United States

Parent allowed ordinary worthless stock deduction on subsidiary


In a recently issued private letter ruling, PLR 201704003, the IRS addressed the ability of Parent Corporation to claim an ordinary worthless stock loss on a corporate subsidiary. 

Worthless stock deductions in general

In general, a worthless stock loss is a capital loss to the shareholder. However, corporations (C corporations and possible S corporations, see IRS memo reveals position on section 165(g)(3) and S corporations, for additional detail) are allowed an ordinary deduction if certain requirements are met as defined within section 165(g)(3).

Section 165(g)(3)

Under section 165(g)(3) the stock of a worthless subsidiary is not a capital asset, and therefore generates an ordinary loss, if the subsidiary corporation is affiliated with corporate parent and the subsidiary satisfies the gross receipts test. To satisfy these requirements the subsidiary must (a) be owned directly by the parent corporation as defined within section 1504(a)(2) (i.e., 80 percent of the vote and 80 percent of the value), and (b) more than 90 percent of the aggregate of its gross receipts for all taxable years (since the date of incorporation) has been from sources other than royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stocks and securities.

PLR 201704003

In the ruling, the subsidiary in question was the successor (i.e., surviving corporation following either a tax-free reorganization or liquidation to which section 381 applies) of numerous other corporations that had generated historic gross receipts. In determining whether the subsidiary satisfied the gross receipts test, the IRS ruled that historic gross receipts of the subsidiary and any predecessor entity are included in the calculation.


This PLR reiterates that the gross receipts test applies a look-through to gross receipts of predecessor entities as well as gross receipts of the subsidiary itself. This serves as a trap for the unwary, but also an opportunity when looking to make the best out of a worthlessness event. Prior to claiming a worthless stock loss, it is critical that you identify all gross receipts from all predecessor and successor entities from the date of their incorporation. Often this can be a very cumbersome task, so proper identification and planning for such a loss is often necessary. We recommend discussing any potential worthless stock item with your tax advisor.


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