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• Corporate Finance
• Corporate Debt

Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt , and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt. In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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• GAINS & LOSSES

Taxing the Transfer of Debts Between Debtors and Creditors

• C Corporation Income Taxation
• NOL & Other Tax Attributes
• Individual Income Taxation

T he frequent transfer of cash between closely held businesses and their owners is very common. If the owner works in the business, the transfer is likely to be either a salary to a shareholder/employee or a Sec. 707(c) guaranteed payment to a partner. Alternatively, the transfer may be a loan. As long as the true substance of the transaction is a loan, it will be respected for tax purposes. 1

The cash flow is not exclusively from the businesses to the owner. Many owners prefer to capitalize their closely held business with a combination of equity and debt. Once again, these loans will be respected and not reclassified as equity if they are bona fide loans.

In the normal course of business, these loans are repaid. The receipt of the repayment will be tax free except to the extent it is interest. However, in difficult economic conditions, many of these loans are not repaid. To the extent that the creditor cancels the obligation, the debtor has cancellation of debt (COD) income under Sec. 61(a)(12). This income is taxable unless the taxpayer qualifies for an exclusion under Sec. 108. In other cases, the debt is transferred between the parties either as an independent transaction or part of a larger one. This article reviews these transactions.

Two basic types of transfers have created significant tax issues. In the first, the debtor transfers the debt to the creditor. If the debtor is the owner of a business and the business is a creditor, the transfer appears to be a contribution. If the business is the debtor and the owner is the creditor, the transfer can be a distribution, liquidation, or reorganization. The other type of transfer is from the creditor to the debtor. Again, the transaction can take the form of a contribution if the creditor is the owner, or it can take the form of a distribution, liquidation, or reorganization if the creditor is the business.

Debtor-to-Creditor Transfers

Corporations.

The two seminal cases that established the framework for analyzing the transfer of a debt obligation from a debtor to a creditor are Kniffen 2 and Edwards Motor Transit Co. 3 Arthur Kniffen ran a sole proprietorship and owned a corporation. The sole proprietorship borrowed money from the corporation. For valid business reasons, Kniffen transferred the assets and liabili ties of the proprietorship to the corporation in exchange for stock of the corporation, thereby transferring a debt from the debtor to the creditor. The transaction met the requirements of Sec. 351.

The government argued that the transfer of the debt to the creditor was in fact a discharge or cancellation of the debt (a single step), which should have been treated as the receipt of boot under Sec. 351(b) and taxed currently. The taxpayer argued that the transfer was an assumption of the debt and, based on Sec. 357(a), should not be treated as boot.

The Tax Court acknowledged that the debt was canceled by operation of law. However, it did not accept the government’s argument as to the structure of the transaction. Instead, it determined that two separate steps occurred. First, the corporation assumed the debt. This assumption was covered by Sec. 357(a). After the assumption, the interests of the debtor and creditor merged and the debt was extinguished. Since the transfer was not for tax avoidance purposes, Sec. 357(b) did not apply. The result was a tax-free Sec. 351 transaction, except to the extent that the assumed debt exceeded the bases of the assets transferred, resulting in gain under Sec. 357(c). This decision established the separation of the debt transfer from its extinguishment.

Edwards Motor Transit Co. cites, and is considered to have adopted, the approach in Kniffen . For valid business reasons, the owners of Edwards created The Susquehanna Co., a holding company, and transferred Edwards’ stock to it under Sec. 351. Susquehanna borrowed money from Edwards to meet certain financial obligations. To eliminate problems that arose from having a holding company owning the stock of an operating company, the owners merged Susquehanna into Edwards under Sec. 368(a)(1)(A). The government acknowledged that the basic transaction was a nontaxable merger. However, the government wanted the company to recognize income as a result of the cancellation or forgiveness of the debt. The Tax Court ruled for the taxpayer, on the grounds that the debt transfer (from debtor to creditor) was not a cancellation of the debt. The ruling cited Kniffen as authority for this conclusion.

On its surface, Edwards Motor Transit affirmed the decision and reasoning in Kniffen . The Tax Court stated, “The transfer by the parent corporation of its assets to Edwards [its subsidiary] . . . constituted payment of the outstanding liabilities . . . just as surely as if Susquehanna had made payment in cash.” This statement relied on both Kniffen and Estate of Gilmore. 4 In Gilmore , a liquidating corporation transferred a receivable to its shareholder who happened to be the debtor. In that case, the court ruled the transaction was an asset transfer and not a forgiveness of debt. The court based its conclusion in large part on the fact that no actual cancellation of the debt occurred.

The statement in Edwards Motor Transit quoted above, however, is inapposite to the conclusion in Kniffen . A payment is not a transfer and assumption of a liability. Since Susquehanna was deemed to have used assets to repay the debt, the Tax Court should have required Susquehanna to recognize gain to the extent that the value of the assets used to repay the debt exceeded their bases. The conclusions in Kniffen and Edwards are consistent only in their holdings that these debt transfers were not cancellations of debts that would result in COD income. In Kniffen, the court ruled that the debt was assumed and then extinguished. In Edwards, the court ruled that the extinguishment of the debt constituted repayment.

It is possible that the Tax Court reached the correct outcome in Edwards Motor Transit but for the wrong reason. In Rev. Rul 72-464, 5 a debtor corporation merged into the creditor corporation in a tax-free A reorganization under Sec. 368(a)(1)(A). The ruling concluded that the debtor corporation did not recognize any gain or loss on the extinguishment of the debt within the acquiring corporation. General Counsel Memorandum (GCM) 34902 6 provided the detailed analysis behind the conclusion.

The GCM cited both Kniffen and Edwards 7 and adopted their underlying rationale. Specifically, it concluded that the basic transaction (the reorganization) results in a transfer of the debt to the acquiring corporation. It is after the transfer that the debt is extinguished by the statutory merger of interests. The transfer is an assumption of debt, which is nontaxable under Sec. 357(a). Therefore, the transferor (debtor corporation) recognizes no gain or loss.

This is exactly what happened in Ed wards . The debt was assumed, not repaid. Therefore, the Tax Court should have reached the conclusion that the transaction was nontaxable under Sec. 357(a) and not have relied on the questionable authority of Estate of Gilmore 8 or concluded that the debt was repaid.

Liquidations

The transactions discussed up to this point have been either tax-free corporate formations (Sec. 351) or tax-free reorganizations (Sec. 361). In a different transaction that is likely to occur, the creditor/shareholder liquidates the debtor corporation.

If the transaction is not between a parent and its subsidiary, taxability is determined by Secs. 331 and 336. Prior to 1986, the outcome might have been determined by Kniffen and Edwards . With the repeal that year of the General Utilities 9 doctrine (tax-free corporate property distributions) and the enactment of current Sec. 336, the outcome is straightforward. Under Sec. 336, the debtor corporation that is liquidated recognizes its gains and losses. Whether the liquidated corporation is treated as using assets to satisfy a debt requiring the recognition of gain or is treated as distributing assets in a taxable transaction under Sec. 336, all the gains and losses are recognized.

The taxation of the shareholder is a little more complex. First, the shareholder must determine how much it received in exchange for the stock. The most reasonable answer is that the shareholder received the value of the assets minus any debt assumed and minus the face amount of the debt owed to it by the liquidated corporation. This amount is used to determine the gain or loss that results from the hypothetical sale of stock under Sec. 331. Second, the shareholder must determine what was received for the debt, whether assets or the debt itself. The amount received in payment of the liquidated corporation’s debt is a nontaxable return of capital. If the shareholder is deemed to have received the debt itself, then the debt is merged out of existence. The basis of all the assets received should be their fair market value (FMV) under either Sec. 334(a) or general basis rules.

If the liquidated corporation is a subsidiary of the creditor/shareholder, the results change. Under Sec. 337, a subsidiary recognizes neither gain nor loss on the transfer of its assets in liquidation to an 80% distributee (parent). Sec. 337(b) expands this rule to include distributions in payment of debts owed to the parent corporation. Therefore, the subsidiary/debtor does not recognize any gain or loss.

The parent corporation (creditor) recognizes no gain or loss on the liquidation of its subsidiary under Sec. 332. The basis of the transferred property in the hands of the parent is carryover basis. 10 This carry­over basis rule also applies to property received as payment of debt if the subsidiary does not recognize gain or loss on the repayment. 11 In other words, the gain or loss is postponed until the assets are disposed of by the parent corporation.

One important exception to the nonrecognition rule is applied to the parent corporation. Under Regs. Sec. 1.332-7, if the parent’s basis in the debt is different from the face amount of the debt, the parent recognizes the realized gain or loss (face amount minus basis) that results from the repayment. Since this regulation does not mention any exception to the rules of Sec. 334(b)(1), the parent corporation is required to use carryover basis for all the assets received without adjustment for any gain or loss recognized on the debt.

