Lehman Brothers Financial SA (LEHNQ)

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http://fordhamlawreview.org/wp-content/uploads/assets/pdfs/Vol_82/Dick_April.pdf

Imagine you are a company with a failing business that is drowning in
debt. On the bright side, you also possess a very valuable asset. This asset
is unique because, unlike most assets, if you liquidate the business through
a Chapter 7 bankruptcy, it will be extinguished and its value will not be
realized by any shareholders or creditors. On the other hand, even if you
substantially liquidate the business using Chapter 11, you can, thanks to an
extraordinary ambiguity in the law, preserve this valuable asset. Even
better, you can direct the value of this asset to your preferred
stakeholders—whether they are shareholders or creditors—rather than
have the asset’s value allocated among stakeholders according to
bankruptcy’s absolute priority rule. You can do this because you have the
most information about this valuable asset and because bankruptcy law and
courts effectively ignore its existence, leaving you to allocate its value as
you see fit. What is this unique asset? Valuable tax attributes, including
net operating losses and credit carryovers. This scenario is not purely
hypothetical; Solyndra and Washington Mutual, among others, have
effectively used Chapter 11 to divert the value of tax losses and credits to a
select group of shareholders and creditors in contravention of bankruptcy’s
distributional norms. This Article recommends statutory revisions to the
tax and bankruptcy laws to remove the unintended tax advantage and thus
neutralize the tax consequences of corporate restructuring decisions.

Among others, Washington Mutual followed a
similar path through Chapter 11, liquidating its business assets and
reorganizing the parent to preserve nearly $18 billion in valuable tax
attributes.
Nonetheless, the bankruptcy court endorsed the Solyndra Plan in October
over the objections of the Internal Revenue Service (IRS) and the U.S. Trustee. The government argued that the principal purpose of the
Solyndra Plan was tax avoidance, as evidenced by the fact that the parent
would emerge from bankruptcy with valuable tax attributes and no active
business. In approving the Solyndra Plan, the court reasoned that the
parent’s business purpose was merely to serve as a holding company and
that the valuable tax attributes would motivate the parent to continue its
historical line of business of investing in companies.