OF THE TAX ADVISORY COMMITTEE
NATIONAL BANKRUPTCY REVIEW COMMISSION
Jack F. Williams
Professor, Georgia State University College of Law
CHAIR, TAX ADVISORY COMMITTEE
[ 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.
This proposal would require an amendment to 11 U.S.C. §901 making 11 U.S.C.
§1129(a)(9)(C) applicable to chapter 9 cases and would conform chapter 9 practice to that
under chapter 11 of the Bankruptcy Code. Because chapter 9 debtors are not generally taxpayers,
most of the taxes involved will be employment or other trust fund taxes. The Commission may
expect this proposal to be controversial from a political perspective. Furthermore, there is some
concern that including a payment provision in chapter 9 may pose Tenth Amendment concerns
even though the proposal applies to municipalities only.
105, 106 & 109 Clarify provisions of the Bankruptcy Code on providing reasonable
notice to governmental units.
The Advisory Committee has agreed that notice provisions in the Bankruptcy Code must be
clarified as those provisions relate to governmental units. There is a consensus that the
government should not lose its rights against the debtor or the bankruptcy estate in a bankruptcy
case because of the debtor's failure to provide notice reasonably calculated to reach the proper
representatives of the government. Although the details as to what constitutes reasonable notice
are not self-evident, the Advisory Committee has reviewed the Tax Related Information items
contained in the Justice Departments letter of March 7, 1997, to the Advisory Committee
on Bankruptcy Rules (Appendix IV) and generally finds these requests reasonable. The Advisory
Committee suggests that the Commission consider three parts to any proposal on notice to the
government. First, notice to the government must be reasonably calculated to reach the proper
representatives of the government and must reasonably identify the debtor. Without a reasonably
targeted notice requirement under the Bankruptcy Code or Rules, one can continue to expect the
government to experience special difficulties because of the large and diffuse nature of
governmental units and the difficulty governments may have in identifying claims and interests in
the bankruptcy case. Improved notice would enhance the fairness and efficiency of the bankruptcy
process. Improved notice should also reduce inadvertent violations of the automatic stay and
reduce costs associated with the bankruptcy case. Second, to facilitate proper notice, the
Commission should recommend some mechanism to provide sufficient information to permit a
debtor to properly identify the relevant federal, state, or local governmental authority for purposes
of providing reasonable notice under the circumstances. For example, a debtors attorney
may be aware of the governmental department to provide notice regarding state sales tax in
Nevada, where that attorney practices, but may be unaware of the department with sales tax
responsibility in Georgia, a state where the client has done business. However, there is a strong
belief among the majority of the Advisory Committee members that a national central registry for
all government units is impractical. When one considers thevast array of local governmental units,
one quickly envisions reams of phone book-like volumes of listings that may quickly become
outdated. Presently, there is no logical entity to support such a system. The consensus of the
Advisory Committee is that the bankruptcy clerks' offices compile and maintain the registry (that
would presumably be available nationally on PACER). A district or local approach, as opposed to
a national registry, should lead to more manageable lists. The clerk's offices are capable of
organizing a notice list into appropriate subdivisions (federal agencies, state agencies, local
governmental agencies) in an effort to make the district registries user-friendly. The creation and
maintenance of a local registry provides a necessary resource to aid in giving adequate notice. If a
governmental unit is not listed in the registry, the debtor would be expected to provide reasonable
notice and would be protected if the debtor made a good faith effort to provide reasonable notice.
Third, failure to provide reasonable notice should result in some sanction, including exception to
any bar date and the nondischargeability of tax claims where the debtor has not provided notice in
a manner consistent with the applicable Bankruptcy Code section or Rule. Finally, the Advisory
Committee recommends that all notice issues affecting governmental units should be taken up as
one overall proposal with amendments coming in the form of changes to the Bankruptcy Rules.
Although it may be more appropriate for the Rules Committee to address the notice issues, the
Advisory Committee wants to emphasize that reasonable notice is a key consideration running
throughout the proposals in this Final Report.
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
The Bankruptcy Code does not specify the interest rate to which tax claims are entitled over
the life of a chapter 11 reorganization plan. Emerging judicial consensus is that a market rate of
interest must be determined and that the statutory rate is relevant to that determination, but not
binding. It is the consensus of the Advisory Committee that judicial resources are wasted litigating
the issue of what rate of interest is appropriate for tax claims entitled to interest in bankruptcy.
Therefore, the Advisory Committee recommends that the Bankruptcy Code be amended to
provide for interest at a stated statutory rate where the claim is in fact entitled to interest. This
proposal is not intended to enlarge the universe of claims entitled to interest in bankruptcy. It is
also the consensus of the Advisory Committee to provide the same stated statutory rate for all
governmental units in the bankruptcy case. Although short of a consensus, a majority of members
of the Advisory Committee suggest that the fixed federal deficiency rate under IRC
§6621(a)(2), without regard to IRC §6621(c), be employed. [ FN: The Advisory Committee representatives of the
federal government believe that the interest rate described under IRC §6621(c) should
apply in the case of "large corporate underpayments, " as that term is used in the
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.
Section 505(b) permits a trustee to request a prompt audit from a taxing authority. If the
taxing authority fails to respond within sixty days to the request, the trustee is discharged from
liability for any taxes beyond the taxes shown on the return. Presently, the Internal Revenue
Service has directed that §505(b) requests be filed with the local District Director.
See Rev. Proc. 81-17, 1981-1 C.B. 688. Nonetheless, some courts have held that a
trustee may ignore the IRS directive and file a §505(b) request with the IRS Service Center.
See In re Carie Corp., 128 B.R. 266 (Bankr. D. Alaska 1989). It is the consensus
of the Advisory Committee that governmental units are entitled to timely and reasonable notice in
the bankruptcy process. However, adequate and timely notice is often dependent on obtaining
information in order to identify the appropriate governmental representative. Consequently, it is
the consensus of the Advisory Committee that the Commission propose the creation and
maintenance of a local or district registry maintained by the bankruptcy court clerks that would
provide sufficient information so that a debtor may comply with more stringent notice
requirements. See comments to Proposal #106. Finally, the Advisory Committee
recommends that all notice issues affecting governmental units should be taken up as one overall
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
The treatment of state and local taxes should be conformed to that of federal taxes regarding
a debtor's tax year election and regarding those tax attributes that are transferred to the
bankruptcy estate upon the filing of the petition in bankruptcy. There is no justification to
maintain two systems in the Bankruptcy Code that provide for the transfer of different tax
attributes based on federal versus state and local tax questions. There is also no justification for
the period of a federal tax year or years being different from a state and local tax year or years.
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
Several tax claims that are identified in the Bankruptcy Code as priority claims or as claims
that are nondischargeable are tied to certain time limits, for example, tax claims assessed within
240 days of the filing of the petition are priority claims under §507(a)(8) and
nondischargeable under §523(a)(1). Where the debtor has filed successive bankruptcy
petitions, the issue posed is whether the first filing tolled the running of these time periods, thus
maintaining the priority and nondischargeable character of the tax claims in the subsequent
bankruptcy case. The consensus of the Advisory Committee is that 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. A debtor should not be entitled to stay the collection of a tax by filing a bankruptcy petition
and then benefit from the pendency of the abortive case by reducing or eliminating the time in
which the governments tax claims would otherwise have been entitled to priority, or
altering the nondischargeability of a tax. Clarification of the law would eliminate unnecessary
litigation and provide uniformity in the law. Compare In re Waugh, 1997
W.L. 135626 (8th Cir. Mar. 26, 1997); West v. United States, 5 F.3d 423 (9th Cir. 1993); In
re Richards, 994 F.2d 763 (10th Cir. 1993); Montoya v. United States, 965 F.2d 554
(7th Cir. 1992); In re Brickley, 70 B.R. 113 (9th Cir. B.A.P. 1986) (all tolling the
§507(a)(8) time periods, with In re Quenzer, 19 F.3d 163 (5th Cir. 1993);
In re Gore, 182 B.R. 293 (Bankr. N.D. Ala. 1995). At present, there is no consensus
among members of the Advisory Committee on whether IRC §6503(h) provides a
reasonable tolling mechanism that should be expressly applied to tax claims under
§§507(a)(8) and 523(a)(1) or whether the more appropriate additional period is the
30-day period in §507(a)(8)(A)(ii).
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.
Under current law, income or gross receipts taxes that are assessed within 240 days of the
date the petition in bankruptcy is filed are entitled to an eighth priority. See 11 U.S.C.
§507(a)(8). If an offer in compromise is made by the taxpayer within 240 days of the
assessment date, the time during which the offer in compromise was outstanding plus 30 days, is
added to the 240 day period. This mirrors the reality that during a pending offer in compromise,
the IRS refrains from taking collection action. In United States v. Aberl, 78 F.3d 241 (6th
Cir. 1996), the court held that the 240-day period is not suspended for offers in compromise made
before the assessment date for those taxes. This proposal speaks directly to some of the problems
posed by pending offers in compromise. It is the consensus of the Advisory Committee that any
offer in compromise pending within the 240-day period should toll that period whether the offer in
compromise was made before or after assessment. The proposal removes an arbitrary distinction
between assessments that could have been made within days of each other. This proposal does not
extend to installment agreements.
