New ruling sheds light on scope of section 246A.
Currently, there is little guidance on the relationship required between debt and a stock investment in order to invoke section 246A. In general, portfolio debt includes the following:
* A nonrecourse loan secured by portfolio stock.
* An equity-financed block of stock used as collateral for a later borrowing when a sale of the stock (in lieu of borrowing) would have been reasonable.
Moreover, the mere coexistence of debt and stock does not, by itself, invoke section 246A.
Letter ruling 9141006 sheds important new light on the contours of section 246A. The ruling concerns a corporation that sold equity and used a portion of the proceeds to acquire portfolio stock. Later it incurred bank debt to finance working capital and fund an acquisition. The taxpayer's accounts receivable and the acquired stock served as security for the bank debt.
The letter ruling, citing revenue ruling 88-66 (situation 1), concludes the bank debt is not portfolio debt because
* The portfolio stock was not used as collateral.
* The loan proceeds were used to finance an acquisition (a major non-recurring expenditure) in a new line of business.
Interestingly, the bank loan required the borrower to maintain a specified level of "quick assets," and the portfolio stock served to meet that requirement. Nevertheless, this loan condition did not serve to invoke section 246A because it did not rise to the level of a security interest in the stock.
Observation: Apparently, section 246A, previously uncertain in scope, can never be invoked if portfolio stock does not serve as security for debt.
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|Title Annotation:||letter ruling 9141006 on dividends-received deduction|
|Publication:||Journal of Accountancy|
|Date:||Jan 1, 1992|
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