C3 -- Cordonnier, Egan & Reilly


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C3 -- Cordonnier, Egan & Reilly

  1. 1. Bank Troubled Asset AcquisitionsPatrick EganNew York Community BancorpBill ReillyNational Banking Tax Partner, Grant ThorntonAndrew CordonnierWashington National Tax Partner, Grant Thornton
  2. 2. 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
  3. 3. Troubled Asset AcquisitionsUpdate• 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
  4. 4. 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 acquirers 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
  5. 5. Section 363 Sale – Summary of General Tax IssuesWhat is a "Section 363" Sale?Why are we discussing it? 5
  6. 6. Section 363 Sale – Summary of General Tax Issues Share Creditors holders 1. 3rd Party Cash Bid 2. Creditor Bid P asset sales S1 S2 S3Does this constitute a G reorganization under section 368(c)(1)(G)? 6
  7. 7. Section 363 Sale – Summary of General Tax IssuesThe Transaction• Gain or Loss on Sale of Assets• Mechanics of Transaction P – Distribution of assets – Assumption of debt S1 S2 – Guarantee expense S3 7
  8. 8. Section 363 Sale – Summary of General Tax IssuesTriggering What items are "triggered" upon asset sale and dissolution? P debt FMV = 0 S1 S2 truck Basis = <100> $ S31. 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) 8
  9. 9. Section 363 Sale – Summary of General Tax IssuesWorthless Stock DeductionsWorthless stock deductions are subject to the "United Loss Rules"("ULRs"); 1.1502-36Basis is reduced under a 3 factor test:1. 1.1502-36(b): Basis redetermination to reduce disparity2. 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 amount3. 1.1502-36: Attribute reduction to prevent duplication of loss 9
  10. 10. Section 363 Sale – Summary of General Tax IssuesApplication of Standard Rules for Debt Workouts • Consolidated Stock Basis; 1.1502-32 • Exclusion of COD Income; 108(b) • Attribute Write-Downs • Property Basis Writedowns P • Application of Section 108/1017 in Consolidated Group – Look-Thru Rule; 1.1502-28(a)(3) S1 S2 – Fan-Out Rule S3 10
  11. 11. Section 363 Sale – Summary of General Tax IssuesIntercompany Debt; 1.1502-13(g) P $100 debt FMV = 20 SUpon certain "realization" events, S is deemed to repay the debt for anamount 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; noimpact on loss disallowance rules 11
  12. 12. Section 363 Sale – Summary of General Tax IssuesMiscellaneous 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
  13. 13. Section 597 FDIC Assisted Transactions/Loan Sharing Agreements (IRC Section 597) 13
  14. 14. Section 597• Enacted in 1981.• Provided payments to troubled financial inst., payments were excluded from gross income and did not reduce basis of institutions 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
  15. 15. 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
  16. 16. 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
  17. 17. Section 597 – Proposed and Final Regulations – When feasible, the timing of inclusion of FFA should match the recognition of the institutions 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
  18. 18. Section 597 – Proposed and Final RegulationsKey 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
  19. 19. Section 597 – Proposed and Final RegulationsKey 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
  20. 20. Section 597 – Proposed and Final RegulationsKey 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
  21. 21. Section 597 – Proposed and Final RegulationsKey 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
  22. 22. Section 597 – Proposed and Final RegulationsKey Aspects of Final Regs. – Consolidated Groups – 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. 22
  23. 23. Section 597 – Proposed and Final RegulationsKey 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
  24. 24. Section 597 – Proposed and Final RegulationsKey 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
  25. 25. Section 597 – Proposed and Final RegulationsKey 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
  26. 26. Section 597 – Proposed and Final RegulationsKey Aspects of Final Regs. – Loss Share Guarantee• 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). 26
  27. 27. Section 597 – Proposed and Final RegulationsKey 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
  28. 28. Section 597 – Proposed and Final RegulationsKey Aspects of Final Regs. – Section 597• 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. 28
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. FDIC Assisted Troubled TransactionsPost 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
  34. 34. Section 597 ExampleSection 597 ExampleAssets Legacy Amount Asset FMV Tax Amount Defd Items (40% Rate)Cash $ 100.00 $ 100.00 $ 100.00Loans (Guaranteed) $ 600.00 $ 200.00 $ 600.00 $ 160.00Securities (Guaranteed) $ 500.00 $ 225.00 $ 500.00 $ 110.00NPV of Guarantee $ 75.00 $ (30.00)Land $ 100.00 $ 25.00Building $ 100.00 $ 25.00Total $ 1,400.00 $ 650.00 $ 1,200.00 $ 240.00LiabilitiesDeposits $ 1,000.00 Purchase Price Sec 597 Amount (Amortized 6 Years)Liabilities Assumed (Deposits) $ 1,000.00 Class I & II $ 1,200.00Transaction Cost $ 100.00 Purchase Price $ (1,100.00)Total Purchase Price $ 1,100.00 Sec 597 Amount $ 100.00Note: 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
  35. 35. Non FDIC Assisted Asset Deals 35
  36. 36. Asset AcquisitionsSection 1060 - Generally• Applies to any "applicable asset acquisition"• An applicable asset acquisition is any transfer of assets constituting a trade or business if the purchasers basis in the acquired assets is determined wholly by reference to the consideration paid for such assets. 36
  37. 37. Asset AcquisitionsSection 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
  38. 38. Asset AcquisitionsSection 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
  39. 39. Asset AcquisitionsSection 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
  40. 40. Asset AcquisitionsSection 1060 – Regulations (Contd) – 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
