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COMMENTS CONCERNING THE TAX RECOMMENDATIONS OF THE
NATIONAL BANKRUPTCY
REVIEW COMMISSION
The following comments are the individual views
of the members of the Section of Taxation who prepared them and do not
represent the position of the American Bar Association or the Section of
Taxation.
These comments were prepared by individual members
of the Special Task Force on the National Bankruptcy Review Commission of the
Section of Taxation. Principal responsibility was exercised by Paul H. Asofsky
and Robert E. McKenzie. Substantive contributions were made by Paul H. Asofsky,
Karrie L. Bercik, Harvey Berenson, Martin B. Cowan, John H.
Eggertsen, Molly Gallagher, Marc E. Grossberg, Thomas I. Hausman,
Milton B. Hyman, Robert A. Jacobs, Morgan D. King,
Robert E. McKenzie, Charles L. McReynolds, George Nelson,
Wm. Robert Pope, Jr., F. Brook Voght, Mark S. Wallace,
Kenneth C. Weil. The comments were reviewed by Kenneth W. Gideon of the
Section's Committee on Government Submissions.
Although many of the members of the Section of
Taxation who participated in preparing these comments have clients who would be
affected by the federal tax principles addressed by these comments or have
advised clients on the application of such principles, no such member (or the
firm or organization to which such member belongs) has been engaged by a client
to make a government submission with respect to, or otherwise to influence the
development or outcome of, the specific subject matter of these comments.
