DISCHARGE-OF-INDEBTEDNESS ISSUES ADDRESSED REGARDING BANKRUPT CORPORATIONS' REORGANIZATION PLANS.

UIL Number(s) 0108.00-00

                                             Date: February 27, 1990

This is in reply to a letter dated May 25, 1989, from your authorized representative requesting a ruling as to the federal income tax consequences of a proposed transaction. Additional information was submitted in a letter dated December 19, 1989. The information submitted is summarized below. This letter supplements PLR 8933001 ("first letter ruling").

Parent is a State X corporation engaged in business as a holding company with * * * subsidiaries. Parent and its * * * subsidiaries file a consolidated federal income tax return. None of the stock of the subsidiaries is owned by anyone other than a member of the consolidated return group.

On Date A, Parent and * * * of its subsidiaries filed separate petitions for reorganization under Chapter 11. The first letter ruling addressed the proposed plans of reorganization and particularly the treatment of the exchanges by creditors of debt for stock and other consideration.

After continuing negotiations, it was proposed that the bankruptcy cases be substantively consolidated by the bankruptcy court. Substantive consolidation would group the * * * bankrupt corporations into * * * business groupings ("Groups") for purposes of the bankruptcy reorganization plans. Each substantively consolidated Group would became a separate Debtor for purposes of Chapter 11. The creditors of each Group, therefore, would be entitled to receive consideration from the entire substantively consolidated Group, rather than the original separate debtor corporation.

The proposed bankruptcy plans provide for the distribution to creditors of packages consisting of Parent voting stock, and, in most cases, cash and/or long-term debt securities of either Parent or one of the subsidiaries in exchange for their claims. Packages will be distributed to those holding allowed claims on the date of Consummation of the plan. Allowed claims are those permitted by the bankruptcy court that were not disputed by the Debtor or have been resolved by the court prior to Consummation. Packages will be distributed after Consummation of the plan with respect to disputed claims when and if such claims are allowed.

It is expected that the proposed plans will provide for the use of a Distribution Reserve Fund in which consideration will be reserved for the payment of disputed claims. Until all disputed claims have been liquidated, a Distribution Reserve Fund would have to be maintained that is sufficient to pay, with respect to each disputed claim that has not yet been resolved, the same consideration that would have been paid with respect to such claim if it had been an allowed claim at the time of Consummation. ¹ The consideration may be reserved for the Group as a whole or on a class by class basis within the Group. For purposes of determining the amount of consideration reserved for the Distribution Reserve Fund, it generally will be assumed that a disputed claim will be fully allowed. However, the bankruptcy court may be asked to determine an appropriate reserve amount in the case of an inflated claim.

If the Fund is overfunded, e.g., because some disputed claims are disallowed, the reserved consideration for such disallowed claims (the "Excess Reserve"), to the extent not paid to Parent for its costs or for its success in favorably resolving claims, will be distributed among the holders of allowed unsecured claims that were not paid in full at Consummation. The allocation of this Excess Reserve will be based on a "Weighted Average" of all allowed claims, ² depending on whether there is one Fund per Group or for each class within the Group. If an underfunding of the Fund occurs, the reserved consideration would be distributed pro rata to creditors holding disputed claims.

Certain unsecured creditors also hold claims of the entire affiliated group under principles of joint and several liability. In addition, there are intercorporate guarantees with respect to the claims of certain creditors. It is expected that these guaranteed claimholders will have a higher recovery rate, due to payments made by both the primary obligor and guarantor, than claims that are not guaranteed by another member of the affiliated group.

In connection with the transaction, the following representations have been made:

(a) The composition of the various substantively consolidated Groups follow natural business segments of the companies that comprise the Parent affiliated group.

(b) The use of substantive consolidation in these cases was not motivated by tax concerns. In particular, the use of substantive consolidation was not made for the purpose of passing the test of section 108(e)(8)(B) of the Code.

Based upon the information submitted and the representations made, it is held as follows:

(1) For purposes of applying the test of section 108(e)(8)(B) of the Code, the phrase "all unsecured creditors participating in the workout" will include all of the unsecured creditors of a substantively consolidated Group that have allowed claims paid at the Consummation of the Group's plan or disputed claims reserved for at the Consummation of the Group's plan.

(2) Unsecured creditors of a substantively consolidated Group will constitute "all unsecured creditors participating in the workout" for purposes of section 108(e)(8)(B) of the Code without regard to whether the claims of such creditors represent deductible expenses of a debtor.

(3) In applying section 108(e)(8)(B) of the Code to the payment of claims allowed at Consummation, the ratios of individual unsecured creditors ("Individual Ratios") will be calculated by treating each such allowed claim as satisfied with the consideration actually paid with respect to such claim at Consummation. The numerator of each Individual Ratio will contain only the value of the stock consideration paid with respect to such claim. The denominator of each Individual Ratio will be the total amount of the claim reduced by the value of non-stock consideration distributed with respect to such claim at Consummation.

