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Bankruptcy Starter OL
Bankruptcy Starter OL
Prof. Liquerman
Fall 2012
Chapter 1
1) Alternatives to Bankruptcy
a) Out-of-court Settlements
i) Extended time to pay
ii) Cash settlement
iii) Issuance of stock
b) Assignment of Assets
i) Sign over title of assets to creditors
2) Bankruptcy
a) Common to All Proceedings
i) Automatic stay
(1) Creditors cannot take action with respect to liens on assets
ii) Priority of claims
iii) Discharge of Debts
iv) Disallowance of preferential payments
3) Chapter 7 – Liquidation
a) Income
i) Means Test –
(1) Can be transferred to a chapter 11 or 13 proceeding
(a) Exception: Mean income is below state determined level
(2) Presumed to be abuse if:
(a) Monthly income – monthly expenses * 60 is not less than the lesser
of:
(i) The greater of 25% of unsecured claims or $7,025; or
(ii) $11.725
b) Deductions
i) National standards
ii) Local Standards
c) Appointment of Trustee
4) Chapter 11 – Reorganization
a) Goal – allow company to continue business with protection from the court in
order to minimize losses from liquidation
b) Creditors’ committee
i) 7 (or more) of the largest unsecured creditors
ii) Act as negotiators for all creditors
c) Develop a plan
i) Get approval of plan
d) Advantages –
i) Less % of creditors needed for approval
ii) Creditors bargain for rights
iii) Assets are safe
iv) Cancellation of contracts
v) Avoidance of certain transfers
5) Chapter 12 – Adjustment of Debts for Farmers
6) Chapter 13 – Adjustment of Debts for Individuals
a) Requirements –
i) Limits on how much secured and unsecured debt an filer can have
ii) Stable income
b) Plan
i) Submit t supervision by trustee
ii) Full payment of priority claims unless creditors agrees otherwise
iii) Same treatment for each class of creditors
Chapter 5 – Reorganizations
1) Common Elements
a) Business Purpose
i) Regulations:
(1) “undertaken for reasons germane to the continuance of the business;”
or
(2) “required by business exigencies”
ii) Bad:
(1) Purely avoiding tax
(2) Sham
iii) Good:
(1) Operating efficiencies
(2) Penetrate new markets
(3) Diversify product lines
b) Continuity of Business Enterprise
i)
c) Continuity of Interest
i) SHs of target continue holding an interest in the new company/Acquirer
ii) Generally 40% or more
2) Types of Reorganizations
a) Acquisitive Asset Reorganizations
i) Type “A” – Merger or consolidation
(1) Benefits:
(a) No G/L on transfer (corp. to corp.)
(b) No G/L for SH
ii) Type “C” – Voting Stock
iii) Triangle
iv) Type “D” –
b) Stock Acquisitions
i) Type “B” –
ii) Reverse Triangle
c) Single Entity Reorganizations
i) Type “E” Reorganizations - recapitalization
ii) Type “F” Reorganizations
d) Devisive
e) Bankruptcy Reorganizations
i) Type “G”
(1) Transfer by corp. or all or part of assets to another corp. in a title 11
or similar case, but only if plan, stock or securities of Acquiring are
distributed in a transactions that fits under 354, 355, 356.
(a) 354 is key
(i) stockholder or security holder
1. need at least 1
2. If not, only NON-SC get taxed
(2) Continuity of Interest
(a) Example: Company has 3 classes of debt (senior, junior,
subordinated)
(i) In reorg, mixture of stock and boot
1. Stock/All consideration
(ii) Seniors get cash
(iii) Juniors get stock and cash
(iv) Sub gets only stock
(v) Proprietary interests = Juniors and Subordinated
(b) Regs – look at THE most senior claim to get stock. Bifurcate it into
continuity part and non-continuity part.
(i) Disregard the non-continuity part.
(3) Proposed Regulation 163313-03 (2005-1 cum. Bul 835)
(a) “Net positive valuation”
(b) Create requirements of Reorganizations:
(i) Surrender of net value
1. If FMV of property transferred by T to A exceeds any
liabilities of T assumed by A + any money received by
target + FMV of other property transferred to target
2. (must be room for some equity)
(ii) Receipt of net value
1. After transaction, FMV of A’s assets must exceed liabilities
(iii) Apply to acquisitive
(4) Example: LossCo is in bankruptcy, 1B assets and 3B debt. Lossco gives
1B of stock to Creditors.
(a) Not a G, but a recapitalization
(b) Gain or Loss at corporate level?
(i) No
(c) G/L to creditor?
(i) Depends if security holder or not
(d) G/L on Corporation issuance?
(i) No
(e) COD income?
(i) Yes, §108(e)(8) – stock for debt exchange
1. Reduce attributes
2. Look for an ownership change
a. limits NOL
3. Special 382 rules
a. (l) 5 & 6
(5) Example w/G reorganization
(a) A has 3B. T is in bankruptcy. T has 1B is assets and 3B in debt. T
transfers all assets (no debt) for 1B of stock.
(b) Steps:
(i) Determine if SH or security holder
(ii) Qualify as G-reorg?
(iii) COD income to T?
1. Yes, 2B
(iv) Reduce attributes
1. What If not in title 11? just partial exclusion
(v) §382
1. % of old = 75
2. % of new = 25
3. ownership change!
(vi) What’s the limitation?
1. Does not qualify for L(5)
(vii) Look to l(6)
1. Lower of:
a. Pre-change gross assets = 1B; or
b. Post change stock value = 4B
2. * tax rate
(viii) Any gain for T on transfer?
1. NO
(ix) A’s basis?
