The Tax Lesson From Nortel"s Bankruptcy Filing
Filing bankruptcy is obviously not something most people want to do. Given the current economic times, however, it goes without saying that many people simply do not have much of a choice. If you are considering it, learn a lesson from the tax implications of the recent Nortel bankruptcy filing.
Nortel Networks is one of the largest communications makers in North American and, indeed, the world. How big? Well, it had both assets and debts of nearly 11 billion dollars when it recently filed bankruptcy. Why file bankruptcy if the ledger looked nearly balanced? The answer is found in debt repayment obligations coming due the company simply could not meet.
Why should you care about the bankruptcy of Nortel Networks? Well, you don't really have to, but you should take into account something that happened from a tax perspective. Specifically, the IRS filed a claim for unpaid taxes with the Bankruptcy Court handling the matter. The amount of the unpaid taxes? A staggering three billion dollars. Making matters all the more interesting, it seems as though the powers that be at Nortel did not realize taxes would be an issue before making the bankruptcy filing.
So, what is the lesson? The issue at hand is how debt is treated in our archaic and odd tax code. It is treated as debt unless it is forgiven. At that point, it converts to income under the tax code. You know what that means. Yes, you owe taxes on that income! Let's look at an example.
I started a business during the boom times earlier this decade. I sold an app for iPhones that shot a flame out the end so bank and stock market executives could light $100 bills to light their cigars. Business was so brisk that I ordered $1 million dollars of the product from China and financed it with a loan from a bank. Well, the economy blew up in 2008 and so did my business. I filed for bankruptcy protection and asked the court to eliminate the $1 million dollar loan debt. The court agrees, but here comes the IRS. They view that relief as income. What does that mean? It means I owe income tax on the million dollars!
This is obviously an extreme example, but it does highlight the fact tax issues need to be considered when filing bankruptcy. In getting rid of debt, you might end up with a tax problem..
Nortel Networks is one of the largest communications makers in North American and, indeed, the world. How big? Well, it had both assets and debts of nearly 11 billion dollars when it recently filed bankruptcy. Why file bankruptcy if the ledger looked nearly balanced? The answer is found in debt repayment obligations coming due the company simply could not meet.
Why should you care about the bankruptcy of Nortel Networks? Well, you don't really have to, but you should take into account something that happened from a tax perspective. Specifically, the IRS filed a claim for unpaid taxes with the Bankruptcy Court handling the matter. The amount of the unpaid taxes? A staggering three billion dollars. Making matters all the more interesting, it seems as though the powers that be at Nortel did not realize taxes would be an issue before making the bankruptcy filing.
So, what is the lesson? The issue at hand is how debt is treated in our archaic and odd tax code. It is treated as debt unless it is forgiven. At that point, it converts to income under the tax code. You know what that means. Yes, you owe taxes on that income! Let's look at an example.
I started a business during the boom times earlier this decade. I sold an app for iPhones that shot a flame out the end so bank and stock market executives could light $100 bills to light their cigars. Business was so brisk that I ordered $1 million dollars of the product from China and financed it with a loan from a bank. Well, the economy blew up in 2008 and so did my business. I filed for bankruptcy protection and asked the court to eliminate the $1 million dollar loan debt. The court agrees, but here comes the IRS. They view that relief as income. What does that mean? It means I owe income tax on the million dollars!
This is obviously an extreme example, but it does highlight the fact tax issues need to be considered when filing bankruptcy. In getting rid of debt, you might end up with a tax problem..
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