PORTFOLIO

Corporate Bankruptcy — Special Topics (Portfolio 791)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. This portfolio looks at certain unique tax issues that may arise in connection with a bankruptcy. 

 

Price: $400 Print

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive resource including 200+ federal tax Portfolios, practice tools, primary sources and timely news.

FREE TRIAL

DESCRIPTION

Corporate Bankruptcy – Special Topics looks at certain unique tax issues that may arise in connection with a bankruptcy.

Specifically, The portfolio spotlights a series of specialized bankruptcy tax topics, including partnership bankruptcies, liquidating bankruptcies, the international aspects of U.S. corporate bankruptcies, the role of tax sharing agreements in bankruptcy, 363 asset sales, and the role of intercompany accounts and restructuring transactions. Finally, the portfolio discusses various tax issues relating to liquidating trusts, disputed claims reserves, qualified settlement funds and other distribution vehicles that may be employed post-confirmation.


Buy Corporate Bankruptcy — Special Topics (Portfolio 791) now


AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Corporate Bankruptcy – Special Topics portfolio was authored by the following attorneys.  

 

CARL M. JENKS

Carl M. Jenks earned his J. D. from Harvard Law School, his Ph.D. from Duke University, and his M.A. from Duke University.

 

Credentials / 

 

Carl M. Jenks: J. D. Harvard Law School (1980); Ph.D. Duke University (1979), M.A. Duke University (1973); B.A. Carleton College (1967).


EDWARD A. PURNELL

Edward A. Purnell earned his J. D. from  Harvard Law School and his  B.A. from Princeton University (1976).

 

Credentials / 

 

Edward A. Purnell: J. D. Harvard Law School (1990); B.A. Princeton University (1976).

 

 

 


CANDACE A. RIDGWAY

Candace A. Ridgway, B.A. graduated cum laude from the  University of Connecticut. She received her M.B.A. from Arizona State University, her J.D., magna cum laude from Cornell Law School and her  LL.M. (Taxation, with distinction) from Georgetown University Law Center. She is a member of the District of Columbia Bar, New York State Bar, American Bar Association, Tax Section and Corporate Tax Committee.

 

Credentials / 

Candace A. Ridgway: B.A. (cum laude), University of Connecticut; M.B.A., Arizona State University; J.D. (magna cum laude), Cornell Law School; LL.M. (Taxation, with distinction), Georgetown University Law Center; member, District of Columbia Bar; member, New York State Bar; member, American Bar Association, Tax Section, Corporate Tax Committee.

 

 

 


TABLE OF CONTENTS

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Special Considerations in the Corporate Bankruptcy Process

