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Transcript of C3 -- Cordonnier, Egan & Reilly
Bank Troubled Asset Acquisitions
Patrick Egan
New York Community Bancorp
Bill Reilly
National Banking Tax Partner, Grant Thornton
Andrew Cordonnier
Washington National Tax Partner, Grant Thornton
Troubled Asset Acquisitions
• M&A activity was expected to pick up in 2011 and
2012, but has not met expectations.
• FDIC Assistance/ Bailouts and Guarantees are not
being granted as they were in previous years.
• Until March 26, 2010, the FDIC shared losses with
assuming banks on an 80/20 basis until the losses
exceeded an established threshold defined in the SLA,
after which the basis for sharing losses shifted to a
95/5 basis. Sharing losses on a 95/5 basis was
eliminated for all SLAs executed after March 26, 2010
2
Troubled Asset Acquisitions
Update
• In 2008, 25 banks failed, and 140 failed in 2009.
• In 2010, 157 banks failed.
• In 2011, 92 banks failed.
• As of September 28, 2012, 43 banks have failed.
• FDIC has paid $291B through it loss sharing
program as of June 30, 2012
3
Due Diligence of Troubled Transactions
• FDIC deals done in 2008-2012 were mostly purchase
and assumption transactions. Many happen with
limited time to conduct thorough due diligence
procedures.
• From acquirer's viewpoint, the due diligence is not as
difficult because it is an asset deal and no liability
carryover.
• Be aware of states implications. Some jurisdictions do
not follow federal (California).
4
Section 363 Sale – Summary of General Tax Issues
What is a "Section 363" Sale?
Why are we discussing it?
5
Section 363 Sale – Summary of General Tax Issues
1. 3rd Party Cash Bid
2. Creditor Bid
Does this constitute a G reorganization under section 368(c)(1)(G)?
P
S1 S2
S3
Share
holders Creditors
asset
sales
6
Section 363 Sale – Summary of General Tax Issues
The Transaction
• Gain or Loss on Sale of Assets
• Mechanics of Transaction
– Distribution of assets
– Assumption of debt
– Guarantee expense
P
S1 S2
S3
7
Section 363 Sale – Summary of General Tax Issues
1. Intercompany Items ("DITs"; 1.1502-13(c)
2. Excess Loss Accounts ("ELAs"; negative stock basis); 1.1502-19(c)
3. Intercompany Debt; 1.1502-13(g)
4. Worthless Stock Deductions; 165(g),1.1502-80(c)
Triggering
What items are "triggered" upon asset sale and dissolution?
P
S1 S2
S3
debt
Basis = <100>
FMV = 0
truck
$
8
Section 363 Sale – Summary of General Tax Issues
Worthless Stock Deductions
Worthless stock deductions are subject to the "United Loss Rules"
("ULRs"); 1.1502-36
Basis is reduced under a 3 factor test:
1. 1.1502-36(b): Basis redetermination to reduce disparity
2. 1.1502-36(c): Stock basis reduction to prevent noneconomic loss. Basis is
reduced by the lesser of:
i. not positive adjustments; and
ii. disconformity amount
3. 1.1502-36: Attribute reduction to prevent duplication of loss
9
Section 363 Sale – Summary of General Tax Issues
Application of Standard Rules for Debt Workouts
• Consolidated Stock Basis; 1.1502-32
• Exclusion of COD Income; 108(b)
• Attribute Write-Downs
• Property Basis Writedowns
• Application of Section 108/1017 in Consolidated
Group
– Look-Thru Rule; 1.1502-28(a)(3)
– Fan-Out Rule
P
S1 S2
S3
10
Section 363 Sale – Summary of General Tax Issues
Intercompany Debt; 1.1502-13(g)
Upon certain "realization" events, S is deemed to repay the debt for an
amount equal to its FMV - P has ordinary bad debt expense of $80; section 166
- S has ordinary COD income of $80; section 108 (but cannot be excluded)
- S has a "net positive investment" of $80.