Contact Person: Paul H. Asofsky
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
Phone: (713) 546-5118
Fax: (713) 224-9511
Dated: April 15, 1997
REPORT
OF THE
ABA TAX SECTION
TASK FORCE
ON THE
TAX RECOMMENDATIONS
OF THE
NATIONAL BANKRUPTCY REVIEW COMMISSION
April 15, 1997 Paul H. Asofsky
Robert E. McKenzie
Co-Chairs
TABLE OF CONTENTS
PREFACE 6
Introduction 6
The Task Force 8
Summary of Principal Recommendations 10
The Commission 14
The Original Bankruptcy Commission and its Legacy
18
Role of the Section 19
The Challenge to the Commission 21
TASK FORCE POSITIONS 23
1. Subordination of Certain Tax Liens in Chapter 7: Section 724(b)(2)
of the Bankruptcy Code (Commission Track Number
100) 23
2. Extending the "Deemed Filed" Rule Beyond Chapter 11
(Commission Track Number 104) 26
3. Notice to Governmental Units
(Commission Track Numbers 105, 106 and 109) 31
4. Scheduling the Tax Basis of Assets
(Commission Track Numbers 107 and 108) 39
5. Burden of Proof (Commission Track Number 211)
44
6. Bringing Tax Returns and Payments Current
(Commission Track Number 212) 48
7. The Chapter 13 "Superdischarge"
(Commission Track Number 213) 60
8. Deferred Payments of Priority Taxes Under Section 1129(a)(9)(C)
of the Bankruptcy Code (Commission Track Number
214) 64
9. Setoffs (Commission Track Number 215) 71
10. Notice Requirements Under Section 505(b) of the Bankruptcy Code
(Commission Track Number 216) 74
11. The Estate of an Individual Family Farmer as a Taxable Entity:
Section 1231(b) of the Bankruptcy Code
(Commission Track Number 217) 77
12. Proposal to Create an Elective Short Taxable Year for
State and Local Tax Purposes (Commission Track
Number 217A) 82
13. Debtor's Duty to Give Notice of Pending Federal Tax Audits
(Commission Track Number 218) 85
14. Sanctions or Contempt Against a Governmental Authority for
Violation of the Automatic Stay (Commission Track
Number 219) 94
15. Suspension of Time Under Section 507(a)(8) of the Bankruptcy Code
During Period of Previous Bankruptcy Cases
(Commission Track Number 311) 97
16. Remedies Upon Default or Dismissal of Confirmed Plan
(Commission Track Number 312) 100
17. Effect of Offers in Compromise on the 240-Day Period
of Section 507(a)(8)(A)(ii) of the Bankruptcy Code
(Commission Track Number 313) 108
18. Nonassessed Taxes as Priority/Nondischargeable Debts
(Commission Track Number 314) 113
19. Special Bank Accounts for Postpetition Taxes and Other Payroll
Deductions (Commission Track Number 315) 117
20. United States v. Energy Resources Co.
(Commission Track Number 321) 119
21. Bankruptcy Court Jurisdiction in Tax Matters, Including Declaratory
Judgments on Tax Matters (Commission Track
Numbers 329 and 433) 127
22. Dischargeability of Penalties Related to Nondischargeable Taxes
(Commission Track Number 331) 134
23. Lien Capping in Chapter 13 (Commission Track
Number 333) 139
24. Avoiding Tax Liens (Commission Track Number
334) 142
25. Priority for Excise and Employment Taxes
(Commission Track Number 335) 147
26. Tax Jurisdiction in No Asset Cases
(Commission Track Number 339) 153
27. Filing Partnership Tax Returns (Commission
Track Number 414) 156
28. Sections 728(c) and 728(d) of the Bankruptcy Code
(Commission Track Number 414A) 162
29. Effect of Discharge of Partnership Indebtedness on Basis of
Partner's Interest in Partnership (Commission
Track Number 415A) 164
30. The Trustee as Tax Matters Partner
(Commission Track Number 415B) 172
31. Postpetition Taxes as Ordinary Course Expenses
(Commission Track Number 421-4) 179
32. Abandonment (Commission Track Number 425) 186
33. Corporate Income Taxes in Year Petition is Filed
(Commission Track Number 432) 191
34. The Estate as Successor Under Section 505(b) of the Bankruptcy Code
(Commission Track Number 438A) 208
35. Fresh Start NOL Proposal (Commission Track
Number 4312) 202
36. Retroactive Challenge to Nonconforming Chapter 13 Plans
(Commission Track Number 441) 212
37. Failure of Tax Authority to File Chapter 13 Proof of Claim
(Commission Track Number 441A) 216
38. Interest on Deferred Chapter 13 Tax Payments
(Commission Track Number 503A) 222
39. Definition of "Willfully" for purposes of Section 523(a)(1)(C)
of the Bankruptcy Code (Commission Track Number
602) 228
40. Consolidated Return Issues Where Common Parent, But Not All
Subsidiaries, Is a Debtor (Commission Track
Number 604A) 233
41. Disclosure Statements (Commission Track
Number 701) 239
42. Subordination of Tax Penalties
(Commission Track Numbers 703 and 704) 243
APPENDIX A - Guide to Track Numbers and
Cross-References 247
APPENDIX B - Dissenting Views 250
APPENDIX C - Fresh Start NOL Proposal: Legislative Language 252
PREFACE
Introduction
This is the first report of a special Task Force (the "Task Force") of the Section of Taxation (the "Section") of the American Bar Association (the "Association") on the tax recommendations of the National Bankruptcy Review Commission (the "Commission"). Under the Section's procedures, this report constitutes individual comments of the members of the Task Force. These comments are therefore the individual views of the members of the Task Force who prepared them and do not represent the position of the Association or of the Section.
Because of the Commission's timetable, there is not sufficient time to invoke the procedures necessary to have this report adopted by the Section and by the Association.(1) However, because of the Section's commitment to improving the functioning of the bankruptcy laws in relation to tax matters and of the tax laws in relation to bankruptcy matters, the Section offers these individual comments for the benefit of the Commission at this time. It is anticipated that once the Commission makes its report to Congress, now scheduled to be released on or before October 20, 1997, this Task Force will prepare a final report on the Commission's definitive proposal. Because we anticipate that there will be a significant interval between adoption of the Commission's report and any hearings held by the relevant committees of Congress, at which the Association and the Section will have an opportunity to testify, the Task Force's final report will be submitted for formal adoption. In the interim, it is possible that there will be supplemental reports by way of individual comments issued by the Task Force to respond to new proposals that are put before the Commission.
Unfortunately, this report is lengthy, but the length is necessary. The Commission is considering a plethora of proposals that individually and in the aggregate would have an important impact on the interaction of bankruptcy and tax laws. Many of these proposals were the result of the participation at an early stage of the Commission's deliberations by the Department of Justice, the Internal Revenue Service and the National Association of Attorneys General. It should not be surprising, therefore, that these pending proposals largely reflect some frustration on their part that the present system does not allow them to collect taxes to which they are entitled without undue interference from the bankruptcy court. This Task Force report necessarily constitutes in large measure a response to those proposals. As will be seen, we support many of them, in the interests of a more efficient operation of the bankruptcy system and in the belief that the government should not lose its ability to collect taxes that are rightfully due from debtors merely as a result of technical flaws in the system. However, as we shall also point out, many of these proposals are unwise. In some cases, the perceived problems ought to be resolved by the normal operation by the bankruptcy rules process, the income tax regulations process and judicial process, and the Commission need not address them at this time. With respect to another group of proposals, we believe that if enacted, they will upset a delicate balance between the bankruptcy process and the tax collection process that is necessary to preserve the integrity of both. Finally, in a few cases we have made proposals of our own, some of which have previously been advanced by the private bar, to improve the operation of the system and to strengthen that delicate balance. We believe that if the Commission, and ultimately the Congress, adopts the positions set forth in this report, both the bankruptcy and tax collection systems will be strengthened.
