A Tale of Two Tax Losses: It Was the Best of Strategies, It Was the Worst of Strategies

If Charles Dickens were still alive, I suspect that the title for this article would cause him to cringe or at least politely ask me to paraphrase someone else. But year-ends always bring to mind ghosts of Christmases past and prospects for future redemption (looking at you, Ebenezer) and, of course, opportunities for tax loss harvesting. Two December 2025 developments for tax loss recognitions, one successful and one unsuccessful, allow us to remember that the benefit of a tax deduction “is quite as great as if it cost a fortune.”^[1]  So, without further ado, let’s explore two strategies for reducing U.S. federal income taxes that were the subject of Internal Revenue Service (IRS) and Tax Court guidance, respectively, this December.

PLR 202549014: The Best of Strategies

The story in PLR 202549014,^[2]  opens with a bank holding company (Old Parent) holding the stock of numerous subsidiaries, including a first-tier subsidiary called simply, “Subsidiary.” Subsidiary was engaged in a full spectrum of financial service businesses. But, alas, its business fortunes turned bleak and regulators seized Subsidiary and placed it into receivership. Subsidiary’s receivership caused Old Parent and another affiliate to file for bankruptcy, as well.

In its bankruptcy, Old Parent determined that the stock of Subsidiary was worthless. As a result of this worthlessness, Old Parent “abandoned” the Subsidiary stock. Old Parent then itself emerged from bankruptcy. Old Parent had a substantial investment in Subsidiary and, under Code § 165(g)(3), claimed a worthless stock deduction in respect of such investment upon the abandonment of the stock of Subsidiary.^[3]  Code § 165(g)(3) permits the holder of worthless securities to claim an ordinary deduction for stock in a “corporation affiliated with a taxpayer which is a domestic corporation” if three requirements are met. First, the stock must become worthless in the year in which the loss is claimed.^[4]  Treasury Regulation § 1.165-5(i) treats a security that is abandoned as worthless. Second, the taxpayer claiming the loss must hold at least 80% of the vote and value of the stock of the corporation whose securities are worthless.^[5]  Third, more than 90% of the annual income earned by the corporation whose securities are worthless must not have been derived from passive sources.^[6]

Given that Old Parent and Subsidiary had filed consolidated federal income tax returns, Old Parent had to navigate those rules as well before it could claim a worthless stock deduction for the Subsidiary stock. Under Treasury Regulation § 1.1502-80(c)(1)(i), no deduction for worthless stock may be claimed until the stock is determined to be worthless under Treasury Regulation § 1.1502-19(c)(1)(iii). Under this limitation, stock is not considered to be worthless until all of the issuer’s assets are disposed of, its debts are discharged or an affiliate claims a deduction for the non-payment of a debt of the stock issuer that is not matched by the cancellation of indebtedness income by the issuer (presumably because the subsidiary is insolvent). Old Parent represented that these conditions were satisfied on the date it abandoned the stock, and not before.

The issue that Parent sought clarity on from the IRS was whether 90% or more of its gross receipts were derived from active sources. The major ruling provided by the IRS appears to be that gross receipts from securities sales are taken into account only to the extent of gains (not the amount realized). The IRS also opined that dividend distributions from predecessor entities are not taken into account if the gross receipts of the predecessors had previously been taken into account in determining satisfaction with the 90% test. With these rulings in hand, Old Parent was allowed to claim a worthless stock deduction for the Subsidiary stock.

For tax purposes, a deduction for the abandonment is available when three conditions are satisfied: (1) the loss was incurred in a transaction entered into for profit, (2) the loss arises from a sudden termination of usefulness^[7]and (3) the property is permanently discarded from use or the transaction is discontinued.^[8]  In 2015, the abandonment doctrine received a significant amount of attention in the Pilgrim’s Pride case.^[9]  In that case, a taxpayer abandoned securities instead of accepting $20 million for securities for which it had paid $98 million because the ordinary tax loss was worth more to the taxpayer than $20 million in cash and a $78 million capital loss. While the taxpayer in Pilgrim’s Pride could not claim a worthless securities loss (the securities had a value of $20 million), it was entitled to an abandonment loss and sustained a loss on that ground alone.

Temnorod v. Comm’r: Not the Best of Strategies

In Temnorod,^[10]  an S corporation of which the taxpayer was a shareholder (Broadvox) purchased substantially all of the assets of a bankrupt affiliated corporation (Infotelecom). Broadvox treated the amounts paid to Infotelecom as an element of cost of goods sold (COGS). This treatment resulted in a substantial ordinary loss being claimed by Broadvox and then passed through to its shareholders. The IRS challenged the addition to COGS and asserted instead that the payments should be capitalized.

Broadvox routed voice over internet protocol (VoIP) telephone calls through Infotelecom. Infotelecom, in turn, routed calls through AT&T and Verizon to internet service providers (ISPs). AT&T and Verizon asserted that the calls should be treated (and paid for) as though they were pricey long-distance calls. Infotelecom asserted that the calls were local calls to the ISPs. As the dispute mounted, Infotelecom filed for bankruptcy. In the bankruptcy, Infotelecom reached an agreement to make payments to AT&T and Verizon. Broadvox assumed liability for these payments when it purchased Infotelecom’s assets. As stated above, Broadvox added these payments to its COGS.