Alternatively: View transaction as a capital contribution; no gain or loss; no
impact on loss disallowance rules
P
S
$100 debt
FMV = 20
11
Section 363 Sale – Summary of General Tax Issues
Miscellaneous Issues
• Recourse v. Nonrecourse debt
• Guarantor Status v. Obligor Status v. Co-Obligor Status
• Asset Basis Writedowns/Writeups for AMT; 56(g)(4)(G)
• FIT Allocations; Impact on Unified Loss Rules
• Prior 382 Ownership changes/Prior Bankruptcies
• Ordering of events
12
Section 597
FDIC Assisted Transactions/Loan Sharing
Agreements
(IRC Section 597)
13
Section 597
• Enacted in 1981.
• Provided payments to troubled financial inst.,
payments were excluded from gross income and did
not reduce basis of institution's assets.
• certain assisted reorgs qualified as tax-free reorgs.
(ignored continuity of interest)
• 382 loss limitation (ability to use NOLs, BILs and
excess credits) was not applied in many cases.
14
Section 597
• In 1989, Notice 89-102 issued that stated that FFA
(Federal Financial Assistance) was taxable.
• Also provided that no transferee liability would be
assessed on the acquiring institution.
15
Section 597 – Proposed and Final Regulations
• Proposed Regs. issued in 1992 (superseded Notice
89-102.)
• Final Regs. issued in 1995 which generally maintained
approach in the Prop. Regs.
• The Regs. reflect generally four principles:
– FFA is treated as ordinary income of the failed
institution.
16
Section 597 – Proposed and Final Regulations
– When feasible, the timing of inclusion of FFA should
match the recognition of the institution's losses.
– Where possible, the income tax consequences of an
assisted acquisition should not depend on its form
– The IRS generally will not collect tax on FFA if the
IRS determines a federal insurer would bear the
burden of the tax.
17
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs.
• Provide rules regarding taxability of FFA (including
special consolidated group rules)
• Special rules regarding taxable asset (and deemed
asset) transactions
• Special rules requiring debt instruments issued to the
FDIC to be ignored while debt is held by FDIC
• Applicability of transferee income tax liability in
connection with assisted transactions.
18
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Taxation of FFA
• FFA – "any money or property provided, under certain
provisions of the National Housing Act, the Federal
Home Loan Bank Act, the Federal Deposit Insurance
Act, … by Agency to an Institution or to a direct or
indirect owner of stock in an Institution."
• Also defines "Agency" and "Institution"
19
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Taxation of FFA
• FFA taxable as ordinary income to recipient institution
• Two exceptions:
– Loss guarantee exception
– Matching of FFA taxation to the institution with its
losses (timing).
20
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Consolidated Groups
• Consolidated Groups
– Seized institutions still have normal tax filing
requirements.
– Group that has subsidiary in receivership may
irrevocably elect to exclude institution from the
consolidated group.
– Effect could be exclusion of FFA from taxable
income from group.
21
– Can have adverse affects
• toll charge will be imposed
• institution must accelerate all sec. 481
adjustments
• restore all deferred intercompany gains and ELAs
• close its taxable year
• and if liabilities > aggregate FMV of assets, group
must treat stock in the institution as worthless.
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Consolidated Groups
22
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Taxable Asset Transfers
• Acquisition of institution in a "taxable transfer" treated
as taxable asset acquisition regardless if acquisition is
actual asset purchase or stock purchase treated as a
mandatory asset purchase.
• Taxable transfer = where an entity transfers (not to a
bridge bank) (a) any deposit liability if FFA is provided,
of (b) any asset for which the Agency has any
financial obligation (like a loss guarantee).
23
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Taxable Asset Transfers
• Certain transfers of stock treated as sale of assets. For
deemed asset sale to occur, amount of share transferred
must be sufficient to cause institution to leave or join
consolidated group or to experience 50% or more
ownership shift.