This discussion of liquidations assumes that the liquidated corporation is solvent. If it is insolvent, the answer changes. The transaction cannot qualify under Secs. 332 and 337. The shareholder is not treated as receiving any property in exchange for stock; therefore, a loss is allowed under Sec. 165(g). The taxation of the debt depends on the amount, if any, received by the shareholder as a result of the debt.

Partnerships

The taxation of debt transfers involving partnerships is determined, in large part, by Secs. 731, 752, and 707(a)(2)(B). Specifically, the taxation of transfers by debtor partners to the creditor/partnership is determined by the disguised sale rules of Sec. 707(a)(2)(B), whereas transfers by debtor partnerships to a creditor/partner fall under Secs. 731 and 752.

Sec. 707(a)(2)(B) provides that a transfer of property by a partner to a partnership and a related transfer of cash or property to the partner is treated as a sale of property. The regulations specify the extent to which the partnership’s assumption of liabilities from the partner is treated as the distribution of the sale price.

Regs. Sec. 1.707-5 divides assumed liabilities into either qualified liabilities or unqualified liabilities. A qualified liability 12 is one that:

• Was incurred more than two years before the assumption;
• Was incurred within two years of the assumption, but was not incurred in anticipation of the assumption;
• Was allocated to a capital expenditure related to the property transferred to the partnership under Temp. Regs. Sec. 1.163-8T; or
• Was incurred in the ordinary course of business in which it was used, but only if all the material assets of that trade or business are transferred to the partnership.

The amount of qualified recourse liabilities is limited to the FMV of the transferred property reduced by senior liabilities. Any additional recourse liabilities are treated as nonqualified debt.

If a transfer of property is not otherwise treated as part of a sale, the partnership’s assumption of a qualified liability in connection with a transfer of property is not treated as part of a sale. The assumption of nonqualified liabilities is treated as sale proceeds to the extent that the assumed liability exceeds the transferring partner’s share of that liability (as determined under Sec. 752) immediately after the partnership assumes the liability. If no money or other consideration is transferred to the partner by the partnership in the transaction, the assumption of qualified liabilities in a transaction treated as a sale is also treated as sales proceeds to the extent of the transferring partner’s share of that liability immediately after the partnership assumes the liability. 13 Following the assumption of the liability, the interests of the debtor and creditor merge, thereby extinguishing the debt. The result is that generally the full amount of these assumed liabilities are part of the sale proceeds. 14

The assumed liabilities that are not treated as sale proceeds still fall under Sec. 752. Since the transaction results in a reduction of the transferor’s personal liabilities, the taxpayer is deemed to have received a cash distribution equal to the amount of the debt assumed under Sec. 752(b). Given that the debt is immediately extinguished, no amount is allocated to any partner. The end result is that the transferor must recognize gain if the liability transferred exceeds the transferor’s outside basis before the transaction, increased by the basis of any asset transferred to the partnership as part of the transaction.

A partnership may have borrowed money from a partner and then engaged in a transaction that transfers the debt to the creditor/partner. The first question is whether the initial transaction is a loan or capital contribution. Sec. 707(a) permits loans by partners to partnerships. The evaluation of the transaction is similar to one to determine whether a shareholder has loaned money to a corporation or made a capital contribution. The factors laid out in Sec. 385 and Notice 94-47 15 should be considered in this analysis.

Assuming the debt is real and it alone is transferred to the creditor/partner, the outcome is straightforward. The partner is treated as having made a cash contribution to the partnership under Sec. 752(a) to the extent that the amount of debt exceeds the amount allocated to the partner under the Sec. 752 regulations. If part of the debt is allocated to other partners, these other partners are treated as receiving a deemed cash distribution.

If the transfer is part of a larger transaction, then the analysis is a little more complex. The transfer of the other assets is governed by Secs. 737, 731, and 751. Sec. 737 requires a partner to recognize gain if, during the prior seven years, the partner had contributed property with built-in gain to the partnership and the current FMV of the distributed property exceeds the partner’s outside basis. The partner is treated as recognizing gain in an amount equal to the lesser of (1) the excess (if any) of the FMV of property (other than money) received in the distribution over the adjusted basis of such partner’s interest in the partnership immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or (2) the net precontribution gain of the partner. The outside basis is increased by the amount of the deemed contribution because the partner assumed a partnership liability. After any gain under Sec. 737 is determined, the general distribution rules of Secs. 731 and 751(b) apply to the transaction. In effect, the transfer to a creditor/partner of a partnership debt owed to the partner is treated the same as any liability assumed by the partner. The extinguishment of the debt should not result in additional tax consequences.

Creditor-to-Debtor Transfers

In addition to debtor-to-creditor transfers, there are creditor-to-debtor transfers. The outcome of these transactions is determined by the two-step analysis in Kniffen . The creditor is treated as having transferred an asset to the debtor/owner. After the transfer, the interests of the debtor and creditor merge, resulting in the extinguishment of the debt. This extinguishment is generally nontaxable since the basis of the debt and the face amount are equal. 16 The result changes if the basis in the hands of the creditor and the adjusted issue price of the debtor are not equal. 17

One of the initial pieces of guidance that addressed this question was Rev. Rul. 72-464. 18 In this ruling, the debt was transferred in a nontaxable transaction. Consequently, the recipient (the debtor) had a carryover basis in the debt. Since this basis was less than the face amount, gain equal to the difference was recognized. This ruling did not explain the reasoning behind the gain recognition or the potential impact if the value of the debt was different from its basis. 19 These items were addressed in Rev. Rul. 93-7. 20

Rev. Rul. 93-7 analyzed a transaction between a partnership and a partner, here designated P and A , respectively. A was a 50% partner. This percentage allowed A to not be a related party to P under Sec. 707(b). P also had no Sec. 751 assets, and A had no share of P ’s liabilities under Sec. 752. These were excluded because they did not affect the reasoning behind the taxation of debt transfers. A issued a debt with a face amount of $100 for $100. P acquired the debt for $100. When the debt was worth $90, it was distributed to A in complete redemption of its interest, which had an FMV of $90 and outside basis of $25. In other words, a creditor/partnership distributed debt to the debtor/partner.

The debt was an asset, a receivable, in the hands of P . When it was distributed to A , P determined its taxation under Sec. 731(b), which provides that no gain or loss is recognized by a partnership on the distribution of property. The application of Sec. 731(b) in this transaction followed directly from Kniffen , which treated the transfer of a debt as a separate transaction from any extinguishment that follows the transfer. Under Sec. 732, A ’s basis in the transferred debt was $25. 21

The basis rules of Sec. 732 assume that a built-in gain or loss on distributed property is realized and recognized when the recipient disposes of the property. In this situation, the distributed debt was extinguished, and therefore no future event would generate taxable gain or loss. Consequently, this extinguishment became a taxable event. In this specific case, A recognized gain of $65 ($90 FMV – $25 basis) and COD income of $10 ($100 face − $90 FMV.) The ruling did not spell out the reasoning for the recognition of both gain and COD income. It is the correct outcome based on Regs. Sec. 1.1001-2. Under that regulation, when property is used to satisfy a recourse obligation, the debtor has gain equal to the difference between the value of the property and its basis, and COD income equal to the difference between the amount of debt and the value of the property used as settlement. The distributed debt is property at the time of the distribution, and the rules of Regs. Sec. 1.1001-2 should apply.

In Rev. Rul. 93-7, the value of the debt was less than the face amount. A debt’s value could exceed its face amount. In that case, the revenue ruling indicated, a deduction for the excess value may be available to the partner as a result of the deemed merger. In Letter Ruling 201105016, 22 the IRS ruled that a taxpayer was entitled to a deduction when it reacquired its debt at a premium as part of a restructuring plan. Rev. Rul. 93-7 cited Regs. Sec. 1.163-4(c)(1), and Letter Ruling 201105016 cited Regs. Sec. 1.163-7(c). Both regulations state that the reacquisition of debt at a premium results in deductible interest expense equal to the repurchase amount minus the adjusted issue price. Regs. Sec. 1.163-4(c)(1) applies to corporate taxpayers, while Regs. Sec. 1.163-7(c) expanded this treatment to all taxpayers. Based on these regulations and the treatment of the distribution as an acquisition of a debt, an interest expense deduction should be permitted when the value exceeds the amount of debt, whereas COD income is recognized when the value is less than the amount of the debt.