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.
It is the consensus of the Advisory Committee that the Bankruptcy Code should be amended
to require that "small business debtors" create and maintain separate bank accounts
for trust fund taxes and nontax deductions from employee paychecks. Present law does not
require the trustee or the debtor in possession to segregate funds for the payment of trust fund
taxes and nontax deductions from employee paychecks. The result is that these taxes may go
unpaid when the reorganization fails and the case is converted to a case under chapter 7 of the
Bankruptcy Code. As to the sanction imposed for failure to comply with this requirement, the
Advisory Committee strongly suggests that the Bankruptcy Code differentiate between failure on
the part of the debtor and failure on the part of the trustee in maintaining segregated accounts.
Where a debtor fails to comply with the segregation requirement, then the court should have the
power to dismiss the bankruptcy case. Where a trustee fails to comply with the segregation
requirement, such as in a chapter 7 case or in some chapter 11 cases, then dismissal is
inappropriate. Rather, more appropriate sanctions in these circumstances include denial of fees to
the trustee, surcharge against the trustee's bond or personal liability for willful failure, or removal
from the trustee panel. There is an emerging consensus to include all business debtors under this
requirement. However, expanding the proposal to include large business debtors needs more
325 Amend 11 U.S.C. §1141(d)(3) to except from discharge
taxes unpaid by businesses entities, which nonpayment arose from fraud.
The consensus of the Advisory Committee is to amend §1141(d)(3) to except from
discharge taxes unpaid by a business debtor where the nonpayment arose from fraud. The
Advisory Committee, however, has not reached a consensus on what conduct and intent are
sufficient to constitute fraud.
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
Section 362(a)(8) stays the commencement and continuation of a proceeding before the
United States Tax Court concerning the debtor. The Tax Court held in Halpern v.
Commissioner, 96 T.C. 895 (1991), that §362(a)(8) stays the commencement or
continuation of a proceeding involving an individual debtors postpetition tax liabilities,
even though the IRS may not file a proper request for payment of an administrative expense for
the individual debtors own postpetition tax liabilities. It is the consensus of the Advisory
Committee to amend §362(a)(8) to overrule the Tax Court's decision in Halpern v.
Commissioner, 96 T.C. 895 (1991). Additionally, the Advisory Committee suggests
that the law be clarified by permitting the appeal of tax court decisions without violating the
automatic stay. The Advisory Committee also suggests that the relevant event for triggering the
application of §362(a)(8)'s limitation is the filing of the petition in bankruptcy and not the
entry of the order for relief.
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.
A consensus has been reached that as to secured tax claims that, without the security, would
otherwise be payable as priority, the period over which payments should be made and the manner
of their payment shall be the same as if the claims were merely priority. For all other purposes, the
requirements of §1129(b)(2) shall continue to be required to be met.
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.
Section 6323 of the Internal Revenue Code provides protection to certain purchasers of
property even after a notice of federal tax lien has been filed in accordance with federal tax law.
IRC §6323 defines "purchaser" as a person who, for adequate consideration,
acquires an interest (other than a lien or security interest) in property, which is valid under local
law against subsequent purchasers without notice. Applicable purchases include securities, motor
vehicles, personal property purchased at retail, and personal property purchased at casual sales.
Section 545(2) of the Bankruptcy Code permits a trustee to avoid a tax lien that is either not
perfected or not enforceable at the time of the filing of the petition against a bona fide purchaser,
"whether or not such purchaser exists." Trustees and debtors in possession have
attempted to employ §545(2) to avoid tax liens on certain of the above-described assets, on
the basis that the trustee or debtor steps into the shoes of the hypothetical bona fide purchaser
entitled to superpriority under the Internal Revenue Code. The purpose of the exceptions in the
Internal Revenue Code is to facilitate the flow of these goods in commerce. Applying
§545(2) to tax liens may result in an unintended windfall to the debtor. Additionally, while
no reported cases have yet attempted to apply the same legal arguments to state tax liens with
similar provisions, the same legal argument could be made to penalize state taxing authorities.
Thus, any amendment should not be limited to the federal government but should also include
state and local governments. One member of the Advisory Committee believes this amendment
should be tied to providing some de minimis exemptions to the federal tax lien for
bankruptcy purposes. Such an amendment would prevent a debtor from having to buy off the tax
lien in clothing, furniture, personal effects, and tools of the trade. Other members of the Advisory
Committee oppose such an amendment for the reasons described with respect to Track 506.
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
Because governmental units are creditors in the vast majority of bankruptcy cases, this issue
has been a real problem for taxing authorities. The proposal would eliminate the need to make a
request to the debtor to pay taxes that are entitled to payment as an administrative expense and
are required to be paid under 28 U.S.C. §§959(b) and 960.
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.
The treatment of postpetition ad valorem real estate taxes in bankruptcy has posed substantial
problems for local taxing authorities. The proposal suggests that these taxes should be treated as
administrative expenses, whether secured or unsecured, and should be paid in the ordinary course
of the debtor's affairs. The proposal is not intended to overrule the limitation on paying property
taxes imposed by 11 U.S.C. §502(b)(3) (prohibiting the payment of a tax assessed against
property if the claim exceeds the estate's interest in the property). Three members of the Advisory
Committee believe that postpetition ad valorem taxes should be charged to secured creditors as a
§506 expense. A §506 surcharge prevents the secured creditors from receiving a
windfall. Cf. E & C Holding Co. v. Piscataway (In re E. Steel Barrel
Corp.), 164 B.R. 477 (D.N.J. 1994)(secured creditor would receive windfall if not charged
with assessed property taxes and sewer charges), with New Brunswick Sav.
Bank v. Scranton Elecs. Inc. (In re Scranton Elecs.), 163 B.R. 740 (Bankr. M.D. Pa.
1994)(court stated that estate has burden of proving that taxes paid benefited the secured creditor
and estate did not carry its burden); In re Swann, 149 B.R. 137 (Bankr. D.S.D. 1993)(tax
due on sale of oversecured estate property not chargeable against secured creditors under
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.
The consensus of the Advisory Committee is that postpetition ad valorem real-estate taxes are
a reasonable and necessary cost of preserving the estate and are entitled to treatment as
administrative expenses payable in the ordinary course of affairs of the debtor. Cases that provide
to the contrary should be overruled.
424 Amend the Bankruptcy Code to establish that ad valorem taxes are
incurred by the estate and, therefore, are entitled to administrative expense
The consensus of the Advisory Committee is that postpetition ad valorem real-estate taxes are
incurred by the estate and are a reasonable and necessary cost of preserving the estate and are
entitled to treatment as administrative expenses payable in the ordinary course of affairs of the
426 Amend the Bankruptcy Code to conform the treatment of state
and local tax claims to that treatment provided for federal tax claims.
702 Amend 11 U.S.C. §346 to conform state and local tax
attributes to the federal list in IRC §1398.
The Advisory Committee recommends the following changes to 11 U.S.C.
§§346, 728, 1146, and 1231.
- Section 346(a) should be revised to provide that for state and local tax purposes the
provisions of the Internal Revenue Code of 1986 are to be used:
- to determine when a separate estate is created as the result of the filing of a
- to determine which attributes, that are available under state and local tax laws, are
transferred to the estate on the filing of a bankruptcy petition and are transferred back to the
individual on termination of the estate.
- to determine how income (to the extent provided for under state and local laws) from
the estate (when created) is taxed or deductions (to the extent provided for under state and local
laws) are allowed.
- to determine how income from the cancellation of debt is to be reported and how
basis and other tax attributes (to the extent they are available under state law) are reduced.
- to determine the tax consequences of transfers between bankruptcy estate and
- A new subsection should be added to provide that the applicable state and local tax rates
(rather than federal rates) should be used to determine any tax liability or refund for state and
- A new subsection should be added to provide that it is the responsibility of the trustee to
file federal, state and local tax returns (when required under applicable federal, state and
locallaws) for a separate estate created by the filing of a bankruptcy petition and for partnerships
and corporations filing bankruptcy petitions.
- Section 346(b) should be repealed. (Section 1398 addresses the applicable issues - when an
estate is created, how an estate is taxed and the accounting methods to use).
- Section 346(c) should be repealed. (Sections 1398 and 1399 and proposed change in
section 346 addresses these issues - filing status for corporations and partnerships and
responsibilities for filing tax returns (item 3 above)).
- Section 346(d) should be repealed (Section is not needed if section 1398 applies - a
separate estate is not created in chapter 13).
- Section 346(e) should be repealed (Section is not needed since 1398 provides for how
income is handled by the estate and the allowance of expenses).
- Section 346(f) should be modified to provide that the same provisions apply to federal tax
law as well - deals with payment of withheld items.
- Section 346(g) should be repealed (Section 1398 addresses the applicable issues - transfers
between bankruptcy estate and individual debtor).
- Section 346(h) should be repealed (Section 1398 addresses the applicable issues -
preservation of NOL and provides that short tax years do not create a separate year for NOL
carryover periods (Note the current §346(h) is inconsistent with IRC.)).
- Section 346(I) should be repealed (Section 1398 addresses the applicable issues - attribute
carryover and use of NOL carryovers).
