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Musings on Debt Modifications Inspired by PLR 200742016  

Author:  David C. Garlock.

Source: Volume 25, Number 02, Winter 2008 , pp.18-31(14)

Journal of Taxation of Investments

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Private Letter Ruling 200742016 1 presents a relatively common fact pattern: a guarantor on a debt instrument becomes the new obligor and the holders of the debt release the old obligor in exchange for a cash payment. This seemingly simple set of facts presents a number of important and unresolved tax issues. In particular, one would like to know (1) is the transaction a significant modification of the debt, (2) what is the taxation of the cash payment to the debt issuer and holders, and (3) if the guarantor and original obligor are members of the same consolidated return group, what are the consequences of this transaction (if any) under the regulations dealing with intercompany obligations? Unfortunately, PLR 200742016 addresses only the first of these issues, and does so only superficially.


Affiliations:  1: Ernst & Young LLP.

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