• Result?
– acquirer does not inherit tax attributes (NOLs, BILs,
etc.)
– G/L recognized on actual transfer of assets.
– amount realized is total of grossed up basis of stock
plus assumed liability.
24
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Loss Share Guarantee
• "Loss Guarantee" – agreement pursuant to which
FDIC / Agency guarantees to pay an institution a
specified amount on disposition or charge-off of
specific assets, institution has right to put assets to
FDIC at specified price, or some similar agreement.
• Most deals have FDIC agreeing to assume a portion of
loss incurred on a pool of acquired assets.
25
• Historic agreements have had the FDIC agreeing to
reimburse 80% of economic losses incurred by
institution up to a specified amount, and 95% of any
losses in excess of the threshold.
• Assets covered in an Loss Share Agreement (LSA) are
treated as "Class II" assets for section 338 purposes
(FMV is deemed to be greater of FMV or guaranteed
amount).
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Loss Share Guarantee
26
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Section 597
• If the FMV of Class I and Class II assets acquired >
than purchase price of acquired assets, the basis of
Class I and II assets is equal to their FMV.
– If purchase price of Class I and II assets is less than
assets' FMV, the basis of the Class I and II assets is
the FMV.
• To extent that the assets' FMV exceeds basis
(purchase price), it is included ratably as OI by the
acquirer over a six-year period beginning in year of
transfer.
27
• This may cause a timing difference over the six year
period.
• Other issues: Options to purchase additional assets;
Claw back provisions; Equity appreciation instruments;
State issues.
Section 597 – Proposed and Final Regulations
Key Aspects of Final Regs. – Section 597
28
Additional Tax Considerations
• Personal property tax – FDIC transactions will list only
assets with "perceived" value while expensing off
immaterial assets. Issue is that there is not clear
knowledge of actual assets within the locations and
property tax implications ahead of time. This is
administratively intensive, while usually immaterial in
economic sense.
• Information reporting required by FDIC – acquirer
performs all "successor" tax reporting on depository
and loan servicing accounts. (assume risk of faulty W-
8s, W-9s, and TINs). 29
Additional Tax Considerations
• State implications such as "bulk sales" tax in NY and
FL (taxable exchange in these states and subject to
use taxes). Sometimes can fit into a "casual sale"
exemption in a few states.
30
Section 597 – Proposed and Final Regulations
• New Regulations? – Status of guidance with regard to
section 597.
– First appeared on March 16, 2010 when Treasury
published the first periodic update to the Priority
Guidance Plan
– Later, Also appears on
• 2010-2011 Priority Guidance Plan issued on
December 7, 2010
31
Section 597 – Proposed and Final Regulations
• 2011-2012 Priority Guidance Plan issued on
September 2, 2011
– As of October 9, 2012, no further reference has
appeared. There has not been an updated Priority
Guidance Plan issued as of October 9, 2012.
32
FDIC Assisted Troubled Transactions
Post Acquisition Tax Considerations
• Bad Debt Deductions (sec. 166)
• Ordering rules and non-accrual income (sec. 446)
• Market Discount (sec. 1276-1278)
• Foreclosure and ORE (sec. 263A)
33
Section 597 Example
Section 597 Example
Assets Legacy Amount Asset FMV Tax Amount Def'd Items (40% Rate)
Cash $ 100.00 $ 100.00 $ 100.00
Loans (Guaranteed) $ 600.00 $ 200.00 $ 600.00 $ 160.00
Securities (Guaranteed) $ 500.00 $ 225.00 $ 500.00 $ 110.00
NPV of Guarantee $ 75.00 $ (30.00)
Land $ 100.00 $ 25.00
Building $ 100.00 $ 25.00
Total $ 1,400.00 $ 650.00 $ 1,200.00 $ 240.00
Liabilities
Deposits $ 1,000.00
Purchase Price Sec 597 Amount (Amortized 6 Years)
Liabilities Assumed (Deposits) $ 1,000.00 Class I & II $ 1,200.00
Transaction Cost $ 100.00 Purchase Price $ (1,100.00)
Total Purchase Price $ 1,100.00 Sec 597 Amount $ 100.00
Note: Liabilities on the balance sheet are recorded at legal (face amount). Liabilities for book are
recorded at FMV. This could give rise to a DTA/DTL.