- Sections 346(j) should be repealed (Sections 1398 and 108 address the applicable issues -
income from cancellation of debt, tax attributed reduction, etc.)
- Section 728(a) should be repealed. (Section 1398 provides that the estate's year ends the
day before the petition is filed if the election for a short year is timely filed).
- Section 728(b) should be repealed (provisions regarding the requirement of the filing of
returns are now included in §346 (see item 3).
- Section 728(c) and (d) should be repealed. (With the suggested changes above, we see no
useful purpose for these provisions).
- Section 1146(a) should be repealed. (Section 1398 provides that the estate's year ends the
day before the petition is filed if the election for a short year is timely filed).
- Section 1146(b) should be repealed (provisions regarding the requirement of the filing of
returns are now included in § 346 (see item 3)).
- Section 1146(c) dealing with stamp and similar taxes is not addressed.
- Section 1146(d) dealing with the request to determine the tax impact of a plan is listed as a
separate item and should not be dealt with here. (It is a controversial issue.)
- Section 1231 should be repealed - a separate estate is not created in chapter 12.
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.
This proposal is a direct response to the situation created by the commencement of an
involuntary bankruptcy case under chapter 7 or 11 of the Bankruptcy Code. Presently, IRC
§1398(d)(2) links the period by which an election must be made to the date the petition in
bankruptcy is filed. This poses no problem in a voluntary case commenced under 11 U.S.C.
§§301-302 (the date the petition is filed is also the date an order for relief is entered
in the bankruptcy case). However, in an involuntary case commenced under 11 U.S.C.
§303, the petition may be filed sometimes months before the order for relief is entered by
the court, if ever. During the involuntary gap period, the debtor may continue to operate as
though no bankruptcy case has been filed. There appears no reason to link the election under IRC
§1398(d)(2) to the filing of the petition in these circumstances. Rather, the more
appropriate event to link the beginning of the time period by which to make the (d)(2) election is
the entry of the order for relief.
437 Clarify IRC §1398 to provide that the bankruptcy estate's
income is subject to alternative minimum tax and capital gains tax treatment if
Some confusion exists as to whether the bankruptcy estate is exempt from the Alternative
Minimum Tax ("AMT"). Presently, some bankruptcy trustees take the position that
the bankruptcy estate is exempt from the AMT but may employ capital gains treatment. These
inconsistent positions should be reconciled.
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."
Some confusion has surrounded the use of the term "assessment" in the
Bankruptcy Code when used in reference to state and local taxing authorities. Some taxing
authorities have no assessment procedure whatsoever, some taxes are self-assessed, etc. The
purpose of this proposal is to provide to the extent possible a universal definition of assessment,
regardless whether conventional "assessment" procedures are employed. The problem
at which this proposal is addressed arises only with respect to state or local tax collections. Thus,
any definition of the term "assessment" should be specifically limited to state and local
tax purposes to avoid any confusion about the meaning of the term for federal purposes. The
proposal is not meant to define "assessment" in §1129(a) or to imply that the
event of "assessment" or some other trigger is more or less appropriate under that
701 Amend 11 U.S.C. §1125(b) to establish standards for tax
disclosures in a chapter 11 disclosure statement.
The Advisory Committee recommends that 11 U.S.C. §1125(b) be amended to require
a discussion of the potential material federal and state tax consequences of the plan to the debtor
and any entity created pursuant to the plan, and a discussion of the potential material federal tax
consequences of the plan to a hypothetical investor typical of the holders of claims or interests. A
failure to discuss the potential tax consequences of a plan of reorganization in the disclosure
statement can result in seriously misleading creditor constituencies and other parties in interest
about the plan's economic effects. See Smith v. Bank of New York, 161
B.R. 302 (Bankr. S.D. Fla. 1993). There is no justification for allowing a plan proponent to
ignore a plan's tax consequences in the disclosure statement. A plan's tax consequences represent
an important aspect of the plan and should be fully discussed to the extent they are material. A
chapter 11 debtor or other plan proponent who possesses the financial resources to propose a
plan of reorganization and draft a disclosure statement is likely to possess the necessary resources
to analyze the plan's tax effects. A debtor or other plan proponent cannot be expected to provide
each creditor with individually tailored tax information; it would be impractical and unreasonably
expensive. On the other hand, addressing the material federal tax matters affecting a hypothetical
creditor or equity security holder in each class created under the plan is not burdensome, and a
plan proponent fairly can be required to supply such information in its disclosure statement.
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.
In chapter 7, §726(a)(1) allows a tardily filed claim for a priority tax if the claim is
"filed before the date on which the trustee commences distribution." One court held
that the date the trustee commences distribution is the date when the court approves the final
report and accounting of the trustee. In re Wilson, 190 B.R. 860 (Bankr. E.D. Mo. 1996).
The court rejected the State of Missouri's argument that the date the trustee commenced
distribution was the date the checks were mailed and rejected the trustee's argument that
distribution commenced when the trustee's final report was sent to the United States Trustee for
approval. The Advisory Committee proposes that the language to §726(a)(1) be changed
from "the date on which the trustee commences distribution" to "the date on
which the court approves the final report and accounting of the trustee." The Advisory
Committee's proposal is a housekeeping amendment designed to minimize future litigation that
may arise from a literal reading of the statute.
441 Conformity of chapter 13 plans with provisions of the Bankruptcy
Code: Requirement to file returns.
Consensus on additional chapter 13 requirements regarding, among
others, the filing of returns:
The Advisory Committee has reached a consensus on filing return requirements in chapter 13
cases. [ FN: Comment by SC: Tax return filing
has been a significant problem in a large number of chapter 13 cases. Track No. 441 would
require the filing of tax returns as a condition of confirmation of a chapter 13 plan. The proposal
also has a number of other elements, including postponement of confirmation until the returns are
filed. I am concerned that the Consumer Working Group or the Commission may view some of
these other elements as overly burdensome and may recommend that the package of proposals be
modified. I would like to take this opportunity to express my views that the essential elements of
any proposal relating to tax return filing requirements in chapter 13 are as follows: (1) the filing of
prepetition tax returns should be an express requirement of chapter 13; (2) the failure to file such
returns should be treated in the same manner as the failure to file schedules, a budget, or
information requested by the chapter 13 trustee; (3) the chapter 13 trustee should police
compliance with this requirement either at the §341 meeting as proposed or otherwise; (4)
confirmation should be postponed, as proposed, but the taxing authority should be allowed to
waive this requirement by agreement with the debtor in return for a firm deadline for filing the
returns and such other consideration as may be agreed upon; (5) if a plan may be confirmed
before all returns are filed, the confirmation should be considered conditional and the debtor
should be required to amend the plan when the returns are filed; and (6) the debtor should not be
permitted to file an objection to a proof of claim for a tax for which the debtor has not filed a tax
return.] Following is an outline of the proposal.
- As a prerequisite for confirming a chapter 13 plan, a debtor must have filed tax returns for
all tax periods ending within six years prior to the petition date. A debtor's written consent to a
substitute for return prepared by a tax authority or written stipulation to a judgment in a
nonbankruptcy tax tribunal will constitute a "filed return" for purposes of this
- Prepetition tax returns must be properly filed with the appropriate tax authorities at least
one day prior to the conclusion of the first meeting of creditors. At or before the conclusion of the
first meeting of creditors, the debtor must file with the court a statement certifying, under penalty
of perjury, that all required tax returns for the relevant periods have been properly filed with the
appropriate tax authorities. The chapter 13 trustee may require that a debtor submit copies of
returns to the trustee.
- If tax returns have not been filed by the date on which the first meeting of creditors
commences, the trustee may continue the first meeting to allow additional time to file returns. The
additional time allowed shall be no longer than (1) 120 days from the order for relief for returns
that are past due as of the order for relief, or (2) for returns not past due as of the order for relief
date, the latter of (i) 120 days from the petition date or (ii) the automatic extension date for filing
a return under applicable tax law.
- Failure to timely file tax returns by the above deadline for prepetition returns, or by due
dates (including extensions pursuant to applicable tax laws) for postpetition returns, shall
constitute cause for conversion or dismissal under §1307(c).
- The court, for good cause shown due to circumstances for which the debtor should not
justly be held accountable, may extend the return-filing deadline. Dismissal or conversion would
be automatic if such extended deadline were missed.
- The deadline for objecting to plan confirmation shall be at least sixty days after prepetition
tax returns are filed with the tax authorities.
- A debtor may not file an objection to a proof of claim for a tax required to be reported on a
return unless the debtor has filed a return for that tax.
- The §502(b)(9) "governmental bar date" will be modified (for tax claims
only) to allow tax authorities sixty days from the filing oftax returns by debtors to file proofs of
claim; provided, however, that this modification will not have the effect of shortening the
governmental bar date in any case.
Rationale. Part 1 - The requirement for six years of
returns reflects a compromise on the part of tax authorities, who generally oppose discharge in
bankruptcy for any period for which a debtor/taxpayer has failed to file returns. In
response to concerns expressed by debtor and trustee representatives at the Commission sessions
in Santa Fe and San Diego that requiring an unlimited number of returns to be filed would
discourage bankruptcy non-filers from "re-entering the system," tax authority
representatives indicated a willingness to compromise on a limited number of years if return filing
was an absolute prerequisite for confirmation and thus, indirectly, discharge. Six years was
generally agreed to be a reasonable period for requiring returns to be filed.