Introductory Material

A. Partnerships and Partners in Bankruptcy

B. Liquidating Bankruptcies

C. International Aspects of U.S. Corporate Bankruptcies

D. The Role of Tax Sharing Agreements

E. B.C. §363 Asset Sales

F. Intercompany Accounts and Restructuring Transactions

G. Liquidating Trusts, Disputed Claims Reserves and Other Distribution Vehicles Employed Post-Confirmation

II. Partnerships and Partners in Bankruptcy

A. Effects of Filing by Partnership

B. Discharge of Partnership Debt

1. Recognition or Exclusion of COD Income

a. The Bankruptcy Exclusion

b. Exclusion of Qualified Real Property Business Indebtedness

c. Exception for Deductible Items

d. Exchange of Partnership Debt for Equity

e. Elective Deferral of COD Income

(1) Basic Concepts

(2) Treatment of Deferred Items

(3) Acceleration of Recognition

(4) Reporting Requirements

2. Allocation of COD Income

3. Deemed Distributions to Partners

4. Election to Reduce Outside Basis

C. Bankruptcy of a Partner

1. Effect on Partnership

2. Effect on Designation of Tax Matters Partner

D. COD Income and IRC §1446 Partnership Withholding

1. Insolvent U.S. Partnership with Foreign Partners

2. Taxation of Foreign Investors in a U.S. Business Partnership

3. The Dilemma: Withholding on COD Income

4. A Solution by Analogy to IRC §1445

E. State and Local Tax Considerations

1. Withholding, Estimated and Composite Tax Payments For Partners

2. Partnership-Level Taxes

3. Investor-Partner Limitations on Taxability

4. Planning Considerations

III. Liquidating Bankruptcies

Introductory Material

A. Liquidation Process

B. Liquidation Tax Issues

1. Minimizing Gains on Asset Dispositions

2. Acceleration of Deferred COD Income

3. Protecting Fiduciaries from Personal Liability

a. The Holywell Case

b. Complying with State Tax Requirements

IV. International Aspects of U.S. Corporate Bankruptcies

A. Introduction

B. Deferral of U.S. Tax and Subpart F

1. Foreign Personal Holding Company Income

2. Foreign Base Company Sales Income

3. Foreign Base Company Services Income

4. Investment of Earnings in U.S. Property

a. Prudential Lines Arguments

b. PBGC Statutory Liens

C. IRC §482 and International Transfer Pricing

D. Foreign Tax Liabilities, the Automatic Stay Rule and the Revenue Rule

1. Seeking a Foreign Law Stay of Foreign Tax Collection

2. Possible Application of the Revenue Rule

3. Application of the Revenue Rule in the Foreign Country

4. Application of the Revenue Rule in the U.S. Plan of Reorganization

5. Paying a Foreign Tax Claim During Bankruptcy

6. 2005 BAPCPA Provisions for Cross-Border Cases

E. Selected Foreign (and Related U.S.) Bankruptcy Tax Issues in U.S. Corporate Bankruptcies

1. Belgium

2. China

a. Equity Interest in Chinese Subsidiaries

(1) Maintaining Its Equity Interest in a Chinese Subsidiary

(2) Disposing of Its Equity Interest in a Chinese Subsidiary

(3) Selling Assets of a Chinese Subsidiary

(4) Local Bankruptcy Proceeding

b. Debt Interest

3. Germany

a. Privileged Reorganization/CODI in a Restructuring Process

b. Migration of COMI

(1) Income Tax Issues

(2) Fiscal Unity-Tax Issues Relating to the Move of the COMI

c. Tax Treatment of CODI at the Level of a German Partnership

d. Loss and Interest Carry-Forwards

e. Real Estate Transfer Tax

f. Transferee's Tax Liabilities in an In-Court or Out-of-Court Reorganization

g. Treatment of Tax Liabilities in a Bankruptcy Court Process

(1) Are the German Holdcos Engaged in a Trade or Business (ETB) in the United States?

(2) Is the CODI U.S. or Foreign Source?

(3) Assuming the CODI Is U.S. Source, Is It FDAP Income Subject to Withholding?

4. France

a. Transfer of Tax Losses Under the Tax Consolidation Rules

b. Waiver of Debt Versus Capitalization of Debt

c. Deduction from a Creditor's Tax Result Where a Partial COD is Granted to a Beneficiary Company upon Conditions

5. Japan

a. Effect of U.S. Bankruptcy Proceeding

b. Tax Treatment

(1) Illustrative Case 1: U.S. Parent Corporation Having a Japanese Subsidiary Is Subject to a U.S. Bankruptcy Proceeding

(2) Illustrative Case 2: U.S. Corporation Having a Branch in Japan Is Subject to a U.S. Bankruptcy Proceeding

(3) Illustrative Case 3: Japanese Corporation Having a Branch in the U.S. Is Subject to a U.S. Bankruptcy Proceeding

