Tax Consequences for a Tax-Driven Plan of Reorganization Under Section 1129(d) of the Bankruptcy Code and Section 269 of the Internal Revenue Code

Saturday, January 1st, 1994 at 12:00 am by Terrence L. Shen
Terrence L. Shen, Tax Consequences for a Tax-Driven Plan of Reorganization Under Section 1129(d) of the Bankruptcy Code and Section 269 of the Internal Revenue Code, 1994 Colum. Bus. L. Rev. 267

Under Section 1129(d) of the Bankruptcy Code (‘Section 1129(d)‘), a court is not permitted to confirm a bankruptcy plan of reorganization if the primary purpose of that plan is to avoid or evade taxes. [FN1] Similarly, Section 269 of the Internal Revenue Code (‘Section 269‘) permits the Internal Revenue Service (‘IRS‘) to disallow any deduction, credit, or other allowance, including the use of net operating loss (‘NOL‘) carryovers, resulting from an acquisition transaction that has as its primary purpose the avoidance or evasion of taxes. Frequently, one of the most valuable assets of a debtor is the use of its NOL carryovers. How can a party to a Chapter 11 plan of reorganization that involves an acquisition transaction and that attempts to preserve the use of the debtor’s most favorable tax attributes (e.g., NOL carryovers) minimize the risk that either the Bankruptcy court will refuse to confirm the plan or that the IRS will disallow the use of the favorable tax attributes?

This Note argues that a party to a bankruptcy proceeding in which such a plan of reorganization is proposed can accomplish this by making clear and obvious its non-tax business purposes for reorganizing and its non-tax reasons for performing the acquisition transaction in Chapter 11 bankruptcy. This Note also argues that, in order to minimize the risk of a Section 269 challenge, the debtor should not attempt to realize, within a short period of time following the confirmation of its plan and through the use of favorable tax attributes, any substantial tax benefits that are not connected with its stated valid business purpose. Part I examines the statutory bases that give the Bankruptcy court the authority to reject, based on tax considerations, a plan of reorganization and the IRS the authority to disallow any deduction, credit, or other allowance, including the use of net operating loss carryovers, resulting from an acquisition transaction. Part II discusses the potential for the concurrent application of Section 1129(d) and Section 269, and examines the issue whether a determination by the Bankruptcy court can affect, through the doctrine of res judicata, the actions of the IRS. Part III synthesizes the statutes and case law and, based on that synthesis, provides recommendations for parties that plan to undertake such transactions.

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