Part 2 - The requirement that returns be filed at least one day before the
completion of the §341 meeting would allow chapter 13 trustees to ask two important
questions at §341 meetings:
- Have you filed your tax returns for the six-year prepetition period?
- Does your plan provide for payment of the amount of taxes reflected in your returns?
If returns have been filed at least one day before the §341 meeting, a trustee (or tax
creditor) may ask for copies or other evidence of filing. The debtor would not be in a position to
say, "Im filing them today" (or tomorrow or next week or next month), but
would have to answer yes or no as to an event occurring in the past. If the answer to the second
question is that the preliminary plan does not provide for payment matching the returns, then the
trustee would presumably not recommend confirmation until the discrepancy had been corrected.
Part 3 - Part 3 also reflects a compromise on the part of tax authorities and
debtors. A stricter standard of requiring that tax returns be current as of the petition date might
delay or deny bankruptcy relief to debtors who need it for nontax reasons (pending home
foreclosure or carrepossession, for example). A looser standard of allowing returns to be filed up
until the government claim bar date (180 days from petition date) would put large-volume tax
authorities under an unrealistically short deadline to file or amend claims and create havoc or
delays in the confirmation process. The anticipated procedure in cases would be that the trustee
would determine at the initial §341 meeting if a debtor has filed necessary tax returns. If
not, but the trustee is satisfied that the debtor is making a reasonable effort to get the returns
prepared and filed, the trustee may continue the §341 meeting for up to 120 days or until
the last available extension for a prepetition return. (For example, a chapter 13 debtor filing a
bankruptcy petition on January 1, 1997, would have the option under tax law of obtaining an
extension through August 15, 1997, to file a 1996 income tax return. Extensions for earlier years
would have expired by the petition date).
Part 4 - Rather than automatic dismissal for failure to file tax returns (a
position tax authorities had originally advocated), the failure to file returns would be added to the
other "causes" for dismissal or conversion contained in §1307. Most courts
now dismiss or convert cases when debtors have failed to file tax returns. That practice would be
Part 5 - Part 5 provides a "safety valve" in case the debtor has
made a good faith effort to get returns prepared and filed, but for unanticipated reasons beyond
the debtors control (delay in receiving necessary information from tax authorities or
incapacitating injury, for example) has been unable to do so. Again, this provision is a
compromise on the part of tax authorities, whose initial preference was for an absolute cutoff
point for filing returns.
Part 6 - Part 6 addresses two issues: (1) How long should tax authorities be
given to act upon filed returns?; (2) Can confirmation proceed before priority tax debts have been
determined? From the perspective of debtors and other creditors, problems are created when the
entire bankruptcy process must be put on hold while tax authorities determine what they are
owed. The proposed sixty-day period would force tax authorities to act in a reasonably prompt
manner to protect their claims at confirmation. From the tax authorities perspective, it is a
considerable waste of time and effort to either have to estimate (and later amend) claims for tax
periods for which no returns have been filedor to file a "place-holding" confirmation
objection that says, in essence, "We dont know how much were owed, so
dont confirm a plan until we find out." Part 4 of the proposal attempts to strike a
reasonable balance: debtors must file returns before confirmation can proceed, but the
confirmation process can proceed fairly quickly after returns are filed. Part 6 would end the
practice in some districts of confirming chapter 13 plans before the amount of priority tax debt is
known. Such practice creates a number of legal and practical issues. First and foremost, how can
a court assess feasibility of a plan under §1325(a)(6) if the amount of priority tax debt that
must be paid in full cannot be determined? The practice of taking the debtors word for the
amount owed, or simply ignoring the issue, is contrary to reason and common sense. From a
procedural standpoint, confirmation of a plan before tax debts are determinable results in a
"preliminary confirmation order." Are such orders appealable as final orders? Do
they have res judicata effect on tax creditors, or on other creditors if modification is required in
the future? Who is responsible for undoing or modifying the preliminary confirmation order after
tax claims are filed? Such questions are eliminated under this proposal. Part 6 of the proposal
takes debtors who are delinquent in filing prepetition returns off the "confirmation fast
track" as long as the delinquency continues. Debtors who are current on their returns as of
the order for relief date or, at least the date of the §341 meeting, would remain on the
"fast track" in jurisdictions that do early confirmations. The disparate treatment does
not seem out of line, since it rewards debtors who have complied with the tax laws (or who
promptly cure noncompliance) and delays those who are delinquent. From a procedural and policy
standpoint, more time should be taken to deal with debtors who have difficulty bringing
their tax returns current. Failure to file tax returns is often indicative of other financial problems
that need to be addressed, and the proposal above would serve to red flag potential problem cases
needing extra attention, appropriately taking them off the confirmation "fast track".
Parts 7 and 8 - As noted above, the practice of filing estimated, "place
holding" proofs of claim for periods for which no returns have been filed creates a number
of problems for tax authorities, debtors and courts. Tax authorities must spend considerable time
and effort preparing debtor-specific estimated proofs of claim, which is a monumental task given
the volume of chapter 13 filings. The task is unnecessary ifdebtors comply with return-filing
obligations applicable to non-debtors, and the effort is simply wasted if returns are later filed and
processed into amended proofs of claim, thereby mooting the estimated claims. Further, tax
authorities are in a "no-win" situation on estimated proofs of claim. Some courts have
directed tax authorities to file claims labeled as estimates to protect their position, while other
courts have sanctioned tax authorities for filing incorrect estimates. Debtors resent estimated
proofs of claim that may overestimate the amount of taxes owed, and "burden of
proof" procedural battles often erupt in such cases. Courts are faced with hearing claim
disputes with a dearth of evidence (due to returns being unfiled). To avoid such difficulties, a
simple rule is proposed: returns must be brought current before debtors can proceed with claim
objections. Note: this would not prevent debtors from objecting to audit claims covering
periods for which returns have been filed. Consistent with the intent to eliminate
"place-holding" estimated proofs of claim, the governmental claims bar date is
proposed to be adjusted to allow tax claims to be filed based upon the returns filed by debtors,
rather than estimates. [ FN: Comment by JP:
While I strongly support requiring the filing of tax returns as a prerequisite to the confirmation of
a chapter 13 plan, I prefer the details of implementation to be left to the discretion of the court. I
do, however, see the necessity of a statutory enactment modifying the bar date for taxing
authorities, as proposed in paragraph 8.]
Three additional notes to proposal: 1. "Filing of returns"
presumes returns are properly filed -- i.e., with the right agency, at the right
address, with the right tax identification numbers, with the requisite signatures, and subject to
penalties of perjury/false filing. If not taken up in the context of discussion on "notice
rules", such presumptions may need to be added to this proposal. 2. This proposal impacts
Track No. 441(a), captioned "Obligation of a chapter 13 debtor to pay all priority taxes
when a proof of claim for such taxes is not filed," but does not purport to resolve Track No.
441(a) altogether. 3. "Returns" for purposes of this section would include substitutes
for return that the debtor has signed and nonbankruptcy tax tribunal stipulations ofliability.
[ FN: The representative of the IRS has
reservations on the issue of what constitutes a filed return. For dischargeability purposes under
Bankruptcy Code §523, the IRS position is that the Internal Revenue Code definition
controls See Track No. 513(b).]
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.
There is consensus on the Advisory Committee that an income tax return prepared by the
taxing authority should not be considered a filed income tax return for purposes of the
700 Dismissal and injunction against filing subsequent case where
court determines that a chapter 13 debtor is abusing the bankruptcy
If there is no proposal from the Consumer Working Group on this
subject, the Advisory Committee, by consensus, recommends the following
proposal to dismiss and enjoin certain chapter 13 cases:
There is a wide variance among districts around the country in terms of whether serial filing
is a problem. The particular focus of tax authorities is on chapter 13 repeat filers, although the
problem can also occasionally arise in individuals' chapter 11 cases. In some districts, effective
monitoring of "serial filers" by chapter 13 Trustees and/or courts limits the numbers
of such cases to minimal levels. In other districts, it is not uncommon for debtors, particularly
small business debtors, to file 4 or 5 or more cases in a 5-10 year span, incurring substantial new
tax debts all the while and without a material change in the debtors' circumstances. Such cases
require an inordinate amount of resources of chapter 13 trustees, the court system and tax
creditors. Some serial filers essentially use the bankruptcy system as a revolving door through
which to duck when tax authorities undertake collection efforts. Many "serial filers"
have no real hope of ever repaying constantly-increasing tax debts in full, as required by
§§ 1322(a)(2) and 1129(a)(9). Bankruptcy Judge Polly Higdon of Oregon presented
data substantiating this problem at the September 1996 Commission meeting in Santa Fe.
The present Bankruptcy Code provides only limited tools to creditors, trustees and judges to
deal with abusive serial filers. Bankruptcy Code § 109(g) prevents serial filings only if (1) a
prior case was dismissed by the court for "willful failure" to abide by court orders or
to appear before the court in prosecution of the case, or (2) the debtor voluntarily dismissed the
case after a creditor's filing of a request for stay relief. Although the case law is split, some courts
have held that the limited circumstances described in §109(e) constitute the only
grounds for dismissing a case with prejudice. In re Merrill, 192 B.R. 245, 252 (Bankr. D.
