FINAL REPORT
OF THE TAX ADVISORY COMMITTEE
to the
NATIONAL BANKRUPTCY REVIEW COMMISSION

Prepared by:
Jack F. Williams
Professor, Georgia State University College of Law
CHAIR, TAX ADVISORY COMMITTEE

August 1997
Washington, D.C.


Introduction | Commission's Charge | Previous Undertakings | Committee Members
Procedures Employed | Findings | Proposals and Status

Introduction

Under the auspices of the National Bankruptcy Review Commission (the "Commission"), the Tax Advisory Committee (the "Advisory Committee") was formed in February 1997. The members of the Advisory Committee were appointed by the Commission and include representatives from the private bar, federal and state governments, and academia. A list of the members of the Advisory Committee can be found here. Professor Jack Williams of the Georgia State University College of Law was appointed chair of the Advisory Committee.

Commission's Charge

The Commission's charge to the Advisory Committee was broad, including the jurisdiction to propose and discuss all issues related to federal, state, and local tax collection, compliance, and reporting related to bankruptcy, the bankruptcy process, and the administration of the bankruptcy estate. By necessity, this charge included an analysis of existing authority under both the Bankruptcy Code, title 11 of the United States Code, and the Internal Revenue Code, title 26 of the United States Code.

The Commission directed that the Advisory Committee report back by way of a Final Report by the August 1997 Meeting of the Commission in Washington, D.C. The Commission further requested that the Advisory Committee prepare Preliminary Reports for the April 1997 meeting of the Commission in Seattle, Washington, and the June 1997 meeting of the Commission in Detroit, Michigan. The Preliminary Reports identified those areas of bankruptcy taxation that the Advisory Committee had determined are susceptible to agreement among its members and those proposals that had been withdrawn from consideration by the Advisory Committee as unimportant, unclear, or considered elsewhere. The Advisory Committee has continued the process of discussing and identifying those proposals that may be susceptible to agreement. The Final Report contains three sections. The first section contains a listing and discussion of twenty-eight consensus items. The first twenty-five of the twenty-eight items were presented to the Commission at the May 1997meeting and twenty-four of the items were adopted unanimously. [ FN: The items adopted by the Commission at the May 1997 meeting are: Track Nos. 105, 106, 109, 214 Part II, 216, 217(a), 311, 313, 315, 325, 326, 332, 334, 421, 422, 423, 424, 426, 702, 435(a), 437, 505, 701, and 711. Track No. 101 was considered by the Commission but not adopted. The Advisory Committee has supplemented the initial list to include additional consensus items, including Track Nos. 441, 513(a), and 700.] The second section contains a listing and discussion of six consensus items. The federal participants on the Advisory Committee abstained from consideration of these proposals. The third section contains a listing and discussion of twenty-nine proposals concerning those areas of bankruptcy taxation that the Advisory Committee has determined are Very Important and Highly Controversial to Controversial. Although short of a consensus on these contested issues, the Advisory Committee has provided to the Commission its recommendations and voting record on the twenty-nine proposals.

Previous Undertakings

Before the Advisory Committee was formed, much work on the interface between bankruptcy and tax had been accomplished. The Department of Treasury, through the Internal Revenue Service ("IRS"), and the Department of Justice prepared working papers on relevant topics and proposals, and participated informally in discussions. The views expressed by the government representatives are their personal views and are not binding on their respective agencies. The National Association of Attorneys General also submitted a number of tax proposals for consideration. The Commission held at least two working meetings in San Diego, California, and Santa Fe, New Mexico, where many bankruptcy taxation issues were discussed and developed. Commission Member James I. Shepard has also undertaken an extensive study of the tax issues posed in the bankruptcy process. Furthermore, the Government Working Group has discussed several tax issues. The Special Task Force on the National Bankruptcy Review Commission of the Section of Taxation of the American Bar Association has prepared an extensive report on bankruptcy tax issues. The National Bankruptcy Conference has already prepared a report on bankruptcy tax issues. Judges, trustees, and other concerned parties have submitted proposals for consideration by the Advisory Committee and the Commission. The Advisory Committee applauds these efforts and has carefully considered these comments in reaching its recommendations.

