This discussion assumes that the Lender Claims and General Unsecured Claims are held as capital assets (generally, property held for investment) within the meaning of section 1221 of the Tax Code and, unless otherwise indicated below, that the various debt and other arrangements to which the Debtors are parties will be respected for U.S. federal income tax purposes in accordance with their form.
The following summary of certain U.S. federal income tax consequences is for informational purposes only and is not a substitute for careful tax planning and advice based upon your individual circumstances. All holders of Claims and Azures common units are urged to consult their tax advisor for the U.S. federal, state, local and other tax consequences applicable under the Plan.
ACCORDINGLY, THE FOLLOWING SUMMARY IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING OR FOR ADVICE BASED UPON THE PARTICULAR CIRCUMSTANCES PERTAINING TO A HOLDER OF A CLAIM. EACH HOLDER OF A CLAIM OR INTEREST IS URGED TO CONSULT ITS OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES APPLICABLE TO IT UNDER THE PLAN.
A. CONSEQUENCES TO THE DEBTORS
Azure is treated as a partnership for U.S. federal income tax purposes and, with the exception of Marlin Midstream Finance Corporation (which has no material assets or liabilities for U.S. federal income tax purposes), each of the subsidiaries of Azure (all of whom are Debtors) are treated as disregarded entities for U.S. federal income tax purposes. As a partnership or disregarded entity (i.e., pass-through entities), Azure and its subsidiaries are not themselves subject to U.S. federal income tax. Instead, each holder of Azures common units (referred to herein as an Azure unitholder) is required to report on its U.S. federal income tax return, and is subject to tax in respect of, its distributive share of each item of taxable income, gain, loss, deduction and credit of the Debtors. Accordingly, the U.S. federal income tax consequences of the liquidation contemplated by the Plan (including the Sale Transaction and the discharge of Claims) generally will not be borne by the Debtors, but instead will be borne by the Azure unitholders. Additionally, Azure General Partner is a disregarded entity for U.S. federal income tax purposes, whose items of taxable income, gain, loss, deduction and credit will generally be borne by the Non-Debtor Affiliate Company.
1. Sale Transaction and Other Disposition of Assets
The Plan authorizes the Debtors to take any and all actions necessary to consummate the sale of all or substantially all of the Debtors assets. Accordingly, the Debtors may recognize gain or loss upon the sale of the Debtors assets. As described above, because Azure and the other Debtors are treated as pass-through entities for U.S. federal income tax purposes, such gain or loss will be allocated to the Azure unitholders. The amount of gain or loss allocable to any particular Azure unitholder depends, in part, on the price such holder paid for its units and the extent to which it has previously been allocated amortization or depreciation deductions with respect to the assets sold. The Azure unitholders are urged to consult their tax advisors regarding the allocation of gain and loss as a result of the sale of all or substantially all of the Debtors assets and any limitations that may be imposed on the deductibility of any losses recognized as a result of the transfer of assets based on an Azure unitholders individual circumstances. An Azure unitholders adjusted tax basis in its common units will be increased to the extent of any net gain allocated to such partner and decreased (but not below zero) to the extent of any net loss allocated to such partner.