The Intersection of Bankruptcy and... Tax Law (Series: Bankruptcy Intersections 2020)

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Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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Meet the Faculty
MODERATOR:
Daniel C. Cohn - Murtha Cullina LLP
PANELISTS:
Gary W. Marsh - Dentons
Keith D. Lowey - Verdolino & Lowey P.C.
David Agler - Crowe LLP
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About This Webinar
The Intersection of Bankruptcy and… Tax Law
The issues created by the intersection of bankruptcy law and tax law are complex and marked
by the tension between federal and state laws designed to assure collection of taxes and the
fundamental goal of the federal bankruptcy laws, which is to give debtors a financial "fresh
start" from burdensome debts. While some tax relief is available to debtors under the
Bankruptcy Code, in general tax liabilities are not dischargeable in bankruptcy and must be
paid on a priority basis. Moreover, debtors continue to be subject to applicable federal
income tax laws and must timely file federal income tax returns and pay federal income tax.
This webinar examines tax claims, responsibilities of debtors to taxing authorities, and the all-
important issue of personal liability for the taxes of a corporate debtor.
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About This Series
Bankruptcy Intersections
Bankruptcy law is generally a federal-based practice, and governed by title 11 of the United
States Code (the Bankruptcy Code). Bankruptcy law, however, is far from an insular practice;
there is substantial interplay between bankruptcy law and almost every other area of law due
to the myriad legal issues that arise during the course of a bankruptcy case. This webinar
series focuses on how issues involving intellectual property, employment and labor, tax law,
and environmental law are treated through the prism of bankruptcy.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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Episodes in this Series
#1: The Intersection of Bankruptcy and… Tax
Premiere date: 2/12/20
#2: The Intersection of Bankruptcy and… Labor/Employment
#3: The Intersection of Bankruptcy and… IP
#4: The Intersection of Bankruptcy and… Environmental
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Episode #1
The Intersection of Bankruptcy and… Tax
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What Type of Insolvency?
• Insolvency outside a formal process
• Bankruptcy
• Receivership
• Assignment for the Benefit of Creditors
• Debt workouts
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What Type of Taxes?
• Must consider all federal, state, local and foreign:
 Income taxes
 Franchise taxes
 Gross receipts taxes
 Payroll, employment and disability taxes
 Sales taxes
 Use & excise taxes
 Withholding taxes
 Other taxes
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What Type of Taxpayers?
• Federal income tax classification and taxation of legal entity or legal arrangement is
governed by federal income tax laws and not non-tax federal, state or local laws
• Taxpayers can include:
 Debtor
 Debtor’s subsidiary and affiliates
 Debtor’s officers, directors and shareholders
 Creditors
 Guarantors
 Fiduciaries, trustees, receivers, assignees
 Certain asset purchasers
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What Are the Issues?
• Tax entity tax liability and/or third party tax liability issues
• Taxable vs. pass-through tax entity classification issues (see discussion below)
• Personal liability for D&Os and employers
• Personal liability for owners
• Personal liability for fiduciaries
• Liens & Priorities
• Entity tax classification, minimization of tax liability, and tax attribute utilization
• Cancellation of debt income (“CODI”) and other income items;
• Current and net operating loss carryovers and carrybacks (“NOLs”);
• 2017 Tax Act (Public Law 115-97) changes.
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Federal Income Tax Considerations for the Debtor in
Insolvency Cases
• Debtor's federal income tax entity status (taxable entity or pass through tax entity)
• Debtor's legal and tax organization structure
• Debtor's tax history and tax attributes
• Debtor's insolvency and whether the Debtor files for bankruptcy
• Debtor's tax year
• Debtor's accounting method
• Debtor's current year tax Items (income, gain, deductions, losses or credits) including tax
items resulting from the debtor's debt restructure or liquidation
• Type of creditor claim that is paid in the case and tax residency of the creditor (U.S. or
foreign)
• Debtor’s management of tax income, gains, expenses and losses.
