Preservation of favorable tax attributes, such as net operating losses that might otherwise be forfeited under applicable nonbankruptcy law, is an important component of a business debtor's chapter 11 strategy. However, if the principal purpose of a chapter 11 plan is to avoid paying taxes, rather than to effect a reorganization or the orderly liquidation of the debtor, the Bankruptcy Code contains a number of tools that can be wielded to thwart confirmation of the plan.

In PLR 201051019 (12/23/2010), the Service ruled that in computing a consolidated group’s §382 limitation after filing for bankruptcy relief, all of its outstanding liabilities before the ownership change should be taken into account at the adjusted issue price, regardless of whether the obligations were subsequently discharged in whole or in part during the recognition period.

In a recent decision, the Bankruptcy Court for the Southern District of New York concluded that an investor in a Real Estate Mortgage Investment Conduit ("REMIC") lacked standing to object to the sale of a chapter 11 debtor's real property, despite that the property served as collateral for loans held in trust by the REMIC for the benefit of its investors.

Background

The implementation of restrictions on stock and/or claims trading has become almost routine in large chapter 11 cases involving public companies on the basis that such restrictions are vital to prevent forfeiture of favorable tax attributes that can be triggered by a change in control. Continued reliance on stock trading injunctions as a means of preserving net operating loss carry forwards, however, may be problematic, after the controversial ruling handed down in 2005 by the Seventh Circuit Court of Appeals in In re UAL Corp.

On August 9, 2006, Judge Burton R. Lifland of the United States Bankruptcy Court for the Southern District of New York entered a Final Order Establishing Procedures for Trading in Claims and Equity Securities of Dana Corporation (the “Dana NOL Trading Order”). The Dana NOL Trading Order is materially different from NOL trading orders that have been approved by other bankruptcy courts and, from the perspective of investors in claims and distressed securities, represents a material improvement.

Treatment of NOLs in Business Reorganizations

In previous Alerts, we have addressed the complexities of claims in bankruptcy. Likewise, trading in claims and securities can present challenges. Difficulties have arisen in large Chapter 11 reorganizations as constituencies engaged in the Chapter 11 process, who are major players in the case, seek to trade in securities relating to that case. This Alert explores the impact that some trading activities may have on potential recoveries in the bankruptcy and the help (and impact) of the Internal Revenue Code.

Investors victimized by the fraud perpetrated by Bernard Madoff and his company, Bernard L. Madoff Investment Securities, LLC (collectively Madoff), should be aware of their legal options and risks. Some of these options have very short deadlines. Likewise, investors who successfully withdrew their investments before Madoff`s fraud came to light could face potential claims. In either circumstance, the prospects of litigation are high.

Given the current state of the economy, it should come as no surprise that business related bankruptcy filings increased 41.6 percent and non-business bankruptcies increased 28.4 percent between June 30, 2007, and June 30, 2008, with more than one million Americans filing for bankruptcy during calendar year 2007, according to the Administrative Office of the U.S. Courts.

It is not surprising that within an economic outlook which seems permanently set to "gloomy" many companies are having to think about reorganising their operations or restructuring their holding structures This article highlights some of the tax and other considerations which must be borne in mind when considering such reorganisations or restructurings with reference to some recent (and less recent) cases and changes in the law and points which have come to the fore in the current climate.

Recapitalisations