that the loan was in substance a distribution by B to owner followed by a contribution by owner to A.
 

#9
dave829  
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Like other posters above, I question whether the loan from B to A was a bona fide debt. Loans between related entities are subject to special scrutiny, particularly where a bad debt is taken. See Herrera, T.C. Memo. 2012-308 for a good discussion of the law involved in determining whether a bad debt deduction was proper for related-party debt.

https://scholar.google.com/scholar_case?case=15408652277776420153&hl=en&as_sdt=6&as_vis=1&oi=scholarr

There aren't anywhere close to enough facts posted here to convince me that the debt involved was a bona fide debt.
 

#10
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That a different issue than presented in the OP.
Steve
 

#11
dave829  
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Not really. 108 won’t apply to discharge of a debt unless it was a bona fide debt.
 

#12
Taxctfl  
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Thanks all for your responses.

Capt - your link doesn't work :(

Using 108 while taking the bad debt write off on the other company seems like one of those things that the IRS would have addressed when it comes to related parties.
 


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