When stock is exchanged for debt in a bankruptcy reorganization, potentially abusive tax situations can result if the reorganization occurs strictly for the carryforward of tax attributes to the acquiring corporation. The basic question is to what extent the discharge of indebtedness provisions, the application of the various statutory and judicial requirements, and the consolidated return regulations prohibit or restrict the carryforward of the tax history of the debtor corporation. Bankruptcy reorganization for a corporation under Chapter 11 of the Bankruptcy Code can take the form of either a recapitalization or a reorganization. Because a “G” reorganization involves a discharge of debt, Internal Revenue Code (I.R.C.) § 108 determines the tax treatment for the debtor corporation and the extent of any reduction of the tax attributes to the debtor based on the debt discharge. I.R.C. § 381(a)(2) allows the acquiring corporation in a “G” reorganization to receive the tax attributes of the debtor corporation, such as net losses. Nevertheless, the disallowance provisions of the consolidated return regulation may limit or prohibit the use of such tax benefits. While the Internal Revenue Service may not have a pre-petition tax liability claim during a bankruptcy proceeding, the tax consequences of a confirmed plan may be significant with potential tax-attribute carryover. The discharge of indebtedness provisions, the applications of the various statutory and judicial requirements, the tax attribute limitation rules, and the consolidated return regulations are effective to prohibit abusive situations involving net operating losses and other tax attributes. The complexity and scope of the limitation's provisions and the proposed consolidated return regulations are so encompassing that the ability to currently structure an acquisition solely for carryover of tax attributes from a non-affiliated corporation is somewhat comparable to Sir Galahad’s quest for the Holy Grail.
St. Mary's University School of Law
Martin M. Van Brauman,
The Carryforward of Net Operating Losses and Other Tax Attributes after Bankruptcy Reorganizations.,
St. Mary's L.J.
Available at: https://commons.stmarytx.edu/thestmaryslawjournal/vol23/iss2/5
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