The Task Force
In November 1996, the Chair of the Section of Taxation of the American Bar Association, after consultation with the Council of the Section, created the Task Force to monitor the work of the Commission with respect to tax matters. Paul H. Asofsky of Houston, Texas and Robert E. McKenzie of Chicago, Illinois were designated as co-chairs of the Task Force. The Section endeavored to solicit the participation of all standing committees of the Section having an interest in the subject matter to place representatives on the Task Force, and many of them did. In addition, the first meeting of the Task Force at the mid-year meeting of the Section on January 10, 1997 in Scottsdale, Arizona was open to all members of the Section. Many interested tax practitioners attended that session and have been added to the Task Force. Since that time, the co-chairs have requested the addition of other members based upon their demonstrated experience and interest in the subject matter. The current members of the Task Force are as follows:
|
Paul H. Asofsky |
- |
Houston, Texas |
|
Karrie L. Bercik |
- |
San Francisco, California |
|
Harvey Berenson |
- |
New York, New York |
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Martin B. Cowan |
- |
New Rochelle, New York |
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John H. Eggertsen |
- |
Detroit, Michigan |
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Molly Gallagher |
- |
San Francisco, California |
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Thomas I. Hausman |
- |
Cleveland, Ohio |
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Robert Joe Hull |
- |
Los Angeles, California |
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Milton B. Hyman |
- |
Los Angeles, California |
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Robert A. Jacobs |
- |
New York, New York |
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Morgan D. King |
- |
Dublin, California |
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William H. Lyons |
- |
Lincoln, Nebraska |
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Robert E. McKenzie |
- |
Chicago, Illinois |
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Charles L. McReynolds |
- |
Dallas, Texas |
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Wm. Robert Pope, Jr. |
- |
Nashville, Tennessee |
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Timothy C. Sherck |
- |
Chicago, Illinois |
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Diane E. Tebelius |
- |
Seattle, Washington |
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F. Brook Voght |
- |
Washington, D.C. |
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Mark S. Wallace |
- |
Los Angeles, California |
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Kenneth C. Weil |
- |
Seattle, Washington |
All of the foregoing individuals are tax attorneys with extensive experience in the bankruptcy field. A number of them actively participated on behalf of the Section in the development of the Bankruptcy Tax Act of 1980.
The huge inventory of proposals before the Commission also required us to reach outside the Task Force and solicit the assistance of some individuals with particular expertise in designated subject matter areas. The Task Force acknowledges the assistance of the following individuals in the preparation of particular sections of the report. These individuals have not participated in commenting on any portion of the report other than the particular proposal as to which their assistance was solicited.
|
Sylvia Mayer Baker |
- |
Houston, Texas |
|
Alex Gluzman |
- |
San Francisco, California |
|
Marc E. Grossberg |
- |
Houston, Texas |
|
J. Hayden Kepner |
- |
Houston, Texas |
|
Wendy K. Laubach |
- |
Houston, Texas |
|
George Nelson |
- |
Houston, Texas |
|
Candace S. Schiffman |
- |
Houston, Texas |
|
Michael St. James |
- |
San Francisco, California |
Summary of Principal Recommendations
The following is an enumeration of the Task Force's recommendations on the more significant issues discussed herein.
The Task Force opposes proposals to repeal the downgrading of tax liens currently contained in section 724 of the Bankruptcy Code. Any viable system must provide for the payment of administrative expenses. But we think that private secured creditors should bear the burden of ad valorem real property taxes. We oppose extension of the "deemed filed" rule from chapter 11 to other bankruptcy chapters. We support efforts to strengthen notice to governmental units so that taxing authorities will not lose their claims because the wrong governmental officials received notice of the claims. State and local taxing authorities should receive notice of pending federal tax audits. Once such amendments are made it will be unnecessary to go further and increase penalties for failure to comply with the notice requirements. We oppose as unduly onerous proposals which would require debtors to schedule the basis of their assets.
We generally support the government's position that the burden of proof in bankruptcy court should be on the taxpayer, but some room must be made for exceptions that would not place trustees and creditors at a disadvantage. We favor maintaining the superdischarge in chapter 13 as it presently exists.
In general, we agree that a chapter 11 debtor should not be able to "backload" priority tax payments under section 1129(a)(9)(C) of the Bankruptcy Code. We foresee the necessity for some exceptions, but we would not allow the debtor to pay other commercial creditors while backloading the stretched out tax payments. When section 1129(a)(9)(C) is invoked, we would fix the interest rate for measuring the value of deferred payments at the regular federal statutory deficiency rate for taxes.
We think the government does not need any statutory increase in its setoff rights. It is adequately protected now.
Many technical amendments need to be made to section 346 of the Bankruptcy Code. The taxable year provisions in the case of individuals must be conformed to the federal rule in the Internal Revenue Code, because the statutory disparity between federal and local taxable years as it exists today is a mistake that has never been corrected. For similar reasons, a separate taxable entity should not be created in chapter 12 family farmer cases, because no such taxable entity is created under the Internal Revenue Code.
We don't believe that a debtor should be required to conduct negotiations with a taxing authority before pursuing contempt sanctions. Taxing authorities must be required to observe the bankruptcy laws the same as any other creditors.
We agree that time periods that run against taxing authorities should be tolled during previous bankruptcy cases of the same debtor and that the 240-day period within which the government can make an assessment of taxes that will be protected in bankruptcy must be suspended during a period when an offer in compromise is pending. We also agree that small business debtors should maintain separate bank accounts for postpetition taxes and withholdings.
We strongly oppose any effort to overrule the Supreme Court's decision in the Energy Resources case. To protect the integrity of that decision, we think it is necessary to give the bankruptcy court authority to enjoin the collection of trust fund taxes from nondebtors during the period when payments under a plan are being made. When payments under a confirmed plan are not made, the rights of governmental taxing authorities should be protected.
