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Tax implication: Intercompany debt-waiver between parent and subsidiary

I work for a US subsidiary (I'll call Inc) whose parent company was based in the Nordics (I'll call A/S) and filed for bankruptcy. A/S no longer exist and is now managed by a Trustee over there. Under the Inc's books, there is an intercompany balance owed that is now being considered to be waived by the Trustee. If this intercompany debt is waived, is this taxable to Inc upon filing of federal tax return? or is there an exception to the rule if the debt is due to a transaction between related parties?

Answers

Anonymous
(Accountant) |

It shouldn't be reflected as an expense on your tax return because nothing is getting settled. I had this issue with a company I worked with. We had intercompany balances with an international owner but because we never settled cash it was as if nothing happened. I'd have a technically qualified cpa sign off on it though. Especially if we're talking big bucks.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

I think this question is far more complicated than at first glance. Cancellation of Debt (COD) rules are governed by complex IRS/Treasury section 385 and associated regulations; more so for related parties. It seems peculiar that the Trustee would "waive" collecting an asset on the parent's books. Rather than waiving, you might want to ask the Trustee to state that the debt is being capitalized into your sub. That could avoid all the potential taxable income issues that could arise from waiving/forgiving the debt.

In any case, it's time for you to consult with tax expertise.

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