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proposals that had been withdrawn from consideration by the Advisory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:
- Very Important
- Important
- Moderately Important
- Unimportant or Unclear
Each proposal was further analyzed to determine the level of
controversy surrounding the proposal. The levels of controversy
include:
- Highly Controversial
- Controversial
- 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).
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 |
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 |
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. |
|
|
|
|