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Personal Liability for Unpaid Taxes in Insolvency Cases
• Personal liability can arise from the application of:
 Federal or state corporate, LLC, or partnership laws including provisions for
recovery of distributions made while insolvent, laws for avoidance of
preferential and fraudulent transfers, and laws imposing successor liability;
 Federal, state or local tax laws imposing responsible person, assignee, or
successor liability specifically in the tax context;
 Federal, state or local debt priority laws, such as the federal priority statute (31
U.S.C. Section 3713).
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Federal Priority Statute (31 U.S.C. Section 3713)
• Under the Federal Priority Statute, debts (including tax debts) to the U.S. government
have priority over other unsecured debts of an insolvent debtor, if:
 debtor assigns property;
 debtor’s assets are attached; or
 “act of bankruptcy is committed.”
• Statute imposes personal liability on any “representative” that pays a creditor other than
the U.S., to the extent of the payment
• Statute expressly does not apply in bankruptcy cases, but does apply to receivers,
assignees for the benefit of creditors, and other fiduciaries
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Application of Federal Income Tax Laws in
Bankruptcy Cases
• Internal Revenue Code (“IRC”) and the Bankruptcy Code (“BC”) do not exempt debtor
or other taxpayers from federal income tax laws.
• Debtor is required to timely file federal income tax returns and pay taxes during the
bankruptcy case. See IRC § 6012; BC § 346; 28 U.S.C. §§ 959 and 960.
• For tax claims arising before the bankruptcy filing:
 Tax liens are generally subject to same rules regarding secured status (see BC
§ 506) and potential avoidance of liens (see, e.g., BC §§ 544, 547, 548) as
non-tax secured claims
 Most unsecured tax claims are entitled to priority over general unsecured
claims (see BC § 507(a)(8))
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Application of Federal Income Tax Laws in
Bankruptcy Cases
• For federal income tax purposes, an entity’s insolvency or bankruptcy does not
automatically result in:
 Tax termination of debtor or tax year change
 Creation of separate taxable estate (exception for an individual debtor who files
Chapter 7 or Chapter 11 bankruptcy)
 Change in debtor’s pass-through tax entity classification
 Change in debtor’s tax status as a member of an affiliated group that files a
consolidated income tax return
 Change in debtor’s tax accounting method
 Change in debtor’s tax accounting period
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Personal Liability for Taxes in Bankruptcy Cases
• Bankruptcy trustees and debtors in possession do not generally have personal liability
for unpaid income taxes solely because bankruptcy estate has insufficient funds to pay
the taxes
• Courts have found bankruptcy trustees personally liable for willful and deliberate breach
of fiduciary duties and for negligent acts, including failure to pay certain tax liability of the
debtor
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Receivership Tax Issues
• When a receiver owes a fiduciary duty to all parties in interest, those will include federal,
state, and local taxing authorities
• A receiver in possession of all or substantially all of the assets of a party must provide
notice to the IRS
• For federal tax purposes, a receiver is generally treated as stepping into the shoes of the
entity or owner and may be required to file federal income tax returns and pay applicable
federal income tax on behalf of the entity or owner.
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 For federal income tax purposes, the appointment of a receiver generally does not
create a separate taxable entity consisting of the receivership estate;
 However, the appointment of a receiver may cause the receivership to be taxed as
a qualified settlement fund (“QSF”) for federal income tax purposes (IRC Section
468B and the Treasury Regulations thereunder). A QSF is a taxable entity that is
taxed separately for federal income tax purposes from the debtor entities or from
creditors. Under these circumstances, the receiver should be concerned with the
filing of federal income tax returns and with the payment of both the QSF’s tax
liabilities and of debtor’s.
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• Best practice in drafting the receivership order: Authorize receiver to take all steps
necessary to comply with the tax laws without further order of the court
 At a minimum, the receivership order should authorize the receiver complete
discretion and power to:
o File tax returns and satisfy all tax reporting and filing requirements;
o Pay all required taxes and federal claims;
o Obtain and review all information necessary to satisfy tax filings;
o Delay distributions until all of the receiver’s tax and debt obligations are
satisfied;
o Enter into a closing agreement with the IRS and other tax authorities.
