Recent Changes in the IRS Bankruptcy Program
by Tommy Mathews
Internal Revenue Service; Washington, D.C.
Consistent with the Internal Revenue Service’s (IRS) broader strategy to reduce the tax gap, the IRS has gradually stepped up activity in the bankruptcy program during the last 18 months – in part by increasing compliance and enforcement actions to better protect the public interest.
All Tax Returns Means All Tax Returns
by Charles Baer
The U.S. Attorney's Office (S.D. Ala.); Mobile
To obtain confirmation, a chapter 13 debtor must file all tax returns for all taxable periods ending during the four-year period before the petition date, even if the return is not yet due under the Internal Revenue Code.
In what the court states was a case of first impression, the bankruptcy court for the Eastern District of Wisconsin interpreted the requirement of Bankruptcy Code §1308(a) to mean that a debtor that is required to file tax returns file all tax returns for all taxable periods ending during the four-year period ending on the day of the petition no later than the day before the first date set for a meeting of creditors. In re French, 354 B.R. 258 (Bankr. E.D. Wis. 2006). The application of this rule to situations where the tax return is not yet due, either because the meeting of creditors is before April 15 or because the debtor has obtained an extension of the time to file from the Internal Revenue Service, has become a common issue in the Gulf Coast region. Due to the 2004-05 hurricane seasons, there have been long extensions of the tax return filing deadlines. Section 1325(a)(9) of the Bankruptcy Code requires that the debtor have filed all tax returns required by §1308 before a case can be confirmed. The argument that §1308(a) does not apply, as the return is not yet due, is usually made by counsel for debtors who are not missing earlier returns.
Shareholder Beware: Don’t Let the Bankruptcy Estate Pay the IRS Without a Fight
by Marc D. Miceli
Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.C.; Roseland, N.J.
The Second Circuit Court of Appeals in EDP Medical Systems Inc. v. United States, 2007 WL 706925 (2d Cir. March 9, 2007), held that a bankruptcy court order allowing an uncontested proof of claim constitutes a final judgment on the merits that can be a predicate for res judicata and thereby bar a taxpayer’s subsequent tax refund claim in the district court.
Above-Median Income Chapter 13 Debtors Must Subtract Actual Taxes, not Withholding Amounts, in Calculating Disposable Income
by TaeRa K. Franklin
New York City Law Department; New York
Recently, a bankruptcy court for the Eastern District of Wisconsin upheld the trustee’s objection to a proposed chapter 13 plan that subtracted the tax withholdings in calculating the debtor’s disposable income (In re Balcerowski, 353 B.R. 581 (Bankr. E.D. Wis. 2006)). This decision is noteworthy in that it (1) reflects the growing judicial acceptance of an approach allowing consideration of factors other than just the historical income, as required by the newly amended Bankruptcy Code, in determining disposable income, and (2) mandates that debtors estimate actual tax expenses as best as they can in calculating their disposable income.
Minutes from 2007 Annual Spring Meeting
The Bankruptcy Taxation Committee met on Saturday, April 14, 2007, during ABI’s Annual Spring Meeting. David H. Stein of Duane Morris, LLP (Newark, N.J.) introduced new Committee Co-Chair John Tittle, Jr., CPA, CIRA, a recent director with LECG, LLC (Fort Worth, Texas) and currently self-employed. Mr. Stein then introduced the panelists for the presentation: Stephen M. Brecher of Weiser LLP (Greenwich, Conn.), T. Keith Fogg from the Internal Revenue Service (Richmond, Va.) and Matthew Schwartz of Bederson & Co. LLP (West Orange, N.J.). The presentation topics for the panel discussion included “Chapter 11 Plans and Preservation of NOLs,” “Tax Implications of Liquidating Trusts” and other “Current Issues.” Mr. Stein moderated the panel, then asked audience members to consider becoming more involved in the work of the committee including writing for the newsletter and speaking at future committee meetings. The Bankruptcy Taxation Committee will next meet during ABI’s Winter Leadership Conference, Dec. 6-8, 2007, in Rancho Mirage, Calif.