Weekly BNA Insights: Parent Precluded From Taking a Worthless Stock Deduction

From the Weekly State Tax Report:

The U.S. District Court for the District of Delaware in June rejected a parent company's bid to take a worthless stock deduction for an insolvent insurance subsidiary operating under a state law rehabilitation order (Triad Guar., Inc. v. Triad Guar. Ins. Corp. (In re Triad Guar., Inc., 2016 BL 205086, D. Del., No. 14-1464, 6/27/16).

Debtor's principal argument implicated a constitutional question. Debtor argues that the bankruptcy court's interpretation of the rehabilitation order conflicted with Debtor's federal right to abandon TGIC's stock and take the worthless stock deduction, thus the bankruptcy court incorrectly determined that a state court order trumped federal law in violation of the supremacy clause.

These types of conflicts are, unfortunately, inherent in the fabric of Section 382(g)(4)(D). In the interest of preventing the “double deduction” of the same economic loss, Congress has almost guaranteed that these types of actions will be frequently litigated since the effect of Section 382(g)(4)(D) is to require previously affiliated, but now adverse, taxpayers to choose (or allow a court to decide) which of them will emerge from difficult financial straits with a tax benefit that both of them can't legitimately claim or enjoy.

Robert Willens from Robert Willens LLC discusses the details of court’s decision in Triad Guar., Inc. in this week’s BNA Insights article, available here (subscription required). Or sign up for a free trial to the Weekly State Tax Report.

Compiled by Lauren E. Colandreo