Colo. 1995)("Although abuse of the bankruptcy system and creditors by frequent or repeat
filers is a well-known problem, Congress has not chosen to combat the problem by authorizing
courts to barabusive debtors from future bankruptcy relief." Debtor had filed 7 bankruptcy
cases (6 chapter 13's and 1 chapter 7) between 1987 and 1995, incurring substantial additional tax
liability during that time. Case dismissed on motion of state tax authority, but without prejudice to
refiling.); In re Jones, 192 B.R. 289 (Bankr. N.D. Ga. 1996) ("The Court is
persuaded that it cannot deny a debtor future access to bankruptcy protection except as provided
by the Bankruptcy Code.... The Court understands the frustration of the IRS caused by repetitive
filings. But, it is not the role or power of the judiciary to remedy a legislative statute by opinion.
Congress easily can change the statute whenever it is so inclined." The Debtor was an
optometrist who had filed 3 cases in 3 years, accumulating more than $277,000 of tax debt to the
IRS.) Alternative remedies. One way to address the problem of
abusive serial filers would be to provide for dismissal with prejudice if a certain number of cases
have been unsuccessfully attempted within a certain period of time --e.g., no more than 3
petitions within 5-year period. The primary downside to such arbitrary limits is obvious, however.
Not all serial filings are abusive. A debtor legitimately pursuing chapter 13 rehabilitation may lose
his or her job, go through a divorce, incur a serious personal injury or face similar uncontrollable
circumstances that may require starting over to achieve a discharge. To avoid inflexibility, but to
provide courts the ability to police abusive filers, a less-draconian remedy is possible.
Proposed solution. Amend §§ 1307 and 1112 to give
bankruptcy judges discretion to dismiss cases with prejudice to refiling under chapter 13 or 11 for
a period determined by the court. A non-exclusive laundry list of relevant factors for courts to
consider in dismissing with or without prejudice would give courts some guidance, without
compelling a result in a particular case. The factors to be considered would include:
(i) the number of prior cases filed by the debtor;
(ii) the extent to which new debts to creditors, including tax debts, have accrued during the
present case or prior cases;
(iii) the good faith, or lack thereof, of the debtor in pursuing plan confirmation and plan
compliance in the pending case or prior cases; and
(iv) the reasons why successful completion of prior cases did not occur.
This would give judges the flexibility to keep the bankruptcy courts open to the
"honest, but unfortunate" debtor who suffers job loss, personal injury, etc., but would
at the same time allow judges to exclude from the bankruptcy system for a period of time the
"revolving door" debtors.
Other proposals before the Commission. None at present,
although the Consumer Working Group is believed to be discussing the "serial filer"
problem. Preliminary discussion in the Consumer Working Group has focused on possible
"up front" hurdles that a repeat-filer debtor would have to clear before proceeding in
a new case. The foregoing proposal addresses the "back end" of a case -- i.e.,
whether the case is dismissed with or without prejudice -- and is designed to be complimentary to
any "front end" proposal that the Consumer Working Group may make. The
"back end" focus is particularly appropriate in the tax area, because it is at the end of
the case that a court can determine if a debtor has incurred postpetition tax liability in violation of
11 U.S.C. §364(b) (that requires court authorization to incur postpetition debt out of the
ordinary course of business) and 28 U.S.C. § 959(b) and 960 (that require trustees and
debtors in possession to operate businesses in compliance with state law, including tax laws). In
summary, this proposal is made independently of any "front end" controls on serial
filers that may be proposed by the Consumer Working Group, but it should work in tandem with
any proposal that may come from that group.
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
A date of discharge in bankruptcy cases should be fixed for purposes of tax attribute
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.
Under present law, it is unclear whether when the estate pays estate assets to the debtor those
payments should be treated as ordinary income, 1099 income, or a distribution. See PLR
8728056 (April 15, 1987). The proposal provides that payments of estate assets to the debtor for
services performed are to be treated as ordinary income, providing the estate with a
corresponding deduction. It is not the intent of the Advisory Committee to suggest that income
from future services performed postpetition by the individual debtor is itself property of the
estate. See 11 U.S.C. §541(a)(6). Rather, this clarification speaks to property that
is already property of the estate that the estate seeks to use to pay the debtor for services
411 Availability of one-time exclusion of $125,000 of capital gain on
sale of residence to the trustee of an individual debtor.
436(a)Tax treatment of the sale by the estate of a debtors
Under current law, an individual over the age of fifty-five can sell a personal residence and
exclude $125,000 of gain. There is bipartisan support in Congress to raise the exclusion amount,
make it available to all taxpayers, regardless of age, and make it available every two years.
See Dep't of Treasury, Taxpayer Bill of Rights 3 and Tax Simplification Proposals 19
(April 16, 1997). The exclusion is not available to bankruptcy estates because a bankruptcy estate
cannot have a personal residence. Pergament v. United States (In re Barden), 105 F.3d
821 (2d Cir. 1997).
If Congress increases the amount of the exclusion and eliminates the age restriction, the
Committee believes the exclusion should be available to bankruptcy estates. Not allowing the
exclusion to the bankruptcy estate creates a hidden, nonuniform exemption and runs counter to
the proposals to create uniform exemptions. All else being equal, debtors with low-basis
residences receive a larger exemption than debtors with high-basis residences. Trustees recognize
this and are less likely to sell the low-basis residence. Also, a hidden incentive is created to file for
bankruptcy, if the debtor recognizes that the trustee will have to abandon the residence because of
the burdens of secured debt, homestead, and tax gain on sale. For example, assume a capital gain
on sale of $56,000 (.28 x $200,000). If the debtor sells the residence after filing for bankruptcy,
the debtor keeps the $56,000 gain, in lieu of a payment to the unsecured creditors.
If Congress does not change the exclusion rule, the Advisory Committee believes the over
fifty-five, once-in-a-lifetime exclusion should still be available to the bankruptcy estate, provided
the estate's use of the exclusion does not eliminate the debtor's right to a once-in-a-lifetime use of
the exclusion. The Advisory Committee suggests that the subsequent use of the exemption by the
debtor be limited to the amount of the exclusion not used by the bankruptcy estate. For example,
if the bankruptcy estate excludes $50,000 of gain from income, the debtorwould be limited to a
Under current law, if the trustee sells the personal residence, the trustee is responsible for
100% of the tax due. Waldschmidt v. I.R.S. (In re Lambdin), 33 B.R. 11 (Bankr.
M.D. Tenn. 1983); and In re Card, 114 B.R. 226 (Bankr. N.D. Cal. 1990). This is true
even if a substantial portion of the proceeds are distributed to the debtor in the form of an
exemption. If uniform exemptions are adopted and if the exclusion rule is expanded and made
available to bankruptcy estates, then the Committee believes current law should not be changed
and the homestead should not carry tax. However, if wide variations in the personal residence
exemption remain in the Bankruptcy Code, the Committee believes a pro rata share of the gain
should be taxed to the debtor. The following ratio could be used: exemption paid to debtor is to
amount realized from sale, as tax allocable to debtor is to total tax due on sale.
4312(a) Whether changes are needed in IRC §§108 and
382 with respect to the issuance of stock for debt.
Statement for modified stock for debt exception to recognition of
cancellation of indebtedness income and the preservation of tax
Under current law, if a corporation is reorganized pursuant to a chapter 11 plan, that
corporation will not include in income any cancellation of indebtedness realized as a result of the
plan. It will, however, be required to reduce its tax attributes, including net operating loss
carryforwards ("NOLs"), capital loss and credit carryforwards, and assets basis in
excess of post reorganization liabilities. Prior to the Omnibus Budget and Reconciliation Act of
1994 ("OBRA 1993"), the stock for debt exception provided an exception to the
requirement that tax attributes be reduced by the amount of any excluded cancellation of
indebtedness. Under current law, however, a corporation that issues stock to its creditors realizes
substantial income from debt cancellation that must then be applied to reduce tax attributes. Thus,
companies emerging from bankruptcy may have a tax balance sheet lower than their financial
balance sheet with greater levels of income for tax purposes and a greater likelihood of liquidation
It is proposed that IRC § 108 be amended to provide that a corporation undergoing a
reorganization in bankruptcy be permitted to make a fresh start election when undergoing
bankruptcy reorganization. The election is identical to the proposed election of the ABA Tax
Section Task Force on the Tax Recommendations of the National Bankruptcy Review
Commission ("ABA Task Force") dated April 15, 1997, at 202-207.
Elimination of the stock for debt exception to the recognition of cancellation of indebtedness
income generates tax revenue and preserves horizontal equity.
713 Whether IRC §1001 should be modified to provide for
parallel tax treatment of recourse and nonrecourse debt.
There is consensus among the members of the Advisory Committee that the Commission
should recommend that Congress modify IRC § 1001 to provide that tax consequences of
the transfer (for example, foreclosure or transfer in lieu of foreclosure) of an asset to satisfy a
nonrecourse debt should be the same as a transfer to satisfy a recourse debt.
