Laserfiche WebLink
E. Tax Consequences to Debtor and Creditors. <br />i. Overview. The Debtor has net operating loss ("NO 1 ") carryforwards for <br />U.S. federal income tax purposes. The amount of any such NOL carryforwards and other <br />losses, and the extent to which any limitations might apply, currently remain subject to <br />audit and adjustment by the IRS. <br />ii. Continuation of Tax Attributes. When a corporation files for bankruptcy. the vast <br />majority of the rules contained in the Tax Code continue to apply to the corporation without <br />modification. Under Section 1399 of the Tax Code. except for the case of an individual in <br />bankruptcy. no separate taxable entity shall result from the commencement of a bankruptcy <br />matter. As a result, the Debtor's tax attributes, including NOL carryforwards, except as <br />otherwise discussed immediately below related to Sections 108 and 382 of the Tax Code, are <br />unaffected by a bankruptcy filing. <br />iii. Cancellation of Indebtedness Income. As a result of the Plan, the amount of the <br />Debtor's aggregate outstanding indebtedness will be substantially reduced. In general, <br />absent an exception, the Debtor will realize and recognize cancellation of indebtedness <br />income ("COD Income") upon satisfaction of certain Claims for an amount less than the <br />adjusted issue price of the debts constituting those Claims. The amount of COD Income, <br />in general, is the excess of (a) the adjusted issue price of the indebtedness satisfied <br />(including accrued and unpaid interest), over <br />(b) the sum of the issue price of any new indebtedness issued, the amount of cash paid and <br />the fair market value of any new consideration (including stock of the issuer) given in <br />satisfaction of such indebtedness at the time of the exchange. Such COD Income is <br />recognized and included in income except to the extent that Section I108 of the Tax Code <br />excludes it from gross income. Under Section 108(a) of the Tax Code, a debtor will not be <br />required to include any amount of COD Income in gross income if such debtor is under the <br />jurisdiction of a court in a Title 11 bankruptcy proceeding and the discharge of debt occurs <br />pursuant to that proceeding. Instead. as a price for such exclusion, a debtor must (as of the <br />first day of the next taxable year) reduce its tax attributes by the amount of COD Income <br />which it excluded from gross income. In general, tax attributes will be reduced in the <br />following order: (a) NOLs, (b) tax credits and capital loss carryovers, and (c) tax basis in <br />assets. In lieu of the generally required order of attribute reduction, a taxpayer may elect <br />instead to reduce first, its tax basis in its depreciable property, and then its remaining tax <br />attributes. Such attribute reductions are made after the determination of the taxpayer's tax <br />liability for the taxable year in which the debt cancellation transaction occurs. Although it <br />is expected that a reduction of tax attributes will be required, the exact amount of such <br />reduction cannot be predicted. To the extent that a reduction of tax attributes is required, <br />RPL anticipates that it will reduce the amount of the Debtor's NOL carryovers and then <br />reduce its other tax attributes, primarily the tax basis of their assets. <br />iv. Limitation on NOLs and Other Tax Attributes. Pursuant to Section 382 of the <br />Tax Code, and subject to certain exceptions discussed below, if there is an Ownership <br />21 <br />