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Assignment for the Benefit of Creditors
• Priority of payment in an assignment for the benefit of creditors (“ABC”) is subject to
state statutes, where applicable
• But, the state statutes and common law are trumped by the federal priority statute (31
U.S.C. § 3713) discussed above
• Assignee must also be aware of any similar state and local tax statutes
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Personal Liability for Entity Taxes
• Generally, responsible officials of a business entity do not have personal liability for the
entity’s income taxes, the employer’s portion of social security taxes, and other taxes
assessed directly on the entity rather than collected or withheld by the entity
• Responsible officials of a business entity generally will have personal liability for taxes
that the entity collects or withholds from others (trust fund taxes), including
 Individual income, social security and Medicare taxes withheld from employees
 Sales taxes collected from customers (depending on state law)
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Preserving Pass-Through Entity Tax Status
• Pass-through tax entity (“PTE”) debtors are generally not subject to federal income tax
 PTEs include but are not limited to:
o S corporations;
o Tax partnerships, including limited liability companies and joint ventures
that are taxed as partnerships;
o Disregarded tax entities such as a single member limited liability company,
a qualified subchapter S subsidiary of S corporations (“Q-Sub”), and
grantor trusts (including bankruptcy liquidating trusts).
 Notwithstanding that PTEs are not generally subject to federal income tax,
PTE’s may be subject to other taxes such as payroll and employment taxes,
sales and use taxes, excise taxes, gross receipts taxes, and state taxes.
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• PTE files federal income tax return that reports tax items and allocation of the tax items
to equity holders who pay applicable tax on such tax items
• Conversion of federal income tax PTE to taxable entity (termination of PTE tax status)
can shift tax liability attributable to debtor's taxable income and gain tax items from
debtor's equity holders to debtor, decreasing debtor's assets available for creditors
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• Some courts have recognized that tax attributes, and debtor's PTE classification are
valuable assets of debtor that may constitute property or a property interest
 Bankruptcy trustees may be allowed to avoid elections and actions
retroactively that adversely affected debtor's tax attributes or PTE
classification.
 See In re Prudential Lines, Inc., 928 F.2d 565 (2nd Cir. 1991); In re Bakersfield
Westar, Inc., 226 B.R. 227 (B.A.P. 9th Cir 1998); In re Majestic Star Casino,
LLC, 716 F.3d 736 (3rd Cir. 2013).
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Tax Gain and Loss Recognition Rules
• Taxable gains and losses are realized for tax purposes by debtor or an actual or deemed
sale, exchange or other disposition of assets (including certain debt modifications
discussed below) in an amount equal to the difference between:
 The “amount realized” by debtor; and
 Debtor's adjusted tax basis in the assets which are disposed of, or deemed
disposed of, by debtor for federal income tax purposes.
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• Sale includes a voluntary and involuntary sale or disposition, including but not limited to
a foreclosure sale, deed in lieu of foreclosure, abandonment and a short sale.
• Tax consequences to debtor with respect to a sale, or other disposition of assets
encumbered by debt to third party, or back to a creditor, depend on whether debt is (1)
satisfied, relieved, discharged for federal income tax purposes, and (2) nonrecourse or
recourse as determined by applying federal and state tax and nontax laws.
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 Recourse debt satisfied -- treated as consideration received by debtor from sale of
the property, but only to the extent recourse debt does not exceed fair market value
of property transferred by debtor. For federal income tax purposes, the remainder
of the recourse debt satisfied, or relieved pursuant to the disposition of the
encumbered asset (debt in excess of fair market value of encumbered asset) is
cancellation of debt income (CODI) that is subject to the tax exclusions discussed
below.
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 Nonrecourse debt satisfied – entire amount of nonrecourse debt encumbering
property disposed of by the debtor is included as amount realized for purpose of
determining the debtor’s gain or loss tax calculation. Unlike recourse debt, none of
the nonrecourse debt relieved or satisfied for federal income tax purposes is
cancellation of debt income that may qualify for an income exclusion.