Broadvox’s position seemed to be a stretch from the outset because Broadvox readily conceded that it was engaged in the service, not manufacturing, business. As a result, Broadvox did not sell goods for which a COGS could be readily ascertainable. But Broadvox argued that the payments to AT&T and Verizon were for “previously purchased services.” As a backstop, Broadvox argued the payments were ordinary and necessary business expenses. To support this position, Broadvox asserted that AT&T and Verizon would have sued Broadvox directly for payment if an agreement for payment had not been reached in the Infotelecom bankruptcy. The court readily dismissed this argument.

The IRS had a much easier position to support. The purchase and sale agreement between Broadvox and Infotelecom specifically stated that Broadvox had assumed liability for the AT&T and Verizon settlement as part of the asset purchase price. The IRS then resorted to the Danielson rule, which generally prohibits a taxpayer from asserting a tax position that is contrary to the position taken in transaction documentation.^[11]  The court then considered the various exceptions to this rule, but found none applicable. Accordingly, it required Broadvox to capitalize the payment into its acquisition of the assets, including goodwill, acquired from Infotelecom.

One interesting footnote to the decision is the fact that Infotelecom was taxable as a partnership owned essentially by the Broadvox shareholders in the same proportions that they held the Broadvox stock.^[12]  Infotelecom initially reported the assumptions of the AT&T and Verizon liabilities as ordinary gross income. It then amended its returns to report such amounts as received for goodwill (capital gain). Since the owners of Infotelecom were substantially the same as the Broadvox shareholders, it appears that the two companies engaged in inconsistent reporting. Infotelecom reported capital gain from the sale of its assets (including goodwill). At the same time, Broadvox enabled the same owners to treat the “flip” side of the same payment as a deductible expense. While these facts are set out in the Temnorod decision, the court did not discuss them at all.

What these discarded facts suggests to your author is that there appears to have been a path to accomplish close to what the parties wanted if the bankruptcy tax planning had received more attention earlier in the process. If Broadvox had paid cash and did not assume Infotelecom’s AT&T and Verizon liabilities, Broadvox would have capitalized the payment and Infotelecom would have capital gain on the sale of its assets. Infotelecom would then pay AT&T and Verizon directly. This payment should have been treated as an ordinary and necessary business expense incurred by Infotelecom that it could have passed through as a deduction to the Infotelecom partners. So, the result would have been some tax-preferenced long-term capital gains matched by ordinary losses and then more ordinary losses as Broadvox amortized the goodwill. A much better result than what ultimately happened—long-term capital gains at Infotelecom (apparently), no deduction for the payments to AT&T and Verizon and 15-year goodwill amortization. And that leads me to think, “It was as true … as turnips is. It was as true … as taxes is. And nothing’s truer than them.”^[13]

Concluding Thoughts

The taxpayer in PLR 202549014 successfully navigated itself to an ordinary loss for its investment in its defunct subsidiary through a bankruptcy abandonment of the stock of the Subsidiary. In contrast, the taxpayer’s attempt in Temnorod to claim an ordinary loss (at Broadvox) and a long-term capital gain (at Infotelecom) failed in the face of transaction documentation that did not support treatment of the payment as a deductible business expense. If there is one lesson that comes through from both decisions it’s that year-end tax planning, like holiday shopping, is best undertaken well in advance of Christmas and Chanukkah.

^{[1] Dickens, C. Christmas Carol, A. Tyndale House, 1999.}

^{[2] Dec. 5, 2025.}

^{[3] All “Code §” references are to the Internal Revenue Code of 1986, as amended.}

^{[4] Code § 165(g)(1).}

^{[5] Code § 165(g)(3)(A) (incorporating the ownership test in Code § 1504(a)(2).}

^{[6] Code § 165(g)(3)(B). Passive sources include royalties, rents, dividends and interest. The author believes that Income from sales of jingtinglers, floofloovers, tartinkas, whohoopers, gardinkas, trumtookas, slooslunkas, blumbloopas and whowonkas shouldn’t be treated as passive income. Oh, the noise. Oh, the noise. Noise. Noise. Noise.}

^{[7] Treas. Reg. § 1.165-2(a).}

^{[8] See Citron v. Comm'r, 97 TC 200, 213 (1991).}

^{[9] Pilgrim’s Pride Corporation v. Comm’r, 779 F.3d 311 (5thCir. 2015), rev’g 141 TC No. 17 (2013).}

^{[10] TC Mem. 2025-127 (Dec. 8, 2025)}

^{[11] Danielson v. Comm’r, 378 F.2d 771 (3d Cir. 1967), vacating and remanding 44 TC 549 (1965).}

^{[12] Temnorod, supra, fn. 10.}

^{[13] Dickens, C., & de Gavin, A. (1992). David Copperfield. Wordsworth Editions.}