Corporate guarantors do not have taxable income as a consequence of being released from their guarantees, the IRS said.

The US Department of Energy found that an oil trading company violated US price controls on its resales of oil and ordered the trading company to repay the overcharges with interest. The government’s restitution order also held the parent company jointly liable for the amount. Later, the government released the parent from any liability.

Ordinarily, when a debtor is released from a debt, he must report the amount as taxable income.

However, there was no discharge of debt in this case, the IRS national office said in an internal legal memorandum. The agency analogized the case to the situation where a corporation guarantees a debt owed by its subsidiary. The debt remains, but the guarantee is released. The parent guarantor has no income because it has had no increase its net worth. There is no income in the sense of an accession to wealth.

The IRS released a redacted version of its analysis in late January. The memorandum is ILM 200402004.

Keith Martin