In Rev. Rul. 93-7, the partnership was the creditor, and the debt was transferred to a debtor/partner. The reverse transaction can occur, in which a creditor/partner transfers debt to the debtor/partnership in exchange for a capital or profits interest. Sec. 721 applies to the creditor/partner. Therefore, no gain or loss is recognized. However, Sec. 108(e)(8)(B) applies to the debtor/partnership. Sec. 108(e)(8)(B) provides that the partnership recognizes COD income equal to the excess of the debt canceled over the value of the interest received by the creditor. This income is allocated to the partners that owned interests immediately before the transfer. The partnership does not recognize gain or loss (other than the COD income) as a result of this transaction. 23 The value of the interest generally is determined by the liquidation value of the interest received. 24 If the creditor receives a profits interest, the liquidation value is zero, and therefore the partnership recognizes COD income equal to the amount of debt transferred.

Corporate Transactions

Debt transfers between corporations and shareholders are just as likely as transfers between partners and partnerships. If the transferor is a shareholder or becomes a shareholder as a result of the transaction, Secs. 1032, 118, and 351 provide basic nontaxability. However, Sec. 108 overrules these sections in certain cases.

If the shareholder transfers the debt to the corporation as a contribution to capital, Sec. 108(e)(6) may result in the recognition of COD income by the corporation. Under Sec. 108(e)(6), the corporation is treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness. Therefore, the corporation has COD income amount equal to the excess of the face amount of the debt over the transferor’s basis in the debt immediately prior to the transfer. In most cases, the face and basis are equal, and no COD income is recognized. If the transfer is in exchange for stock, Sec. 108(e)(8)(A) provides that the corporation is treated as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. Therefore, the corporation recognizes COD income equal to the excess of the face value of the debt over the value of the stock received. In many cases, the value of the stock is less than the debt canceled, and therefore COD income is recognized. Sec. 351 provides that 80% creditor/shareholders recognize neither gain nor loss if the debt is evidenced by a security. If Sec. 351 does not apply, the creditor/shareholder may be able to claim a loss or bad-debt deduction.

Rev. Rul. 2004-79 25 provides a detailed analysis of the transfer of debt from a creditor corporation to a debtor shareholder. The analysis is similar to the one for partnership distributions covered by Rev. Rul. 93-7, discussed previously.

Modifying the facts of Rev. Rul. 2004-79, assume that a shareholder borrows money from his corporation. The face amount of the debt is $1,000, and the issue price is $920. The original issue discount (OID) of $80 is amortized by both the corporation and the shareholder. At a time when the adjusted issue price and basis are $950 but the FMV is only $925, the corporation distributes the debt to the shareholder as a dividend.

From the corporation’s point of view, this is a property dividend. Rev. Rul. 2004- 79 cites Rev. Rul. 93-7, but it could just as easily have cited Kniffen . As a property dividend, the transaction’s taxa tion to the corporation is governed by Sec. 311. Since the value in the revenue ruling was less than the basis, the corporation recognized no gain or loss. If the value had appreciated, the corporation would have recognized gain equal to the appreciation.

The shareholder receives a taxable dividend equal to the value of the debt; consequently, the debt has a basis equal to its FMV of $925. Since the debt is automatically extinguished, the shareholder is treated as having satisfied an obligation in the amount of $950 with a payment of $925. Therefore, the shareholder must recognize $25 of COD income.

A second fact pattern in the revenue ruling is the same, except the value of the distributed debt is $1,005. Under these facts, the shareholder would be entitled to an interest expense deduction under Regs. Sec. 1.163-4 or 1.163-7 in the amount of $55 ($1,005 − $950). In other words, the shareholder is deemed to have reacquired its own debt for a payment equal to the basis that the distributed debt obtains in the transaction.

The conclusions of Rev. Rul. 2004-79 are consistent with those in Rev. Rul. 93-7. They follow the reasoning of Kniffen .

Another transaction that could occur involving shareholder debt is a liquidation of the corporation, resulting in a distribution of the debt to the debtor/shareholder. The results should be similar to those in Rev. Rul. 2004-79. The corporation that distributes the debt is taxed under Sec. 336. Therefore, the corporation recognizes gain or loss depending on the basis of the debt and its FMV. This is the same result as in the dividend case, except that the loss is recognized under Sec. 336 instead of being denied under Sec. 311. The shareholder’s basis in the debt is its FMV under Sec. 334(a). The shareholder recognizes COD income or interest expense, depending on whether the basis is less than or greater than the adjusted issue price of the debt. These results flow from the regulations under Secs. 61 and 163 and are consistent with the conclusions in the above revenue rulings.

The results change slightly if the liquidation qualifies under Secs. 332 and 337. The IRS discussed these results in Chief Counsel Advice 200040009. 26 Sec. 332 shields the parent from recognition of income on the receipt of the debt. Sec. 337 shields the liquidating corporation from recognizing gain or loss on the transfer of the debt to its parent corporation. The basis is carryover basis under Sec. 334(b). Then, because the debt is extinguished, the parent recognizes either COD income or interest expense on the extinguishment of the debt. As in the prior revenue rulings and Kniffen , the extinguishment has to be a taxable event because the elimination of the carryover basis prevents the parent corporation from having a taxable transaction in the future involving this debt. These results are consistent with prior decisions.

The results discussed for a parent/subsidiary liquidation should also apply if the debtor/corporation acquires a corporation that owns its debt in a nontaxable asset reorganization. In this case, Sec. 361 replaces Secs. 332 and 337. The extinguishment of the debt is a separate transaction that should result in recognition of income or expense.

Acquired Debt

So far, this article has discussed transactions between the debtor and creditor. Now it turns to how the holder of the debt acquired it. In many cases, the holder acquired the debt directly from the debtor, and the acquisition is nontaxable. In other situations, the debt is outstanding and in the hands of an unrelated party. The holder acquires the debt from this unrelated party. In these cases, Sec. 108(e)(4) may create COD income.

Under Sec. 61, if a debtor reacquires its debt for less than its adjusted issue price, the debtor has COD income. Sec. 108(e)(4) expands on this rule: If a party related to the debtor acquires the debt, the debtor is treated as acquiring the debt, with the resulting COD income recognized. Related parties are defined in Secs. 267(b) and 707(b)(1).

The regulations provide that the acquisition can be either direct or indirect. A direct acquisition is one by a person related to the debtor at the time the debt is acquired. 27 An indirect acquisition occurs when the debtor acquires the holder of the debt instrument, where the holder of the debt acquired it in anticipation of becoming related to the debtor. 28 The determination of whether the holder acquired the debt in anticipation of becoming related is based on all the facts and circumstances. 29 However, if the holder acquires the debt within six months before the holder becomes related to the debtor, the acquisition by the holder is deemed to be in anticipation of becoming related to the debtor. 30

In the case of a direct acquisition, the amount of COD income is equal to the adjusted issue price minus the basis of the debt in the hands of the related party. In the case of indirect acquisitions, the calculation depends on whether the debt is acquired within six months of being acquired. 31 If the holder acquired the debt within six months of being acquired, the COD income is calculated as if it were a direct acquisition. If the holder acquired the debt more than six months before being acquired, the COD income is equal to the adjusted issue price minus the FMV of the debt instrument on the date that the holder is acquired.

When a debtor reacquires its own debt, in addition to reporting COD income, the debtor has the debt extinguished as a result of the merger of interests. When a related party acquires the debt, the debtor has COD income, but the debt remains outstanding. In these cases, the debtor is treated as issuing a new debt instrument immediately following the recognition of the COD income for an amount equal to the amount used to calculate the COD income (adjusted basis or FMV 32 ). If this issue price is less than the stated redemption price at maturity of the debt (as defined in Sec. 1273(a)(2), the difference is OID that is subject to the amortization rules of Sec. 1272.

Rev. Rul. 2004-79 provides a simple example of this transaction. In the ruling, a parent corporation, P , issued $10 million of debt for $10 million. After issuance, S , a subsidiary of P , purchased the debt for $9.5 million. Under Regs. Sec. 1.108-2(f), P had to recognize $500,000 of COD income ($10 million face − $9.5 million basis to S ). After this recognition, P was treated as having issued the debt to S for $9.5 million. Therefore, $500,000 of OID was amortizable by P and S . If S later transfers the debt to P , the previously discussed rules determine the taxation of the transfer using S ’s basis ($9.5 million + amortized OID).

Secs. 61 and 108(e)(4) apply only if the debt is acquired for less than the adjusted issue price. If the acquisition price is greater than the adjusted issue price, the acquiring party treats this excess as premium and amortizes it, thereby reducing the amount of interest income recognized by the holder.

Installment Obligations

An installment obligation differs from other obligations in that the holder recognizes income when cash is collected in payment of the obligation. The rules describing the taxation of installment obligations were rewritten as part of the Installment Sales Revision Act of 1980, P.L. 96-471. Under old Sec. 453(d) (new Sec. 453B(a)), if the holder of an installment obligation distributes, transmits, or disposes of the obligation, the taxpayer is required to recognize gain or loss equal to the difference between the basis in the obligation and the FMV of the obligation. There is an exception to this rule for distributions in liquidation of a subsidiary that are exempt from taxation under Sec. 337.