(4) Provided that the reorganization plans adopt a Distribution Reserve Fund approach in handling disputed claims:

In applying section 108(e)(8)(B) of the Code to the payment of allowed and disputed claims, a "similar ratio for all unsecured creditors participating in the workout" (the "Group Ratio") will be calculated by: (a) treating all allowed unsecured claims against the Group as satisfied with the consideration actually paid with respect to such claims at Consummation, and (b) determining an imputed collective allowed amount for the disputed claims in each class of unsecured claims and deeming such disputed claims to be collectively satisfied with the Distribution Reserve Fund amount attributable to disputed claims in such class. The imputed collective allowed amount for disputed claims in a class will be determined by "grossing up" the consideration reserved with respect to such disputed claims. That is, such claims will be treated as allowed unsecured debt equal to the product of the consideration reserved with respect to such claims multiplied by a fraction, the numerator of which is the sum of the allowed claims of the same class at the Consummation of the Group's plan and the denominator of which is the value of the consideration paid at Consummation with respect to such allowed claims. Accordingly, the Group Ratio will equal the ratio between (a) the value of all shares of Parent stock received by all creditors of the Group (without regard to whether the receipt of such stock qualifies under section 108(e)(10)(B) of the Code ³), and (b) the sum of all allowed claims and all disputed claims (calculated pursuant to this ruling) reduced by the value of all non-stock consideration paid with respect to allowed claims or reserved with respect to disputed claims at Consummation.

If the payment of an allowed claim at Consummation does not result in cancellation of indebtedness income when tested on the foregoing basis, no cancellation of indebtedness income will result from subsequent payments made with respect to such claim out of the Group's Distribution Reserve Fund on account of the disallowance of disputed claims, as long as the subsequent payments are made in accordance with the Weighted Average (see footnote 2).

(5) A payment made from a Group's Distribution Reserve Fund with respect to an unsecured claim that is not allowed until after the Consummation of the Group's plan will be treated as the payment of "a debtor in a Title 11 case" for purposes of section 108(e)(10)(B) of the Code. The payment made when such claim is allowed shall not result in cancellation of indebtedness if no cancellation of indebtedness would have resulted from payment at Consummation, with respect to an allowed claim of equal allowed amount, of the same amount of cash, the same debt instrument, and the same number and type of shares of stock. (Thus, post-Consummation fluctuations in value of the stock and debt instrument will be ignored.) If no cancellation of indebtedness results from the payment made when a claim is allowed after Consummation, no cancellation of indebtedness will result from subsequent payments made with respect to such claim out of the Group's Distribution Reserve Fund on account of the disallowance of other disputed claims, as long as the subsequent payments are made in accordance with the Weighted Average (see footnote 2).

(7) For purposes of section 108(e)(8)(B) of the Code, a Group shall be treated as owing a creditor asserting a claim for joint and several liability against more than one Group an amount equal to the creditor's allowed claim amount under the Plan (i.e., the amount, whether determined by agreement between the creditor and the debtors or by the judgment of a court, that represents the maximum allowable total recovery of the creditor from all Debtors if all Debtors were fully able to pay) multiplied by a fraction, the numerator of which is the value of the "consideration paid" by such Group with respect to the joint and several liability claim and the denominator of which is the value of all consideration paid by all Groups with respect to such claim. For purposes of this ruling, the "consideration paid" includes all types of consideration.

(8) For purposes of section 108(e)(8)(B) of the Code, a guarantor shall not be treated as owing a creditor any amount with respect to the guarantee, and any amount paid to the creditor by the guarantor shall be treated as paid by the guarantor into the estate of the Group that includes the primary obligor. Such payments will be treated as a contribution to capital under section 118 if the guarantor is the parent of the primary obligor or as a distribution in accordance with section 301 if the guarantor is a subsidiary of the primary obligor and added to the amount paid directly by such Group to such creditor.

No opinion is expressed as to the tax treatment of the transaction under other provisions of the Code and Regulations or about the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction that are not specifically covered by the above rulings.

Temporary or final regulations pertaining to one or more of the issues addressed in this ruling letter have not yet been adopted. Therefore, this ruling letter may be modified or revoked if temporary or final regulations as adopted are inconsistent with any conclusions herein. See section 8.04 of Rev. Proc. 90-1 I.R.B. 1, 20. However, when the criteria in section 8.05 of Rev. Proc. 90-1 are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances.

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

A copy of this letter should be attached to the federal income tax returns of the taxpayers involved for the taxable year in which the transaction covered by this ruling letter is consummated.

Pursuant to the power of attorney on file in this office, copies of this letter are being sent to your authorized representatives.

                                   Sincerely yours,

² The Weighted Average (which may be done on a group basis or a class by class basis) allocates the Excess Reserve as follows using a group basis: The dollar amount of all allowed claims in a class of Impaired Claims (those not paid in full at Consummation), whether allowed before or after Consummation, will be multiplied by the rate at which such class's claims were paid at Consummation ("Initial Share"). The portion of the Group's Excess Reserve allocable to a class of Impaired Claims will equal the product of the Excess Reserve multiplied by a fraction, the numerator of which is such class's Initial Share and the denominator of which is the sum of the Initial Share of all Impaired Classes; provided, however, that no class's shares of the Excess Reserve will exceed the difference between the amount of such class's allowed claims and such class's Initial Shares (i.e., the Excess Reserve distribution will not result in a recovery greater than 100 cents on the dollar for any class of Impaired Claims). The portion of the Excess Reserve allocable to a class of Impaired Claims will be distributed pro rata among holders of allowed claims of such class (whether such claims are allowed prior to or after Consummation). If a class by class basis is used and separate reserve funds are established for each class, the Excess Reserve with respect to a class will be distributed pro rata among holders of allowed claims of such class (whether such claims are allowed prior to or after Consummation).

³ No opinion is expressed as to whether section 108(e)(10)(B) applies to Parent stock exchanged for the indebtedness of creditors of subsidiaries which were not specifically addressed in the first letter ruling.