34
Non FDIC Assisted
Asset Deals
35
Asset Acquisitions
Section 1060 - Generally
• Applies to any "applicable asset acquisition"
• An applicable asset acquisition is any transfer of
assets constituting a trade or business if the
purchaser's basis in the acquired assets is determined
wholly by reference to the consideration paid for such
assets.
36
Asset Acquisitions
Section 1060 - Generally
• Regulations under 1060 define assets constituting
trade or business as consisting of any group of assets
(i) the use of which would constitute an active trade or
business for purposes of section 355, or (ii) to which
goodwill or going concern value could under any
circumstances attach.
37
Asset Acquisitions
Section 1060 - Generally
• If section 1060 applies, the "consideration
received" for the acquired assets must be allocated
among the purchased assets per the regulations
under section 338(b)(5). The allocation must be
done under the "residual method."
• There are reporting requirements for each party to
the transaction if section 1060 is applicable.
38
Asset Acquisitions
Section 1060 - Regulations
• Regulations were issued for sections 338 and 1060 by
way of TD 8940. (2001).
– Regulations clarify that a trade or business is
present if goodwill could attach to the group of
assets, regardless whether any value will be
allocated to the residual class. The presence of
section 197 intangibles is a factor to be considered
in determining whether goodwill or going concern
value could attach.
39
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
– A purchaser is subject to section 1060 even if the
seller is treated as selling something different than
what the purchaser is treated as purchasing.
– In determining if there is a trade or business
transferred, all transfers between parties in a series
of related transactions are aggregated.
– As long as a part of the assets are deemed a trade
or business, all the assets will be treated as being a
single trade or business for the application of the
residual method.
40
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
– Seller's covenant not to compete with purchaser is
treated as an asset transferred as part of trade or
business.
– The buyer and seller may adjust their allocation to
particular assets for costs incurred which are
specifically identified with those assets. The total
amount the seller allocates to an asset for which it
incurs specifically identifiable costs would be less
than its fair market value and, for the purchaser,
greater than its fair market value.
41
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
• The seven asset classes under the section 338
regulations are incorporated in the section 1060
regulations:
– Class I –cash and general deposit accounts
(including savings and checking accounts) other
than certificates of deposit held in banks, savings
and loan associations, and other depository
institutions.
42
– Class II –actively traded personal property within the
meaning of section 1092(d)(1) and Treas. Reg. §
1.1092(d)-1, certificates of deposits, and foreign
currency. Class II assets do not include stock of
target affiliates, other than actively traded stock
described in section 1504(a)(4)).
– Class III –assets that the taxpayer marks to market
at least annually for Federal income tax purposes
and debt instruments (including accounts receivable
but excluding certain other debt instruments)other
debt instruments).
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
43
• Class IV –stock in the trade of the taxpayer or other
property of a kind which would properly be included in
the inventory of taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily
for sale to customers in the ordinary course of its trade
or business.
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
44
Asset Acquisitions
Section 1060 – Regulations (Cont'd)
– Class V –all assets other than Class I, II, III, IV, VI,
and VII assets.
– Class VI –all section 197 intangibles, as defined in
section 197, except goodwill and going concern
value.
– Class VII –goodwill and going concern value
(whether or not the goodwill and going concern
value qualifies as a section 197 intangible).
45
Asset Acquisitions
Section 1060 – Example
46
Asset Acquisitions
Section 1060 – Example Cont.