1. 362 (subject to reduction)
(x) No g/L on issuance
1. 1032
(6)
3) Why we care for this Class?
a) Loss Trafficking: When profitable company buys loss company to use NOLs
to offset their own income
b) Types of Items Trafficked:
i) Built-in losses
ii) NOLs
iii) Capital Loss carry forward
iv) Credits
a) Application
i) When there is an Ownership Change
(1) “The % of stock of a “loss corporation” owned by one or more 5% SHs
has increased by more than 50 percentage points relative to the
lowest percentage owned by the same 5% SHs during the testing
period”
(2) What is a “Loss Corporation”?
(a) A corporation with a:
(i) NOL
1. For that year, or one that can be carried into that year
(ii) NUBIL (Net Unrealized Built-In Loss)
1. RBIL when you recognize the loss
a. Only subject to the limitation for 5 years after the
“ownership change”
(iii) Capital loss in year of change (or carryover)
1. §383
(iv) Credit in year (or carryover)
1. §383
(3) What is the “testing date”
(a) “Any day on which the ownership interest of ANY 5% SH changes
(i) Sale
(ii) Issuance
(iii) Redemption
(iv) Tax-free reorganization
(4) Percentage of Stock of Corporation
(a) Includes:
(i) Stock other than under §1504(a)(4)
1. Affiliated group for consolidated returns
2. Characteristics (need all to be §1504) – non-voting, limited
and preferred as to dividends, no participation to
significant extent, not convertible into common
(ii) Attribution Rules:
(5) Owned by 1 or more 5% SHs (Directly or indirectly)
(a) Attribution Rules: §1.382-2T-J1
(i) Example:
1. Loss Co has Public L owns 41%, C1 owns 50% (Owned by
X10%, Y20%, Z6%, and 64% by Public C), C2 owns 4%, and
X owns 5%
2. Who are 5% SH? (must = 100%)
a. X owns 5% and 5% = 1-%
b. Y owns 10%
c. Public L owns 45% (Public L and C2)
d. (Z is 6% owner but NOT at 5% Shareholder)
e. Public C owns 35% (Z + Public C)
3. If public group from above is NOT a 5% holder, add them to
the lower Public
(b) Aggregation Rules: (combine small SHs into a “Public Group”)
(c) Segregation Rules: (separate the public group into other groups)
(i) Example:
1. Loss Co has 20 shares owned by A and 80 owned by Public.
It has a debt that it pays off using 40 shares (Public 2)
2. Chart
a. A = 14%, 20, 0
b. P1 = 57%, 80, 0
c. P2 = 29%, 0, 29
(ii) Exceptions:
1. Small Issuance (3J) (**still shift, but just reduces it)
a. If issuance is “small” then the shares are acquired by the
direct public group
i. If more than one public groups, it will be acquired
proportionally according to their interests
b. “Small”:
i. Corporate-wide – 10% or less of the total value of
the shares of the corporation outstanding (at the
beginning of the year)
ii. If over, the remaining goes to a new public group
iii. Class-by-class – less than 10% of the number of
shares outstanding at the beginning of each year
2. Cash Issuance
a. Exempts a portion of shares that were issued for cash
an amount = to ½ of the aggregate % of the amount
owned by direct public groups before the issuance
(Public % * ½ * shares sold for cash) that number
treated as acquired by old Public (remaining are not
exempt and are put into New Public)
b. Chart –
i. A – 14%, 20, 0
ii. P1 – 69%, 80, 0
iii. P2 – 17%, 0, 17
(d) Segregation of Loss corporation
(i) Example: L owned by: A-20 and Public #1–80. A sells 10 shares
to the Public.
1. 1.382-2Ta(j)(3)
a. Event because A is 5% holder
b. A “sold” to new public
i. If you didn’t create new pubic groups, it would
decrease the shifts over time.
(ii) What if A sold 3 shares?
1. Still segregation event because disposition by 5% holder.
a. Treat new public as 5% SH.
(iii) Notice 2010-49 –
1. 2 approaches to look at for segregation rules
a. Ownership tracking
i. Tend to create more public groups after 5%
transaction (maximizes ownership shift)
b. Purposive –
i. Treat as sale back to the existing public groups (if no
one person becomes a 5% owner)
ii. No one “becomes” a 5%
iii. Example – A owns 20, Public owns 80. If A sells 2…
iv. A sells to current
2. IRS proposed Reg. – 1.382-3 I and J
a. Examples
b. **Not covered because not officially released**
(6) Increased by more than 50 percentage points over the lowest
percentage owned by those SHs at any time
(a) General rule VALUE of the stock
(7) During a testing period
(a) General 3 years back from testing date
(b) Exception:
(i) If ownership change within 3 years, only have to look back as
far as your latest ownership change
ii) Determining Ownership Change
(1) Example:
(a) Loss Co has 3 direct SHs, A, B, & C. A has 30 shares, B has 30
shares, and C has 40 shares.
(b) Tests:
(i) Who is 5% SH?
(ii) What do they own at the end of the testing date?
(iii) What was the lowest of what they otherwise owned
during testing period
(iv) What % increase did they have?
(c) Transactions:
(i) A sold 30 shares to D
5% TD Lowest TP %
B 30 30 0
C 40 40 0
D 30 0 30
(ii) The next day, B sells all stock to E (assume all are unrelated)
5% TD Lowest TP %
C 40 40 0
D 30 0 30
E 30 0 30
5% TD Lowest TP %
C 40 40 0
D 30 30 0
E 30 0 30
5% TD Lowest TP %
B 30 30 0
C 40 40 0
E 30 0 30
Limitations on NOLs