This model is full debt relief and not partial debt relief or waiver of certain conditions under the credit agreement. And if the credit is between related people, always consider what unrelated parties would do in similar circumstances. However, the income tax provisions of paragraph 19 may apply to the loan if Company B has used the proceeds of the loan for the acquisition of impairment assets and/or deductible expenses. To the extent that an amount within the meaning of section 19 is included in company B`s gross income, company A would then receive a capital loss from the loan waiver. In addition, there are a large number of intra-group credit accounts in virtually all corporate structures. These loan accounts often arise either from financing provided by one company to another, or in circumstances where, for example, one company provides services or sells goods to another company and the consideration remains unpaid in the loan account. The correct characterization of a transfer of funds to a business entity from an affiliate can determine a number of tax consequences resulting from the transfer, including, for example, the following: crediting interest income to the lender; the creditor`s ability to claim a deduction of bad debts; the payment of an implicit dividend to the owner of the lender, where the „loan“ is actually a capital contribution. The factors examined by the Court above provide useful guidance for structuring a loan between related companies. If these factors are taken into account and the parties to the lending transaction document it at the same time, they have objectively determinable evidence of their intent as reflected in the form and economic reality of the transaction. Of course, they must also act consistently with what the transaction claims to be – they must act as any independent party would in the circumstances. There are many other situations where proper characterization of a money transfer between affiliates can have a significant impact on income tax.
Either way, the bottom line is simple: decide early on what is planned, then act accordingly CSB`s revenues were largely based on intra-group loans and were not calculated with sufficient precision to eliminate intercompany debt or ensure that only the taxpayer`s personal debt was cancelled. Similarly, the capital loss deduction claimed by the taxpayer for bad debts was calculated on the basis of the sum of the intra-group claims recognised. Often, these credit accounts are written off, especially in circumstances where the borrower is unable to repay the loan or in a group context where the group wants to „clean up“ its intergroup transactions. At one point, the taxpayer decided to transfer money between its affiliates to finance the taxpayer`s business ventures and accounted for the transfers as loans. In those years, about $100 million in intercompany transfers were made, called loans. There have also been direct transfers to the individual taxpayer, which have also been recorded as loans. The big question is whether there was „a real intention to create a debt, with a reasonable expectation of repayment, and did this intention coincide with the economic reality of creating a debtor-creditor relationship?“ A transaction is subject to special scrutiny if the borrowing entity is affiliated with the lender. In this particular case, can it be demonstrated that there was a realistic expectation of repayment? Would a third-party lender have granted the loan on similar terms? Keep in mind that when it comes to depreciating a loan, there will likely be accounting and tax issues to consider. This would be beyond the scope of this website; However, it is strongly recommended to consider seeking appropriate advice regarding any accounting and tax issues that may arise. Of course, any „presumption“ against credit processing can be rebutted by a statement that shows that at the time of the „loan“ there was a real expectation of repayment and the intention to enforce debt collection. As noted above, the key issue in this case was whether a series of transfers from one of the taxpayer`s corporations to the taxpayer and/or its other controlled corporations constituted bona fide loans or should be reclassified as taxable distributions.
[xiii] A recent Seventh Circuit decision involved a history of alleged loans between a family holding company („taxpayer“) taxable as a C corporation and a number of businesses owned by a family member. It is necessary to examine whether the taxpayer is entitled to deductions on account of bad debts in respect of those loans. [xvi] Accounting standards require companies to value their assets at the end of each period to determine whether there is objective evidence that certain assets are impaired. Therefore, if a loan cannot be repaid, it would be impaired and may require a provision for doubtful or doubtful debts at the end of the year, which may well lead to the final release of the loans in question. The „debt reduction provisions“ in section 19 and paragraph 12A of the eighth annex should also be taken into account in the context of a proposed waiver of loans. .