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Rules for Debt Cancellation
• Debtor’s income includes “canceled or discharged indebtedness” (CODI) for which
debtor is liable
• CODI may arise from the following voluntary or involuntary transactions in and outside of
bankruptcy:
 Debt reduction, forgiveness, or relief;
 Debt repurchases or reacquisitions by the debtor or a person related to the
debtor (IRC Section 108(e)(4));
 Debt-for-debt exchanges (IRC Section 108(e)(10));
 Debt modifications (Treas.Reg. Section 1.1001-3);
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 Sale, exchange or other disposition of debt encumbered assets including
foreclosures, deeds in lieu of foreclosures, abandonments, and short sales (IRC
Section 1001 and Treas.Reg. Section 1.1001-2);
 Capital contributions of debt (IRC Section 108(e)(6));
 Debt for equity exchanges and capitalization/recapitalization of debt to equity (IRC
Section 108(e)(8));
 Non-liquidating and liquidating distributions of debt.
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• Generally, CODI must be taken into income upon occurrence of an event indicating that
debt will never be paid, or have to be paid by debtor
 Timing of cancellation or discharge depends on substance, rather than form of
transaction, and is determined on case-by-case basis.
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• CODI events include:
 Discharge of debt under Bankruptcy Code or other law;
 Unilateral discharge by creditor, or agreement between creditor and debtor to
discharge all or a part of a debt;
o includes agreements that result in taxable exchange of assets by debtor
under gain and loss rules;
 Cancellation or extinguishment by operation of law that renders debt
unenforceable;
o e.g., expiration of statute of limitations for collection of debt; and
 Abandonment of security by creditor.
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• The CODI inclusion rule (IRC Section 61(a)(12)) is subject to the CODI exclusion and
deferral rules under IRC Sections 108 and 1017, and certain non-statutory CODI
exceptions (exclusions);
 Bankruptcy exception (IRC Section 108(a)(1)(A));
 Insolvency exception (IRC Section 108(a)(1)(B));
 Qualified Farm Indebtedness exception (IRC Section 108(a)(1)(C);
 Qualified Real Property Business Indebtedness exception (IRC Section
108(a)(1)(D);
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 Lost deduction exception (IRC Section 108(e)(2);
 Purchase price reduction exception (IRC Section 108(e)(5));
 Contested debt exception (Zarin v. Commissioner, 916 F.2d 110 (3rd Cir. 1990);
 Tax benefit rule exception.
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• IRC Sections 108 and 1017 allow a Debtor to reduce tax attributes in lieu of realizing
CODI if the debt cancellation occurred in a bankruptcy or when the Debtor was
insolvent. IRC Section 108(b)(1) provides that subject to an election under IRC Section
1017, an insolvent or bankruptcy taxpayer is required to reduce tax attributes by the
amount of CODI excluded as a result of the Debtor’s insolvency or bankruptcy. The tax
attributes are reduced in the following order and priority, such reductions to be made
after tax liability is determined for the taxable year:
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 NOLs – Dollar for dollar reduction in NOLs (a) for year of discharge, and (b) from
carryover years;
 General Business Credit – 33 1/3 cents for CODI dollar reduction in IRC Section 38
credit;
 Minimum Tax Credit available under IRC Section 53(b) – 33 1/3 cents for each
dollar of CODI excluded from GI;
 Capital Loss Carryovers (“CLC”) – dollar for dollar reduction in CLC under IRC
Section 1212(a) for (a) CLC incurred in year of discharge and (b) CLC carried
forward to year of discharge;
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 Basis of Assets of Taxpayer – dollar for dollar reduction in basis of assets of
taxpayer as set forth in IRC Section 1017;
 Passive Activity Loss and Credit Carryovers under IRC Section 469(b) – 33 1/3
cents for each dollar of CODI excluded from GI;
 Foreign Tax Credit Carryovers – 33 1/3 cents for CODI dollar reduction for IRC
Section 27 Foreign Tax Credit.
