CCA 201310031: Department of Commerce funding initially characterized as a bona fide loan

Plain-English summary

Chief Counsel gave preliminary advice on whether an amount received from a Department of Commerce program should be treated as a loan, grant, or award. Based on the available facts, the amount appeared to be a bona fide loan because there was a promissory note, interest, a repayment date, security, and default remedies. The advice noted that the lack of repayment on demand and a periodic payment schedule required more factual development.

Ruling snapshot

• Question: Should the Department of Commerce amount be treated as a bona fide loan or as income from a grant or award?
• Outcome: Advice given, preliminary analysis favored loan treatment.
• Key authorities: IRC § 61

Full text (IRS public release)

ID: CCA-530438-12 Number: 201310031
Release Date: 3/8/2013
Office: -----------------
UILC: 61.22-00

From: ----------------
Sent: Wednesday, May 30, 2012 4:38 PM
To: ----------------
Subject: ------------------------------------------------------------

Hi ---------- Here is the response from our ------------------------------------------------division.

From: -----------------
Sent: Monday, May 07, 2012 3:31 PM
To: ------------------------------------------
Cc: --------------------------------------------------
Subject: -----------------------------------------------------------------

---------

------------has reviewed the memo regarding income from discharge of indebtedness. Based on the facts presented in the memo and the information provided by -----------------------------------------(Taxpayer), we would initially characterize the amount of $-------------that Taxpayer received on behalf of its subsidiary-----
--------------------------------(-----) from the --------------- Department of Commerce as a bona fide loan. Thus, subject to ------- analysis, we do not see the need to characterize the $-------------amount as a grant or an award requiring inclusion in the year of receipt.

The $-------------amount has many characteristics of a bona fide loan: (1) there is a promissory note; (2) the promissory note provides for interest, a prepayment option, a fixed repayment date for principal and interest, and a defined term for repayment; (3) there is security for the loan in the form of certain equipment; and (4) there are remedies in the event of -----’s default. The loss of -----’s security interest upon default and -----’s reporting of --------- of the $------------ amount to “miscellaneous income” for book purposes (in anticipation of repayment) further supports the treatment of the $------------ amount as a loan. Additionally, there is no indication that the --------------- Department of Commerce would not pursue -
----- for full repayment. Conversely, the lack of a provision for repayment on demand and a periodic payment schedule suggests that more factual development is necessary to determine whether the $--------
----------- amount should be treated as otherwise than a bona fide loan.

These are our initial thoughts given the compressed timing; however, ------------would be happy to provide a more detailed analysis on this issue.

Thanks,
---------

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