Prior to the Code revision, the regulations permitted the transfer of installment obligations without gain recognition if the transaction was covered by either Sec. 721 or 351. 33 Although the regulations have not been revised for the Code change, the IRS continues to treat Secs. 721 and 351 as overriding the gain recognition provision. 34

If the transaction results in transfer of the obligation either from the creditor to the debtor or from the debtor to the creditor, the tax result changes. The seminal case is Jack Ammann Photogrammetric Engineers, Inc. 35 In it, the taxpayer created a corporation to which he contributed $100,000 in return for 78% of the corporation’s stock. He then sold his photogrammetry business to the corporation for $817,031. He received $100,000 cash and a note for $717,031. He reported the sale under the installment method. When he was still owed $540,223 on the note, he transferred it to the corporation for stock of the corporation worth $540,223. He reported this as a disposition under Sec. 453(d) and recognized the deferred gain. Later, he filed a claim for refund, arguing that Sec. 351 prevented recognition of the deferred gain. After allowing the refund, the IRS assessed a deficiency against the corporation, arguing that the corporation came under Sec. 453(d). The corporation argued that, under Sec. 1032, it was not taxable. The Tax Court ruled for the IRS.

The Fifth Circuit reversed the decision. The underlying reasoning was that the disposition by the shareholder and the extinguishment of the debt in the hands of the corporation were separate transactions. The extinguishment did not fall under Sec. 453(d). The court indicated that the IRS should have assessed the tax against the shareholder.

Following this case, the IRS issued Rev. Rul. 73-423. 36 In this ruling, a shareholder transferred an installment obligation from Corporation X back to the corporation in a transaction described in Sec. 351. The ruling concluded that the transfer was a satisfaction of the installment agreement at other than face value under Sec. 453(d)(1)(A) and that the shareholder was required to recognize gain without regard to Sec. 351. The corporation had no gain or loss under Sec. 1032 and Ammann .

Sec. 453(d) is now Sec. 453B(a), and the rule has not changed. Therefore, if a creditor transfers an installment obligation to the debtor in an otherwise tax-free transaction, the obligation is treated as satisfied at other than its face value, and the creditor is required to recognize gain or loss as discussed in Rev. Rul. 73-423. 37

New Sec. 453B(f) covers transactions in which installment obligations become unenforceable. This section covers the extinguishment of an installment debt through a merger of the rights of a debtor and creditor. The Code treats these transactions as dispositions of the obligation with gain or loss recognized. When the debtor and creditor are related, the disposition is at FMV but no less than the face amount.

If the debtor of an installment obligation engages in a transaction in which the creditor assumes the debt, the results are consistent with those of transactions involving obligations other than installment notes. The debtor is deemed to have received cash equal to the amount of the debt. This is fully taxable unless exempted by Sec. 357, 721, or a similar provision. The creditor falls under Sec. 453B(f), with the extinguishment treated as a taxable disposition of the obligation for its FMV (which for related parties is no less than the face amount).

Business entities often incur debts to their owners, and, conversely, the owners incur liabilities to their business entities. In numerous transactions these obligations are canceled for consideration other than simple repayment of the debt. Based on Kniffen , these transactions are treated as a transfer of consideration followed by an extinguishment of the debt. If a shareholder’s debt to his or her controlled corporation is transferred to that corporation along with assets, the transaction may be tax free under Secs. 351 and 357(a). If a shareholder/creditor receives the related corporate debt in a distribution or liquidation, Sec. 311 or 336 determines the corporation’s taxation.

The cancellation of a partner’s debt to the partnership is generally governed by the distribution rules, including the constructive sale or compensation rules of Sec. 707(a)(2). When a partner cancels the partnership’s debt, the partner has made a contribution to capital. This can have consequences to all partners since the total liabilities are decreased and the partners’ bases are decreased under Sec. 752.

In most cases the merger of debtor and creditor interests is nontaxable. However, if the basis of the debt or receivable does not equal the face amount of the debt, income or loss is recognized. The exact amount and character of the income or loss depends on factors discussed in this article. It is important for the tax adviser to identify those cases in which the debt transfer is not tax free.

1 Invalid loans to shareholders have been reclassified as dividends.

2 Kniffen , 39 T.C. 553 (1962).

3 Edwards Motor Transit Co. , T.C. Memo. 1964-317.

4 Estate of Gilmore , 40 B.T.A. 945 (1939).

5 Rev. Rul. 72-464, 1972-2 C.B. 214.

6 GCM 34902 (6/8/72). The GCM also refers to Sec. 332, which will be dis cussed later.

7 As the GCM points out, by using Sec. 357(a), taxpayers could achieve the same outcome in C reorganizations.

8 See Chief Counsel Advice 200040009 (10/6/00), which suggests Estate of Gilmore ’s requirement of a formal cancellation of debt before COD income is recognized may no longer be valid.

9 General Utilities & Operating Co. v. Helvering , 296 U.S. 200 (1935).

10 Sec. 334(b)(1).

12 Regs. Sec. 1.707-5(a)(6).

13 If the partnership transfers money or other consideration in the transaction, the amount treated as sales proceeds may be limited under Regs. Sec. 1.707-5(a)(5)(i)(B).

14 Under Regs. Sec. 1.707-5(a)(3)(ii), a partner’s share of liabilities is reduced by liabilities assumed that are anticipated to be reduced. Based on Kniffen and Edwards , the reduction will be anticipated.

15 Notice 94-47, 1994-1 C.B. 357.

16 See, e.g., IRS Letter Ruling 8825048 (3/23/88).

17 The transaction that gives rise to the difference and the taxation that results are discussed later.

18 Rev. Rul. 72-464, 1972-2 C.B. 214. Although this is a debtor-to-creditor transfer, the result is the same.

19 See GCM 34902 (6/8/72).

20 Rev. Rul. 93-7, 1993-1 C.B. 125.

21 If the partnership makes a Sec. 754 election, the partnership has a Sec. 734 adjustment of $75 ($100 inside basis – $25 basis after distribution).

22 IRS Letter Ruling 201105016 (2/4/11).

23 Regs. Sec. 1.108-8, effective Nov. 17, 2011.

24 See the Regs. Sec. 1.108-8(b)(2) safe-harbor rule.

25 Rev. Rul. 2004-79, 2004-2 C.B. 106.

26 CCA 200040009 (10/6/00).

27 Regs. Sec. 1.108-2(b).

28 Regs. Sec. 1.108-2(c)(1).

29 Regs. Sec. 1.108-2(c)(2).

30 Regs. Sec. 1.108-2(c)(3).

31 Regs. Secs. 1.108-2(f)(1) and (2).

32 Regs. Sec. 1.108-2(g).

33 Regs. Sec. 1.453-9(c)(2).

34 See IRS Letter Rulings 8824044 (3/22/88) and 8425042 (3/19/84).

35 Jack Ammann Photogrammetric Engineers, Inc. , 341 F.2d 466 (5th Cir. 1965), rev’g 39 T.C. 500 (1962).

36 Rev. Rul. 73-423, 1973-2 C.B. 161.

37 Although this revenue ruling involved a corporation, the IRS believes the same rule applies to partnerships. Treasury is currently working on a revision of the regulations to clarify the results. See the preamble to Regs. Sec. 1.108-8, T.D. 9557 (11/17/11).

A $10.7 million compensation deduction miss

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Intercompany Debt — Is It Even Debt?

2013-Issue 40 —This edition of  Tax Advisor Weekly  updates our previous discussion on intercompany debt and outlines recent case law developments in this important area of tax law.

Two months ago, we discussed the practical considerations facing a CFO or tax executive in planning appropriate levels of subsidiary debt and intercompany debt. (See  “Intercompany Debt — How Much Is Reasonable?” 2013-Issue 32 .) Part of that analysis is the consideration of whether an instrument is characterized as debt or equity. In recent years, several large multinationals have been required to disclose Internal Revenue Service disallowances of billions in interest and related deductions that had been recognized on prior-year federal income tax returns. Often, the grounds for such a disallowance were that the company’s intercompany debt was more properly characterized as equity and, accordingly, that all related interest payments had been improperly deducted for U.S. federal tax purposes. The stakes are big, both for multinational corporations and the IRS with regard to potential adjustments in this area, so it should be no surprise that a number of cases address testing the approach taken by both the taxpayer and the IRS in making this debt versus equity analysis.

Courts have developed a long line of precedent since the 1913 inception of the income tax, providing insights into how to determine whether an instrument should be classified as debt or equity for U.S. income tax purposes. These cases apply a variety of factors to which they incorporate the facts and circumstances surrounding a particular instrument to make this determination. The result of this patchwork of case law has been the development and evolution of factors that may vary from court to court, from circuit to circuit. The number of factors and the weight ascribed to each may vary as well. Most courts apply 11 or more factors in their analyses. Five of the common factors were subsequently proscribed by Congress in Internal Code Section 385, the Code section enabling future Treasury regulations on the topic:

1) Whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest;

2) Whether there is subordination to or preference over any indebtedness of the corporation;

3) The ratio of debt to equity of the corporation;

4) Whether there is convertibility into the stock of the corporation; and

5) The relationship between holdings of stock in the corporation and holdings of the interest in question.