The combined efforts of the parties described above have led to the development of a Tax Matrix in excess of ninety pages. Rather than initiate a new numbering system to track bankruptcy tax proposals, the Advisory Committee continued the numbering and tracking system of the previous tax matrices as a matter of convenience and in an effort to reduce confusion over discussions concerning bankruptcy tax proposals. Those proposals added to the matrix by the Advisory Committee were assigned 700-series index numbers. Furthermore, where appropriate, the Advisory Committee split multiple proposals into component parts; thus, original proposal No. 414 has been redesignated Nos. 414, 414(a), and 414(b).

Nonetheless, the Advisory Committee seeks to clarify one potential issue: The proposals as identified and discussed in the Preliminary and Final Reports are given the precise meaning attached to them by the Advisory Committee and not the meaning, if any, attached by the original sponsors of the proposals. Thus, the Preliminary and Final Reports are self-contained studies.

Procedures Employed

The Advisory Committee has reviewed and established levels of priority as to all 145 proposals on the Revised Tax Matrix. Initially, the Advisory Committee identified those proposals worthy of consideration. Those proposals found unanimously by the Advisory Committee to be unimportant, unclear, or considered elsewhere were withdrawn from consideration. A list of those proposals is here. The Advisory Committee assumes that the Commission will not further consider these proposals. [ FN: Obviously, this observation applies only to proposals that the Advisory Committee determined are either unimportant or unclear.] However, should the Commission desire to do so, the Advisory Committee urges that the Commission make a public announcement to that effect so that interested parties may comment on these proposals and that the Advisory Committee may then further consider the previously withdrawn proposals.

The remaining proposals were then considered to determine whether any proposals would be susceptible to agreement among the members of the Advisory Committee. After identifying those proposals susceptible to agreement, the Advisory Committee reviewed the remaining proposals to identify whether each proposal was:

  1. Very Important
  2. Important
  3. Moderately Important
  4. Unimportant or Unclear

Each proposal was further analyzed to determine the level of controversy surrounding the proposal. The levels of controversy include:

  1. Highly Controversial
  2. Controversial
  3. Noncontroversial

In the Final Report, the Advisory Committee has considered those proposals that are Very Important and Highly Controversial to Controversial. The voting protocol employed by the Advisory Committee was straightforward. First, only members of the Advisory Committee could vote on specific proposals. Second, each member’s vote was assigned equal weight. Third, rather than merely providing to the Commission a tally of the votes alone, the Final Report also identifies how each member of the Advisory Committee cast his or her vote. Where a matrix item contained more than one proposal, the Advisory Committee discussed and voted on each of the proposals. Each member of the Advisory Committee could then cast a vote for or against (or abstain from) each of the proposals within a given matrix item. When this situation arose, the Advisory Committee undertook a second vote to ascertain its preference among competing proposals. The Final Report contains a brief discussion of these proposals and provides to the Commission the Advisory Committee’s recommendation, where appropriate, and voting record.

Findings

This Report is divided into several sections. The first section reports on those proposals where a consensus has been reached (including those proposals withdrawn from consideration). That section contains discussion on twenty-eight proposals reported out of the Advisory Committee as consensus items. [ FN: The items adopted by the Commission at the May 1997 meeting are: Track Nos. 105, 106, 109, 214 Part II, 216, 217(a), 311, 313, 315, 325, 326, 332, 334, 421, 422, 423, 424, 426, 702, 435(a), 437, 505, 701, and 711. Track No. 101 was considered by the Commission but not adopted. These items have previously been identified and discussed in the April 1997 Preliminary Report filed with the Commission. The Advisory Committee has supplemented the initial list to include additional consensus items, including Track Nos. 441, 513(a), and 700.] The second section reports on those proposals where a consensus has been reached by all members of the Advisory Committee except those members from the federal government who expressed no views on Internal Revenue Code provisions. That section contains a discussion of six proposals. The third section sets forth the differing position statements for each of the remaining Very Important and Highly Controversial to Controversial items upon which the Advisory Committee has taken action. That section contains a discussion of twenty-nine items containing, in many instances, multiple proposals. Another fifty-one proposals were carefully considered and withdrawn from further consideration by the Committee. A list of the fifty-one withdrawn proposals is here.