Under this proposal, the difference between the basis of the property and the fair market value
of the property would be a gain or loss on transfer and the difference between the fair market
value and the amount of the nonrecourse debt would be income from the cancellation of debt
under IRC § 61. The tax treatment of income from cancellation of debt would be governed
by IRC § 108. This treatment is consistent with the tax consequence of the transfer of
property to satisfy recourse debt.
This change would overrule Commissioner v. Tufts, 461 U.S. 300 (1983), and follow
the position taken by Professor Wayne G. Barnett in an amicus to the Tufts case. It would
eliminate the problems that arise when recourse debt is converted to nonrecourse debt over which
the taxpayer has no control such as when the trustee abandons property to the debtor. For
example, in Private Letter Ruling 8918016 (January 31, 1989), the IRS ruled that the
abandonment was not a taxable event to the estate but held that the recourse debt became
nonrecourse as a result of the discharge.
Taxpayers that plan to transfer property to satisfy a nonrecourse debt often work out an
agreement with the creditor to forgive all or part of the debt in excess of the value of the property
as a separate transaction prior to transferring the property to avoid all of the gain being taxed as a
gain on transfer. (Of course, if the taxpayer has capital loss carryovers, this agreement would be
unnecessary.) This proposed change to § 1001 would eliminate action of this nature and
the problems associated with attempting to determine if debt is recourse or nonrecourse or
attempting to convert nonrecourse debt to recourse or visa versa depending on the needs of the
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.
Statement in support of proposal to retain present 11 U.S.C.
§724(b), which requires subordination of tax liens to
administrative expenses and priority claims in a chapter 7 case:
Under bankruptcy law, there is a long-standing bankruptcy policy beginning with the 1938
Chandler Act amendments that has subordinated tax liens to administrative expenses. On each
subsequent occasion in which Congress has revisited the issue, it has broadened the extent of such
subordination. If the bankruptcy system is to be viable, all administrative expenses must be paid.
Failure to provide for administrative expenses will undermine the system in all cases. In some
cases, failure to provide funds will prevent the trustee from recovering for all creditors, including
governmental creditors, substantial assets. The Bankruptcy Code creates its own set of priorities,
in which administrative expenses are superior to tax claims. In chapter 7 cases, this fundamental
structure should not be nullified because a state legislative body gives itself a tax lien that results
in circumventing the system of priorities created by the federal Bankruptcy Code. It may be that in
some cases consensual secured creditors should contribute to administrative expenses of the
estate, including property taxes. The Commission, if it feels that such change is needed, should
deal with this question directly, rather than undermining the bankruptcy system through repeal of
§ 724(b)(2). Additionally, complexity in the current statute is not a ground for repealing it.
If its underlying principles can be validated through simplification, let the Commission do it.
Statement against the proposal to retain §724(b):
The section is complicated and obscure, making it difficult to understand and apply. Thus, it
is applied inconsistently or not at all, creating disparate results in different districts. The section
imposes a hardship upon individual debtors because property that would havebeen used to pay
nondischargeable tax debts, is instead used to pay dischargeable accountants and
attorneys fees. The section also works a particular hardship on local school districts and
city/county governments that may be very dependent on the revenue at risk under §724(b).
Additionally, §724(b) presents an ethical dilemma for tax authorities by discouraging them
from moving to convert chapter 11 cases to chapter 7 cases in otherwise appropriate instances
because of the availability of §724(b). The section encourages debtors and their attorneys
to allow unsuccessful cases to linger in chapter 11 because they know that even if the case is
converted to chapter 7, unpaid salary and attorneys fees accrued in the case will ultimately
be paid out of prepetition tax liens.
Expanding the scope of §506(c) would be a fairer method of dealing with the need to
allow for the payment of truly necessary administrative expenses. Alternatively, if neither
expansion of §506(c) nor an outright repeal of §724(b) is possible, it should at least
be modified to limit its applicability to administrative and/or priority wage and benefit claims.
By a vote of 5 to 4 (with 1 abstention), the Advisory Committee recommends to the
Commission the repeal of 11 U.S.C. §724(b).
For proposal to retain §724(b): PA, RMcK, GN, MS
Against proposal to retain §724(b): MB, SC, RM, JP, JW
211 Application of the burden of proof rules to tax issues in
IRS position that burden of proof in bankruptcy should follow applicable
Clarify that when an IRS determination of tax is challenged, the burden of proof is on the
debtor or trustee unless the Internal Revenue Code shifts the burden. In our system of
self-assessment and voluntary compliance with tax laws, because the taxpayer has control of the
facts that govern the determination of tax, the taxpayer generally has the burden of proof in tax
cases litigated outside of bankruptcy. In the Tax Court, generally the burden of proof is on the
taxpayer for all issues raised in the statutory notice. Similarly, in refund or collection cases, an
IRS assessment is presumed to be correct and the taxpayer has the burden of proving otherwise.
In a bankruptcy proceeding, a proof of claim filed by a creditor is presumed to be correct, but the
presumption essentially disappears when the debtor files an objection to the proof of claim. Some
courts have concluded that this allocation of burdens overrides the allocation of burdens that
generally applies in tax litigation and have placed the burden of going forward and the burden of
persuasion on the United States. See Franchise Tax Bd. of Cal. v. MacFarlane
(In re MacFarlane), 83 F.3d 1041, 1044-1045 (9th Cir. 1996), cert. denied ,
__ U.S. __ (March 17, 1997); Placid Oil Co., 988 F.2d 554 (5th
Cir. 1993), non acq. 1995-1 C.B. 1; In re Premo, 116 B.R. 515 (Bankr. E.D.
Mich. 1990); In re Fullmer, 962 F.2d 1463, 1466 (10th Cir. 1992); In re Gran,
108 B.R. 668 (Bankr. E.D. Ark. 1989), affd, 131 B.R. 843 (E.D. Ark.
1991), affd., 964 F.2d 822 (8th Cir. 1992); United States v.
Coleman, 26 B.R. 825 (Bankr. D. Kan. 1983). Other courts have concluded that the burden
of proof remains with the taxpayer/debtor. See In re Landmark Equity Corp., 973
F.2d 265 (4th Cir. 1992); Resyn Corp. v. United States, 851 F.2d 660, 663 (3d Cir.
1988). The proposal specifically provides that when an IRS determination of tax is challenged, the
burden of proof is to be on the party who would have it under nonbankruptcy law.
Proposal to conform the government's burden of proof with the burden of
proof for other creditors:
The government should not receive treatment different from other creditors in bankruptcy
courts. The prevailing rule in circuits where the government has the identical burden as other
creditors can be expressed as follows: A properly filed claim constitutes prima facie
evidence of a claim's validity; the debtor has the burden of rebutting this prima facie
validity; if that burden is met, the creditor must present evidence to prove the claim. Franchise
Tax Bd. of Cal. v. MacFarlane (In re MacFarlane), 83 F.3d 1041, 1044-1045 (9th
Cir. 1996), cert. denied , __ U.S. __ (March 17, 1997). A
primary objection to leaving the ultimate burden on the government is that the taxpayer has the
records. However, if the taxpayer does not produce those records, then the taxpayer cannot rebut
the prima facie validity of the proof of claim. Thus, the issue of "who has the
records" is a red herring. The proposed burden shifting rule also adds unnecessary work for
the creditor or trustee who objects to the government's claim. The government's burden of proof
should be identical to any other creditor's.
Proposal shifting burden to taxing authority upon proper showing:
A debtor should not be able to gain an advantage in a tax controversy with the government by
litigating his claims in the bankruptcy court rather than a traditional tax tribunal. The allocation of
the burden of proof should generally mirror the burden outside the bankruptcy court, including
placement on the government in cases of fraud or where new issues are raised by the government
at trial. The allocation of the burden of proof in tax matters results from the debtors personal
knowledge of its own transactions. That rationale does not support uniformly placing the burden
on the party objecting to a tax claim where the debtor is not the real party in interest. Where the
trustee or a creditor files the objection, upon motion to the court, the court should be able to
place the burden of proof on the government if, based uponprior audits of the debtor's return or
other factors, shifting the burden would be equitable. In such case, the trustee or other objector
should be required to turn over all records in its possession to the government.
By a vote of 9 to 1, the Advisory Committee recommends the rejection of Proposal 2, which
follows the McFarlane rule. By a vote of 9 to 1, the Advisory Committee endorses
Proposal 1, the IRS proposal, and by a vote of 8 to 2, endorses Proposal 3, the burden shifting
proposal. When asked to state a preference for one of the Proposals, 5 of the 10 members favored
Proposal 3, 4 members favored Proposal 1, and 1 member favored Proposal 2.
For Proposal 1: All Committee Members except KW
Against Proposal 1: KW
For Proposal 2: KW
Against Proposal 2: All Committee Members except KW
For Proposal 3: PA, MB, RMcK, GN, JP, MS, KW, JW
Against Proposal 3: SC, RM
212 Obligation of a debtor to file prepetition and postpetition returns
and pay postpetition taxes and the consequences for failure to comply.
