Workouts and Debt Restructurings
We have extensive experience developing and implementing a wide variety of workout and restructuring transactions for distressed businesses. Because of our in-depth understanding of both the tax issues that are precipitated by transactions undertaken to restructure or modify debt and the differing tax positions of the various parties involved, we bring a unique perspective to our representation of both debtors and creditors. In addition, our attorneys have particular expertise in state and local transfer and other transaction taxes which can often have a significant unanticipated impact on restructuring transactions. For these reasons, we often are brought in by other law firms to provide tax support to their bankruptcy and workout practices.
We have represented corporate, partnership, and individual debtors; equity owners; existing creditors; providers of new debt or equity financing; and purchasers of businesses. Each of these constituencies has differing tax motives, positions, and objectives that must be considered in order to implement an effective and efficient restructuring. We have worked both outside of bankruptcy and, when appropriate, under the aegis of a Bankruptcy Court. Where a business is being restructured under the bankruptcy laws, we have received permission from the Bankruptcy Court to be engaged as special tax counsel to the bankrupt debtor or to an official creditors’ committee. One of our attorneys served for several years as Co-Chair of the Committee on Bankruptcy of the Tax Section of the New York State Bar Association.
Corporate and Partnership Restructurings
We have developed structures for both corporations and partnerships to deal with debt modifications, debt-for-debt and debt-for-equity exchanges, and taxable and tax-free mergers and acquisitions. We focus on ways to defer or eliminate the recognition of income from the discharge of indebtedness; the recognition of gain or loss on the exchange by creditors of their debt instruments for new debt or equity; and accounting for, and determining the deductibility of, stated interest and “original issue discount” on debt instruments. We also address the impact of restructuring transactions on shareholders and partners. The survival of, and succession to, corporate net operating loss carryovers and other valuable tax attributes is another common concern whenever there is a significant change in shareholdings. Whether in the context of a major restructuring or in connection with a creeping acquisition, we assist in maximizing the ongoing tax benefits of such attributes.
Real Estate Workouts
Workouts, restructurings and refinancings of partnerships, limited liability companies, and corporations engaged in the ownership, rental, or development of real estate frequently raise special tax issues and present their own potential pitfalls and opportunities. When the debt on a property exceeds its fair market value and the owner can repay or acquire the debt for less than its face amount, the after-tax economics of a transaction can be vastly different depending upon how the transaction is structured. Implementing such transactions requires coordinating a variety of income tax rules, including those relating to discharge of indebtedness and partnership taxation, with a host of other variables, such as available structures for ongoing financing, the estate planning needs of the principals, and state and local transfer, recording, and similar taxes. We have broad experience in creating structures that address these complex requirements.
When our client determines the extent to which the property can be refinanced and the terms that will be imposed, our role is to identify and analyze various alternatives (including the applicability of in-substance or legal defeasance) and to factor in the impact that taxes will have on each. Available alternatives cover a wide range: current recognition of cancellation of indebtedness (“COD”) income; various tax deferral and basis reduction elections; acquisition of debt at a discount by an appropriate party; taxable and nontaxable asset dispositions (section 1031 tax-free exchanges) prior to triggering COD income; and changing the character of the gain. Once the choice is made we assist with implementing and documenting the transaction.