Because the statute indicated that the list of factors was not exclusive, the judicial differences persist. A consistency rule was added to Section 385 in 1992 to bind taxpayers to the label placed on the face of an instrument at the time of issuance. However, the IRS is afforded great latitude in challenging the characterization of an instrument as debt or equity and is explicitly not bound by the label ascribed to the instrument by the issuer. Given the latitude provided by the statute and emphasis on facts and circumstances, the issue is litigated regularly, and issuers have to rely on inconsistent judicial guidance when seeking to design instruments with a particular characterization.

A trio of cases decided by the Tax Court in 2012 addressed situations in which the IRS challenged the taxpayer’s characterization of its instruments as debt or equity. The Tax Court delivered two opinions in favor of the taxpayer on debt versus equity analyses. In  PepsiCo Puerto Rico, Inc. et al. v. Comm’r  (TC Memo 2012-269), the taxpayer prevailed in its argument that its instrument should be characterized as equity. Seeking the opposite characterization in  NA General Partnership, et al. v. Comm’r  (TC Memo 2012-172) (“ Scottish Power ”), Scottish Power convinced the Court that its instrument should be characterized as debt. In the third decision,  Hewlett-Packard Co. v. Comm’r  (TC Memo 2012-135), the Tax Court disagreed with the taxpayer, finding that Hewlett-Packard’s instrument actually reflected a debt obligation and was not an equity investment.

Scottish Power  provides insight into the Tax Court’s current approach to intercompany financing considerations, highlighting 11 key factors that the Tax Court considered in the case and that companies must consider when entering into intercompany debt arrangements:

1. The name given to the documents evidencing the indebtedness;

2. The presence of a fixed maturity date;

3. The source of the payments;

4. The right to enforce payments of principal and interest;

5. Participation in management;

6. A status equal to or inferior to that of regular corporate creditors;

7. The intent of the parties;

8. “Thin” or adequate capitalization;

9. Identity of interest between creditor and stockholder;

10. Payment of interest out of only dividend money; and

11. The corporation’s ability to obtain loans from outside lending institutions.

Despite the divergent characterizations sought by the taxpayers in  PepsiCo  and  Scottish Power , there were similar factual scenarios that the Tax Court’s opinions focused on that were absent in the  Hewlett-Packard  case. In both of those former cases, the taxpayer’s acquisition of entities as part of an effort to expand operations across borders necessitated the issuance of the instrument in controversy. Conversely, in  Hewlett-Packard , the foreign investment that predicated the instrument was constructed by an investment bank as a product to market to clients so as to generate foreign tax credits. The Tax Court focused on that credit generation as the substance of the transaction to disregard the conflicting form applied by the issuer.

In all three of the cases noted above, the Tax Court focused on whether the taxpayers’ actions were consistent with their intended characterization of the instrument. The Court found that the taxpayer in  Hewlett-Packard  had failed to act in a manner that a reasonable equity holder would have acted with respect to its subsidiary, and used that finding as the basis of its opinion to discredit Hewlett-Packard’s assertion that its instrument was equity. On the other hand, the efforts of PepsiCo and Scottish Power to adhere to the structure of their instruments were emphasized, and the taxpayers were given some leniency by the Tax Court for the instances in which they did not strictly follow the form of their instrument.

It seems likely that the existence of an ordinary course of business transaction with a strong business purpose contributed to the upholding of the taxpayers’ characterization in  PepsiCo  and  Scottish Power , but the lack of that business purpose in  Hewlett-Packard contributed to the recharacterization of the instrument. An IRS Special Counsel confirmed this following the release of the opinions, stating that “when the primary purpose of a transaction is to get to a tax answer . . . that does affect the analysis.” The three decisions noted above are part of an overall trend across both federal District Courts and the Tax Court that the IRS tends to be successful against taxpayers that entered into transactions with the primary purpose of obtaining a favorable tax answer and lacked a strong business purpose.

Regardless of the motivation for a company entering into an intercompany debt planning transaction, it is important to think through and properly document the transaction. The IRS and state and local taxing authorities are scrutinizing the substance of these transactions and have procedural tools in place to help them identify these issues during audit. Therefore, the disclosure of tax positions regarding debt versus equity classification may be required in two areas. First, the IRS specifically did not exclude these positions from the scope of disclosure required for uncertain tax positions on Schedule UTP in a 2010 announcement. Second, financial statement disclosures of the debt or equity classification position taken on an instrument may also be warranted under ASC 740, the codification of FAS 109, and ASC 740-10, the codification of FIN 48.

Several large multinationals have disclosed in their SEC filings that the IRS had examined the character of their intercompany instruments, something that could result in future rulings and guidance on this issue. For example, in 2007, Ingersoll-Rand PLC disclosed that interest paid on intercompany debt that it had incurred in connection with the company’s inversion had been disallowed by the IRS on the grounds that the instrument was equity. While the IRS later reversed its position, allowing the taxpayer to characterize the instrument as debt, it is safe to assume that Ingersoll-Rand incurred significant costs in defending the audit.

Alvarez & Marsal Taxand Says:

Companies that have in place, or are considering issuing, intercompany debt should ensure they have appropriate support for their intercompany financing arrangements in place prior to or contemporaneous with the transaction. While careful attention must be paid to developments in ongoing disputes, there is already a long line of judicial and statutory precedence that exists to assist a taxpayer in understanding whether the IRS is more or less likely to characterize its intercompany instrument as debt or equity. Despite this precedence, given the subjective nature of applying these factors, as well as changing terms appearing in instruments over time, the takeaway should be that while it may be true that a comprehensive debt-equity analysis and documentation of that analysis prior to entering into a intercompany debt transaction may not provide certainty given the patchwork of precedent and multiple factors subject to judicial interpretation that currently exist, it is worth the time and effort to make that analysis. Therefore, for a CFO or senior tax officer of a multinational, conducting a robust debt equity analysis upfront can go a long way to establishing the facts and intent around the debt instrument in question, while taking the many factors discussed above into account. It may be just enough to keep your company from engaging in costly audit defense or litigation down the road.

Kristina Dautrich Reynolds Senior Director, Washington D.C. +1 202 688 4222

Phil Antoon, Managing Director, Gwayne Lai, Senior Director, and Nicole Mahoney, Senior Associate, contributed to this article. 

For More Information:

Juan Carlos Ferrucho Managing Director, Miami +1 305 704 6670

Albert Liguori Managing Director, New York +1 212 763 1638

Jeff Olin Managing Director, Chicago +1 312 601 4240

Other Related Issues

08/06/2013 Intercompany Debt  —  How Much Is Reasonable?

02/17/2009 Financing U.S. Affiliates of Foreign Enterprises: Summary of Relevant U.S. Federal Income Tax Rules and Recent Developments

11/23/2006 Financing U.S. Operations

As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer. 

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit  www.alvarezandmarsal.com  or  www.taxand.com

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Intercompany Agreement

Jump to section, what is an intercompany agreement.

An intercompany agreement, or sometimes referred to as an ICA, is a legal document that helps facilitate two or more companies owned by the same parent company in exchange for financing, goods, services, or other exchanges. An agreement of this type is important to have as it can cement pricing structures, protect intellectual property, and formalize the rights of each company engaging in the agreement.

An intercompany agreement has a bit more flexibility in negotiations because the companies involved are all related under the same parent company. Intercompany agreements can facilitate the sharing of what they call intercompany services, which may include human resources, accounting, and legal service

Common Sections in Intercompany Agreements

Below is a list of common sections included in Intercompany Agreements. These sections are linked to the below sample agreement for you to explore.

Intercompany Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.1 2 dex101.htm MASTER INTERCOMPANY AGREEMENT , Viewed October 13, 2021, View Source on SEC .

Who Helps With Intercompany Agreements?

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Dean represents client in all manners of tax controversy and provides comprehensive business consulting to corporations, LLCs, and non-profits. He has worked with multi-national companies, but most enjoys assisting small businesses with all legal matters from formation to dissolution. Dean routinely represents individuals and businesses before the IRS and various state taxation agencies. From audits to appeals, he works closely with his clients to reach favorable outcomes and beneficial resolutions. Though he assists many clients in his home state of California, Dean values working with a diverse clientele throughout the country.

