Page 135 - Bankruptcy Volume 1

Chapter 17

Income Tax Awareness Issues fn 1

This section describes some of the federal income tax issues that should be considered while providing
bankruptcy and reorganization services. fn 2 The tax issues associated with the insolvency and bankrupt-
cy of corporate entities are complex, and a tax adviser who specializes in such matters should be brought
into the process early. Although the items covered here are meant to provide an overview of some of the
more common federal income tax considerations in connection with a corporate bankruptcy restructur-
ing, it should be noted that such items do not represent an all-inclusive list of the tax considerations in
such a transaction.

The Impact of Bankruptcy Filing on Tax Compliance

Generally, the filing of a bankruptcy petition has no impact on the debtor’s duty to file tax returns or the
ability of a taxing authority to subject it to audit for those returns. Additionally, no new taxable entity is
created upon the filing of a bankruptcy petition under Section 1399. fn 3 However, as discussed in more
detail later, a bankruptcy filing does have the effect of bifurcating the tax filings and any associated lia-
bilities into two types: (a) prepetition, which cannot be paid without bankruptcy court approval, and (b)
postpetition, which must be paid currently and in the ordinary course.

Tax Attributes in Bankruptcy

Debtors in bankruptcy will often have a significant amount of NOLs and other tax attributes (for exam-
ple, credits), which might have significant value to the company prospectively. As such, preserving val-
uable tax attributes is often an integral part of a bankruptcy reorganization.

Certain matters can potentially inhibit a debtor’s ability to consider various alternatives to utilize tax at-
tributes prospectively, such as the following:

 An inadvertent ownership change during the pendency of a bankruptcy case (that is, pre-
emergence), which may subject certain tax attributes to a nominal or possibly zero annual limita-
tion on future utilization.

 Similarly, a 50% shareholder who claims a worthless stock deduction for tax purposes prior to
emergence may cause an ownership change, which may subject certain tax attributes to a nomi-
nal or possibly zero annual limitation on future utilization.

fn 1 Any tax advice included herein was not intended or written to be used, and it cannot be used by the taxpayer for the purpose of
avoiding any penalties that may be imposed by any governmental taxing authority or agency.

fn 2 The discussion herein is limited to select federal income tax considerations in connection with a restructuring. Additional consid-
eration must be given to state income taxes, as well as federal and state non-income taxes.

fn 3 References to a "Section" or "IRC Section" herein are to sections of the Internal Revenue Code of 1986, as amended, unless oth-
erwise noted, and references to "Reg. Section" are to the regulations promulgated thereunder.

© 2020 Association of International Certified Professional Accountants 133