Facts:
• Purchase Price: $1,000,000
• T Assets:
– Cash: $ 200,000
– Land: $ 50,000
– Inventory: $ 100,000
– Building: $ 200,000
– Stock Portfolio: $ 25,000
– A/R $ 100,000
Allocation under Residual Method:
– Class I (cash) $ 200,000
– Class II (stock) $ 25,000
– Class III (acct. rec.) $ 100,000
– Class IV (Inventory) $ 100,000
– Class V (land / building) $ 250,000
– Total FMV of Class I-V $ 675,000
– Class VII (Goodwill) = $1,000,000
($ 675,000)
$ 325,000
47
Other Considerations and Issues
48
Repurchase Premium and Debt Issuance Costs:
Timing of Deductions
• Existing Debt: Face = $100; Adjusted Issue Price = $95; 5 year term
• New Debt: Face = $100; 8 year term
• Debt for Debt Exchange; Significant Modification – 1.1001-3
• Deduction for Repurchase Premium May Be Allowed
– Deduction to extent of debt is repaid for an amount in excess of its adjusted issue
price
Creditor
Debtor
General
49
Repurchase Premium and Debt Issuance Costs:
Timing of Deductions
Exception for Deduction of Repurchase Premium
If issue price of new debt is determined under sections
1273(b)(4) or 1274, repurchase premium is not deductible –
must be amortized over term of new debt. 1.163-7(c)
- Generally, if the debt is not publicly traded and is not
issued for cash, repurchase premium is nondeductible
(i.e., issue price of new debt is determined under sections
1273(h)(3) or 1273(h)(4).
50
Repurchase Premium and Debt Issuance Costs:
Timing of Deductions
• If a "substantial" amount of the debt is issued for cash,
then 1273(b)(4) and1274 are not applicable
- Thus, the repurchase premium is generally deductible
Old Creditor
Group 1 (20%)
Old Creditor
Group 2 (80%)
New Creditor
Group (20%) Debtor New Debt w/
face of $20
New Debt w/
face of $80 $20
$20
Typical Debt Restructuring Example -
51
Repurchase Premium and Debt Issuance Costs:
Timing of Deductions
• Section 279: 5%; 1.279-3(c)(2)
• Section 280G: 33.3%; 1.2806-1; Q&A 29
• Section 453 Discount: 20%; 15A. 453-1(e)(5)
• Substantial Authority: 35-40%; subjective
• Section 148: 10%; 1.148-1
52
Repurchase Premium and Debt Issuance Costs:
Timing of Deductions
Debt Issuance Costs
– Similar Analysis
53
Acquiring Discounted Debt
• Example: $100 face amount purchased upon original
issuance for $60.
– Tax basis: $60.
• General Rule: accrue from $60 to $100
• Under commonlaw, a lender may stop accruing
interest on a debt it holds if there is no reasonable
expectation of collection of the debt. (see Corn
Exchange Bank, 37 F.2d. 34 (2d Cir. 1930) and Jones
Lumber Co., 404 F.2d. 764 (6th Cir. 1968).
• The IRS stated in TAM 9538007 that this case law
DOES NOT apply to OID accruals. 54
Acquiring Discounted Debt
OID
• Reg sec. 1.446-2(e) says that all payments are treated
first as interest to the extent accrued, then as principal.
There are no exceptions explicitly for distressed debt,
but unclear that taxpayers have to treat a partial
payment on a nonperforming loan as attributable first
to interest.
• To the extent there is OID on purchased debt, the
purchaser of note inherits the existing OID income
stream. Therefore, a purchased note could have
interest income without cash payment regardless of
the ability of the borrower to pay.
55
Acquiring Discounted Debt
Market Discount
• Market Discount = the excess of the face amount of a
debt instrument over a taxpayer's basis in the debt.
• Market Discount is similar to OID except the market
discount attaches to the purchase of existing debt
rather than to the original issuance of the debt.
