An S corporation had a problem—its subsidiary which had elected to be treated as a Qualified Subchapter S Subsidiary (QSUB) was about to be placed in receivership by a government agency, being in a condition “unsafe to conduct business.”  This would effectively result in the S corporation losing the entire subsidiary and receiving nothing in return.

The shareholders wanted to make the best of a bad situation and at least get an ordinary loss from the worthlessness of the subsidiary.  They came up with a theory about how to trigger an ordinary loss, a theory the the National Office gave its comments on in Chief Counsel Advice 201552026.  Unfortunately for the shareholders, the National Office did not concur with their view of the proper treatment.