C3 -- Cordonnier, Egan & Reilly

Bank Troubled Asset Acquisitions

Patrick Egan

New York Community Bancorp

Bill Reilly

National Banking Tax Partner, Grant Thornton

Andrew Cordonnier

Washington National Tax Partner, Grant Thornton

Troubled Asset Acquisitions

• M&A activity was expected to pick up in 2011 and

2012, but has not met expectations.

• FDIC Assistance/ Bailouts and Guarantees are not

being granted as they were in previous years.

• Until March 26, 2010, the FDIC shared losses with

assuming banks on an 80/20 basis until the losses

exceeded an established threshold defined in the SLA,

after which the basis for sharing losses shifted to a

95/5 basis. Sharing losses on a 95/5 basis was

eliminated for all SLAs executed after March 26, 2010

2

Troubled Asset Acquisitions

Update

• In 2008, 25 banks failed, and 140 failed in 2009.

• In 2010, 157 banks failed.

• In 2011, 92 banks failed.

• As of September 28, 2012, 43 banks have failed.

• FDIC has paid $291B through it loss sharing

program as of June 30, 2012

3

Due Diligence of Troubled Transactions

• FDIC deals done in 2008-2012 were mostly purchase

and assumption transactions. Many happen with

limited time to conduct thorough due diligence

procedures.

• From acquirer's viewpoint, the due diligence is not as

difficult because it is an asset deal and no liability

carryover.

• Be aware of states implications. Some jurisdictions do

not follow federal (California).

4

Section 363 Sale – Summary of General Tax Issues

What is a "Section 363" Sale?

Why are we discussing it?

5


1. 3rd Party Cash Bid

2. Creditor Bid

Does this constitute a G reorganization under section 368(c)(1)(G)?

P

S1 S2

S3

Share

holders Creditors

asset

sales

6


The Transaction

• Gain or Loss on Sale of Assets

• Mechanics of Transaction

– Distribution of assets

– Assumption of debt

– Guarantee expense

P

S1 S2

S3

7


1. Intercompany Items ("DITs"; 1.1502-13(c)

2. Excess Loss Accounts ("ELAs"; negative stock basis); 1.1502-19(c)

3. Intercompany Debt; 1.1502-13(g)

4. Worthless Stock Deductions; 165(g),1.1502-80(c)

Triggering

What items are "triggered" upon asset sale and dissolution?

P

S1 S2

S3

debt

Basis = <100>

FMV = 0

truck

$

8


Worthless Stock Deductions

Worthless stock deductions are subject to the "United Loss Rules"

("ULRs"); 1.1502-36

Basis is reduced under a 3 factor test:

1. 1.1502-36(b): Basis redetermination to reduce disparity

2. 1.1502-36(c): Stock basis reduction to prevent noneconomic loss. Basis is

reduced by the lesser of:

i. not positive adjustments; and

ii. disconformity amount

3. 1.1502-36: Attribute reduction to prevent duplication of loss

9


Application of Standard Rules for Debt Workouts

• Consolidated Stock Basis; 1.1502-32

• Exclusion of COD Income; 108(b)

• Attribute Write-Downs

• Property Basis Writedowns

• Application of Section 108/1017 in Consolidated

Group

– Look-Thru Rule; 1.1502-28(a)(3)

– Fan-Out Rule

P

S1 S2

S3

10


Intercompany Debt; 1.1502-13(g)

Upon certain "realization" events, S is deemed to repay the debt for an

amount equal to its FMV - P has ordinary bad debt expense of $80; section 166

- S has ordinary COD income of $80; section 108 (but cannot be excluded)

- S has a "net positive investment" of $80.

Alternatively: View transaction as a capital contribution; no gain or loss; no

impact on loss disallowance rules

P

S

$100 debt

FMV = 20

11


Miscellaneous Issues

• Recourse v. Nonrecourse debt

• Guarantor Status v. Obligor Status v. Co-Obligor Status

• Asset Basis Writedowns/Writeups for AMT; 56(g)(4)(G)

• FIT Allocations; Impact on Unified Loss Rules

• Prior 382 Ownership changes/Prior Bankruptcies

• Ordering of events

12

Section 597

FDIC Assisted Transactions/Loan Sharing

Agreements

(IRC Section 597)

13

Section 597

• Enacted in 1981.

• Provided payments to troubled financial inst.,

payments were excluded from gross income and did

not reduce basis of institution's assets.