As of July 1997, the Commission has taken the following action with respect to bankruptcy taxation proposals. The Commission has unanimously adopted the following items: Track Nos. 105, 106, 109, 214 Part II, 216, 217(a), 311, 313, 315, 325, 326, 332, 334, 421, 422, 423, 424, 426, 702, 435(a), 437, 505, 701, and 711 (discussions of which are contained in Section 1 of this Report). The Commission has unanimously adopted Government Working Group Proposal Nos. 8 (burden of proof on tax matters in bankruptcy) and 13 (setoff of tax refunds against prepetition tax claims). By a vote of 6 to 2, the Commission adopted the second alternative to the §724(b) proposal contained in the Government Working Group Proposal as modified at the June 1997 meeting, providing for the exemption of ad valorem taxes from the provisions of §724(b) and marshaling and surcharge under §506(c).


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TABLE of CONTENTS

SECTION 1
CONSENSUS ITEMS
[ FN: All of these items, except Track Nos. 441, 513(a), and 700, were contained in the April 1997 Preliminary Report filed with the Commission.]
101 In chapter 9 cases, require as a condition of confirmation that all prepetition taxes be paid in full in cash in a manner as set forth in 11 U.S.C. §1129(a)(9)(C).
105, 106 & 109 Clarify provisions of the Bankruptcy Code on providing reasonable notice to governmental units. ADOPTED May 14, 1997
214 Part II Amend the Bankruptcy Code to prescribe that to the extent that a tax claim presently is entitled to interest, such interest shall accrue at a stated statutory rate. ADOPTED May 14, 1997
216 Amend 11 U.S.C. §505(b) to require debtor taxpayers and trustees seeking an expedited audit to comply with local notice and specificity requirements to assist governmental units in making a timely response. ADOPTED May 14, 1997
217(a) Conform §346 of the Bankruptcy Code to IRC 1398(d)(2) election; also conform local and state tax attributes that are transferred to the estate to those tax attributes that are transferred to the bankruptcy estate under IRC §1398. ADOPTED May 14, 1997
311 Amend 11 U.S.C. §507(a)(8) and 523(a)(1) to provide for the tolling of relevant periods in the case of successive filings. Thus, in the event of successive bankruptcy filings, the time periods specified in §507(a)(8) shall be suspended during the period in which a governmental unit was prohibited from pursuing a claim by reason of the prior case. ADOPTED May 14, 1997
313 Amend 11 U.S.C. §507(a)(8)(ii) to toll the 240-day assessment period for both pre- and post assessment offers in compromise. ADOPTED May 14, 1997
315 Amend the Bankruptcy Code to require "small business debtors" to create and maintain separate bank accounts for trust fund taxes and nontax deductions from employee paychecks. Also, any proposal should provide for sanctions for failure to comply with this Bankruptcy Code requirement. ADOPTED May 14, 1997
325 Amend 11 U.S.C. §1141(d)(3) to except from discharge taxes unpaid by businesses entities, which nonpayment arose from fraud. ADOPTED May 14, 1997
326 Amend 11 U.S.C. §362(a)(8) to confine its application to proceedings before the Tax Court for tax periods ending on or prior to the filing of the petition in the bankruptcy case and to permit appeals from Tax Court decisions. ADOPTED May 14, 1997
