Provisions of the American Recovery and Reinvestment Act of 2009 Relating to Deferral of Cancellation of Debt Income

The American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, amends the Internal Revenue Code to permit companies that have outstanding debt to elect to defer “cancellation of debt” (COD) income that may result from restructuring or retiring their debt in 2009 or 2010. The new COD deferral election is relevant to issuers that may engage in a number of different types of liability management transactions, including: cash tender offers, exchange offers, consent solicitations, repurchases of debt by a shareholder, sponsor or other related party, debt forgiveness, debt-for-equity swaps, and foreclosure.

COD income of an issuer that makes the election generally will be deferred through 2013 and then recognized ratably over the following five years. We expect that the ability to defer or in some cases avoid paying cash taxes attributable to COD may greatly facilitate liability management transactions for the next two years. However, the new COD deferral election reduces or eliminates certain favorable provisions of current law for issuers who make the election. Accordingly, issuers will need to consider carefully whether making the election is on balance advantageous to them.