• Up Against the Ivory Tower: 2011 Brings Fresh IRS Guidance on Debt Restructurings
  • January 12, 2011 | Authors: Yoram Keinan; Mark H. Leeds
  • Law Firm: Greenberg Traurig, LLP - New York Office
  • The current "Great Recession," which began in late 2007 with a maelstrom in the debt capital markets, has necessitated a rethinking of the federal income tax rules governing debt restructurings. The harsh rules promulgated by the Internal Revenue Service (IRS) in reaction to the 1991 taxpayer-favorable decision in Cottage Savings v. Commissioner, have been inhibiting restructurings. Instead, rules that did not trigger adverse tax results have been needed to induce lenders and borrowers to restructure obligations that can no longer be paid according to their terms. Although 2011 has only just begun, the IRS has already promulgated three sets of administrative guidance alleviating certain adverse U.S. federal tax consequences on exchanges of debt instruments. The guidance comes at a critical point for many issuers and holders of nonperforming debt as the restructuring of the pre-recession "debt overhang" appears to be an important precondition for a healing of the broader economy.