Tax Traps in an Acquisition of a Financially Distressed Target

Summary

This practice note discusses certain tax considerations applicable to the acquisition of an insolvent company or a bankrupt company, and contains a discussion of tax considerations applicable to the insolvent or bankrupt company and its owners. Some of the issues include limitations on using an insolvent or bankrupt company's tax benefits, cancellation of indebtedness income, tax lien considerations, potential tax reorganizations, Section 1001 deemed exchange rules on debt modifications, and worthless securities deductions.