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A gain or loss could be recognized by the investor when it is a seller or net-seller of in-substance common stock. This treatment is considered acceptable because the in-substance common stock is determined to have risks and reward characteristics that are substantially the same as the entity’s common stock. After the gain or loss is recognized, the investor should assess whether the investment is still in-substance common stock.
Gains and losses arising from investee transactions of a capital nature are not currently taxable events. Deferred taxes will have to be provided for the entire difference between the book and tax basis in the investment, including the portion that results from a change in interest gain for all investees unless:
  • the entity is a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration; or
  • an entity is a domestic subsidiary for which the basis difference is a permanent difference rather than a temporary difference.
If deferred taxes are provided on a change of interest gain reflected as a credit to investor paid-in capital, intraperiod tax allocation must be followed. See TX 11 for further information.

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