Chapter 15 recognition supports bankruptcy debt discharge exclusion

Plain-English summary

Several domestic subsidiaries participated in foreign insolvency proceedings that restructured and partly forgave debt owed by the U.S. group. A U.S. bankruptcy court recognized the foreign proceedings under chapter 15 of the Bankruptcy Code. The IRS concluded that the subsidiaries were under the concurrent jurisdiction of the foreign court and the U.S. bankruptcy court, and that the debt discharge occurred under a plan approved by the U.S. court. The subsidiaries therefore could exclude the resulting cancellation-of-debt income under section 108(a)(1)(A), subject to the related tax-attribute reduction rules. The ruling was limited to the submitted facts and did not determine the amount discharged or address other chapter 15 cases.

Ruling snapshot

• Question: Could the domestic subsidiaries exclude debt-discharge income after a U.S. bankruptcy court recognized and approved their foreign restructuring?
• Outcome: Approved on the stated facts and representations
• Key authorities: IRC §§ 61(a)(12), 108(a)(1)(A), 108(b), and 108(d)(2); Bankruptcy Code chapter 15

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510025 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Number: 108.01-01, 108.03-00
Person To Contact:
------------------------------ ---------------------ID No.----------
------------------------------------------ Telephone Number:
-------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:ITA:B04
PLR-120001-14
Date:
November 06, 2014

LEGEND

Parent = --------------------------------------------------------
Corp A = --------------------------------------------------------
Country Z = ---------------------
Act = ----------------------------------------------------------
BkCourt = ------------------------------------------------------------------------------------
Corp B = -----------------------------------------------------------
Corp C = -------------------------------------
Corp D = ------------------------------------------------------------
Corp E = ------------------------------------------
Corp F = -----------------------------------------
Corp G = ---------------------
Date 1 = -------------------
Date 2 = --------------------------
Date 3 = --------------------------
Date 4 = -----------------------
Date 5 = ------------------------
$r = ----------------
$s = --------------
$t = ----------------

Dear------------:

This is in reply to your letter requesting a letter ruling that as a result of the recognition
and approval of foreign proceedings1 under the Country Z Act pursuant to chapter 15 of
title 11 of the United States Bankruptcy Code by BkCourt, a U.S. Bankruptcy Court,

1
See 11 U.S.C. § 101(23) (“Foreign proceeding” is defined as a “collective judicial or administrative
proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or
adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or
supervision by a foreign court, for the purpose of reorganization or liquidation.”)
PLR-120001-14 2

Debtors may exclude from income under § 108(a)(1)(A) of the Internal Revenue Code
discharge of indebtedness income arising from restructuring of the U.S. Debt.

FACTS

Parent is a domestic corporation and is the wholly-owned subsidiary of Corp A, a
Country Z corporation. Parent is the parent corporation of a U.S. affiliated group made
up of Corp B, Corp C2, Corp D, Corp E, and Corp F (the Debtors); however, Parent is
not a Debtor and is not a participant in the insolvency proceedings. Parent’s direct and
indirect subsidiaries are ------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

------------.

Certain debt obligations of Corp A’s direct and indirect affiliates and subsidiaries,
including the Debtors, forced a restructuring under Country Z insolvency proceedings.
All of the Debtors are under the jurisdiction of the Country Z court.

As of Date 2, approximately $r (including accrued interest of $s) of the original
outstanding balance remained owing from the Debtors on the U.S. Debt. Pursuant to a
Restructuring Agreement between Corp A and the lenders, the U.S. Debt was amended
and restated. You represent that approximately $t of the U.S. Debt was forgiven.3

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------.

---------------------------------------------------------4-----------------------------------------------------------

2

3

--------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------.
4
See 11 U.S.C. § 1502(7) (“Recognition” means the entry of an order granting recognition of a foreign
main proceeding or foreign nonmain proceeding under this chapter.”)
PLR-120001-14 3

---------------------------------------------------------------------------------------------------------------------

---------.

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

----------------.5---------------------------------------------------------------------------------------------------
-------------------------6-------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

-------------------------------------------------.

LAW AND ANALYSIS

Section 61(a)(12) provides that gross income includes income from the discharge of
indebtedness.

Section 108(a)(1)(A) provides that gross income does not include any amount which
(but for this subsection) would be includible in gross income by reason of the discharge
(in whole or in part) of indebtedness of the taxpayer if the discharge occurs in a title 11
case.

Section 108(b)(1) provides that the amount excluded from gross income under
§ 108(a)(1)(A) shall be applied to reduce the tax attributes of the taxpayer as provided
in § 108(b)(2).

Section 108(d)(2) provides that the term “title 11 case” means a case under title 11 of
the United States Code (relating to bankruptcy), but only if the taxpayer is under the
jurisdiction of the court in such case and the discharge of indebtedness is granted by
the court or is pursuant to a plan approved by the court.

5

--------------------------------------------------------------------------------------------------------------------------------------------

6

PLR-120001-14 4

To summarize the applicable law, § 108(a)(1)(A) excludes from gross income amounts
that would otherwise be included in gross income due to the discharge of indebtedness
if the discharge occurs in a title 11 case but only if (i) the taxpayer is under the
jurisdiction of the court and (ii) the discharge of indebtedness is granted by the court or
pursuant to a plan approved by the court.

In this case, discharge of indebtedness on the U.S. Debt meets the two requirements
for it to qualify as a discharge occurring in a title 11 case for purposes of § 108(a)(1)(A).
First, the Country Z court and BkCourt have concurrent jurisdiction over the Debtors.

-------------------------------------------------------------------------------------. Second, under these
facts, the discharge of indebtedness was granted pursuant to a plan approved by
BkCourt.---------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------.

CONCLUSION

Based strictly on each of the facts submitted and representations made, the Debtors
may exclude from gross income under § 108(a)(1) cancellation of indebtedness income
arising from restructuring of the U.S. Debt.

Except as expressly provided herein, we do not express or imply an opinion concerning
the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. For example, we do not express or imply any opinion concerning the
amount of the Debtors’ U.S. Debt that was discharged or the effect of a Chapter 15
proceeding under § 108(a)(1)(A) in cases other than the facts and representations of
this letter ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
PLR-120001-14 5

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,


                                       Michael J. Montemurro
                                       Chief, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)

cc: