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Buying Debt for Pennies on Dollar in US and Canada

Say a large public company has many bonds that mature from 2012 through

2020. Because of financial problems they are able to buy back that debt for 50 cents on the dollar today.

In US tax law, would the company be forced to claim the amount it saved on the buyback as ordinary income? Or could they claim it as long term capital gain? For example, if they bought back a bond for 40 cents on the dollar, would the 60 cents on the dollar savings be taxed as ordinary income?

What about the scenario above under Canadian tax law?

Reply to
W
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I have a further refinement on this question. If the company in question buys back a bond that matures in 2014 in 2012, and they pay 50 cents on the dollar, can they just hold that bond as an investment security until maturity? If yes, then how would any tax on gain from buying the bond below par value be calculated at the maturity date?

Reply to
W

One additional question: in US and Canada, can a company spread out tax payments on gains from debt buybacks over more than one year?

Reply to
W

If they bought another company's bond below par, they'd have to pay tax on the assumed accretion each year. I don't know about their own, or the tax difference (if any) between canceling it and paying on it after they buy it back.

Seth

Reply to
Seth

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