Meagan Kirchner has nearly a decade of experience in Immigration law. She has significant experience working on H-2B immigration matters. Her practice also focuses on business immigration, particularly representing corporate clients pursuing H, E3, TN, O, and L nonimmigrant classifications, as well as lawful permanent residence (EB-1A, NIW, EB-1C). Meagan has represented clients in a variety of industries including agriculture, hospitality, healthcare, IT, engineering, and finance. Meagan has a Bachelor of Science degree in Business from George Mason University and a Juris Doctor degree from the George Mason University School of Law. She is licensed to practice law in Virginia and is also a member of the American Immigration Lawyers Association (AILA).

In 1991, Barbara Markessinis graduated cum laude from Albany Law School in Albany, New York. Shortly thereafter, Barbara was admitted to practice in New York State and in the United States District Court for the Northern District of New York. In 1997, Barbara was admitted to practice in Massachusetts and in April of 2009 she was admitted to the United States District Court for the District of Massachusetts. After graduating from law school, Barbara worked in private practice in the Albany, New York area and for Sneeringer, Monahan, Provost & Redgrave Title Agency, Inc. before joining the New York State Division for Youth and the New York State Attorney General's Real Property Bureau as a Senior Attorney. During her tenure with the Division for Youth, Attorney Markessinis found herself in Manhattan Family Court in front of Judge Judy! A career highlight for sure! After admission to the Massachusetts Bar, Barbara returned to private practice in the Berkshires and eventually started her own firm in June of 2006. Attorney Markessinis offers legal services in elder law, estate planning and administration/probate, family law, limited assistance representation (LAR), real estate and landlord tenant disputes. In 2016, after a family member found themselves in need of long term care, Attorney Markessinis’ launched her elder law practice. Through this experience, Attorney Markessinis discovered that the process of selecting a long term care facility and/or caregiver, applying for MassHealth and preserving an applicant’s assets are serious issues faced by many people every day. This area of the law is Barbara’s passion and she offers her legal services to families who find themselves in need of an elder law attorney. Attorney Markessinis is part of the Volunteer Legal Clinic in the Berkshire Probate & Family Court and has provided limited free legal services to patients and families at Moments House cancer support center in Pittsfield. She currently serves as a Hearing Committee Member for the MA Board of Bar Overseers and is a member of the Berkshire County and Massachusetts Bar Associations, Berkshire County Estate Planning Council (BCEPC). Attorney Markessinis is also the host of WUPE Talks Law. She also serves on the Town of Hancock Zoning Board of Appeals and Planning Board.

40 years practicing most areas of commercial real estate and commercial real estate financing: heavy emphasis on reviewing, drafting and negotiating commercial shopping center leases, agreements of purchase and sale, title and survey, letters of intent, closing documents, lease amendments, lease terminations, etc

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Spotlight On…Intercompany Loans

Intercompany balances frequently build up between members of a group, often without formal documentation

It’s important to think about the tax consequences, otherwise a simple group transaction can lead to a nasty tax charge

Groups often want to tidy up their intercompany balances, particularly prior to a sale of a subsidiary or as part of a group reorganisation.

It’s easy to assume that a transaction between two group members will be tax neutral – but if you get it wrong, tax charges can be a significant cost. However, with a bit of advance planning, any problems can usually be solved.

This is relevant for all companies that are part of a group and have intercompany balances.

Where there is a formal intra-group loan, this will be a ‘loan relationship’ and specific tax rules set out how any profits or losses will be taxed. Provided borrower and lender are part of the same group, a loan waiver will not be taxed for the borrower (and the lender will not get a tax deduction).

Where the balance is a historical one, it is important to identify whether it is a ‘loan relationship’ or arises from some other transaction. A loan relationship is a transaction which relates to the lending of money; other transactions include the sale of goods or services, or outstanding payments for management fees.

A waiver of a trading balance can still be tax free for the borrower, but it’s important to have a formal release, supported by a deed of waiver – otherwise a tax charge could arise.

What should you do next?

Review the intercompany balances within the group and ensure that you know their history and background. If the balances are old and unidentified, sort out the position by making a formal loan so that the old balances can be repaid and replaced by a new loan relationship, and the tax treatment in future will be clear.

Also watch out for balances between companies who are not part of the same group – the rules are different, and there are particular pitfalls if two companies become related after the lender has made a bad debt provision.

There are some specific reliefs for companies in financial difficulties, but you need to make sure that you satisfy all the conditions in order to get the relief.

Would you like to know more?

If you would like to discuss any of the above guidance, please get in touch with your usual Blick Rothenberg contact or with one of the partners whose details you can find on this page.

If you would like to discuss any of the above guidance, please get in touch with your usual Blick Rothenberg contact.

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Intercompany Reconciliation Guide With Examples

Multi-entity organizations have a unique accounting challenge that other companies don’t face; intercompany transactions. So, in addition to traditional account reconciliation, multi-entity accounting teams also have to perform intercompany reconciliation (ICR) to verify all of the transactions among affiliates of the parent company.

In this post, we’ll discuss what intercompany reconciliation is, examples of intercompany reconciliation, the manual intercompany reconciliation process, and how to automate the process.  

What Is Intercompany Reconciliation?

Intercompany reconciliation is the process of verifying the transactions that occur between various legal entities owned by a single parent company.

It is very similar to standard account reconciliation, though instead of matching the company’s general ledger to a bank’s statement, the accountant reconciles transactions between the company’s various entities.  

This is important because it ensures there aren’t any discrepancies in the data and helps avoid double entries across multiple subsidiaries.

While you can manually reconcile the various entities in your company, plenty of automation solutions are also available. We’ll discuss both the manual process and automated solutions below.

Intercompany Reconciliation Process

If there are only one or two small entities within the parent company, you probably won’t have too many intercompany transactions and can perform the reconciliation process either monthly or quarterly. Therefore, you might be able to perform intercompany reconciliation manually. 

The first step to manually reconciling your accounting processes is to ensure that you accurately identify all intercompany transactions in each entity’s balance sheet and income statement.

To make this process easier for yourself, use the same identification and data entry standards for all journal entries involved in intercompany transactions. Ideally, all entities within the parent company use consistent data entry standards, though, at the very least, the journal entries for intercompany transactions should be consistent.

From there, you can choose one of three different processes to execute the intercompany reconciliation process:

• G/L Open Items Reconciliation (Process 001): For the reconciliation of open items
• G/L Account Reconciliation (Process 002): For reconciling profit/loss accounts or documents on accounts that don’t have open time management. 
• Customer/Vendor Open Items Reconciliation (Process 003): Used for most accounts payable and accounts receivables attached to customer or vendor accounts.

As you can see, manually consolidating entries is time-consuming and can slow down your monthly close process. In addition, it’s also risky. As the month-end draws near, your accountants will feel the pressure to finish the reconciliation process which can lead to errors in the data.

For this reason, we recommend that all companies invest in software to automate the process.

An Example of Intercompany Reconciliation (Automated)

Smaller multi-entity companies can theoretically get away with manually performing intercompany reconciliations in spreadsheets. However, larger corporations that deal with thousands or even millions of intercompany transactions execute the reconciliation process daily and therefore have to invest in automation software. 

While various software solutions offer intercompany reconciliation automation, we built SoftLedger because we couldn’t find a solution designed specifically to solve the challenges multi-entity companies face.

We’re particularly proud of it because it automates the entire intercompany accounting and consolidation process. Here’s a brief overview of how SoftLedger handles multi-entity transactions and automates the intercompany reconciliation process:

As you can see, as soon as a transaction for a single subsidiary enters the platform, SoftLedger automatically creates the corresponding journal entries for each intercompany transaction. It also performs any necessary intercompany eliminations and performs the reconciliation process for you.

This way, you always have access to real-time data and never have to worry about manual errors creeping into your consolidated financial statements.

It also makes it easier for you to close the books faster and improves the overall efficiency of your team’s workflow. 

However, there are also a few other key benefits of SoftLedger that make it unique from other traditional ERP systems. 

First, the platform is 100% programmable via API, making it easy to build just about any integration. This also makes it highly flexible, so you can build out your own customizations to fit specific needs. 

It is also the first accounting platform to offer native cryptocurrency capabilities. So rather than purchasing an add-on to integrate your crypto financial data with your fiat financial data, SoftLedger seamlessly combines the two.

As you perform the intercompany reconciliation process, there are probably a few other terms that you’ll hear as well. We’ll discuss these terms below.

Intercompany Payables

An intercompany payable is when a subsidiary in your company owes a payment (like a credit, loan, or advance) to another subsidiary in the parent company. In this case, the company that records the payable consumed the resources provided by the other subsidiary. 

That being said, intercompany payables are ultimately eliminated in the final consolidated balance sheet to avoid inflating the company’s financial data.

Intercompany Receivables

Intercompany receivables occur when one subsidiary provides resources to another subsidiary in the parent company. In this case, the subsidiary providing the resources records the intercompany receivable. 

Like intercompany payables, all intercompany receivables ultimately need to be eliminated in the final consolidated financial statement.

