Distressed Debt Buybacks and Restructurings – It’s Easy, Unless It’s Not

General

The credit crisis continues to take its toll on virtually all economic activity. As it sweeps the globe, it has left many companies financially weakened, if not crippled. In some situations, the fair market value of corporate debt has fallen significantly below face amount. As a result, some companies may be forced to restructure their debt and others may wish to take advantage of this "opportunity" to repurchase their debt at a discount. Interesting tax issues arise in this context.

A corporation is generally subject to tax on cancellation of indebtedness ("COD") income. COD income may arise in several situations, including forgiveness of debt by the debtholder, the repurchase of debt by the issuer at a discount, the exchange of one debt instrument of the issuer for another, significant modification of debt, the exchange of debt for equity of the issuer, and the acquisition of debt by a person related to the issuer. COD income, however, generally is not