Fundamentals of Federal Income Taxation for Financially Troubled Corporations, Partnerships and S Corporations
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Learn federal income rules that drive tax consequences of modifying the debt component of a corporate capital structure in bankruptcy or out of court.In light of the COVID-19 epidemic and its impact on the local and global economies, many corporations will be re-examining their capital structures to better reflect the current business environment and financial realities. In some situations, debtors will determine that their financing arrangements are not aligned with their changed business situation. To reduce the cash drain of interest and principal payments, many corporate debtors will be looking to modify the terms of debt, replace debt with equity or reduce the amount of debt owed in an out of court process or in a bankruptcy case. While a troubled company may not always be able to optimize its debt restructuring due to lender demands, undertaking a debt workout without properly addressing the tax considerations may result in significant cash tax leakage post restructuring. Even if they cannot alter the terms of the debt workout, debtors should still understand the tax consequences of their actions so that they can fully understand the after-tax costs and benefits of modifying their debt structure. We will consider what is cancellation of debt income (CODI) and when is CODI realized? When is realized CODI not included in gross income? How is the deferral of income recognition achieved under the Internal Revenue Code? What are the special rules for consolidated return groups, S-corporations and partnerships?
AuthorsRichard D. Liebman, BDO USA, LLP
Cancellation of Debt Income (CODI)
• What Is CODI?
• When Is CODI Realized?
• Is CODI Taxable?
Recourse and Non-Recourse Debt
• What Is the Difference Between Recourse and Non-Recourse Debt?
• What Are the Differences in the Tax Treatment of Recourse and Non-Recourse Debt?
• What Is the Significance of the Distinction Between Recourse and Non-Recourse Debt for Financially Troubled Companies?
Basic Corporate Rules for Tax Treatment of CODI
• What Are the Basic Rules of Sections 108(a) and (b)?
• What Are the Rules of Section 1017?
• What Tax Policy Is Implemented by These Rules?
• What Are the Rules of Section 108(e)?
Application of Sections 108 and 1017 to Groups of Corporations Filing Consolidated Returns
• What Is the Policy of Section 1.1502-28?
• What Are the Operative Steps in Section 1.1502-28?
• When Is Intercompany Debt Important?
Sections 382(l)(5) and (l)(6)
• What Is Section 382 in General?
• How Do Sections 382(l)(5) and (l)(6) Modify the General Rule?
• What Are the Benefits and Detriments of Section 382(l)(5)?
CODI and Partnerships and S Corporations
• How Does Section 108 Apply to Partnerships?
• How Does Section 108 Apply to S Corporations?
Section 1.1001-3 and Modification of Debt Terms
• What Is a Modification?
• What Is a Significant Modification?
• What Are the Tax Consequences of a Significant Modification?