c. 2010 Tax Reform

6. Mexico

7. United Kingdom

V. The Role of Tax Sharing Agreements

A. The Government and Tax Sharing Agreements

1. Role of the Common Parent

2. Liability for the Group's Tax Obligations

3. Effect of Tax Obligations on Member Earnings and Profits

B. Why Tax Sharing Agreements Exist

C. Status of Tax Sharing Agreements as Executory Contracts in Bankruptcy

D. Enforcement of Tax Sharing Agreements in Bankruptcy

E. Tax Sharing in the Absence of a Tax Sharing Agreement

VI. Section 363 Asset Sales

A. Introduction to B.C. §363

1. General Use

2. Statutory Provisions

3. Bankruptcy Standards for Approval of 363 Sale

4. Sale "Free and Clear" of Liens

5. 363 Sale Process

6. Varieties of 363 Sale Transactions

a. Debtors Sell Substantially All Assets and Subsequently Liquidate

b. "G" Reorganization Sale

c. Credit Bid 363 Sales

B. Federal Income Tax Considerations in 363 Sales

1. Taxable Asset Sales

a. General Tax Consequences of Taxable Asset Sales

b. Tax on Sale of Stock of Domestic Subsidiaries

(1) In General

(2) Consolidated Group Issues

(a) Deferred Intercompany Gain Trigger

(b) Excess Loss Account Trigger

c. Tax on Sale of Stock of Foreign Subsidiaries

(1) IRC §1248 Dividend

(2) Subpart F Income

2. Tax-Free "G" Reorganization

a. In General

b. Tax Treatment of Parties

(1) Debtor-Transferor Corporation and Acquiring Corporation

(2) Shareholders and Creditors

3. Cancellation of Debt Income

C. Credit Bidding Pursuant to B.C. §363(k)

1. Maximization of Secured Creditor Recovery

2. Tax Consequences to Secured Lender

a. Gain/Loss, Basis

b. Bad Debt Deduction

3. Tax Consequences to Debtor-Seller

a. Recourse Debt

(1) Realization of Income or Loss

(2) Excludability of COD Income Under IRC §108

b. Nonrecourse Debt

4. Credit Bid/"G" Reorganization

D. Foreign Tax Considerations in 363 Sales

E. State Tax Considerations in 363 Sales

1. Transfer Taxes

2. Income, Franchise and Gross Receipts Taxes

3. Property Taxes

4. Responsible Person Liability Taxes

F. Need for Provision for Taxes in 363 Sales

1. Administrative Expense Status for Taxes on 363 Sale

2. Priority Tax Claims

3. Personal Liability Issues

4. Tax Funding Mechanisms

G. Restructuring Transactions in Connection with the 363 Sale

1. Debtor-Seller Entities, Purchased Entities and Acquiring Entities

2. Pre-Sale Restructuring Transactions

3. Treatment of Intercompany Debts

H. Subsequent Liquidation of Debtors

VII. Intercompany Accounts and Restructuring Transactions

Introductory Material

A. Debtors' Historic Intercompany Accounting System

B. Bankruptcy Aspects of Intercompany Claims

1. Classification

2. Non-Debtor Stakeholders

C. Potential Restructuring Transactions Involving Intercompanies

1. Intercompany Offsets

2. Use of Intercompany Receivables as Currency to Pay Intercompany Payables

3. Contribution to Capital

a. Generally

(1) Tax Consequences to Shareholder

(2) Tax Consequences to Subsidiary

(3) IRC §382

b. Consolidated Groups

4. Liquidations

a. Solvent 80%-or-More Owned Debtor Subsidiary Liquidates into Corporate Parent: IRC §332 Liquidation

(1) IRC §332 Generally

(2) Application of IRC §332 to Liquidation of Subsidiary with Intercompany Payables

(a) Intercompany Payable to Parent

(b) Intercompany Payable to Other Affiliate

(3) Application of IRC §332 to Liquidation of Subsidiary with Intercompany Receivables

(a) Intercompany Receivable from Parent

(b) Intercompany Receivable from Other Affiliate

(4) Consolidated Groups

b. Solvent Debtor Subsidiary Liquidates into Non-Corporate Parent or Less-than-80% Corporate Parent: IRC §331 Liquidation

(1) IRC §331 Generally

(2) Application of IRC §331 to Liquidation of Subsidiary with Intercompany Payables

(a) Intercompany Payable to Shareholder

(b) Intercompany Payable to Other Affiliate

(3) Application of IRC §331 to Liquidation of Subsidiary with Intercompany Receivables

(a) Intercompany Receivable from Shareholder

(b) Intercompany Receivable from Other Affiliate

c. Insolvent Debtor Subsidiary Liquidation: IRC §1001 Exchange

(1) Generally

(2) Consolidated Groups

5. Non-Liquidating Distributions; Rights of Reimbursement

6. Cancellation of Brother-Sister Intercompany

7. Mergers and Asset Transfers

8. Disregarded Entity Restructuring Transactions

9. State Tax Considerations

10. Cross-Border Intercompanies

VIII. Liquidating Trusts, Disputed Claims Reserves and Other Distribution Vehicles

Introductory Material

A. Framing the Issues

B. Dealing with Certain Debtor Assets Post-Petition

1. Liquidating Trusts

a. Generally

b. Trusts with More than One Class of Beneficial Interest

c. Other Liquidating Trust Issues

(1) Expense Reserves

(2) Liquidating Trust as Distribution Agent

2. Limited Liability Companies

C. Dealing with Certain Claims Post-Petition

1. Disputed Claims Reserve

a. Mechanics of Reserve

b. Taxation of Disputed Claims Reserve

(1) Disputed Claims Reserve Taxed as Disputed Ownership Fund

(2) Disputed Claims Reserve as Taxable Trust

(3) Disputed Claims Reserve Treated as Grantor Trust

(4) Choice of Entity Considerations

c. Liquidating Trusts with Disputed Claims Reserves

d. Practical Considerations

2. Qualified Settlement Funds

D. Post-Petition Reporting and Withholding Requirements


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Internal Revenue Manual — Principal Topic Headings and Sections Pertaining to Bankruptcy

Bibliography

Books and Treatises

Periodicals

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010