332 Application of the periodic payment provisions of §1129(a)(9)(C) to secured tax that would be entitled to priority absent their secured status. ADOPTED May 14, 1997
334 Amend 11 U.S.C. §545(2) to overrule cases that have penalized the government due to certain benefits for purchasers provided for in the lien provisions of the Internal Revenue Code. ADOPTED May 14, 1997
421 Amend 11 U.S.C. §503 and 28 U.S.C. §960 to eliminate the need for a governmental unit to make a "request" to the debtor to pay tax liabilities that are entitled to payment as administrative expenses. ADOPTED May 14, 1997
422 Amend 11 U.S.C. §§502(a)(1) and 503(b)(1)(B) to provide that postpetition ad valorem real estate taxes should be characterized as an administrative expense whether secured or unsecured and such taxes should be payable as an ordinary course expense. ADOPTED May 14, 1997
423 Amend the Bankruptcy Code to overrule Investors of The Triangle v. Carolina Triangle Ltd. Partnership (In re Carolina Triangle Ltd. Partnership), 166 B.R. 411 (9th Cir. B.A.P. 1994), and to ensure that postpetition ad valorem real-estate taxes are a reasonable and necessary cost of preservation of the estate. ADOPTED May 14, 1997
424 Amend the Bankruptcy Code to establish that ad valorem taxes are incurred by the estate and, therefore, are entitled to administrative expense priority status. ADOPTED May 14, 1997
426
& 702
Amend the Bankruptcy Code to conform the treatment of state and local tax claims to that treatment provided for federal tax claims.
Amend 11 U.S.C. §346 to conform state and local tax attributes to the federal list in IRC §1398.
ADOPTED May 14, 1997
435(a) Amend 11 U.S.C. §346 and IRC §1398 to provide that for purposes of making the election to close the debtor's tax year, the time period for making such election commences on the date the order for relief is entered. ADOPTED May 14, 1997
437 Clarify IRC §1398 to provide that the bankruptcy estate's income is subject to alternative minimum tax and capital gains tax treatment if otherwise applicable. ADOPTED May 14, 1997
505 Amend the Bankruptcy Code to provide that the term "assessed or assessment" as used in 11 U.S.C. §§362(b)(9) and 507(a)(8) shall mean "that time at which a taxing authority may commence an action to collect the tax." ADOPTED May 14, 1997
701 Amend 11 U.S.C. §1125(b) to establish standards for tax disclosures in a chapter 11 disclosure statement. ADOPTED May 14, 1997
711 Clarify 11 U.S.C. §726(a)(1) to provide that a taxing authority must file a claim for a priority tax before the final order approving the trustee's report is entered by the court. ADOPTED May 14, 1997
441 Conformity of chapter 13 plans with provisions of the Bankruptcy Code: Requirement to file returns. ADOPTED August 11, 1997
513(a) Whether an income tax return prepared by the taxing authority should be considered a filed income tax return for purposes of the Bankruptcy Code. ADOPTED August 11, 1997
700 Dismissal and injunction against filing subsequent case where court determines that a chapter 13 debtor is abusing the bankruptcy process. ADOPTED August 11, 1997


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SECTION 2
ITEMS FEDERAL GOVERNMENT DID NOT TAKE POSITION ON IN TAX ADVISORY COMMITTEE DISCUSSIONS BUT WOULD OTHERWISE BE CONSENSUS ITEMS
[ FN: The federal participants on the Advisory Committee abstained from consideration of these proposal.]