• certain assisted reorgs qualified as tax-free reorgs.

(ignored continuity of interest)

• 382 loss limitation (ability to use NOLs, BILs and

excess credits) was not applied in many cases.

14

Section 597

• In 1989, Notice 89-102 issued that stated that FFA

(Federal Financial Assistance) was taxable.

• Also provided that no transferee liability would be

assessed on the acquiring institution.

15

Section 597 – Proposed and Final Regulations

• Proposed Regs. issued in 1992 (superseded Notice

89-102.)

• Final Regs. issued in 1995 which generally maintained

approach in the Prop. Regs.

• The Regs. reflect generally four principles:

– FFA is treated as ordinary income of the failed

institution.

16


– When feasible, the timing of inclusion of FFA should

match the recognition of the institution's losses.

– Where possible, the income tax consequences of an

assisted acquisition should not depend on its form

– The IRS generally will not collect tax on FFA if the

IRS determines a federal insurer would bear the

burden of the tax.

17


Key Aspects of Final Regs.

• Provide rules regarding taxability of FFA (including

special consolidated group rules)

• Special rules regarding taxable asset (and deemed

asset) transactions

• Special rules requiring debt instruments issued to the

FDIC to be ignored while debt is held by FDIC

• Applicability of transferee income tax liability in

connection with assisted transactions.

18


Key Aspects of Final Regs. – Taxation of FFA

• FFA – "any money or property provided, under certain

provisions of the National Housing Act, the Federal

Home Loan Bank Act, the Federal Deposit Insurance

Act, … by Agency to an Institution or to a direct or

indirect owner of stock in an Institution."

• Also defines "Agency" and "Institution"

19


Key Aspects of Final Regs. – Taxation of FFA

• FFA taxable as ordinary income to recipient institution

• Two exceptions:

– Loss guarantee exception

– Matching of FFA taxation to the institution with its

losses (timing).

20


Key Aspects of Final Regs. – Consolidated Groups

• Consolidated Groups

– Seized institutions still have normal tax filing

requirements.

– Group that has subsidiary in receivership may

irrevocably elect to exclude institution from the

consolidated group.

– Effect could be exclusion of FFA from taxable

income from group.

21

– Can have adverse affects

• toll charge will be imposed

• institution must accelerate all sec. 481

adjustments

• restore all deferred intercompany gains and ELAs

• close its taxable year

• and if liabilities > aggregate FMV of assets, group

must treat stock in the institution as worthless.


Key Aspects of Final Regs. – Consolidated Groups

22


Key Aspects of Final Regs. – Taxable Asset Transfers

• Acquisition of institution in a "taxable transfer" treated

as taxable asset acquisition regardless if acquisition is

actual asset purchase or stock purchase treated as a

mandatory asset purchase.

• Taxable transfer = where an entity transfers (not to a

bridge bank) (a) any deposit liability if FFA is provided,

of (b) any asset for which the Agency has any

financial obligation (like a loss guarantee).

23


Key Aspects of Final Regs. – Taxable Asset Transfers

• Certain transfers of stock treated as sale of assets. For

deemed asset sale to occur, amount of share transferred

must be sufficient to cause institution to leave or join

consolidated group or to experience 50% or more

ownership shift.

• Result?

– acquirer does not inherit tax attributes (NOLs, BILs,

etc.)

– G/L recognized on actual transfer of assets.

– amount realized is total of grossed up basis of stock

plus assumed liability.

24


Key Aspects of Final Regs. – Loss Share Guarantee

• "Loss Guarantee" – agreement pursuant to which

FDIC / Agency guarantees to pay an institution a

specified amount on disposition or charge-off of

specific assets, institution has right to put assets to

FDIC at specified price, or some similar agreement.

• Most deals have FDIC agreeing to assume a portion of

loss incurred on a pool of acquired assets.

25

• Historic agreements have had the FDIC agreeing to

reimburse 80% of economic losses incurred by

institution up to a specified amount, and 95% of any

losses in excess of the threshold.

• Assets covered in an Loss Share Agreement (LSA) are

treated as "Class II" assets for section 338 purposes

(FMV is deemed to be greater of FMV or guaranteed

amount).


Key Aspects of Final Regs. – Loss Share Guarantee

26


Key Aspects of Final Regs. – Section 597

• If the FMV of Class I and Class II assets acquired >

than purchase price of acquired assets, the basis of

Class I and II assets is equal to their FMV.

