Magazine article Business Credit

Unsecured Creditors Examine New Tax Bill

Magazine article Business Credit

Unsecured Creditors Examine New Tax Bill

Article excerpt

With the passage of the major tax bill just prior to the summer recess, several pieces of legislation important to NACM remain to be addressed during this session. However, two provisions in the tax bill itself merit some consideration for the unsecured creditor community. The two issues are the stock for debt exception and the amortization of intangible assets.

With regard to the stock for debt exclusion, many insolvent corporations issue stock to creditors in exchange for debt as a means of emerging from Chapter 11 reorganizations. There is a tax advantage under the stock for debt exception for debtor corporations who transfer more stock (in fair market value) than they have debt. Under the stock for debt exception, the difference between the stock issue and the debt may qualify as non-taxable income. The purpose behind this provision is to allow emerging businesses the greatest possible opportunity to realize a successful recovery from financial distress.

For example, a business operating in a Chapter 11 situation could issue $15 million in stock (fair market value) to satisfy a debt of $20 million. Under normal tax rules, the difference ($5 million) is taxable income, even though the taxpayer has received no cash income with which to pay the debt. Existing law would allow insolvent taxpayers to recognize the $5 million as non-taxable and subject to no tax consequence.

The new tax bill repeals the stock-for-debt exception but delays the effective date for all transactions until Dec. 31, 1994. NACM is concerned that this provision will substantially reduce the ability of financially distressed companies to emerge from bankruptcy workouts. The new treatment will expose the "stock for debt" income of companies evolving from bankruptcy to tax liability (i.e., $5 million in the above example effectively denying net operating losses with which to shelter profits. Our members have stated that repeal of this exception will make it more difficult for companies to work themselves out of bankruptcy and would make creditors less willing to accept stock as part of a

With regard to the amortization of intangible assets, Congress has voted to set the write off period for such assets at 15 years. NACM is concerned that by shortening the write-off period for this class of assets, the potential for predator driven leveraged buyouts (LBOs) could increase. Many NACM members have indicated that unfriendly LBOs have generally been detrimental to unsecured creditors. …

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