4121 Create a method by which a trustee may obtain a safe harbor and certainty regarding the nature, amount, and consequences of debt discharged. ADOPTED August 11, 1997
714 Amend IRC §1398(e)(3) to provide that a debtor should be treated as an employee of the bankruptcy estate as to payments by the estate of estate assets to the debtor for services performed. ADOPTED August 11, 1997
411
& 436(a)
Availability of one-time exclusion of $125,000 of capital gain on sale of residence to the trustee of an individual debtor.
Tax treatment of the sale by the estate of a debtor’s homestead.
ADOPTED August 11, 1997
4312(a) Whether changes are needed in IRC §§108 and 382 with respect to the issuance of stock for debt. ADOPTED
with ABA proposal annexed
August 11, 1997
713 Whether IRC §1001 should be modified to provide for parallel tax treatment of recourse and nonrecourse debt. ADOPTED August 11, 1997


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SECTION 3
ADVISORY COMMITTEE DISPOSITION OF VERY IMPORTANT AND HIGHLY CONTROVERSIAL TO CONTROVERSIAL ITEMS

.
100 Subordinating tax liens to administrative expenses and priority claims in a chapter 7 case.
211 Application of the burden of proof rules to tax issues in bankruptcy.
212 Obligation of a debtor to file prepetition and postpetition returns and pay postpetition taxes and the consequences for failure to comply. To be forwarded to Congress
213 Application of the superdischarge in chapter 13 cases to tax claims. Disposition Pending
214 Requirement of periodic payment for deferred payments of tax under §1129(a)(9) and designation of interest rate used while making those deferred payments. ADOPTED August 11, 1997
215 Application of the automatic stay to the setoff of tax refunds against tax claims.
312 Effect of a subsequent filing or default on the status or nature of a tax claim provided for in a chapter 11 plan. To be forwarded to Congress
313(a) Effect of an installment payment agreement on 240-day assessment period applicable to certain tax priorities.
314 Priority of taxes assessable at the time of the petition but attributable to fraudulent and unfiled returns.
321 Efficacy of an order allocating chapter 11 plan payments to trust fund taxes and collection remedies available to taxing authorities after order is entered. To be forwarded to Congress
329(a) Proposal to limit the scope of Bankruptcy Code §505(a): Procedural limitations.
329(b) Proposal to limit the scope of Bankruptcy Code §505(a): Limitation on Bankruptcy Court’s power to determine tax liability of nondebtor.
331 Discharge of tax penalties where the tax to which the penalties relate is not discharged.
333 Release of a tax lien in a chapter 13 case before completion of all payments under the plan.
335 Simplification of the terms in the priority tax provisions.
425 Tax treatment of abandonment of property by an estate to the debtor.
[ FN: The federal participants on the Advisory Committee abstained from consideration of the proposals under this track number.]
Proposal No. 3
ADOPTED
as amended
August 11, 1997
432 Bifurcation for claim filing purposes of a corporate tax year that straddles the petition date. Proposal No. 3
ADOPTED
August 11, 1997
433 Authority of bankruptcy courts to grant declaratory judgments on prospective tax issues in chapter 11 plans of reorganization. ADOPTED August 11, 1997
438(a) Application of §505(b) discharge to estate as well as to the debtor, successor to the debtor, and trustee where taxing authority does not audit. ADOPTED August 11, 1997
438(b) Annual requests by a trustee for a prompt audit.
441(a) Obligation of a chapter 13 debtor to pay all priority taxes when a proof of claim for such taxes is not filed.
442 Clarify the treatment of postpetition taxes for which claims are filed under §1305.
503(a) Whether a debtor should be required to pay interest on deferred priority taxes payable under a chapter 13 plan.
506 Attachment of a federal tax lien to exempt property
513(b) Whether a substitute for return shall constitute a filed return for purposes of dischargeability issues. To be forwarded to Congress
602 Clarify the exception to discharge in §523(a)(1)(C) ("willfully attempt in any manner to evade or defeat such tax"). To be forwarded to Congress
703 Whether payment of prepetition nonpecuniary loss tax penalties in Chapter 11, 12, and 13 cases should be subordinated to payment of general unsecured claims. ADOPTED August 11, 1997
704 Whether the payment of postpetition tax penalties should be subordinated.
705 Whether trust fund taxes should be eligible for superdischarge in Chapter 13 after seven years from the date of assessment.
 

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