We oppose provisions that would limit the jurisdiction of the bankruptcy court to the power of a nonbankruptcy tribunal. The strength of the bankruptcy system is that it provides a forum for the bankruptcy court to expeditiously adjudicate all claims against a debtor so that distribution can be made.
We support a wide array of proposals that would conform the letter of the bankruptcy law to its purpose, notwithstanding that these would strengthen the government's hand in collecting taxes. Thus, we would not give a bankruptcy trustee or debtor in possession the rights of a bona fide purchaser in avoiding tax liens. On the other hand, we oppose fundamental changes in the priority and discharge provisions of the Bankruptcy Code.
There are places in current law that give the government too much protection from bankruptcy court procedures and they must be changed. It is time that the bankruptcy courts were given full jurisdiction to issue declaratory judgments on the tax consequences of a plan of reorganization, and the failure by the government to respond to an appropriate section 505(b) request should protect not only the trustee, the debtor and a successor to the debtor, but the creditors and the estate as well. Also, the subordination of certain tax penalties should be restored.
We have also proposed some technical amendments to the Internal Revenue Code and the Bankruptcy Code in places where the current provisions do not work well or are in need of clarification. Thus, we would make clear a trustee's duty to file partnership information returns, and we would allow such trustee to serve as the tax matters partner to fill a void in present law. We would write a standard of willfulness that appropriately governs priority and discharge of certain individual tax debts. We would clarify the effect of a discharge of a partnership's debt on a partner's basis for his partnership interest. We have a new proposal to deal with the troublesome issue of the tax effect of abandonment on the debtor and his estate. We would clarify the jurisdiction of the bankruptcy court over consolidated returns where the common parent corporation, but not all members of its group, is a debtor. We would strengthen the position of all parties by requiring specific standards for discussion of tax issues in chapter 11 disclosure statements. Finally, we have endorsed a proposal which partially redresses the imbalance created by repeal of the stock for debt exception.
On one proposal, there was no consensus after discussion. Under present law, the tax liability of a corporation for the year of filing a petition is divided into a prepetition claim and an administrative claim. Taxing authorities generally seek to reverse this rule. Some of our members agree with these taxing authorities and others wish to retain present law. We have not made a Task Force recommendation on this question, but have set forth the present law and stated the basis for our division.
Some of our positions would work to the benefit of the government and others would work to the benefit of debtors and creditors. What is most important is that taken as a whole, these proposals present the kind of balance that would make the bankruptcy system work better, and that is why we believe that Congress created the Commission.
The Commission
The National Bankruptcy Review Commission is an independent commission established pursuant to the Bankruptcy Reform Act of 1994.(2) The Commission was created to investigate and study issues relating to the Bankruptcy Code, solicit divergent views of parties concerned with the operation of the bankruptcy system, evaluate the advisability of proposals with respect to such issues and prepare a report to be submitted to the President, Congress and the Chief Justice not later than two years after the date of the first meeting.
The report, which is due October 20, 1997, must contain a detailed statement of the Commission's findings and conclusions, together with recommendations for legislative or administrative action.
The members comprising the Commission were appointed by the President, Congress and Chief Justice. It was originally chaired by former Representative Mike Synar (D-OK) who resigned on December 19, 1995 and died on January 9, 1996. On March 29, 1996, Brady C. Williamson, Esq. of Madison, Wisconsin was appointed by the President to be the Chair. The other members of the Commission are Vice Chair Honorable Robert E. Ginsberg, U.S. Bankruptcy Judge, Illinois; Jay Alix, CPA, Michigan; M. Caldwell Butler, Esq. a former Member of Congress, Virginia; Babette A. Ceccotti, Esq., New York; John A. Gose, Esq., Washington; Jeffrey Hartley, Esq., Alabama; Honorable Edith Hollan Jones, U.S. Circuit Judge, Fifth Circuit, Texas and James I. Shepard, Esq., California.
Although the Commission was created by 1994 legislation, it did not receive funding until more than a year later. Nevertheless, individual Commissioners began working on projects of interest to them prior to the time that funds were appropriated and staff was hired. The Commission divided itself into a number of distinct "Working Groups." The Working Group on Government took jurisdiction over tax issues. The Working Group on Government consists of Chairman Williamson and Commissioners Shepard and Gose.
