Distressed Debt: OSG Tax Issues

Update: The diligent analysts, going through the Schedules found this: http://www.reorg-research.com/pdf/64783.pdf - the SOFA for ST Holdings LLC. See page 27: $115M interco payable directly to holdco...

Distressed Debt Investing has written multiple times on the OSG case. The case began heating up again when the IRS filed their tax claim in the case (priority claim for $463,013,177.63). Since then many parties have discussed what the ultimate tax issues will play out in the case. More information may come out during a bankruptcy hearing on March 5th where contested matters include both application for entries for an order for retention of PWC and Deloitte as Independent Audtior, Accountant, and Tax Advisor and Tax Advisors respectively to the company (responses have been received by the indenture trustee, the U.S. trustee, and the Official Committe). And today a notice of withdrawal for no objection also hit the docket in regards to the employment of PWC - so things could get interesting.

The objection from Wilmington Trust (Docket item 672) is actually a pretty good read. This is one of the better quotes: "Although the Debtors seek to retain Deloitte Tax LLP (“Deloitte”) as tax advisors to the Debtors and apparently intend to transition the Debtors’ tax work from PWC to Deloitte, the Debtors nevertheless fail to explain in their Motion why it is appropriate for them to retain as their auditor the very same auditors who audited the financial statements of the Debtors which have to be restated." Solid burn. The objection goes on to note that PWC may not be a disinterested party  according to the code, a professional firm can only be retained if they are 'disinterested').

This got me thinking: Has anyone done any work on the Deloitte retention documents (Docket 534)? As those following case know the tax issue is this (From the docket):

"As noted in the First Day Declaration, OSG has publicly announced that it is in the
process of reviewing a tax issue arising from the fact that OSG is domiciled in the United States but has substantial international operations, in relation to the interpretation of certain provisions contained in OSG’s loan agreements (the “International Tax Issues”)."
Deloitte is effectively being retained to work through these issues for OSG as debtor in possession. The proposed work order states that Deloitte will "assist clients with the computation of its entries required to adjust the income tax account balances such that they are consistent with the tax return filed for the years ended..." for 2011, 2012, and 2013.  The Tax Compliance Work Order states that the "target date for completion of federal tax returns is August 31, 2013."  What's interesting here is that if you look at the "Tax Due" from the above claim it looks like this:

With a huge penalty apparently from the 2010 returns...Who is looking at those returns? Also - how is it possible that 2010 and 2011 penalties are identical when net income is all over the place for both foreign and domestic operations of OSG? Does it have something to do with the guarantee side of the bank debt?

I know many funds have gone out of their way to figure out what the tax penalty entails as it is a huge swing factor for bonds at issued out of the holding company. To me the play all along has been bank debt holders (DK, GS, and a few other prominent ones) to do a rights offering to pay down European banks holding this bank debt on their book (probably marked too high), and cram down the bonds. But that will be a lot harder to do if the tax claims in much less or even pari with the bonds.

I'll add some more information after the hearing on the 5th.


How to invest 3/02/2013  

Good point of view!


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.