Intercompany Reconciliation Automation Software

While you can theoretically perform the intercompany reconciliation process manually, it’s time-consuming and can slow down the monthly close process.

In addition to creating an operational drag, this delay also means that executives won’t have accurate data for decision-making, leading to poor investment decisions.

To solve this problem, we built SoftLedger, which automates the intercompany reconciliation process.

Designed specifically for multi-entity companies, your team will always have access to real-time data, which makes it easy to close the month faster and improves data accuracy by minimizing the opportunity for human error.

To see for yourself how SoftLedger can streamline your accounting operations and improve efficiency, schedule a demo today !

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• Practical Law

Assignment of loan

Practical law uk standard document 9-500-4767  (approx. 31 pages).

• Lending - General
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Key questions on subordination

Sponsored by.

There are different forms and treatments of subordination agreements in Swiss insolvency. This article is inspired by the authors’ experience representing the security agent of $1.75 billion bond issue of a Swiss based oil refinery group

When a group of lenders extends credit to the same borrower, it usually enters into an intercreditor agreement, a key component of which is a subordination provision setting out the ranking and priority of repayment rights. In addition, the subordination of intragroup funding, ie loan agreements between group companies, to the lenders' claims is frequently seen in financing transactions. In Switzerland, subordination agreements also serve as an instrument under company law (article 725 II Swiss Code of Obligations (CO)) that enables over-indebted companies to continue doing business. The subordination clauses as seen in the intercreditor agreements or other debt financing structures on the one hand ( Nachrangigkeit ) and subordination agreements satisfying the requirements of article 725 II CO ( Rangrücktritt ) on the other serve different purposes and need to be carefully distinguished. Although all subordination agreements are concluded with a view to a possible insolvency of the borrower, their effect and enforceability in Swiss insolvency proceedings is only clear if falling under article 725 II CO, whereas the treatment of other contractual subordination is uncertain.

Subordination pursuant to article 725 II CO

Under Swiss corporate law, the board of directors has to take specific measures if the company finds itself in distress. These measures include a duty to notify the bankruptcy court, if a company suffers from a capital deficit to the extent that the claims of the company's creditors are no longer covered, whether the assets are appraised at going concern or liquidation values (over-indebtedness). The board of directors can refrain from notifying the judge, if a creditor subordinates its claims in the amount of the capital deficit to all other liabilities pursuant to article 725 II CO. There is no need for the board of directors to obtain approval from the other creditors or the shareholders. By subordinating their claims, creditors agree that, if insolvency proceedings are opened over the borrower company, dividend distributions will only be paid out to them if and after all other unsubordinated and unsecured claims are satisfied in full.

An agreement to subordinate a claim does not constitute a waiver. The borrower company must continue to account for subordinated claims as liabilities and disclose the subordinated loan separately in the annual financial statements. Accordingly, the subordination itself does not constitute a restructuring measure since the financial situation of the company remains unchanged. However, subordination agreements increase the chances for a distressed company to financially recover as they allow for more time to adopt restructuring measures. Subordinated loans pursuant to article 725 II CO have in practice often been used as de facto equity surrogates for many years, although this is not the intention of the law. It is important to note that the Swiss Federal Supreme Court held that subordinated claims are to be included in the calculation of damage when ruling on a director's liability claim.

The law stipulates that the board of directors can only refrain from notifying the judge if the amount of subordinated claims equals or exceeds the capital deficit. The wording of article 725 II CO does not indicate whether the deficit should be appraised at going concern or liquidation values for the purposes of determining the necessary subordination amount. The question is controversially discussed. Some authors argue that in addition to the capital deficit the subordination amount should cover at least part of the share capital. A 2003 judgment of the Swiss Federal Supreme Court dealing with the termination of a subordination agreement, indicates that it is admissible to appraise assets at going concern value if the company is expected to overcome the state of over-indebtedness. If this is not the case, for example due to the company's liquidity problems, accounting on a going concern basis is no longer permitted. In such a case, the extent of the subordination of claims required needs to be calculated at liquidation values, which usually makes restructuring impossible. The going concern statement of the auditors is paying an important role in the termination of the subordination and any restructurings.

Legal doctrine and case law have determined that any subordination agreement needs to include a deferral agreement, at least with regards to the principal amount of the loan, as well as a prohibition for the borrower to repay or set off the subordinated liabilities. If it were possible to satisfy the subordinated creditor before insolvency, this would jeopardise the purpose of article 725 II CO to improve the borrower's financial situation, and the position of the other unsubordinated and unsecured creditors. The declaration to subordinate must further be irrevocable, unconditional and unlimited in time (although termination is possible under the requirements explained below) to meet the requirements of article 725 II CO. Finally, the claim covered by subordination may not be collateralised with assets of the borrower.

The subordination agreement can only be terminated once the borrower company is no longer over-indebted, which may be assessed on a going concern basis. Until then, the subordination agreement remains effective, according to the Federal Supreme Court.

Subordination agreements in debt financing – relative subordination

In addition to the subordination pursuant to article 725 II CO, which constitutes a company law instrument and may enable restructuring measures, subordination agreements can serve to secure the payment of debt owed to one or more specific creditors and are most commonly used in the context of financing transactions. Since the subordination according to article 725 II CO benefits all other creditors, it is often referred to as general subordination. This is in contrast to the subordination agreements intended to benefit only specific lenders, ie provide for relative subordination. If the subordination is not intended to have the effect of article 725 II CO, it does not have to fulfil the requirements described above. In most cases though, a subordination agreement will contain a deferral as well as a prohibition of repayment or set off, to ensure the intended effect of the subordination. In addition, the subordinated creditor might assign its claim to the senior creditor. However, such assignment of the subordinated claim is not mandatory to give effect to the relative subordination.

Subordination provisions in intercreditor agreements

Intercreditor agreements determine the ranking between the lenders of a syndicated loan including provisions on payment seniority, security interest priority and contractual subordination (payment waterfall or application of proceeds).

The basic premise of intercreditor agreements including mezzanine and senior debt financings is that mezzanine debt is subordinated in right of payment to senior debt. The borrower is usually blocked from paying the mezzanine debt and the mezzanine creditors are prohibited from exercising remedies against the borrower. The intercreditor agreement may also contain a provision, by which the mezzanine creditor is required to turn over any amounts they receive but are not entitled to under the intercreditor agreement, to the agent for application in accordance with the payment waterfall. As it is generally the agent's responsibility to receive payments from the borrower and distribute them to the parties in accordance with the intercreditor agreement, the enforceability of such subordination provisions in Swiss insolvency proceedings (namely their consideration ex officio by liquidators), is of limited relevance.

Subordination of intercompany loans

If a company requires capital beyond what they are able or wish to obtain through the standard syndicated loan they may enter into an additional financing transaction. A company may combine a syndicated loan with a high yield bond. In simplified terms, such a structure might look as follows (see illustration above): a group of companies, ie their holding company X Holding AG, receives financing from a bank syndicate under a credit facility. In addition, the group's finance company, X Ltd, as an example, issues bonds at a later stage, the proceeds of which are distributed within the group through various intercompany claims. Normally, all of the group's assets are assigned as collateral to the bank syndicate – with the exception of the intercompany loans. These intercompany claims remain the only asset available to provide security for the bondholders. Intercompany claims are frequently not assigned to the bank syndicate because re-assignment for restructuring purposes requires the consent of all, or at least the majority, of banks. For the same reasons, the assignment as security of all intercompany claims in favour of the bondholders is not desirable from the borrower's perspective. In our example, a couple of intercompany loans into the same group company – X AG – are assigned as security to the bondholder agent and constitute the senior claim of the bondholders into X AG. In addition, some group companies agree to subordinate their (current and future) intercompany claims against that same company, X AG, in favour of the senior claim, to prevent that additional intercompany indebtedness of X AG impair the value of the bondholders' security, ie the senior claim, in the event of insolvency.

The relevant missing element, if intercompany loans are subordinated to secure the obligation under a separate second financing transaction, is that there is no intercreditor agreement between the subordinated intra-group companies and the senior lenders of the second financing transaction.

Enforcement of subordination in Swiss insolvency proceedings

Subordination agreements are subject to the choice of law. If insolvency proceedings, ie bankruptcy or composition proceedings, are opened over a company domiciled in Switzerland, these proceedings are governed by Swiss law. Therefore, if the question arises as to whether a subordination agreement is valid and how it is to be qualified, foreign law may apply – often English law. The question of how subordinated claims are to be dealt with in Swiss insolvency proceedings is governed by Swiss law, namely the Swiss Debt Enforcement and Bankruptcy Law (DEBL).