– If purchase price of Class I and II assets is less than

assets' FMV, the basis of the Class I and II assets is

the FMV.

• To extent that the assets' FMV exceeds basis

(purchase price), it is included ratably as OI by the

acquirer over a six-year period beginning in year of

transfer.

27

• This may cause a timing difference over the six year

period.

• Other issues: Options to purchase additional assets;

Claw back provisions; Equity appreciation instruments;

State issues.


Key Aspects of Final Regs. – Section 597

28

Additional Tax Considerations

• Personal property tax – FDIC transactions will list only

assets with "perceived" value while expensing off

immaterial assets. Issue is that there is not clear

knowledge of actual assets within the locations and

property tax implications ahead of time. This is

administratively intensive, while usually immaterial in

economic sense.

• Information reporting required by FDIC – acquirer

performs all "successor" tax reporting on depository

and loan servicing accounts. (assume risk of faulty W-

8s, W-9s, and TINs). 29

Additional Tax Considerations

• State implications such as "bulk sales" tax in NY and

FL (taxable exchange in these states and subject to

use taxes). Sometimes can fit into a "casual sale"

exemption in a few states.

30


• New Regulations? – Status of guidance with regard to

section 597.

– First appeared on March 16, 2010 when Treasury

published the first periodic update to the Priority

Guidance Plan

– Later, Also appears on

• 2010-2011 Priority Guidance Plan issued on

December 7, 2010

31


• 2011-2012 Priority Guidance Plan issued on

September 2, 2011

– As of October 9, 2012, no further reference has

appeared. There has not been an updated Priority

Guidance Plan issued as of October 9, 2012.

32

FDIC Assisted Troubled Transactions

Post Acquisition Tax Considerations

• Bad Debt Deductions (sec. 166)

• Ordering rules and non-accrual income (sec. 446)

• Market Discount (sec. 1276-1278)

• Foreclosure and ORE (sec. 263A)

33

Section 597 Example

Section 597 Example

Assets Legacy Amount Asset FMV Tax Amount Def'd Items (40% Rate)

Cash $ 100.00 $ 100.00 $ 100.00

Loans (Guaranteed) $ 600.00 $ 200.00 $ 600.00 $ 160.00

Securities (Guaranteed) $ 500.00 $ 225.00 $ 500.00 $ 110.00

NPV of Guarantee $ 75.00 $ (30.00)

Land $ 100.00 $ 25.00

Building $ 100.00 $ 25.00

Total $ 1,400.00 $ 650.00 $ 1,200.00 $ 240.00

Liabilities

Deposits $ 1,000.00

Purchase Price Sec 597 Amount (Amortized 6 Years)

Liabilities Assumed (Deposits) $ 1,000.00 Class I & II $ 1,200.00

Transaction Cost $ 100.00 Purchase Price $ (1,100.00)

Total Purchase Price $ 1,100.00 Sec 597 Amount $ 100.00

Note: Liabilities on the balance sheet are recorded at legal (face amount). Liabilities for book are

recorded at FMV. This could give rise to a DTA/DTL.

34

Non FDIC Assisted

Asset Deals

35

Asset Acquisitions

Section 1060 - Generally

• Applies to any "applicable asset acquisition"

• An applicable asset acquisition is any transfer of

assets constituting a trade or business if the

purchaser's basis in the acquired assets is determined

wholly by reference to the consideration paid for such

assets.

36

Asset Acquisitions


• Regulations under 1060 define assets constituting

trade or business as consisting of any group of assets

(i) the use of which would constitute an active trade or

business for purposes of section 355, or (ii) to which

goodwill or going concern value could under any

circumstances attach.

37

Asset Acquisitions


• If section 1060 applies, the "consideration

received" for the acquired assets must be allocated

among the purchased assets per the regulations

under section 338(b)(5). The allocation must be

done under the "residual method."

• There are reporting requirements for each party to

the transaction if section 1060 is applicable.

38

Asset Acquisitions

Section 1060 - Regulations

• Regulations were issued for sections 338 and 1060 by

way of TD 8940. (2001).

– Regulations clarify that a trade or business is

present if goodwill could attach to the group of

assets, regardless whether any value will be

allocated to the residual class. The presence of

section 197 intangibles is a factor to be considered

in determining whether goodwill or going concern

value could attach.