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• Tax basis reduction limitation IRC Section 1017(b)(2)
 Absent a tax basis reduction election under IRC Section 108(b)(5), in the case
of CODI excluded in bankruptcy or when the taxpayer is insolvent, the
reduction in tax basis of assets under IRC Section 108(b)(2)(E) cannot exceed
the excess of the aggregate tax basis of the taxpayer’s properties immediately
after the discharge over the aggregate liabilities of the taxpayer immediately
after the discharge;
 Tax basis reduction election IRC Section 1017(b)(5).
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• The rules for excluding CODI under the bankruptcy and insolvency exclusion rules (IRC
Sections 108(a)(1)(A) and (B)) are determined and applied:
 For C corporations and S corporations at the corporation level, rather than the
shareholder level;
 For Q-Subs, at the Q-Sub shareholder (S corporation) level;
 For tax partnerships and single member LLC that are taxed as a disregarded
entity, at the partner or member level.
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Debt Modification Rules
• Material or significant modification of terms of existing debt instrument will be treated for
federal income tax purposes as a taxable exchange of existing debt for new debt with
modified terms
 Tax consequences may differ substantially depending on:
o Form of modification;
o Facts surrounding issuance of debt; and
o Facts surrounding acquisition of debt by creditor.
 Debt-for-debt exchanges may result in CODI to debtor unless an exception to
CODI applies.
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Debt Modification Rules
• Debt-for-debt exchange may constitute a taxable exchange by creditor under I.R.C.
Section 1001 unless tax-free recapitalization provisions of IRC apply (discussed below)
• “Modification” broadly defined as any alteration (including an addition or deletion) in any
legal right or obligation of issuer of debt or holder of debt
 Where change in a term of a debt instrument occurs under plan of
reorganization (within meaning of I.R.C. § 368(a)(3)(A)), modification occurs on
effective date of plan.
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Net Operating Losses
• I.R.C. Section 172 allows debtor to carryforward and utilize NOLs to offset taxable
income and federal income tax liability in subsequent tax years.
 Under the 2017 Tax Act, for tax years beginning on or after January 1, 2018,
the debtor is generally allowed to utilize only 80% of its NOLs to offset taxable
income in future tax years. Exceptions apply for certain farming losses and
certain insurance company losses.
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 For tax years beginning before January 1, 2018, the debtor is allowed to
carryback 100% NOLs to the debtor’s two preceding tax years and carryover
100% of its NOLs to future tax years (subject to the application of the alternative
minimum tax rules).
 In a tax free asset transfer reorganization transaction, the debtor’s NOLS and
other tax attributes carryover to the corporation acquiring the debtor’s assets,
subject to the IRC Section 382 limitation rules.
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• As discussed below, under certain circumstances and transactions, I.R.C. Sections 269
and 382 provide specific limitations on the use of NOLs
• Section 382 applies after a corporation with net operating losses or built-in losses
undergoes a qualifying ownership change or an equity structure shift that limits the
amount of the new corporation’s taxable income that may be offset by pre-change NOLs
• Sections 382(l)(5) and 382(l)(6) provide relief for loss corporations and built-in losses in
bankruptcy or similar proceeding
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Avoiding Mismatching of Income, Deductions, Gains
& Losses
• Mismatching can occur where debtor cannot offset tax income and gains, with tax
deductions and losses, because of difference between tax character and timing of
income, gains, deductions, and losses
• Different tax regime for ordinary and capital gains and losses could result in debtor
incurring non-deductible capital losses and taxable ordinary income during same tax
year.
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Avoiding Mismatching of Income, Deductions, Gains
& Losses
• Mismatching can also occur where debtor realized income, deductions, gains, and
losses in different tax years due to its own accounting method
• The 2017 Tax Act includes tax provisions that may adversely affect financially troubled
taxpayers. These provisions limit NOL carryovers incurred in tax years beginning on or
after January 1, 2018 to future tax years (80% limitation), prevent certain NOL
carrybacks to previous tax years, and limit interest deductions by the debtor
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Preserving Federal Income Tax Losses and Other
Tax Attributes
• A debtor can also lose current or future tax benefits of some or all of its current or future
tax losses, NOLs, capital losses or built-in losses in its assets if:
 Debtor engages in related party asset sale, certain distributions of assets, or
other disposition transaction that results in a loss disallowance for federal
income tax purposes;
 Debtor engages in non-taxable transfer of assets to a non-consolidated group
corporation that causes the transferred assets and debtor's tax losses to be
separately taxed (i.e., the transferor of debtor's assets cannot use debtor's
losses).
