Baker Hughes Inc. v. United States, 313 F. Supp. 3d 804

Baker Hughes (successor to BJ Parent) operated in Russia through subsidiary ZAO Samotlor Fracmaster Services (BJ Russia) under a multi‑year, guaranteed performance contract with TNK‑BP worth ~ $44M.
BJ Russia suffered losses and, in Oct. 2008, the Russian Ministry of Finance warned BJ Russia faced forced liquidation for failing Russian net‑asset capitalization rules.
To avoid liquidation (and potential exposure under its performance guarantee), BJ Parent reorganized ownership so Samotlor Holding (Cyprus) became majority shareholder and Samotlor issued a "Free Financial Aid" agreement for $52M to BJ Russia; BJ Parent transferred the funds on Samotlor’s behalf.
The Free Financial Aid agreement expressly stated the funds were not expected to be repaid; BJ Russia used some funds to pay down intra‑group liabilities and restore net assets.
Baker Hughes claimed a $52M deduction on its U.S. tax return; the IRS disallowed it. Baker Hughes sued for refund, arguing the payment was either (1) a bad‑debt deduction under §166 or (2) an ordinary and necessary business expense under §162.
On cross motions for summary judgment, the court evaluated (as a matter of law) whether the payment was debt (deductible) or capital/contribution (not deductible).

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the $52M transfer is a bad debt deductible under §166	Payment discharged BJ Parent's guaranty exposure (treated as payment of debt by guarantor under Treas. Reg. §1.166‑9)	No debt was created or discharged; transfers were "free financial aid" (equity/contribution), not enforceable loans	Transfer was not a debt, did not discharge any guaranty obligation; §166 deduction denied
Whether the $52M transfer is an ordinary and necessary business expense under §162	Payment was ordinary/necessary to protect BJ Parent's business (avoiding >$160M exposure and reputational harm)	Voluntary capital contribution to recapitalize subsidiary; benefits extend beyond taxable year; not an expense of payer; Lohrke exception inapplicable	Transfer was a capital contribution (not an "expense"), benefits were capital in nature; §162 deduction denied

Stinnett's Pontiac Service, Inc. v. Comm'r, 730 F.2d 634 (11th Cir. 1984) (advances are debt only where reasonable expectation of repayment exists; distinguishes loans from capital contributions)
Slappey Drive Ind. Park v. United States, 561 F.2d 572 (5th Cir. 1977) (shareholder funds are at business risk; factors for debt vs. equity)
Estate of Mixon v. United States, 464 F.2d 394 (5th Cir. 1972) (multi‑factor test for determining debt versus equity characterization)
Piggy Bank Stations, Inc. v. Comm'r, 755 F.2d 450 (5th Cir. 1985) (voluntary payments/gifts to corporation are not deductible as bad debts)
INDOPCO, Inc. v. Comm'r, 503 U.S. 79 (1992) (capital expenditures produce future benefits; capitalization generally required)
Comm'r v. Fink, 483 U.S. 89 (1987) (shareholder capital contributions are not currently deductible and instead adjust stock basis)
Mills Estate v. Comm'r, 206 F.2d 244 (2d Cir. 1953) (recapitalization‑related costs are capital in nature and nondeductible)