Could Future COVID-19 Relief Allow COD Income Deferral?

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) (P.L. 116-136), signed into law March 27, contained numerous business relief provisions, one of which was a repeat from the 2008-2009 financial crisis. While the current crisis was not precipitated by an extreme disruption to the credit markets, companies are facing a liquidity crunch, and highly leveraged companies—of which there are many—are particularly susceptible.

In a recent article in The New York Times entitled “Coronavirus May Light Fuse on ‘Unexploded Bomb’ of Corporate Debt,” Peter S. Goodman writes that “[c]ompanies facing grave debt burdens may be forced to cut costs, laying off workers and scrapping investments, as they seek to avoid default.” But what if a lender is willing to forgive or modify a borrower’s debt, so that the borrower can spend its limited cash on salaries rather than debt service? One provision that could prove helpful was introduced in 2009 and would give such debtors additional time to pay the tax due on phantom income they have as a result of debt forgiveness/modification, even in cases where the debt workout is facilitated by a related party.

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