39

Asset Acquisitions

Section 1060 – Regulations (Cont'd)

– A purchaser is subject to section 1060 even if the

seller is treated as selling something different than

what the purchaser is treated as purchasing.

– In determining if there is a trade or business

transferred, all transfers between parties in a series

of related transactions are aggregated.

– As long as a part of the assets are deemed a trade

or business, all the assets will be treated as being a

single trade or business for the application of the

residual method.

40

Asset Acquisitions


– Seller's covenant not to compete with purchaser is

treated as an asset transferred as part of trade or

business.

– The buyer and seller may adjust their allocation to

particular assets for costs incurred which are

specifically identified with those assets. The total

amount the seller allocates to an asset for which it

incurs specifically identifiable costs would be less

than its fair market value and, for the purchaser,

greater than its fair market value.

41

Asset Acquisitions


• The seven asset classes under the section 338

regulations are incorporated in the section 1060

regulations:

– Class I –cash and general deposit accounts

(including savings and checking accounts) other

than certificates of deposit held in banks, savings

and loan associations, and other depository

institutions.

42

– Class II –actively traded personal property within the

meaning of section 1092(d)(1) and Treas. Reg. §

1.1092(d)-1, certificates of deposits, and foreign

currency. Class II assets do not include stock of

target affiliates, other than actively traded stock

described in section 1504(a)(4)).

– Class III –assets that the taxpayer marks to market

at least annually for Federal income tax purposes

and debt instruments (including accounts receivable

but excluding certain other debt instruments)other

debt instruments).

Asset Acquisitions


43

• Class IV –stock in the trade of the taxpayer or other

property of a kind which would properly be included in

the inventory of taxpayer if on hand at the close of the

taxable year, or property held by the taxpayer primarily

for sale to customers in the ordinary course of its trade

or business.

Asset Acquisitions


44

Asset Acquisitions


– Class V –all assets other than Class I, II, III, IV, VI,

and VII assets.

– Class VI –all section 197 intangibles, as defined in

section 197, except goodwill and going concern

value.

– Class VII –goodwill and going concern value

(whether or not the goodwill and going concern

value qualifies as a section 197 intangible).

45

Asset Acquisitions

Section 1060 – Example

46

Asset Acquisitions

Section 1060 – Example Cont.

Facts:

• Purchase Price: $1,000,000

• T Assets:

– Cash: $ 200,000

– Land: $ 50,000

– Inventory: $ 100,000

– Building: $ 200,000

– Stock Portfolio: $ 25,000

– A/R $ 100,000

Allocation under Residual Method:

– Class I (cash) $ 200,000

– Class II (stock) $ 25,000

– Class III (acct. rec.) $ 100,000

– Class IV (Inventory) $ 100,000

– Class V (land / building) $ 250,000

– Total FMV of Class I-V $ 675,000

– Class VII (Goodwill) = $1,000,000

($ 675,000)

$ 325,000

47

Other Considerations and Issues

48

Repurchase Premium and Debt Issuance Costs:

Timing of Deductions

• Existing Debt: Face = $100; Adjusted Issue Price = $95; 5 year term

• New Debt: Face = $100; 8 year term

• Debt for Debt Exchange; Significant Modification – 1.1001-3

• Deduction for Repurchase Premium May Be Allowed

– Deduction to extent of debt is repaid for an amount in excess of its adjusted issue

price

Creditor

Debtor

General

49



Exception for Deduction of Repurchase Premium

If issue price of new debt is determined under sections

1273(b)(4) or 1274, repurchase premium is not deductible –

must be amortized over term of new debt. 1.163-7(c)

- Generally, if the debt is not publicly traded and is not

issued for cash, repurchase premium is nondeductible

(i.e., issue price of new debt is determined under sections

1273(h)(3) or 1273(h)(4).

50



• If a "substantial" amount of the debt is issued for cash,

then 1273(b)(4) and1274 are not applicable

- Thus, the repurchase premium is generally deductible

Old Creditor

Group 1 (20%)

Old Creditor

Group 2 (80%)

New Creditor

Group (20%) Debtor New Debt w/

face of $20

New Debt w/

face of $80 $20

$20

Typical Debt Restructuring Example -

51



• Section 279: 5%; 1.279-3(c)(2)

• Section 280G: 33.3%; 1.2806-1; Q&A 29

• Section 453 Discount: 20%; 15A. 453-1(e)(5)

• Substantial Authority: 35-40%; subjective

• Section 148: 10%; 1.148-1

52



Debt Issuance Costs

– Similar Analysis

53

Acquiring Discounted Debt

• Example: $100 face amount purchased upon original

issuance for $60.