  41. 41. Asset AcquisitionsSection 1060 – Regulations (Contd) – Sellers 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
  42. 42. Asset AcquisitionsSection 1060 – Regulations (Contd)• 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
  43. 43. Asset AcquisitionsSection 1060 – Regulations (Contd) – 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). 43
  44. 44. Asset AcquisitionsSection 1060 – Regulations (Contd)• 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. 44
  45. 45. Asset AcquisitionsSection 1060 – Regulations (Contd) – 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
  46. 46. Asset AcquisitionsSection 1060 – Example 46
  47. 47. Asset AcquisitionsSection 1060 – Example Cont.Facts:• Purchase Price: $1,000,000 Allocation under Residual Method:• T Assets: – Class I (cash) $ 200,000 – Cash: $ 200,000 – Class II (stock) $ 25,000 – Land: $ 50,000 – Class III (acct. rec.) $ 100,000 – Inventory: $ 100,000 – Class IV (Inventory) $ 100,000 – Building: $ 200,000 – Class V (land / building) $ 250,000 – Stock Portfolio: $ 25,000 – A/R $ 100,000 – Total FMV of Class I-V $ 675,000 – Class VII (Goodwill) = $1,000,000 ($ 675,000) $ 325,000 47
  48. 48. Other Considerations and Issues 48
  49. 49. Repurchase Premium and Debt Issuance Costs:Timing of DeductionsGeneral Creditor Debtor• 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 49
  50. 50. Repurchase Premium and Debt Issuance Costs:Timing of DeductionsException for Deduction of Repurchase PremiumIf issue price of new debt is determined under sections1273(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
  51. 51. Repurchase Premium and Debt Issuance Costs:Timing of DeductionsTypical Debt Restructuring Example - Old Creditor Old Creditor Group 1 (20%) Group 2 (80%) New Debt w/ $20 face of $80 $20 New Creditor Debtor Group (20%) New Debt w/ face of $20• 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 51
  52. 52. 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
  53. 53. Repurchase Premium and Debt Issuance Costs:Timing of DeductionsDebt Issuance Costs – Similar Analysis 53
  54. 54. 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
  55. 55. Acquiring Discounted DebtOID• 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
  56. 56. Acquiring Discounted DebtMarket Discount• Market Discount = the excess of the face amount of a debt instrument over a taxpayers 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
  57. 57. Acquiring Discounted DebtMarket Discount• 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. 57
  58. 58. Acquiring Discounted DebtMarket 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
  59. 59. Acquiring Discounted DebtMarket Discount – 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. 59
  60. 60. Acquiring Discounted DebtMarket 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
  61. 61. Acquiring Discounted DebtMarket Discount• 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 61
  62. 62. Application of Market Discount Rules to DistressedDebtSection 1276 recharacterizes gain on the disposition orrepayment 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 priceat maturity of a loan over the taxpayer’s basis in such loan.Market discount is intended to operate like OID and thus isconsidered as a substitute for ordinary income. 62
  63. 63. Application of Market Discount Rules to DistressedDebtExample 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 tothe fact that market interest rates have risen in comparison to the statedinterest 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 has30,000 of income. As of the time of sale, the accrued market discount is$25,000 under a ratable – straightline – accrual method. Thus, $25,000 ofthe income qualifies as ordinary market discount income, and $5,000 ofthe income is capital gain. 63
  64. 64. Application of Market Discount Rules to DistressedDebtExample 2A 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 onthe 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 incomeupon 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
  65. 65. Application of Market Discount Rules to DistressedDebtIf A decides to treat a portion or all of the gain as capital gain under someeconomic 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
  66. 66. Application of Market Discount Rules to DistressedDebtWhat are the technical positions for disregarding a plain reading of thestatutory language? Legislative history/Congressional intent/abuse of discretion; The instrument is not debt, it is something else; State law considerations 66
  67. 67. Acquiring Discounted DebtLoan 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
  68. 68. Acquiring Discounted DebtLoan Modifications – 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) 68
  69. 69. Acquiring Discounted DebtLoan 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
  70. 70. Acquiring Discounted DebtLoan Modifications 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). 70
  71. 71. Acquiring Discounted DebtLoan 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
  72. 72. Acquiring Discounted DebtLoan Modifications 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. 72
  73. 73. Acquiring Discounted DebtLoan Modifications• Simple solution to this is to require the original lender make the modifications prior to the purchase of the notes. 73
  74. 74. Stock Acquisitions 74
  75. 75. 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
  76. 76. Considerations of Strategic Acquisitions• Tax implications – Valuation Allowances – Section 382 limitations (NOLs, BILs) – Bad Debt deductions – Restructuring – DTA preservation 76
  77. 77. Bad Debt Deduction – PLR 201105031• Holding:IRS ruled that pursuant to Notice 2003-65, bad debtdeductions under sec. 166 arising from debt owed to asub at the beginning of the recognition period will not berecognized BIL if the deduction is taken into account afterthe first 12 months of the recognition period. 77
  78. 78. Bad Debt Deduction – PLR 201105031• 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). 78
  79. 79. Bad Debt Deduction – PLR 201105031 – 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). 79