Tackling unsettled issues in the liquidation of an insolvent subsidiary

Common issues regarding the liquidation of insolvent subsidiaries in a separate return context are explored. When an insolvent subsidiary is liquidated, the parent corporation would not receive any amount in exchange for the common stock of the subsidiary. Efforts to fall within Sections 332 and 337 by avoiding a subsidiary's insolvency before liquidation are subject to IRS's scrutiny and challenge. The parent corporation may experience uncertainty on the timing of the deduction and the character of the loss with respect to worthless stock and uncollected debt. Similarly, the insolvent subsidiary may be faced with unresolved tax treatments of debt discharge and debt assumption by the parent corporation. Guidance is needed so the tax consequences to all involved are more easily determined.