Linens Holding's settlement of Canadian estates' tax issues approved

By Jim Witters

Wilmington, Del., June 27 - Linens Holding Co. Chapter 7 trustee Charles M. Forman received approval for a settlement that should bring the consolidated estates of the debtors C$26.7 million from the liquidation of the Canadian subsidiaries, according to a June 27 filing with the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, the amount is contingent upon the implementation of a series of set-off transactions.

In December 2011, Duff & Phelps Canada Restructuring, Inc. was appointed as the receiver and bankruptcy trustee for the Canadian subsidiaries.

Duff & Phelps now holds about C$24.4 million.

The Canadian subsidiaries also hold an interest in C$11.8 million potential tax refunds arising from 2009 losses.

Duff & Phelps negotiated with the Canada Revenue Agency for several years regarding the potential taxes owed by the Canadian subsidiaries and the taxes that could be assessed against distributions to one or more of the debtors.

The negotiated issues included: transfer pricing arising from the dealings between the U.S. debtors and the Canadian subsidiaries and the fees charged to the Canadian companies; withholding taxes arising in connection with the transfer pricing issues and other payments from the Canadian subsidiaries to other debtors; intercompany loans and advances; and interest on the outstanding taxes.

Settlement terms

Under the approved settlement:

• The parties agreed to a downward adjustment of the transfer pricing, resulting in an increase in taxable income of C$19.7 million;

• The Canadian subsidiaries will pay income tax, Canadian withholding tax and interest totaling C$9.5 million;

• The tax refund claims will be reduced to C$4.5 million from C$11.8 million; and

• The setoff transactions will eliminate all or most of the C$4.3 million withholding tax liability but not the C$1 million in interest due.

Contingencies

The settlement also is subject to these conditions:

• The Ontario and Alberta tax authorities agree to make adjustments that correspond to the CRA adjustments; and

• The Ontario bankruptcy court authorizes Duff & Phelps to enter into the proposed resolution.

Linens, a Clifton, N.J., home furnishings specialty retailer, filed for bankruptcy on May 2, 2008. Its Chapter 7 case number is 08-10832.

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