Statement in support of the proposal:
Add as grounds for conversion or dismissal in chapter 11, 12, and 13 cases the following:
failure to file prepetition tax returns; failure to file postpetition tax returns; and failure to file
postpetition returns and pay postpetition taxes. The purpose of this proposal is to encourage a
bankruptcy court to grant motions to dismiss or convert when the debtor fails to meet its tax
obligations. While the failure on the part of the debtor to pay prepetition taxes would not be a
basis for dismissal or conversion, the proposal contemplates that the continued failure to file
prepetition tax returns, and the failure to file postpetition tax returns or pay postpetition taxes can
be legitimate bases for dismissal or conversion, depending on the facts and circumstances. A
debtors inability to become current will indicate problems for the feasibility of a
reorganization plan. Passage of this proposal may also help to prevent a debtor from pyramiding
employment taxes, a practice that insures the failure of many chapter 11 plans.
Statement against the proposal:
The devil is in the details. If Track 212 proposes that the nonpayment of postpetition tax for
more than one period can be considered as one of many factors for converting or dismissing a
chapter 13 case, then there is no objection. If Track 212 proposes making a chapter 13 case
dismissable if any postpetition tax goes unpaid, then the objection is strong. Consider also the
effects of such a proposed rule on 11 U.S.C. §1305(a)(1), which allows a governmental
unit to file a claim for unpaid postpetition taxes.
By a vote of 7 to 3, the Advisory Committee recommends that the Commission adopt the
For proposal: MB, SC, RMcK, RM, GN, JP, JW
Against proposal: PA, MS, KW
213 Application of the superdischarge in chapter 13 cases to tax
Proposal to retain the current chapter 13 superdischarge:
The current superdischarge in chapter 13 should be retained. Chapter 13 provides a more
robust discharge in return for greater recovery for creditors then they would have received in a
chapter 7 case. The superdischarge breathes life into the fundamental bankruptcy policy of
providing an individual debtor a fresh start. The major problem with Proposal 3 is that a court
could read the requirement of an affirmative act to mean only a de minimis act.
IRS proposal to conform the discharge of chapter 13 to that of chapter
Eliminate the superdischarge of priority taxes in a chapter 13 case, and clarify that
postpetition taxes for which a proof of claim is filed under § 1305(a)(1) are not subject to
discharge. The proposal would align the chapter 13 exceptions to discharge to those of chapter 7
and an individual chapter 11. The Bankruptcy Code now discharges a chapter 13 debtor from
taxes that are provided for by the plan or are disallowed under § 502. Several courts have
held that priority taxes mentioned in the plan are "provided for" and can be
discharged whether or not they are actually paid. Similarly, claims for priority taxes that have been
disallowed in the bankruptcy proceeding under § 502 and would not be dischargeable in a
chapter 7 or 11 proceeding have been held to be dischargeable because they were mentioned in
the chapter 13 plan. The problem most often arises in those cases where the Services claim
was untimely filed or where the Service failed to file a claim at all. See In re
Tomlan, 102 B.R. 790 (E.D. Wash. 1989), affd, 907 F.2d 114
(9th Cir. 1990) (untimely claim disallowed, then discharged); In the Matter of
Border, 116 B.R. 588 (Bankr. S.D. Ohio 1990) (unfiled claim discharged); In re
Ryan, 78 B.R. 175 (Bankr. E.D. Tenn. 1987) (prepetition tax claims assessed postpetition
were discharged because noclaim filed). The most serious concern of the Service occurs with
derivative liabilities, such as the trust fund recovery penalty, where the debt is prepetition but the
determination of liability does not occur until after the bar date. Additionally, under present law a
chapter 13 debtor may obtain a discharge for taxes fraudulently underreported or evaded more
than 3 years ago. Certain tax penalties can also be discharged under chapter 13, although those
same taxes and penalties would not be dischargeable for individuals in a chapter 7 or 11 case.
Proposal for modest modifications to the superdischarge of chapter 13:
Amend 11 U.S.C. §1328(a) to deny a discharge to those chapter 13 debtors who have
filed fraudulent returns or who have engaged in an affirmative act or acts in an attempt to willfully
and fraudulently evade a tax where the governmental unit proves in accordance with applicable
nonbankruptcy law the fraudulent conduct in the bankruptcy case. Evidence suggests that taxing
authorities receive a greater recovery in chapter 13 cases than they do in chapter 7 cases. In fact,
the Bankruptcy Code recognizes this consequence in chapter 13 cases and provides incentives for
individual debtors to seek relief under chapter 13. These incentives include relief from postpetition
interest on unsecured tax claims, an expanded scope of the automatic stay, and the broad
discharge in §1328(a). These incentives for filing under chapter 13 as opposed to chapter 7
should be continued. Thus, a broader scope of discharge is justified under chapter 13. At the same
time, however, the chapter 13 process should not result in a haven from tax liabilities for those
taxpayers that have defrauded a governmental authority. Although the requirement that any
chapter 13 plan must be proposed in good faith may operate as a gate to prevent abuses of the
bankruptcy process by tax protestors and defrauders, courts are not in agreement on the meaning
of good faith in these circumstances and present law lacks clarity. Thus, a specific amendment to
11 U.S.C. §1328(a) is necessary to except from the scope of the chapter 13 discharge tax
claims with respect to which the debtor made a fraudulent return or with respect to which the
debtor engaged in an affirmative act or acts in an effort to willfully and fraudulently attempt to
evade a tax where thegovernmental unit proves in accordance with applicable nonbankruptcy law
the fraudulent conduct in the bankruptcy case.
Two related issues are directly affected by this proposal and are considered here. The first
related issue is the strong argument by governmental units relating to notice of derivative tax
liabilities. Presently, a chapter 13 plan may be confirmed in an expedited fashion without proper
notice to taxing authorities regarding trust taxes. A notice provision along the lines as proposed in
the Final Report should address this concern. The second but related issue concerns non-filers.
Again, a related proposal seeks to address the nonfiler issue.
By a vote of 8 to 2 and 6 to 4, respectively, the Advisory Committee recommends the
rejection of Proposals 2 and 3, which state the IRS proposal and the proposal suggesting modest
changes to the chapter 13 discharge, respectively. However, the Advisory Committee failed to
reach a majority on remaining Proposal 1, which would retain the chapter 13 superdischarge in all
respects. As to Proposal 1, 4 members voted for, 4 voted against, and 2 abstained. When asked to
state a preference for one of the Proposals, 4 members favored Proposal 1, 4 members favored
Proposal 3, and 2 members favored Proposal 2.
For Proposal 1: PA, RMcK, MS, KW
Against Proposal 1: MB, SC, RM, JP
Abstain: GN, JW
For Proposal 2: SC and RM
Against Proposal 2: All Committee Members except SC and RM
For Proposal 3: MB, GN, JP, JW
Against Proposal 3: PA, SC, RMcK, RM, MS, KW
Statement by KW: At some point the door must open for tax debtors to reenter the
system. I remain deeply concerned over the Governments dischargeability proposal that
would close the door or, at best, leave it only slightly ajar.
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.
A proposal to amend §1129(a)(9) to require periodic
payment for deferred payments of tax under
§1129(a)(9), designation of interest rate used while
making those deferred payments, and establishing a six-year period from the
date of the order for relief by which such taxes are to be paid:
Section 1129(a)(9) should be amended. It has been agreed that to prevent unnecessary and
time consuming litigation, the section should provide that where interest is required to be paid on
priority taxes that the rate be determined by §6621(a)(2) of the Internal Revenue Code,
without regard to IRC §6621(c), in effect as of the confirmation date. There is a consensus
that because of prejudice to the taxing authorities and the greater risk of non-payment, the section
should expressly provide for periodic payments (monthly or quarterly), and that balloon payments
be prohibited. There has been a discussion that the statute be amended to provide for a fixed
period over which payments should be made, regardless of whether the tax has been
"assessed". It is agreed that the use of the word "assessment" can be
confusing and sometimes difficult to apply to the types of taxes asserted by states (such as sales
taxes). Thus, the proposal provides a period of up to six years from the date of the order for relief
regardless of the age of the tax owed as the length of time over which payments may be made.
A proposal to maintain present §1129(a)(9):
Proposal 1 weakens the priority status of taxes by giving debtors an unreasonably long period
of time to pay taxes that are past-due on the petition date. Under Proposal 1, if trust fund taxes
are 4 years old on the petition date, debtors would have 10 years total to repay the taxes,
including 6 years from the petition date, compared to 2 years under current law. This undermines
the historic priority treatment Congresshas given taxes and encourages prepetition delay and
abuse of the tax system. Further, the proposal allows "stairstep" payment plans, with
no increase in post-confirmation interest rates to reflect the heightened risk compared to
straight-line amortization payments. There is no prohibition on payments to general unsecured
creditors in cash or stock (which can be sold for cash) while so-called "priority" tax
creditors are being stretched out. Essentially, the "priority" and risk of default as
between general unsecured and "priority" creditors have been reversed. By
comparison, general unsecured creditors in Chapters 7, 12 and 13 get paid nothing until priority
claims are paid in full. Finally, the asserted need to abandon "assessment" as the
commencement date for measuring the tax pay-back period is greatly exaggerated.
"Assessment" is a well-defined and well-understood term under federal tax law, and
adequate case law has developed to deal with state and local tax laws that do not define
"assessment." Cases have generally considered the tax return due date or date of
audit liability notification as being "assessments" under state and local law, and the
state of the law in this respect is adequate.