The Commission scheduled a meeting in Santa Fe on September 18, 1996, coincident with a meeting of the States' Association of Bankruptcy Attorneys. After that meeting in September in Santa Fe, the Commission subsequently held meetings in other venues. However, although governmental agencies in their capacity as governmental agencies were invited to send representatives to sit on the Commission's panels, the Commission did not invite any bar association that regularly comments on tax legislation to participate in these panels. From the beginning, governmental taxing authorities at the federal and state levels involved themselves in the Commission's process. By letter dated August 28, 1996 the Internal Revenue Service submitted to the Commission a thoughtful set of legislative proposals that the Service had been interested in for a long time.(3) By report dated September 1996 a Bankruptcy Working Group of the Department of Justice submitted a lengthy bound report to the Commission.(4) As of December, therefore, the Commission had before it the IRS proposals, the Department of Justice proposals, and a list of proposals generated by Commissioner Shepard.(5)
On December 23, 1996 Stephen H. Case, a prominent bankruptcy lawyer and an advisor to the Commission, together with Jennifer C. Frasier, an attorney on the Commission's staff, made the first attempt to systematize the Commission's tax process. Mr. Case and Ms. Frasier produced a matrix identifying 114 separate tax proposals before the Commission, identifying their source (Shepard, Department of Justice, IRS) and assigning a priority status to these proposals. It was clear that many of the items included in this matrix are relatively unimportant, and with very few exceptions, most strengthen the hand of governmental taxing authorities vis-a-vis debtors. Notwithstanding the absence of participation by the organized private bar in setting the Commission's tax agenda, there have been in public print for some time proposals from the private sector to change the bankruptcy laws relating to tax issues and the tax laws relating to bankruptcy issues.(6) Not surprisingly, they have a very different perspective. Although there is legitimate grounds for difference of opinion with respect to many of these proposals, they were not included in the Commission's matrix.
After the appointment of this Task Force, Mr. Asofsky, co-chair of the Task Force, wrote to Chairman Williamson, advising him of the formation of the Task Force and pointing out the one-sided nature of the Commission's agenda. It is assumed that the Commission heard this complaint from other sources as well. In early February of 1997, Chairman Williamson appointed an informal tax advisory committee (the "Advisory Committee") to assist the Commission in "sifting and winnowing" the Commission's tax agenda. This committee, for the first time, consisted of four government representatives(7), four private practitioners(8) and two members of the academic community.(9) The Advisory Committee has been meeting and talking in an attempt to unburden the agenda of items that are truly not important and can be resolved in the normal course of the legal process and to identify those important issues that the Commission must resolve. It is anticipated that the Advisory Committee will make a final report to the Commission in the near future. The Section welcomes the Chairman's initiative. It holds out the hope that the Commission will develop an agenda and a procedure that elicits all sides of controversial issues and will result in a balanced proposal by the Commission that government representatives, private groups and scholars can support in unity before the Congress.
At the May meeting of the Section in Washington, D.C., the members of the Working Group on Government will meet with the Task Force, and Commissioner Shepard will participate in a mini-program open to all Section members and the public. We hope that the exchanges of views that result will lead to the kind of balanced legislative proposal we can join in urging the Congress to enact.
The Original Bankruptcy Commission and its Legacy
The Commission was modeled after, and its work will undoubtedly be measured against that of, the original Bankruptcy Commission (the "1970 commission"). In 1970, Congress passed a resolution creating a special commission to study the bankruptcy laws of the United States for the purpose of adopting a comprehensive new legislative scheme.(10) The 1970 commission hired as one of its consultants William T. Plumb, Jr., a prominent tax lawyer from Washington, D.C., whose books and articles on tax law subjects remain classics today.
The 1970 commission reported three years after its birth a two volume product consisting of a new comprehensive bankruptcy statute(11) and a report consisting of 12 well annotated chapters,(12) each setting forth the 1970 commission's deliberations and reasoning as the basis for its proposed statute. Mr. Plumb went beyond the report. Not only did he contribute a chapter to the 1970 commission's report explaining the few tax provisions included in the bill;(13) he produced a series of four law review articles published during a one year span that stretched 600 pages.(14) These articles remain today a gold mine of legislative history. They set forth the tax treatment of every major bankruptcy transaction relevant at the time, together with an explanation of the 1970 commission's proposals. There is no doubt that the Plumb articles informed every change in the legislative product that developed in the ensuing five years.
Many of Plumb's proposals, or variants thereof, were enacted as part of either the Bankruptcy Reform Act of 1978 or the Bankruptcy Tax Act of 1980. The success of the Plumb initiative is clearly attributable to the balance they reflected. Plumb's tax proposals can be said to be neither pro-government nor pro-taxpayer/debtor. Every one of them could be justified on the basis that it meshed the sometimes competing objectives of the tax laws and the bankruptcy laws. Transactions legitimately undertaken in bankruptcy did not have to be abandoned because of user-unfriendly tax code provisions not sensitive to the peculiar needs of the bankruptcy process and the government's legitimate claims as a creditor were recognized.
Role of the Section
The Section did not play a formal role during the deliberations of the 1970 Commission. However, in 1977, the Section created an ad hoc committee for bankruptcy revision which actively participated through regular communication with the Treasury Department, the Internal Revenue Service and the staff of the Joint Committee on Taxation during the legislative process. The Section gave detailed testimony on each version of the bill in a series of Congressional hearings.(15) In those hearings, the Section supported the IRS (in opposition to the bankruptcy bar) in adding to the Internal Revenue Code section 108(b) that provides "attribute reduction" as a quid pro quo for exclusion of discharge of indebtedness by bankrupt and insolvent taxpayers. On the other hand, the Section urged the retention of the stock-for-debt exception to discharge of indebtedness. As another example, the Section actively supported the Plumb proposal to eliminate the tight restrictions on tax-free reorganizations in bankruptcy that previously characterized section 371 of the Internal Revenue Code. On the other hand, the Section supported the Service in urging the overruling of a line of Tax Court cases that permitted the tax-free receipt of stock and securities in consideration of a claim for accrued but unpaid interest. And there were many other examples.