– Tax basis: $60.

• General Rule: accrue from $60 to $100

• Under commonlaw, a lender may stop accruing

interest on a debt it holds if there is no reasonable

expectation of collection of the debt. (see Corn

Exchange Bank, 37 F.2d. 34 (2d Cir. 1930) and Jones

Lumber Co., 404 F.2d. 764 (6th Cir. 1968).

• The IRS stated in TAM 9538007 that this case law

DOES NOT apply to OID accruals. 54


OID

• Reg sec. 1.446-2(e) says that all payments are treated

first as interest to the extent accrued, then as principal.

There are no exceptions explicitly for distressed debt,

but unclear that taxpayers have to treat a partial

payment on a nonperforming loan as attributable first

to interest.

• To the extent there is OID on purchased debt, the

purchaser of note inherits the existing OID income

stream. Therefore, a purchased note could have

interest income without cash payment regardless of

the ability of the borrower to pay.

55


Market Discount

• Market Discount = the excess of the face amount of a

debt instrument over a taxpayer's basis in the debt.

• Market Discount is similar to OID except the market

discount attaches to the purchase of existing debt

rather than to the original issuance of the debt.

• Market discount rules are devised under the

assumption that the discount is an "interest

equivalent."

56

• Market discount accrues on a straight line basis over

the remaining life of debt unless the taxpayer elects

constant yield accrual. Market discount is generally

included in income when payments are made.

• All payments on the debt (interest or principal) are

characterized as interest up to the amount of the

accrued market discount that has not already been

taken into account.


Market Discount

57


Market Discount

• Amortizing Loans:

– Market Discount (MD) is included into income

periodically as amortization payments are made.

– Each payment of principal is treated as ordinary

income to the extent of the accrued MD that has not

already been taken into income.

– Gain on sale or retirement is treated as ordinary

income to extent of the accrued MD.

58

– Taxpayer can elect to accrue MD on constant rate

basis, applying compounding (YTM) principles

similar to OID rules.

– A taxpayer may choose to use the constant rate

accrual method so less of MD accrues upfront while

more of the MD is pushed to the backend based on

compounding principles.


Market Discount

59


Market Discount

• Timing and characterization results maybe unfavorable

under literal application of rules.

• Taxpayer can elect to include MD into income currently

using OID principles.

• If the election is NOT made, the taxpayer cannot

deduct interest on any debt incurred to fund the

purchase of MD notes until the MD is included into

income.

60

• Election – Risks

– Election applies to all MD debts acquired by

taxpayer. Pool loans create substantial complexity

in this case.

– General rule on debt is that each debt stands on its

own. Section 1272(a)(6) supports pool transaction

treatment.

• Mark to Market Tax Planning


Market Discount

61

Application of Market Discount Rules to Distressed

Debt

Section 1276 recharacterizes gain on the disposition or

repayment of a loan as ordinary income to the extent of the

“accrued market discount” on such loan.

Market discount is the excess of the stated redemption price

at maturity of a loan over the taxpayer’s basis in such loan.

Market discount is intended to operate like OID and thus is

considered as a substitute for ordinary income.

62


Debt

Example 1:

A purchases a $1 million loan, with 2 years left to maturity, for $950,000.

The loan has $50,000 of market discount upon purchase, which is due to

the fact that market interest rates have risen in comparison to the stated

interest rate on the loan.

A holds the loan to maturity and receives $1 million of principal repayment.

A incurs ordinary market discount income of $50,000.

Suppose instead that A sells the loan after 1 year for $980,000. A has

30,000 of income. As of the time of sale, the accrued market discount is

$25,000 under a ratable – straightline – accrual method. Thus, $25,000 of

the income qualifies as ordinary market discount income, and $5,000 of

the income is capital gain. 63


Debt

Example 2

A purchases a $1 million loan with 2 years left to maturity for $400,000.

The loan is in default at the time of purchase. After 1 year, A forecloses on

the property and receives $600,000 of collateral in full payment of the loan.

Under a plain reading of section 1276, A has $200,000 of ordinary income

upon receipt of the collateral.