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Tax Attributes
• A debtor can also lose current or future tax benefits of some or all of its current or future
tax losses, NOLs, capital losses or built-in losses in its assets if:
 Debtor engages in one or more debt restructuring transactions causing a loss
limiting “change of ownership” of debtor's stock within the meaning of I.R.C.
Section 382;
 Shareholder of debtor that owns more than 50% of debtor's stock claims a
worthless stock deduction for income tax purposes with respect to debtor's
stock that results in a change of ownership of debtor; or
 Stockholder of debtor takes certain other actions that result in a change of
ownership. See IRC Section 382.
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Tax Attributes
• A debt restructuring transaction that results in the application of the loss/tax attribute
limitation rules to debtor corporation will cause debtor's pre-ownership tax attributes
(including losses), to be limited or lost
• In general, ownership change of debtor occurs if immediately after any owner shift
involving a 5% shareholder, or any equity structure shift, the percentage of the stock of
debtor loss corporation owned by one or more 5% shareholders has increased by more
than 50 percentage points over lowest percentage of stock of debtor loss corporation
owned by such shareholders at any time during the testing period (generally three years)
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Qualifying for the Bankruptcy Case Exceptions to the
Change of Ownership Rules
• IRC provides for 2 bankruptcy exceptions to change of ownership loss limitation rules
 Under I.R.C. Section 382(1)(5) the Section 382 limitation does not apply to any
ownership change if:
o The debtor corporation is under the jurisdiction of the bankruptcy court,
and;
o The pre-change shareholders and qualified creditors of debtor-corporation
own after the ownership change, and as a result of being pre-change
shareholders and qualified creditors, stock equal to at least 50% of voting
power and 50% of value of debtor’s stock.
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 Under I.R.C. Section 382(l)(5), the debtor's NOL deduction for any post- change
year is reduced by the amount of the debtor's interest deduction attributable to debt
converted into stock pursuant to the court proceeding during any taxable year
ending within three years preceding the taxable year in which the ownership change
occurs, and that part of the year of the change on or before the change date.
 Under the I.R.C. Section 382(l)(5) exception, if a second ownership change occurs
within two years after the first ownership change, the debtor's pre-change losses
will no longer be available.
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 A qualified creditor is defined as the beneficial owner, immediately before the
ownership change, of qualified indebtedness of the loss corporation. A qualified
creditor owns stock of the new loss corporation (or a controlling corporation) as a
result of being a qualified creditor only to the extent that the qualified creditor
receives stock in full or partial satisfaction of qualified indebtedness in a transaction
that is ordered by the court or is pursuant to a plan approved by the bankruptcy
court.
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 Indebtedness of the debtor loss corporation is qualified indebtedness if it has been
owned by the same beneficial owner since the date that is 18 months before the date of
the filing of the bankruptcy case, or arose in the ordinary course of the trade or business
of the debtor loss corporation and has been owned at all times by the same beneficial
owner. For this purpose, indebtedness arises in the ordinary course of the Debtor loss
corporation's trade or business only if the indebtedness is incurred by the debtor in
connection with the normal, usual, or customary conduct of business, determined
without regard to whether the indebtedness funds ordinary or capital expenditures of the
loss corporation.
 A debtor loss corporation may elect not to have the provisions of I.R.C. Section 382(l)(5)
apply to an ownership change in a bankruptcy case.