IRS proposal to modify §1129(a)(9):
The appropriate interest rate should be the IRC § 6621 rate. Section 1129(a)(9)(C)
should be clarified to require that payments pursuant to the plan must be in equal payments, no
more than three months apart, with no authority for a plan term providing for a balloon payment
or the back-loading of distributions. No change should be made in the current requirement that
deferred payments must be completed no later than six years from the date of assessment for
prepetition assessments and the confirmation date for assessments made postpetition and
By a vote of 7 to 3, the Advisory Committee recommends that the Commission adopt
Proposal 1. All 7 members who voted for Proposal 1 also identified the Proposal as their
preferred proposal, whereas 1 member preferred Proposal 2, and 2 members preferred Proposal 3.
For Proposal 1: PA, RMcK, GN, JP, MS, KW, JW
Against Proposal 1: MB, SC, RM
For Proposal 2: MB, GN, JW
Against Proposal 2: PA, SC, RMcK, RM, JP, MS, KW
For Proposal 3: MB, SC, RM, JP
Against Proposal 3: PA, RMcK, GN, MS, KW, JW
215 Application of the automatic stay to the setoff of tax refunds
against tax claims.
Proposal to modify the stay to permit setoff of prepetition tax refunds
against prepetition tax claims:
Permit taxing authorities to setoff prepetition refunds against prepetition taxes without first
seeking relief from the automatic stay. Under §362(a)(7), the filing of a petition in
bankruptcy stays the setoff of any debt owed to the debtor that arose before the commencement
of the bankruptcy case against any claim against the debtor. None of the exceptions to this stay
apply to setoffs of tax liabilities against tax credits or refunds. Thus, while the stay is in effect, a
taxing authority is not allowed to setoff a prepetition refund owed to a taxpayer regardless of
whether the taxpayer owes taxes of a different nature or for different taxable periods. A proposed
change to §362(b) would remedy this situation by allowing a taxing authority to setoff
prepetition refunds against prepetition taxes owed by the debtor.
Outside the context of a bankruptcy proceeding, tax overpayments are routinely and
systematically credited by the IRS against outstanding tax liabilities by computer, pursuant to
I.R.C. § 6402(a). Notice that an overpayment has been credited against a tax liability is
automatically issued to the taxpayer by the Service Center.
When the IRS receives notice of a bankruptcy proceeding, the Service Center is notified by
the local Special Procedures Function (SPF), and routine offsets by the computer at the Service
Center are prevented by the input of a freeze code. The actions taken by the IRS with respect to
the overpayment vary depending upon the judicial district. In most judicial districts, the
overpayment is simply frozen and remains so until court action is initiated by the IRS or the
debtor and/or trustee. IRS instructions provide that these cases may be referred to counsel for
lifting of the automatic stay so the amount can be collected by setoff during the pendency of the
The IRS function responsible for preparing and filing proofs of claim inbankruptcy cases is
the Special Procedures Function ("SPF"). When a proof of claim is prepared by SPF,
the taxpayers account is researched by reading the computer file of that taxpayer
maintained at the Service Center. If this research reveals the existence of an overpayment, the
amount of the overpayment is listed on the proof of claim form. The debtor/trustee can dispute
the application of the overpayment by filing an objection to the proof of claim. Even if the setoff
has already occurred, there is no question that relief can be provided if the court so determines.
In many jurisdictions, local rules or standing orders authorize the IRS or other taxing
authorities to offset tax refunds against tax liabilities subject to different local law imposed
IRS proposal to modify stay to permit setoff of tax refunds against
prepetition tax claims and postpetition nondischargeable tax claims:
The IRS proposal would go further by permitting the setoff of postpetition tax refunds
against taxes excepted from discharge. Section 553 refers specifically to the offset of prepetition
debts owed to a debtor against prepetition claims. Thus, it allows only the setoff of prepetition tax
refunds against prepetition tax claims. It is not equitable to require a taxing authority to make a
refund to a debtor at a time when the debtor owes a nondischargeable tax. The proposed
amendment would allow a government unit to offset a postpetition refund against a prepetition
Proposal that no change in the law is necessary:
Where the need for an order permitting setoff of tax refunds is necessary and appropriate, a
particular district may enter into a standing order permitting such setoff. Otherwise, the taxing
authority may seek relief from the stay in appropriate circumstances. A major problem with
Proposal 1 is that it does not contain a notice provision for the debtor or other creditors who
might have a claim to the refund. Proponents forchange have failed to make their case.
Proposal to overrule all standing stay orders and to retain the stay
The taxing authority should have no greater rights to setoff than any other creditor.
Overruling standing stay orders that exist in some districts would promote uniformity. The taxing
authority may seek relief from the stay in appropriate circumstances.
By a vote of 8 to 1 (with 1 abstention), the Advisory Committee recommends that the
Commission adopt Proposal 1. The Advisory Committee recommends that the Commission reject
Proposal 2 by a vote of 6 to 4 and Proposal 4 by a vote of 9 to 1. The Advisory Committee is split
5 to 5 on the merits of Proposal 3. As to preferences, the Advisory Committee is split, with 4
members preferring Proposal 1 and 4 members preferring Proposal 2.
For Proposal 1: MB, SC, RMcK, RM, GN, JP, MS, JW
Against Proposal 1: PA
For Proposal 2: SC, MB, RM, JP
Against Proposal 2: PA, RMcK, GN, MS, KW, JW
For Proposal 3: PA, RMcK, GN, MS, KW
Against Proposal 3: MB, SC, RM, JP, JW
For Proposal 4: PA
Against Proposal 4: All Committee Members except PA
312 Effect of a subsequent filing or default on the status or nature of a
tax claim provided for in a chapter 11 plan.
Proposal to preserve status of tax claims in subsequent bankruptcy plans
or liquidation cases following a failed plan or dismissal:
Existing law is unclear with respect to whether a taxing authority can take administrative
collection action when a plan is dismissed or the debtor defaults on payment of taxes. The taxing
authorities take the position that tax claims remain collectable as taxes in the event of a dismissal
of a bankruptcy or a default by the debtor as to the terms of payment of taxes under the plan.
Some debtors have argued, however, that the only remedies upon dismissal or default are
contractual. The uncertainty regarding the rights of taxing authorities leads to needless litigation
and requires clarification. The rights of taxing authorities to collect tax debts as taxes rather than
as contractual claims in the event a bankruptcy is dismissed or the debtor defaults by failing to
comply with the terms of payment of taxes under a plan should be clarified.
Statement against the proposal:
The priority status of a tax claim provides certain negotiation rights that are limited to the
initial confirmed plan. Once the plan has been confirmed, the priority tax claim is replaced with a
contract claim based on the terms of the plan.
Proposal 1 above with the addition that the taxing authorities may not
begin to collect the tax after default on payment of taxes until the taxing
authority has provided thirty-days notice of the default
to the taxpayer:
The thirty-day notice requirement provides the taxpayer reasonable notice without unduly
burdening the taxing authorities. A notice provision should also permit the debtor/taxpayer an
opportunity to cure any default and promote the reorganizational efforts of the debtor. Also,
status of a tax claim as priority, or not, should not be frozen by theChapter 11 plan if there is a
By a vote of 7 to 3, the Advisory Committee recommends to the Commission the adoption of
Proposal 2. By a vote of 6 to 4, the Advisory Committee recommends to the Commission the
adoption of Proposal 1. As to preferences, the Advisory Committee prefers Proposal 1 to
Proposal 2 by a vote of 6 to 4.
For Proposal 1: MB, SC, RM, GN, JP, JW
Against Proposal 1: PA, RMcK, MS, KW
For Proposal 2: PA, RMcK, GN, MS, KW, JP, JW
Against Proposal 2: MB, SC, RM
313(a) Effect of an installment payment agreement on 240-day
assessment period applicable to certain tax priorities.
IRS proposal to extend tolling to installment agreements:
Provide that the 240-day period after the filing of a petition, in which taxes must be assessed
in order to be entitled to priority treatment, is suspended for installment agreements in the same
manner as it is suspended for offers in compromise. Under current law, taxes that are assessed
within 240 days of the date of petition in bankruptcy are entitled to eighth priority. If an offer in
compromise is made by the taxpayer within 240 days of the assessment date, the IRS refrains
from taking collection action during the pendency of the offer, the time during which the offer
was pending plus 30 days is added to the 240 days. There is nothing under current law that
similarly applies if an installment agreement is entered into within 240 days of the assessment date,
even though the IRS is prohibited from collection action while the installment agreement is in
effect. The purpose of this proposal is to treat installment agreements the same as offers in
compromise. Otherwise, the IRS is disadvantaged by entering into an installment payment
agreement in return for a deferral of collection.
Statement against tolling priority periods where an installment
agreement is outstanding:
The IRS recommendation to stay the 240-day period for installment agreements should be
rejected unequivocally. Given the frequency with which installment agreements are entered, this
rule could make the nondischarge period for a tax unlimited. This is especially true since the
collection division of the IRS is very skilled at convincing taxpayers that installment agreements
are in their best interest and the statute of limitation on collection must be extended as part of the
installment agreement process.
The IRS's proposed rule would harm compliant taxpayers who are try