Southern District of New York Bankruptcy Court Issues Final Order Restricting Transfers of Shares in General Motors Corp. In Order to Preserve GM's Tax Attributes

On June 25, the U.S. Bankruptcy Court for the Southern District of New York, Bankr. S.D. N.Y. No. 09-50026 (REG) June 25, 2009, issued a final order under §§105(a) and 362 of the Bankruptcy Act setting forth notification procedures and transfer restrictions pertaining to the transfer of GM stock retroactive to the filing of the petition before the court. It also scheduled a final hearing on open issues under the Chapter 11 proceeding.

As part of its final order the Court held: (i) that the Debtors’ net operating loss carryforwards "NOLs", foreign tax credits and other excess credit carryforwards, inotherwords the Debtors’ aggregate tax attributes, were property of the Debtors’ estates and are protected by section 362(a) of the Bankruptcy Code; (ii) unrestricted trading in GM stock could, before the Debtors' emergence from chapter 11 could severely limit the Debtors' ability to use the tax attributes for purposes of the Internal Revenue Code of 1986, as amended (i.e., by application of section 382 ownership change of the Code and related provisions); and (iii) with a view to preserving the maximium benefit or use of such tax attributes, set out detailed share transfer notification procedures and restrictions viewed as necessary and proper to preserve the tax attributes and in the best interests of the Debtors, their estates, and their creditors.

As background, where a corporation possessed with carryovers, i.e., NOLs, excess business or foreign tax losses, etc., undergoes an ownership change, section 382(a) imposes prospective use of such tax attributes. More specifically, an ownership change occurs if, for example, the percentage of stock owned by one or more of the corporation's 5% shareholders increases by more than 50% points over 3 year "testing period" on the day of any owner shift involving a "5% shareholder" as defined. As is true with public companies, section 382(g)(4) provides that stock owned by all shareholders who are not 5% shareholders is generally treated as owned by one 5% shareholder group n determining whether an ownership change has occurred. However, unless the corporation elects otherwise, the section 382(a) limitation does not apply to an ownership change if the old loss corporation is under the jurisdiction of a court in a Title 11 or similar case and the shareholders and qualified creditors, as defined, of the old loss corporation (determined immediately before the ownership change) own, as a result of being shareholders or creditors immediately before the change, stock of the new loss corporation constituting at least 50% of the total voting power and 50% of the total value of stock of the new loss corporation. See also Treas. Reg. §1.382-9(d)(3)(i)(debt "as always" equity rule). This paragraph is an oversimplification of the breadth and depth of section 382 to a corporation with tax attributes both in bankruptcy and non-bankrupcty contexts.


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