• Market discount rules are devised under the
assumption that the discount is an "interest
equivalent."
56
• Market discount accrues on a straight line basis over
the remaining life of debt unless the taxpayer elects
constant yield accrual. Market discount is generally
included in income when payments are made.
• All payments on the debt (interest or principal) are
characterized as interest up to the amount of the
accrued market discount that has not already been
taken into account.
Acquiring Discounted Debt
Market Discount
57
Acquiring Discounted Debt
Market Discount
• Amortizing Loans:
– Market Discount (MD) is included into income
periodically as amortization payments are made.
– Each payment of principal is treated as ordinary
income to the extent of the accrued MD that has not
already been taken into income.
– Gain on sale or retirement is treated as ordinary
income to extent of the accrued MD.
58
– Taxpayer can elect to accrue MD on constant rate
basis, applying compounding (YTM) principles
similar to OID rules.
– A taxpayer may choose to use the constant rate
accrual method so less of MD accrues upfront while
more of the MD is pushed to the backend based on
compounding principles.
Acquiring Discounted Debt
Market Discount
59
Acquiring Discounted Debt
Market Discount
• Timing and characterization results maybe unfavorable
under literal application of rules.
• Taxpayer can elect to include MD into income currently
using OID principles.
• If the election is NOT made, the taxpayer cannot
deduct interest on any debt incurred to fund the
purchase of MD notes until the MD is included into
income.
60
• Election – Risks
– Election applies to all MD debts acquired by
taxpayer. Pool loans create substantial complexity
in this case.
– General rule on debt is that each debt stands on its
own. Section 1272(a)(6) supports pool transaction
treatment.
• Mark to Market Tax Planning
Acquiring Discounted Debt
Market Discount
61
Application of Market Discount Rules to Distressed
Debt
Section 1276 recharacterizes gain on the disposition or
repayment of a loan as ordinary income to the extent of the
“accrued market discount” on such loan.
Market discount is the excess of the stated redemption price
at maturity of a loan over the taxpayer’s basis in such loan.
Market discount is intended to operate like OID and thus is
considered as a substitute for ordinary income.
62
Application of Market Discount Rules to Distressed
Debt
Example 1:
A purchases a $1 million loan, with 2 years left to maturity, for $950,000.
The loan has $50,000 of market discount upon purchase, which is due to
the fact that market interest rates have risen in comparison to the stated
interest rate on the loan.
A holds the loan to maturity and receives $1 million of principal repayment.
A incurs ordinary market discount income of $50,000.
Suppose instead that A sells the loan after 1 year for $980,000. A has
30,000 of income. As of the time of sale, the accrued market discount is
$25,000 under a ratable – straightline – accrual method. Thus, $25,000 of
the income qualifies as ordinary market discount income, and $5,000 of
the income is capital gain. 63
Application of Market Discount Rules to Distressed
Debt
Example 2
A purchases a $1 million loan with 2 years left to maturity for $400,000.
The loan is in default at the time of purchase. After 1 year, A forecloses on
the property and receives $600,000 of collateral in full payment of the loan.
Under a plain reading of section 1276, A has $200,000 of ordinary income
upon receipt of the collateral.
Does this result make sense?
A was economically purchasing an interest in the underlying collateral.
Does the gain resemble OID, interest, payment for the passage of time?
64
Application of Market Discount Rules to Distressed
Debt
If A decides to treat a portion or all of the gain as capital gain under some
economic theory, how do the following factors impact such an analysis?
Whether the loan is distressed;
The extent of the market discount compared to the stated
redemption price;
Whether the loan is in default;
Whether the loan is purchased before or after the maturity date.
65
Application of Market Discount Rules to Distressed
Debt
What are the technical positions for disregarding a plain reading of the
statutory language?
Legislative history/Congressional intent/abuse of discretion;
The instrument is not debt, it is something else;
State law considerations
66
Acquiring Discounted Debt
Loan Modifications
• Modification of debt after acquisition of said debt
requires debt exchange analysis, if the modification is
"significant".