Section members regularly comment on proposed legislation, regulations and matters of tax policy. This Task Force believes that the views expressed herein represent the kind of balance for which the Section always strives. Thus, on many issues that are of importance to federal and state taxing authorities, we have taken a position in favor of the government. For example, we have supported their proposals to strengthen the notice requirements to taxing authorities. We have agreed with their proposal to conform the burden of proof on tax matters in the bankruptcy court to the burden of proof in other forums, although we have recommended an important exception. We have agreed that deferred payments of prepetition taxes under Bankruptcy Code § 1129(a)(9)(C) should not be backloaded, with exceptions that protect the interests of the government. We have agreed that the 240-day period in Bankruptcy Code § 507(a)(8) should be tolled during any period that an offer in compromise is outstanding. We have also agreed with many other proposals advanced by the government. On the other hand, we believe that there are some proposals pressed on the Commission by the taxing authorities that are injurious to the bankruptcy process and go too far, and we have said so emphatically. Among our more important disagreements with the government are that we oppose repeal of Bankruptcy Code § 724(b)(2). We oppose any rule that would require an up-front scheduling by a debtor of the basis of its assets. We oppose repeal of the chapter 13 superdischarge. We oppose the suggestion that the Supreme Court's decision in United States v. Energy Resources Co. be legislatively overturned. And we oppose attempts to limit the jurisdiction of the Bankruptcy Court to grant declaratory judgments as to the tax consequences of a plan of reorganization.
The Challenge to the Commission
The bankruptcy laws curtail the force and operation of every part of our law and jurisprudence. They impair the obligation of contract. They limit the jurisdiction of duly constituted courts. They divest individuals and entities of their property. They deny shareholders the right to corporate governance by directors of their own choosing. If they also sometimes restrict the right of government to collect taxes, it is because there is a compelling public interest in fair treatment of creditors and the rehabilitation of financially troubled debtors. We do not take lightly the political or economic imperative of assuring a free flow of revenues to the government or of preventing unscrupulous debtors from passing on their fiscal obligations to the taxpaying public at large.
The proposals suggested herein are designed to preserve the government's tax priority, foster the rehabilitation of debtors, treat all creditors fairly and create substantive tax rules that are not at odds with those purposes. They reflect our view that reform must have as its objective making the bankruptcy system work, rather than punishing wrongdoers.
TASK FORCE POSITIONS(16)
SUBORDINATION OF CERTAIN TAX LIENS IN CHAPTER 7:
SECTION 724(b)(2) OF THE BANKRUPTCY CODE
(COMMISSION TRACK NUMBER 100)
Present Law
The general rule in a Chapter 7 liquidation is that, upon any sale of property, the claims of secured creditors must be satisfied in full before any payment is made to claimants with a statutory priority or to general unsecured creditors. Bankruptcy Code 724(b), which governs the order of distribution of property subject to valid, nonavoidable federal, state and local tax liens, deviates from the general rule that unsecured priority claims do not trump perfected secured claims. Under section 724(b), a trustee is required to subordinate valid tax liens to the costs of administration and other unsecured priority claims occupying the first through seventh rungs on the priority ladder. This allows unsecured priority claimants "to step into the shoes of the tax collector"(17) and receive distribution from property of the estate before valid tax claims despite the fact that the tax claim is properly allowed and secured. Moreover, section 724(b) enables a trustee to administer property that is otherwise without value to the estate due to the existence of liens in order to generate a pool of funds from which priority claims can be paid.
Proposals Before The Commission
Commission Track Number 100. The Government Working Group proposes that section 724(b)(2) be amended to limit the subordination of properly perfected nonavoidable tax liens on real and personal property to only section 507(a)(3) wage claims. See Government Working Group proposal number 2. The Department of Justice and Commissioner Shepard had proposed that Section 724(b) be repealed altogether. See Justice Proposal, p. 97; Santa Fe Discussion Issues, p. 2, Item IB1.
Task Force Position
The Task Force opposes all of these proposals.
Reasons for Position
Section 724(b)(2) was intended to free up assets to pay costs of administration and satisfy claims of employees having priority. As a result of subsequent amendments to Section 724(b), the favored claimants were expanded to include individual farmers and fishermen, individuals making deposits for personal, family or household use and alimony, maintenance and support claims. For nearly 60 years Congress has consistently postponed or subordinated government tax entities to payment of administrative expenses and wage claims, even if the claims of the government entity were secured by tax liens.(18)
Tax claims are generally given priority over most unsecured claims because (1) there is a public interest in insuring an uninterrupted flow of revenues for the purpose of supporting governmental operations and (2) the government, as an involuntary creditor, is not in a position to protect its interests by negotiating adequate security arrangements with a taxpayer when a tax debt is created. Notwithstanding these important public policy considerations underpinning priorities for most tax claims, bankruptcy laws have always subordinated tax claims to administrative expenses and some other claims. Section 724(b) is a recognition that statutory tax liens are no more than governmentally created superpriorities. Downgrading tax liens in bankruptcy merely validates the scheme of priorities created by the bankruptcy system. Bankruptcy Code priorities must supersede the states' interests in buttressing their collection capabilities. Therefore, we oppose any effort to change the basic structure of section 724(b).
