088. Federal Tax Ruling On Waiver Of Shareholder Debt

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An en banc panel (Grosser Senat) of the Federal Tax Court has issued its long-awaited ruling on the waiver of receivables held by shareholders against their corporations. The ruling (dated 9 June 1997) holds that the constructive contribution which can result from such waivers is limited to the receivable's realisable value. Frequently, the face amount greatly exceeds the realisable amount because the waiver is motivated by the corporation's legal insolvency. Any excess of the amount of the liability on the books of the corporation over the realisable value is now expected to be treated as taxable income to the corporation. The shareholder is deemed to have received an amount equal to the realisable value of the receivable, increasing his basis in his shares by this amount.
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