CCA concludes that unsupported related-party advances were not bona fide debt

Plain-English summary

Chief Counsel Advice supports the Field's position that a purported related-party loan was not bona fide debt. The record did not show a fixed maturity date, principal repayments, interest charged or paid, or efforts to collect the alleged debt. The parties also treated the amount as equity for foreign-jurisdiction purposes. Because a bona fide debt did not exist, the advice concludes that the taxpayer was not entitled to a bad debt loss deduction under IRC § 166.

Ruling snapshot

• Question: Did the taxpayer have bona fide debt that could support a bad debt loss deduction?
• Outcome: Advice given, the IRS supported denying the deduction on the submitted facts.
• Key authorities: IRC §§ 166 and 385; Treas. Reg. § 1.166-1(c)

Full text (IRS public release)

ID: CCA-118131-13
Office: -----------------
UILC: 166.00-00, 385.01-00
Number: 201323021
Release Date: 6/7/2013
From: ------------------
Sent: Friday, January 18, 2013 12:22:48 PM
To: --------------------
Cc: ------------------------------------------------------------ Subject: ------------------------ Bad debt (debt v equity)

We have reviewed the documents submitted in this matter and coordinated with CC:-----
-------------- and CC:-----. Based on the facts submitted for our review, ----- does not object to the position taken in the draft memorandum, but defers to --------- regarding whether a bona fide debt exists.

------------ analysis of whether there is a bona fide debt is that:

Based on the facts submitted for our review, we support the Field's argument that a bona fide debt does not exist. The taxpayer has not provided any information to show that the parties treated the amount as debt. Specifically, the taxpayer did not provide a fixed maturity date for the purported loan, there is no evidence of any principal repayment, or interest charged/paid. The purported creditor made no attempt to collect the alleged debt. Furthermore, beginning in -------, the parties treated the purported debt as equity for foreign jurisdiction purposes.

As noted in the draft memorandum, if there is not a bona fide debt, then there can not be a bad debt loss under section 166. Treas. Reg. section 1.166-1(c). Therefore, based on the facts submitted for our review, and given that ----------supports the argument that a bona fide debt does not exist, we support the Field’s argument that the taxpayer is not entitled to a bad debt loss deduction under section 166.

Sincerely,

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