Notwithstanding the foregoing, present law distorts the relative positions of local taxing authorities and commercial secured creditors. The expectation of such creditors is that their security interests will be primed by ad valorem real property tax liens. That bankruptcy should not give these creditors a windfall gave rise to the enactment of section 362(b)(18) in 1994. A similar "fix" is needed in section 724(b). If an estate is administratively insolvent, the secured creditor should not receive a windfall at the expense of the local taxing authority. The private secured creditor should bear the burden of ad valorem real property taxes.
Finally, it has been argued that section 724(b) is complex and it is often misapplied in practice. If the provision can be simplified, the Commission should address that problem, but it should not repeal a legislative policy of long standing.
Other Institutional Positions
The National Bankruptcy Conference and Association of the Bar of the City of New York oppose repeal of Section 724(b).
EXTENDING THE "DEEMED FILED" RULE BEYOND CHAPTER 11
(COMMISSION TRACK NUMBER 104)
Present Law
Bankruptcy Rule 3002(a) sets forth the general rule regarding filing proofs of claim in a bankruptcy case, which is that all unsecured creditors must file proofs of claim in order for their claims to be allowed.(19) Bankruptcy Rule 3003, however, carves out an exception to Rule 3002(a) in cases under chapters 9 and 11 of the Bankruptcy Code.(20) Under Bankruptcy Rules 3003(b)(1), creditors in chapter 9 and chapter 11 cases whose claims are listed in the schedule of liabilities filed by the debtor and whose claims are not designated as disputed, contingent or unliquidated do not need to file proofs of claim in order for their claims to be allowed; the scheduled amount of their claims shall be prima facie evidence of the validity and amount of such claims.(21) This exception applies only in cases under chapter 9 and chapter 11 of the Bankruptcy Code; creditors of debtors in cases under chapter 7,(22) chapter 12(23) and chapter 13(24) must file proofs of claim regardless of whether their claims are listed in the debtor's schedule of liabilities.
The theory of the current rule is that chapter 9 and chapter 11 debtors will generally have significantly more creditors than will debtors filing under other chapters of the Bankruptcy Code. Chapter 9 and chapter 11 debtors are also likely to have some sort of accounting system in place that will readily identify most creditors and the amounts of their claims. Moreover, at least in the large chapter 11 cases, the general practice is for the chapter 11 debtor to notify the creditors as to exactly how their claims are scheduled. By allowing creditors to rely on the scheduled amounts of their claims, it is presumably simpler for everybody.
Debtors filing under chapters 7, 12 or 13, on the other hand, generally have fewer creditors, and may have less of an idea of just how much they owe and to whom. Their accounting practices are often poor or nonexistent. Moreover, an individual debtor is strongly encouraged to liberally schedule all potential claims against him in order to discharge as many potential liabilities as possible. To the extent that he fails to schedule a claim, regardless of how remote that claim may be, that claim may not be discharged in his bankruptcy case. The individual debtor is under no real obligation to determine the precise amount of any claims against his estate; he only needs to provide his best estimate as to the amount of the claims and to provide the correct names and addresses of his creditors so that they will receive notice of his bankruptcy.
In cases under chapter 7, for example, the general procedure is for the bankruptcy court to send out a notice to the scheduled creditors of the commencement of the case and to notify the creditors of their right to file a proof of claim. In addition, the bankruptcy court will notify the creditors as to whether or not there is expected to be sufficient assets in the debtor's estate to provide a distribution to the creditors. If the chapter 7 case is expected to be a "no asset" case (as the vast majority are), then the creditors are advised that there is no point in filing a proof of claim. If the bankruptcy court determines that assets are expected to be available to distribute to creditors, the bankruptcy court will set a bar date for filing proofs of claim, notify the creditors of the bar date, and send the creditors proof of claim forms to fill out and return.
Proposals Before The Commission
Commission Track Number 104. The Government Working Group proposes to expand the applicability of Rule 3003 so that creditors in all bankruptcy cases will be able to rely on the debtor's schedules in the same manner that creditors currently can in chapter 9 and chapter 11 cases. In other words, if a creditor's claim is listed in the debtor's schedule of liabilities and is not listed as contingent, disputed or unliquidated, that creditor need not file a proof of claim in order for its claim to be allowed as a claim against the debtor's bankruptcy estate in the scheduled amount. See Government Working Group Proposal Number 1. The Advisory Committee has recommended that this proposal be dropped as unimportant.
Task Force Position
The Task force does not support the Government Working Group proposal.
