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Abstract
On December 9, 2003, the IRS issued Rev. Rul. 2003-125, which holds that a deemed liquidation resulting from a check-the-box election can constitute an identifiable event, which triggers a worthless stock deduction. In contrast to its approach in FSA 200226004, where it all but ignored the solvency question and concluded that when a business continues after a check-the-box liquidation the entity's stock must have had potential value, the IRS in Rev. Rul. 2003-125 correctly changed its focus and looked instead to the insolvency prong of the worthlessness test. Rev. Rul. 2003-125 holds that when a check-the-box election is made for a subsidiary, the shareholder is entitled to a worthless stock loss under Section 165(g)(3) if the fair market value of the entity's assets, including intangible assets such as goodwill and going concern value, is less than the entity's liabilities on the effective date of the election. Taxpayers that plan to check the box on an insolvent subsidiary and claim a worthless stock loss while the business continues can take comfort in Rev. Rul. 2003-125's conclusion that the check-the-box election will be treated as an actual liquidation, an identifiable event terminating potential value for worthless stock loss purposes.