The IRS has issued a private letter ruling (PLR 2012-28-023) taking the unusual position of applying the open transaction doctrine and ruling that no debtor corporation in a consolidated group filing for Chapter 11 bankruptcy would realize COD (cancellation of debt) income until either the debtor corporation made all the distributions required under the bankruptcy plan or the bankruptcy plan ceased to be a plan of liquidation for federal income tax purposes.
This is in contrast to the general rule that the COD is realized at the moment of an identifiable event where it becomes clear the debt will never have to be paid. This unusual ruling appears to result from facts and circumstances that involve extremely complex and open litigation issues, valuation issues, complex and illiquid assets, and a depressed financial marketplace. Moreover, it was estimated that the resolution of the impaired creditor claims would take a number of years (the exact number was redacted, but the ruling indicates that more years than what were originally stipulated were going to be needed).
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