Academic journal article Journal of Accountancy

Tax Act Repeals Stock-for-Debt Exception

Academic journal article Journal of Accountancy

Tax Act Repeals Stock-for-Debt Exception

Article excerpt

Buried in the Omnibus Budget Reconciliation Act of 1993 (OBRA) are revenue-raising provisions that repeal the "stock-for-debt exception," which will complicate life for businesses in financial straits. The result could be an acceleration of bankruptcy filings before the year's end.

Generally, when corporate debt is discharged at a discount to its adjusted issue price, the discount amount is included in gross income. If a business is in bankruptcy proceedings or is insolvent, the discount is excluded from income but, under Internal Revenue Code section 108(b), the business must reduce the size of its favorable tax "attributes" (such as net operating losses [NOLs], capital losses, credits and so forth).

For over 50 years, however, a stock-for-debt exception allowed a bankrupt or insolvent business to avoid both gross income and attribute reduction if its debt was discharged for a specified amount of equity. The exception required the stock to be dispersed proportionately among unsecured creditors and to be unavailable when limited-interest preferred stock was transferred to creditors. …

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