Tax Court shuts down Broadvox’s bankruptcy loss claim
Temnorod v. Commissioner, T.C. Memo. 2025-127, No. 5114-19, 2025 BL 438676, Court Opinion
Broadvox could not run $3.162 million of bankruptcy-related payments through cost of goods sold. It had to capitalize them as part of the price of buying Infotelecom’s assets.
Holding
The Tax Court agreed with the IRS. Broadvox had to treat the $3.162 million paid to resolve Infotelecom’s AT&T and Verizon bankruptcy claims as part of the cost of acquiring Infotelecom’s assets. Broadvox could not treat those amounts as cost of goods sold or a current deduction.
Why It Matters
Service businesses usually do not have “cost of goods sold” in the tax sense. They have deductible expenses, or capital costs, or both.
Payments that function as conditions to acquiring assets generally get capitalized under §263, even if the buyer views them as settling disputes or protecting its business.
Assumed liabilities and “cure” amounts paid to get contracts and assets out of bankruptcy often become part of the basis, not current deductions.
S-corporation shareholders feel the impact directly because disallowed losses flow through to their individual returns, including net operating loss carrybacks.
Timeline
2001–2008: Broadvox group builds VoIP business. Infotelecom operates as a CLEC and signs interconnection agreements with AT&T and Verizon.
2011: Disputes over access-charge “deltas” escalate. Infotelecom files Chapter 11 in Ohio.
March–May 2012: Bankruptcy court approves settlements and “cure” structures with AT&T and Verizon tied to the planned asset sale.
June 22, 2012: Broadvox’s subsidiary closes on the asset purchase. It pays $1.6 million to Verizon and $1.660 million to Infotelecom, and Infotelecom funds the AT&T cure.
2012 return cycle: Broadvox reports $3.162 million as cost of goods sold and reports a large loss that flows to shareholders.
IRS exam: IRS disallows the cost-of-goods-sold treatment. Deficiencies follow for shareholders, including 2010 carryback years for some.
Key Facts
Broadvox, Inc. was an S corporation. It owned BV Holding, a single-member LLC treated as disregarded for federal tax purposes.
Infotelecom, a related telecom carrier, went through Chapter 11. AT&T and Verizon filed large unsecured claims tied to disputed access charges.
BV Holding bought “substantially all” of Infotelecom’s assets through a bankruptcy-approved Asset Purchase Agreement.
Closing payments included:
$1,600,000 to Verizon (the “Verizon Cure”).
$1,660,754 to Infotelecom (including the stated cash purchase price and amounts for other allowed claims).
Infotelecom paid AT&T $1,562,004 under a bankruptcy order (funded through a mix of escrow releases and a wire transfer).
Broadvox treated $1,600,000 and $1,562,000 as cost of goods sold on its 2012 Form 1120S, resulting in a reported $7.79 million loss.
Statutory or Regulatory Framework
§162 allows deductions for ordinary and necessary business expenses.
§263 generally requires capitalization of amounts paid to acquire, improve, or create assets, or that otherwise directly relate to acquiring an asset.
Capitalization usually controls when an expenditure could arguably fit both buckets. The Code prioritizes capitalization over current deduction (the §161 and §261 ordering concept, as explained in Idaho Power and INDOPCO).
Courts look at whether a payment directly relates to an acquisition process. If it does, it generally increases basis, including assumed liabilities.
Arguments
Taxpayer argued:
Broadvox provided telecom services. The payments were “cost of sales” and belonged in cost of goods sold.
Alternatively, the $3.162 million functioned as settlement payments to eliminate exposure to AT&T and Verizon claims tied to disputed deltas, not as consideration for assets.
The asset purchase price should be viewed as smaller. The rest was paid to clear liabilities and keep the business operating.
IRS argued:
Broadvox was a service provider. The cost of goods sold did not fit.
The Asset Purchase Agreement and bankruptcy orders treated the payments as part of the acquisition structure. The buyers should not recharacterize the deal after the fact.
Amounts paid or assumed to satisfy the seller’s liabilities as a condition of acquiring the assets must be capitalized into the basis.
Court’s Reasoning
Broadvox did not sell goods. It sold services. That made the “cost of goods sold” framing a nonstarter for these payments.
The Asset Purchase Agreement described the purchase price as a bundle. It included the cash price and assumed liabilities, including the Verizon cure. The bankruptcy court also found the consideration fair and tied to the acquired assets.
The court treated the terms of the agreement as clear. Petitioners did not show a mistake, fraud, duress, or other grounds that would allow them to rewrite what the contracts provided.
Even if the payments had a second purpose, like reducing Broadvox’s risk of claims, they were still directly related to acquiring Infotelecom’s assets and contracts out of bankruptcy.
Paying off, curing, or assuming the seller’s obligations to get the assets transferred is a classic capitalization fact pattern. That remains true even if the buyer views the payment as protective or business-motivated.
Infotelecom’s later amended return treatment, which characterized the $3.162 million as proceeds from goodwill, reinforced that the payments aligned with asset value, not current operating expense.
Result
The $3.162 million could not reduce Broadvox’s 2012 taxable income as cost of goods sold or current deductions. Broadvox had to capitalize the payments, and shareholder-level deficiencies followed.
The Takeaway
If you pay money in a bankruptcy deal so that the contracts and assets actually transfer, the IRS will treat that money like part of the purchase price. You can call it “settlement” all day long. The tax law still tends to call it “basis,” and it makes you wait to recover it.