Does this result make sense?

A was economically purchasing an interest in the underlying collateral.

Does the gain resemble OID, interest, payment for the passage of time?

64


Debt

If A decides to treat a portion or all of the gain as capital gain under some

economic theory, how do the following factors impact such an analysis?

Whether the loan is distressed;

The extent of the market discount compared to the stated

redemption price;

Whether the loan is in default;

Whether the loan is purchased before or after the maturity date.

65


Debt

What are the technical positions for disregarding a plain reading of the

statutory language?

Legislative history/Congressional intent/abuse of discretion;

The instrument is not debt, it is something else;

State law considerations

66


Loan Modifications

• Modification of debt after acquisition of said debt

requires debt exchange analysis, if the modification is

"significant".

– With regard to the lender, modification does not

impact them. Basis in "new" and "old" notes will be

the same.

– The holder of the note may be subject to adverse

implications.

67

– Example:

FMV of "New Note": $2,000,000

Basis in Old Note or Disc.

purchase price: $1,000,000

"Deemed" or "Phantom" Gain $1,000,000

(can be capital or ordinary)


Loan Modifications

68


Loan Modifications

• A deemed exchange is triggered on any "significant"

modification. Cottage Savings.

• Modifications are viewed collectively and in the

aggregate.

• There are ten safe harbor tests:

1. Change in yield of 25 basis points (or 5% of the

annual yield) is "significant." Reg sec. 1.1001-

3(e)(2)(ii).

69

2. Change in timing of payment. Reg. sec. 1.1001-

3(e)(3)(i). Payment is deferred more than the less

of five years or 50% of the original term of the note.

3. Change in Obligor. (this is for a recourse

obligation). Reg. sec. 1.1001-3(e)(4)(ii).


Loan Modifications

70


Loan Modifications

4. An addition/deletion of a co-obligor, if it affects the

likelihood of repayment. Reg. sec. 1.1001-

3(e)(4)(iii).

5. Change in security or credit enhancement. Reg.

sec. 1.1001-3(e)(4)(iv).

6. Change in priority of debt. Reg. sec. 1.1001-

3(e)(4)(v).

7. Change from debt to equity. Reg. sec. 1.1001-

3(e)(5)(vi).

71

8. Change in recourse nature. Reg. sec. 1.1001-

3(e)(5)(vii)(A).

9. Change in customary financial covenants. Reg.

sec. 1.1001-3(e)(6). (generally not significant)

10. Indirect tax exempt bond modifications. Reg. sec.

1.1001-3(f)(6).

Adding guaranty or additional collateral to non-

recourse debt is generally significant.


Loan Modifications

72


Loan Modifications

• Simple solution to this is to require the original lender

make the modifications prior to the purchase of the

notes.

73

Stock Acquisitions

74

Considerations of Strategic Acquisitions

• An acquirer acquires stock of target

• Issues and Considerations in General:

– Unwanted Assets

– Basis determination

– historic tax attributes

– Consideration

– TruPS outstanding

– TARP considerations

75

• Tax implications

– Valuation Allowances

– Section 382 limitations (NOLs, BILs)

– Bad Debt deductions

– Restructuring

– DTA preservation

Considerations of Strategic Acquisitions

76

Bad Debt Deduction – PLR 201105031

• Holding:

IRS ruled that pursuant to Notice 2003-65, bad debt

deductions under sec. 166 arising from debt owed to a

sub at the beginning of the recognition period will not be

recognized BIL if the deduction is taken into account after

the first 12 months of the recognition period.

77

• Facts:

– "Target" bank holding company (BHC) to merge with

"Taxpayer" (another BHC).

– Subsidiary ("S") was wholly owned by Target.

– merger would result in ownership change of S under

382(g)(1). S would be a loss corporation with NOL

carryover and NUBIL, due to adjusted basis of debt

portfolio over FMV of the same portfolio.

– S did not make, nor intended to make, a conformity

election under section 1.166-2(d)(3).


78

– After merger, S planned to recognize one or more

wholly or partially worthless bad debt deductions

under section 166 related to the debts it held prior to

the merger. S expected deductions would be taken

into account during and after the first year of the five

year recognition period after the ownership change

of S.

– S intended to use the section 1374 methodology to

determine which bad debt deductions will be RBIL

under 382(h)(2)(B).


79

Documents

C3 -- Cordonnier, Egan & Reilly