“Energy Debt Write-Offs Mean Tax Headache For Investors”
So as many energy firms, particularly in the exploration and production and service sectors, are now struggling to keep up with debt payments, their owners and investors are learning about what Thompson & Knight LLP tax partner Roger Aksamit calls “the dark underside of using tax partnerships in energy.”
For example, Aksamit is working with clients who are renegotiating debt that’s trading at 30 cents to its face value. He said he’ll be rolling up his sleeves to address what will be a $200 million tax gain to the partners in that company.
He and other tax lawyers say that while the partnership and LLC structures provide great tax advantages to company owners when times are good, the opposite side of that coin means sizable tax bills when those companies take debt reductions through workouts, restructurings and bankruptcies.
And even if a partnership is structured with several tiers of LLCs, the rules provide that tax liability goes up the chain to reach the ultimate owners, Aksamit said.
“Even though economically they haven’t made a dime, and chances are the partnership is still struggling or even underwater, they could have huge liability,” he said.
Aksamit said some partners may want to formally abandon their interests in a partnership if they think there won’t be any upside to the business later on. Abandonment brings tax consequences of its own, but the size of the tax bill may be less than that created by debt cancellation, he said.