An Opportune Time To Reacquire Or Restructure Business Debt

Under new Section 108(i) of the Internal Revenue Code, 2009 and 2010 would appear to be an ideal time for taxpayers to reacquire or restructure their debt, much of which may have been heavily discounted.

Background

A borrower is not required to include the proceeds of a loan made to it as gross income, because the borrower is required to repay the loan. When a debt instrument is discharged for less than its principal amount (i.e., at a discount), such discharge generally gives rise to cancellation of indebtedness income (COD) in an amount equal to the discount, which income is taxable as ordinary income. Although bankrupt and insolvent taxpayers are not required to recognize COD as such, certain tax attributes of these taxpayers, such as net operating losses, are reduced dollar-for-dollar by the amount of the COD.