– With regard to the lender, modification does not
impact them. Basis in "new" and "old" notes will be
the same.
– The holder of the note may be subject to adverse
implications.
67
– Example:
FMV of "New Note": $2,000,000
Basis in Old Note or Disc.
purchase price: $1,000,000
"Deemed" or "Phantom" Gain $1,000,000
(can be capital or ordinary)
Acquiring Discounted Debt
Loan Modifications
68
Acquiring Discounted Debt
Loan Modifications
• A deemed exchange is triggered on any "significant"
modification. Cottage Savings.
• Modifications are viewed collectively and in the
aggregate.
• There are ten safe harbor tests:
1. Change in yield of 25 basis points (or 5% of the
annual yield) is "significant." Reg sec. 1.1001-
3(e)(2)(ii).
69
2. Change in timing of payment. Reg. sec. 1.1001-
3(e)(3)(i). Payment is deferred more than the less
of five years or 50% of the original term of the note.
3. Change in Obligor. (this is for a recourse
obligation). Reg. sec. 1.1001-3(e)(4)(ii).
Acquiring Discounted Debt
Loan Modifications
70
Acquiring Discounted Debt
Loan Modifications
4. An addition/deletion of a co-obligor, if it affects the
likelihood of repayment. Reg. sec. 1.1001-
3(e)(4)(iii).
5. Change in security or credit enhancement. Reg.
sec. 1.1001-3(e)(4)(iv).
6. Change in priority of debt. Reg. sec. 1.1001-
3(e)(4)(v).
7. Change from debt to equity. Reg. sec. 1.1001-
3(e)(5)(vi).
71
8. Change in recourse nature. Reg. sec. 1.1001-
3(e)(5)(vii)(A).
9. Change in customary financial covenants. Reg.
sec. 1.1001-3(e)(6). (generally not significant)
10. Indirect tax exempt bond modifications. Reg. sec.
1.1001-3(f)(6).
Adding guaranty or additional collateral to non-
recourse debt is generally significant.
Acquiring Discounted Debt
Loan Modifications
72
Acquiring Discounted Debt
Loan Modifications
• Simple solution to this is to require the original lender
make the modifications prior to the purchase of the
notes.
73
Stock Acquisitions
74
Considerations of Strategic Acquisitions
• An acquirer acquires stock of target
• Issues and Considerations in General:
– Unwanted Assets
– Basis determination
– historic tax attributes
– Consideration
– TruPS outstanding
– TARP considerations
75
• Tax implications
– Valuation Allowances
– Section 382 limitations (NOLs, BILs)
– Bad Debt deductions
– Restructuring
– DTA preservation
Considerations of Strategic Acquisitions
76
Bad Debt Deduction – PLR 201105031
• Holding:
IRS ruled that pursuant to Notice 2003-65, bad debt
deductions under sec. 166 arising from debt owed to a
sub at the beginning of the recognition period will not be
recognized BIL if the deduction is taken into account after
the first 12 months of the recognition period.
77
• Facts:
– "Target" bank holding company (BHC) to merge with
"Taxpayer" (another BHC).
– Subsidiary ("S") was wholly owned by Target.
– merger would result in ownership change of S under
382(g)(1). S would be a loss corporation with NOL
carryover and NUBIL, due to adjusted basis of debt
portfolio over FMV of the same portfolio.
– S did not make, nor intended to make, a conformity
election under section 1.166-2(d)(3).
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78
– After merger, S planned to recognize one or more
wholly or partially worthless bad debt deductions
under section 166 related to the debts it held prior to
the merger. S expected deductions would be taken
into account during and after the first year of the five
year recognition period after the ownership change
of S.
– S intended to use the section 1374 methodology to
determine which bad debt deductions will be RBIL
under 382(h)(2)(B).
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79