Creditor rankings in Swiss insolvency proceedings

In Swiss insolvency proceedings, all claims are ranked as follows:

Estate claims ( Masseverbindlichkeiten ) consist of claims arising out of transactions entered into after the opening of insolvency proceedings as well as the costs of conducting the proceedings and are satisfied with priority before any distributions are made to other creditors.

Secured claims ( pfandgesicherte Forderungen ) are satisfied on a priority basis from the proceeds of the disposal of the security. If these proceeds are not sufficient to satisfy the entire secured claim, the uncovered amount ranks as unsecured claim.

Unsecured claims are divided into three classes:

The first class of claims mainly consists of claims arising from employment relationships.

The second class encompasses claims from social security.

The third class comprises all other unsecured and unsubordinated claims.

Dividend distributions are made according to the creditors' ranking. Claims in a lower ranking class will only receive dividend payments if all claims in a higher ranking class have been satisfied in full. If the insolvency estate does not have enough funds to cover all claims in one class, the proceeds are distributed to the creditors of that class on a pro rata basis according to the claim amounts. The division of unsecured creditors into three classes is binding for the liquidators. A contractual subordination, by which a creditor agrees to have his claim satisfied only after specific or all other claims are satisfied needs to be dealt within the legal ranking system of the DEBL.

Enforcement of subordination pursuant to article 725 II CO

In prevailing doctrine there is a consent that the liquidators in a bankruptcy or composition proceeding have to enforce a subordination pursuant to article 725 II CO ex officio. Generally, the liquidator admits or rejects a creditor's claim in a schedule of claims and accordingly prepares a distribution plan. Although the effect of a subordination agreement will not materialise before the stage of dividend distribution, as it can only then be determined whether the claims of the beneficiaries will be fully satisfied, the liquidators have to include their decision on the admittance of the subordinated claim and the validity of the subordination agreement in the schedule of claims. If the subordination is accepted by the liquidators, the subordinated creditor only receives dividend distributions, if there are sufficient funds in the insolvency estate to satisfy the claims of the beneficiaries. In the case of a subordination agreement pursuant to article 725 II CO, all other unsubordinated creditors will benefit from the subordination – the subordinated creditor will in most cases not receive any distributions.

Enforcement of relative subordination

Whether a liquidator also has to consider a subordination agreement which only benefits specific creditors (relative subordination) ex officio is controversially discussed. Some authors and liquidators argue that a claim which is relatively subordinated, should be admitted in the schedule of claims like a normal claim and dividend payments made to the subordinated creditor. According to prevailing opinion, however, relative subordination should be enforced by the liquidator just like subordination pursuant to article 725 II CO. In this case, the dividend accruing to the subordinated creditor would not be paid out to the subordinated creditor but directly to the senior creditor (in addition to the senior creditor's own dividend) until the senior claim was paid in full. After the senior creditor has been paid, the remainder of the subordinated creditor's dividend would be paid toward the subordinated creditor's own claim.

This discussion also becomes relevant if parties have to enforce the subordination agreement in court. If the subordination is to be admitted or rejected in the schedule of claims ex officio, any disagreement between the parties about its validity or its extent must be settled by means of an action to contest the schedule of claims. Such litigation takes place in Switzerland, where insolvency proceedings were commenced. If on the contrary, the liquidator does not have to take the subordination into account, the senior creditor would have to file an action against the subordinated creditor to turn over dividend distributions, ie a normal action for payment outside insolvency proceedings.

In cases where the subordination has been agreed to in an intercreditor agreement, the senior creditors are not as dependent on the liquidator to decide on the subordination in the schedule of claims. If the liquidators ignore the relative subordination and make distributions to the subordinated creditor, the latter would have to turn over such distributions to the agent for application of proceeds. Hence, the senior creditors may assert their claims under the subordination clause against the subordinated creditor or the agent.

The situation is different if a company raises funds through two separate financing transactions, and intercompany loans (or other claims) are subordinated to secure repayment of the second transaction. As explained, in such structures the senior creditors are not party to an intercreditor agreement and thus cannot rely on an agent to apply proceeds according to a waterfall provision. Further, in most cases the entire group of companies becomes insolvent, thus not only the borrower but also the subordinated creditors. If the Swiss liquidator does not have to decide on the relative subordination ex officio , the bondholders would potentially have to initiate separate litigation against all the subordinated creditors in their respective jurisdictions. Although the subordination agreement will usually contain a jurisdiction clause, claims against insolvent subordinated creditors have to be filed where they were domiciled. This would increase the risk of conflicting interpretations of the subordination agreement by the respective courts, while coordination in Switzerland in the context of the same insolvency proceedings would be much simpler and more practical.

In case of insolvency of the whole group, there is also a risk of claim dilution should the subordination not be enforced by the liquidator and the senior creditor not be able to rely on an intercreditor agreement (see illustration below). If the subordinated creditor becomes insolvent as well, the senior creditor will have to file their claim for turnover of dividends paid to the subordinated creditor by the borrower as an insolvency claim. Should the senior creditor prevail, they can only expect a (further) dividend payment from the insolvency estate of the subordinated creditor. That dividend payment will be calculated on the basis of the dividend the subordinated creditor received from the borrower's insolvency estate. Thus, senior creditors can only expect to receive a dividend on the dividend.

As of today, Swiss courts have not had the opportunity to address the question of whether a liquidator is under an obligation to take into account an agreement providing for relative subordination to the benefit of specific creditors. As long as the Swiss Federal Supreme Court has not issued a judgment in this respect, the enforceability of a relative subordination agreement, as often used in financing transactions, in Swiss insolvency proceedings is uncertain. In addition, it is controversially discussed whether the senior creditor has a right to file the subordinated claim in the insolvency proceedings on behalf of the subordinated creditor. Some authors oppose this view, arguing that the senior creditor is only left with a compensation claim against the subordinated creditor, should the latter refrain from filing his claim. For all these reasons, alternative mechanisms to a relative subordination should be considered in transactions involving Swiss companies.

The benefits of a relative subordination might be achieved through an assignment of the claim by way of security. The enforceability of a security assignment in insolvency proceedings is undisputed and has been confirmed by the Swiss Federal Supreme Court. In addition, the assignee is not dependent on the assignor to actually file the claim, as they himself become the claimant. As explained above, with respect to intercompany claims an assignment is generally avoided deliberately, as this restricts a group's future restructuring possibilities and the work of the finance department. To avoid this, the effectiveness of the assignment could be made conditional upon the insolvency of the borrower. As there is an increased risk in an intra-group context, that the subordinated creditor become insolvent around the same time as the borrower, parties should bear in mind the risk of claw-back actions in the insolvency of the subordinated debtor.

Given the important role subordination agreements play in the context of financing transactions, the enforceability of not only general but also relative subordination in Swiss insolvency proceedings would be desirable, in order to not restrict their use. The relevance of this discussion is limited in standardised transactions including an intercreditor agreement, as the subordination can be enforced by means of the agent. However, the relative subordination of intercompany loans is also a common structuring possibility in financing transaction. In these cases, senior creditors need to rely on the liquidator to enforce the payment waterfall or might face proceedings in several jurisdictions and risk a dilution of their claims, if the subordinated creditor became insolvent as well. Until the Swiss Federal Supreme Court decides the matter, this useful tool should be employed with caution. A conditioned security assignment as described above should be considered in addition to a subordination agreement.

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• Business and industry

Corporate Finance Manual

Cfm31130 - loan relationships: related transactions: transferring debt, transferring debt.

A company can transfer its rights or liabilities by such methods, as listed in CTA09/S304(2), as

• selling them for consideration
• giving them away, or
• exchanging them

as long as the terms and conditions of the debt allow this; for example some debt may be non-transferable.

In some circumstances the company may be required to assign its rights by operation of law rather than by bargain.

SDR Ltd holds £50,000 in loan notes of YV plc, to be redeemed in 10 years. Because of cash flow problems, it needs the money now, so it might

• sell the loan notes to JK Ltd, a third party
• exchange the loan notes with a third party for, say, government securities that it could cash quite easily.

These are both related transactions.

Liabilities

Liabilities cannot be assigned from the original debtor to another so as to free the original debtor from the obligations. The obligations may be delegated or sub-contracted, but normally the only way to transfer the obligations under a contract is by novation.

Liabilities can be transferred under English law and the law of many other jurisdictions under an operation of law called novation. A novation involves substituting a new debt for the original debt, where the lender remains the same person but the debtor is usually different. Novations often occur when companies are restructuring, and requires the agreement of all parties to the debt. In most cases, it will be clear from the documents that there is a tripartite agreement, although in some cases agreement can be inferred from conduct.

Debt transferred in a reorganisation or takeover

Inter-company debt transferred during company or group reorganisations may derive from the provision of goods or services and not from the lending of money between the group members. The debt may therefore not be a loan relationship.

Repos and stock loans

Profits and losses from transfers involving repos and stock loans are not treated as related transactions. See CFM45000 .

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