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• I.R.C. Section 382(l)(6) applies to any ownership change occurring pursuant to a plan of
reorganization in a bankruptcy case to which I.R.C. Section 382(l)(5) does not apply. In
such case, the value of the loss corporation for purposes of applying the annual loss
limitation amount is equal to the lesser of the value of the stock of the debtor loss
corporation immediately after the ownership change, or the value of the loss
corporation's pre-change assets
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• Under Section 382(l)(6), when calculating the value of the old loss corporation, the new
loss corporation may include the increase in the value of the old loss corporation
resulting from any surrender or cancellation of creditors’ claims in the ownership change
transaction;
• Canceling debt increases the total equity value of a company, and so increases the
annual NOL limitation under IRC Section 382 and Section 382(l)(6).
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Loss Limitation Rules Under I.R.C. Section 269
• I.R.C. Section 269 operates in conjunction with Section 382 loss limitation to limit the
use of debtor's tax attributes when a change of ownership occurs.
 Under I.R.C. Section 269, if any person acquires control of a corporation for the
principal purpose of evading or avoiding federal income tax by securing the tax
benefit of a deduction, credit, or other allowance person or corporation would
not otherwise enjoy, IRS may disallow such deduction, credit, or other
allowance.
62

Tax Free Reorganizations and Other Tax Free
Transfers in Insolvency Cases
• The federal income tax reorganization provisions generally allow the debtor in an
insolvency case to exchange its assets tax free (or partially tax free to debtor) for stock of
an acquiring transferee corporation or of another qualifying corporation that is a party to
the reorganization
 Qualifying corporation is a corporation that controls the acquiring corporation.
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• The tax reorganization provisions also generally allow creditors holding a “security” of
debtor in an insolvency case to exchange tax free (or partially tax free to creditor):
 Debt “security” for a new qualifying debt “security”; or
 For stock of debtor; or
 For a debt “security” or stock of another qualifying corporation that is a party to
reorganization.
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• Under tax-free reorganization provisions, no gain or loss is recognized by debtor
transferor corporation that is party to a reorganization, if under the reorganization:
 Debtor exchanges assets solely for stock or securities of acquiring corporation,
or to;
 Another qualifying corporation that is a party to reorganization.
65

• In general, no gain or loss is recognized by shareholder or security holder of debtor-
transferor in tax-free asset transfer reorganization transaction if exchange is for stock or
securities of debtor for stock or “securities” of acquiring company
• Non-recognition rules do not apply to extent shareholder or security holder:
 Receives securities back but does not relinquish securities in exchange;
 principal amount of securities received exceeds principal amount of securities
exchanged; or
 principal amount of securities received is attributable to accrued interest on
securities surrendered.
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• Tax reorganization provisions allow tax-free or partially tax free treatment to bankrupt debtor
and security holders of debtor, if
 Under bankruptcy plan, debtor corporation transfers all or part of its assets to
another acquiring corporation in exchange for acquiring corporation's stock or
securities; and
 Debtor distributes acquiring corporation's stock and securities to its shareholders or
security holders, in transaction that qualifies under I.R.C. Sections 354, 355 or 356.
• In a tax free asset transfer reorganization transaction, the debtor’s NOLS and other tax
attributes carryover to the corporation acquiring the debtor’s assets, subject to the IRC
Section 382 limitation rules.
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• “Recapitalization” qualifies as an “E Reorganization”
 Neither IRC nor Treasury Income Tax Regulations defines term
“recapitalization”;
 Courts define as “reshuffling of a capital structure within framework of an
existing corporation”;
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• Under Treasury Income Tax Regulations, court cases and IRS rulings, a
recapitalization reorganization (“E Reorganization”) generally includes an exchange by
security holder of:
 Outstanding bonds for other qualifying bonds of debtor;
 Common stock for new common stock of debtor;
 Common stock for preferred stock of debtor; and
 Preferred stock for new common stock of debtor.
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• Neither continuity of interest nor continuity of business enterprise is required in
recapitalization;
• In a recapitalization (E Reorganization), if a security holder exchanges securities for
stock or other securities and also receives money or “other property” not allowed under
I.R.C. Section 354, then security holder recognizes income and/or gain.
