Financial Analysis
EQUITY, BUSINESS ENTITIES, ESTATES, INTANGIBLES, AND ECONOMIC VALUE

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Insolvency Valuations
Under IRC §108(b)

Corporate debt restructuring is relatively common in today's marketplace — often the aftermath of taking on excessive debt in a merger or acquisition. Debt restructuring has serious implications; for example, reduced debt can increase tax liability through the recognition of "cancellation of debt" income. Such tax issues can then trigger the consideration of filing a bankruptcy petition, with its attendant costs. Decision-making in debt restructuring is a difficult and complicated process.

An insolvency valuation study is advantageous for a company considering debt restructuring, because it provides insight into available options and ensuing tax consequences. Such an analysis enables executives to make sound, effectual decisions. Corporate leaders and attorneys often turn to the experts at Arthur Consulting Group, inc. who have specialized knowledge of tax issues relating to insolvency, along with the skills for the proper application of IRC §108(b).

Arthur Consulting Group, inc. is an international consulting firm specializing in economic and financial analysis, valuation, and tax consulting. Our sole focus is valuation. Our methods are found to be acceptable by the Internal Revenue Service and other agencies for whom we perform analyses and provide litigation support when advanced skills are required.

What is IRC §108(b)?

IRC §108(b) is a subsection of §108, the Internal Revenue Service's guidelines for Debt Discharge and Income from Discharge of Indebtedness. IRC §108 provides a definition of insolvency, the limits of income non-recognition, and the process for reducing certain tax attributes or the basis in depreciable property. These rules are applicable for the discharge of indebtedness in cases of insolvency and/or in a Title 11 case.

The Service defines insolvency as "the excess of liabilities over the fair market value of assets determined with respect to the taxpayer's assets and liabilities immediately before the discharge." Insolvency can be declared within or outside the jurisdiction of bankruptcy. In either case, the tax consequences are distinctly different.

Debt restructuring is sometimes initiated without adequate knowledge and consideration of current tax laws and court cases. Arthur Consulting Group's valuation approach utilizes existing tax laws and the most current interpretations. The results of these studies often reveal significant tax relief and an overall reduction of expenses.

ACG Insolvency Valuation Methodology

The taxpayer has the burden of demonstrating insolvency — giving rise to the need for an Insolvency Valuation. In establishing the fair market value of assets and liabilities, ACG determines current values rather than book values. The amount recoverable, rather than the face amount of an asset such as a note receivable, is included in the total current value of the assets. When appropriate, the valuation team at ACG favors the "going concern" approach, which includes the value of tangible assets, intangible assets (e.g. trademarks, patents, etc.), and goodwill in the fair market value.

In all aspects of an ACG Insolvency Valuation, our analysts are thoroughly knowledgeable of and conscientiously adhere to generally accepted valuation standards.

Facts About Insolvency and Bankruptcy

Current tax law provides some incentives for a company to file for bankruptcy through IRC §382 and §383. Conversely, bankruptcy results in substantial accounting and legal costs and may be damaging for a corporation.

Debtors who are insolvent in bankruptcy do not recognize COD (cancellation of debt) income. Instead, they must reduce their tax credit carry-overs or the basis in their assets. An insolvent taxpayer that restructures debt outside of bankruptcy may only exclude COD income to the extent of the insolvency.

A complete Insolvency Valuation performed by ACG specialists provides a fully-documented analysis, with attention to important facts needed to make the right decisions regarding debt restructuring.

Fully Documented Studies

Every study we do is thoroughly documented, providing relevant company and industry background; citing the regulations, statutes and rulings which govern acceptable methods of analysis; showing the analysis and its findings; providing confirmatory analyses through the use of alternative methods, where advisable; and detailing the source data used.

This is critical because the documentation itself is designed to answer almost any question which might arise under third party review, without arousing further scrutiny, skepticism, or confusion. Clients want correct answers, but they also need to be able to support and defend those answers with little or no additional burden.

 

 

 

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