Parent guarantees are a benefit to subsidiaries for which the parent company should be paid, and if a fee is not paid, then one should be imputed, the tax section of the New York State Bar Association told the IRS.

The bar association sent the IRS extensive comments on parent guarantees in September. The agency is already studying whether to issue guidance.

The bar association said guidance is “sorely needed” and suggested that it cover not just guarantees, but also other arrangements that enhance the credit of a subsidiary. However, a promise by a parent company to make future capital contributions to the subsidiary should not lead to an imputed fee to the parent.

The imputed fee should be what a third party would charge to provide the same credit support. Some have argued for use of a “yield approach,” where the fee is a function of the savings in borrowing costs to the subsidiary from having the parent guarantee, but the bar association said such an approach should not be “reflexively preferred.”

It recommended against reducing the imputed fee for benefits supposedly conferred on the parent from having a more valuable subsidiary and suggested ignoring arguments that it might be more expensive for a third party to provide a guarantee than for the parent to do so.

by Keith Martin