Federal Tax

Tax Aspects of Restructuring Financially Troubled Businesses (Portfolio 541)

  • This Portfolio analyzes the tax implications when a business chooses to restructure its debts as an alternative to foreclosure or bankruptcy.


Bloomberg Tax Portfolio, Tax Aspects of Restructuring Financially Troubled Businesses, No. 541, analyzes the tax implications of restructuring a business’ debt, primarily focusing on out-of-court restructurings as an alternative to foreclosure or bankruptcy. Restructuring debt may allow a financially troubled business to continue operations, but may also result in federal income tax liabilities, such as debt-discharge income, or other adverse tax consequences.

Among the topics discussed in this Portfolio are tax consequences that may arise when a business (or a related party) acquires its debt for less than the debt’s outstanding balance, and when the business and its creditor modify the terms of outstanding debt. The Portfolio also analyzes the federal income tax consequences of restructuring affiliated groups, modifying partners’ interests in partnerships, and corporate reorganizations, when made as part of debt-restructuring plans.

If an out-of-bankruptcy restructuring is not successful, a business may reorganize under the provisions of the Bankruptcy Code. Bankruptcy tax matters are discussed in detail in 790 T.M., Corporate Bankruptcy , and 791 T.M. Corporate Bankruptcy — Special Topics.

Finally, the Portfolio provides a discussion of the federal tax implications of payments made by guarantors, or other secondary obligors, in satisfaction of guarantee obligations with respect to a financially troubled business, and of the impact of debt restructuring on creditors.

Table of Contents

I. Introduction
II. Discharge-of-Indebtedness Income
III. Modification of Terms of Debt
IV. Special Considerations for Partnerships
V. Special Considerations for Corporations
VI. Special Considerations for Consolidated Groups
VII. Bankruptcy Considerations
VIII. Guarantors, Endorsors, and Indemnitors
IX. Creditors Taxation

Candace A. Ridgway
Tax Partner
Jones Day
Colleen Laduzinski
Tax Partner & Partner-in-Charge
Jones Day
Patrick O'Brien
Jones Day
Benjamin Jacobs
Jones Day
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