VRC has addressed several situations where a business enterprise value for a particular legal entity is needed to provide support for the worthlessness of a legal entity as a worthless stock investment for its parent. The benefit of ordinary loss characterization is that an ordinary loss can offset both ordinary and capital gains for a company while a capital loss can only offset capital gains.

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In addition, in order to be a qualified corporation, more than 90% of the subsidiary's gross receipts historically must have been from other than passive-type income such as royalties, rents, interest, dividends, etc.

Assuming that the subsidiary meets the requirements as a qualified affiliated corporation, in order to claim a worthless stock deduction under IRC Section 165(g)(3), the taxpayer has the burden of proving that the security became worthless in the year of deduction and that the security had tax basis.

Meeting these requirements is heavily dependent on a taxpayer's specific circumstances.

In order to support that the stock is worthless, a taxpayer must generally prove that 1) the security has no liquidating value and 2) there is a complete lack of future potential value, which is sometimes supported by the occurrence of an identifiable event occurring during the year of worthlessness.

An identifiable event would include, but is not limited to, a cessation of business or a sale of substantially all of the assets.

As noted above, a key component of support for this deduction is proving that the security has no liquidating value.

Obtaining a valuation from an independent valuation provider is essential to the first requirement.

The following case studies illustrate the role of valuation in support of IRC Section 165(g)(3) - worthless stock deductions.

1) A multinational company engaged us to provide a valuation of real and personal property of its affiliates located in Denmark and the UK.

The purpose of the appraisal was for tax reporting purposes as support for a worthless stock deduction under IRC Section 165(g)(3).

Our valuation was a fair market value opinion of equity values on a controlling interest basis.