New Treasury Rules Seek To Curb Post-Bankruptcy Tax Breaks

by Leroy Baker, Tax-News.com, New York

04 September 2003

The US Treasury Department has published new regulations aimed at curbing the ability of certain companies to continue using tax deductions such as net operating losses once they have emerged from bankruptcy.

“These regulations are an important clarification of how consolidated groups are to treat debt forgiveness in bankruptcy,” commented Pam Olson, Assistant Secretary for Tax Policy in a recent statement.

The Treasury's information release says:

"Under current law, the discharge of indebtedness is generally income to a debtor corporation. There is an exception to this rule, however, when the debtor corporation is in bankruptcy. In lieu of including the amount of indebtedness discharged in income, the bankrupt corporation must reduce its “tax attributes” by the amount of debt discharged. The reduction of attributes prevents corporations from avoiding taxable income in bankruptcy while retaining tax attributes that can reduce future tax liability.

"Because consolidated attributes could later be used to reduce the tax liability of the bankrupt member, the temporary regulations clarify that all of the consolidated attributes of the group are available for reduction when the debt of a member of the group is discharged. In addition, they provide a methodology for reducing attributes. The temporary regulations apply immediately."

The Treasury's decision is particularly pertinent given the recent controversy surrounding MCI which is hoping to retain some $7 billion in tax breaks when it emerges from bankruptcy protection. Treasury officials have sought to play down the significance of the MCI case in relation to the rule changes, although spokeswoman Tina Bradshaw told the Wall Street Journal that it was "conceivable" that MCI could be affected by the new regulations.

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