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About the Faculty
Daniel Cohn - dcohn@murthalaw.com
Dan Cohn devotes his practice at Murtha Cullina LLP to financially distressed businesses and
is one of New England’s best-known counsel to troubled companies. His experience includes
Chapter 11 reorganizations and sales, out of court debt restructurings, troubled company
acquisitions, trust mortgages and assignments for benefit of creditors. He has represented
directors and officers, equity sponsors, litigation defendants, trustees, landlords, suppliers,
tort claimants and creditors’ committees. Dan is a trained mediator and frequent lecturer on
bankruptcy law. A fellow of the American College of Bankruptcy, he currently serves on the
College’s board of directors. Mr. Cohn is listed in America’s Leading Business Lawyers
(Chambers & Partners USA), Best Lawyers in America, and other directories.
For more, go to http://www.murthalaw.com/our_people/daniel-cohn
72

About the Faculty
David Agler - david.agler@crowe.com
David Agler is a Principal in Crowe Horwath LLP’s Tax Services Group. Mr. Agler practices in
the area of tax planning for United States and international business transactions. He has
extensive experience in planning and structuring acquisitions, reorganizations and
dispositions of solvent and insolvent businesses, including bankruptcy and receivership
reorganizations and liquidations. He has extensive experience in tax planning for debt
restructurings and workouts, equity recapitalizations and reorganizations, sales of assets and
liquidations of businesses involving individual, corporate and partnership bankruptcy estates.
Prior to joining Crowe, he was a Partner and Senior Director of Taxation Services at
Grobstein, Horwath & Company LLP from 1996 to 2008. Prior to that, he was a Tax Partner at
Baker & Hostetler from 1987-1996.
73

About the Faculty
Keith Lowey - klowey@vlpc.com
Keith Lowey is the President of Verdolino& Lowey, P.C., joining the firm as a principal in 1990. Keith has
been engaged regularly as an interim CEO/CFO, fiduciary, financial advisor, estate representative, and
liquidating trustee, as well as the accountant for other parties serving in these same capacities across the
Northeast. He has extensive experience in dealing with complex tax and accounting issues, wind-downs;
liquidations in accordance with state laws; bankruptcy matters; receiverships; forensic and fraud
investigation; cash flow and business analyses; creditor claims reconciliation; and shareholder
distributions. He is also frequently engaged to provide guidance and advice to individuals and
businesses, both inside and outside of bankruptcy, for records reconstruction and litigation support. Keith
has testified as an expert witness in numerous matters including, but not limited to: D&O litigation
matters; insolvency; various forensic accounting investigations, etc. Keith is a licensed CPA, Certified in
Financial Forensics, and a Certified Insolvency & Restructuring Advisor. Keith was also inducted as a
Fellow in the American College of Bankruptcy.
74

About the Faculty
Gary Marsh - gary.marsh@dentons.com
Gary Marsh is co-chair of Dentons’ US Restructuring, Insolvency and Bankruptcy practice, and focuses
on general commercial litigation and bankruptcy, workouts and debtor/creditor law. He represents
creditors and debtors in Chapter 11 reorganization proceedings, out of court restructurings and
debtor/creditor litigation. He also represents court appointed receivers, examiners and trustees. Mr.
Marsh has extensive experience in representing creditors in and out of bankruptcy court in enforcing their
rights and remedies. He also analyzes and defends against preference and fraudulent conveyance
actions, represents buyers of assets out of bankruptcy and represents landlords and other parties who
have leases or contracts with debtors. Georgia Trend selected him as one of Georgia’s “Legal Elite”
and Atlanta Magazine named him one of Georgia’s “Super Lawyers,” and a “Top 100 Super Lawyer” in
2007 and 2012. Mr. Marsh is a fellow in the American College of Bankruptcy and has been included
in The Best Lawyers in America and Chambers USA as one of America’s Leading Business Lawyers in
Bankruptcy law. And he was recognized in 2013 by the Georgia chapter of the Turnaround Management
Association for his outstanding turnaround work. Mr. Marsh is Board Certified in Business Bankruptcy and
Creditors’ Rights by the American Board of Certification.
75

Questions or Comments?
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IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
76

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