Reasons for Position
Although the proposal would not appear to unfairly prejudice debtors, the proposal could have the unintended consequence of significantly increasing the administrative burdens of the trustee appointed to administer the assets of debtors in chapter 7, chapter 12 or chapter 13 cases, as well as prejudicing the legitimate creditors that care enough to file proofs of claim. The trustee appointed in bankruptcy cases has the responsibility of distributing the debtor's non-exempt assets to the legitimate creditors, and to object to any illegitimate claims. Under the current rule, any creditor that wants to receive a distribution from the debtor's assets in cases under chapter 7, chapter 12 or chapter 13 must file a proof of claim and attach any evidence to substantiate the claim. It is relatively easy for the trustee to make a cursory examination of the proofs of claim and the supporting documents filed in the case in order to determine whether or not to object to a claim. Moreover, it is a criminal offense for a creditor to file a false proof of claim. Accordingly, it is probably relatively rare that outright fraudulent claims are submitted or allowed to share in any distributions in most bankruptcy cases.
If the trustee were required to rely upon the debtor's schedules, however, it would be far more difficult for the trustee to determine which claims are legitimate and which ones are not. An individual debtor often has few records of his debts, has little incentive to substantiate the liabilities listed on his schedules, and is encouraged to schedule every conceivable liability to ensure that he receives as broad a discharge as possible. Accordingly, it is possible that the debtor will schedule far more creditors than actually hold legitimate claims against him as of the petition date. Since the trustee will not be able to verify the accuracy of those claims from the schedules alone, he has the choice of (i) independently investigating the scheduled claims in order to substantiate such claims, (ii) filing objections to any scheduled claim that could possibly be considered questionable, (iii) making distributions to illegitimate creditors, or (iv) all of the above. In either case, the estate's assets will be depleted through unnecessary administrative expenses or unwarranted distributions.
In sum, this proposal may sound good in theory but be bad in practice. It could easily drive up the cost of individual bankruptcies and deplete the estates' assets to the detriment of legitimate creditors. It will undoubtedly increase the administrative burdens on bankruptcy trustees. Furthermore, it may permit illegitimate creditors to share in the distribution of the debtors' estates to the detriment of the legitimate creditors.
It is the understanding of the Task Force that governmental taxing authorities do not suffer prejudice from application of the present rule. As a matter of routine, such creditors know to file proofs of claim outside of chapter 11. This change is not needed to protect taxing authorities from their own inadvertent errors.
Other Institutional Positions
A focus group of the American College of Bankruptcy opposes extending the deemed filed rule for governmental creditors only, but would support an extension for all creditors.
NOTICE TO GOVERNMENTAL UNITS
(COMMISSION TRACK NUMBERS 105, 106 AND 109)
Present Law
Governmental Agencies Required to Receive Notice: Bankruptcy Code § 521(a) and Bankruptcy Rule 1007(a) require a debtor to file a list containing the name and address of each creditor, unless a schedule of liabilities (which essentially includes this information) is filed. Unless the court enters an order limiting notice, all notices are sent to these creditors, including the notice of the commencement of a case under the Bankruptcy Code. If the case is a chapter 11 case, then Bankruptcy Rule 2002(j) provides that notices to the United States shall be mailed to, among others, the District Director of Internal Revenue for the district in which the case is pending. Further, some jurisdictions have adopted local rules requiring that a debtor provide notice to a specified Internal Revenue Service office. See, e.g., Note to Rule 1002 of the Local Bankruptcy Rules for the United States Bankruptcy Court for the Northern District of Texas (specifying that the mailing matrix should include the Special Procedures Staff of the Internal Revenue Service and providing the address). It should be noted that Bankruptcy Rule 7004(b)(6) addresses service of process in an adversary proceeding and is thus inapplicable to the notice issues raised in these proposals.
Content of Notice: Bankruptcy Code § 342(a) provides that notice shall be given of the commencement of a case under the Bankruptcy Code. Bankruptcy Rule 9009 states that the "Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate." The Official Forms include forms to be used to notify creditors of the commencement of the case, the meeting of creditors and certain deadlines set by the bankruptcy court. Bankruptcy Code § 342(c) provides that if notice is required to be given to a creditor under the Bankruptcy Code (this includes, but is not limited to, the notice of commencement of the case), the Bankruptcy Rules or an order of the Court, then the "notice shall contain the name, address and taxpayer identification number of the debtor, but the failure of such notice to contain such information shall not invalidate the legal effect of such notice."
Bar Date With Respect to Claims Filed By Governmental Agencies: Bankruptcy Code § 502(b)(9) and Bankruptcy Rules 3002(c)(1) and 3003(c)(3) provide that a proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief.
Effect of Failure to Give Proper Notice: Bankruptcy Code § 523(a)(3) provides that an individual debtor is not discharged, under certain circumstances, from a debt that the debtor fails to list or schedule under the name of the creditor to whom such debt is owed, if known by the debtor.
Effect of Failure to Provide Sufficient Information: Although the Bankruptcy Code and the Bankruptcy Rules do not generally address a debtor's failure to provide sufficient information, from a practical standpoint, creditors and other parties in interest are not prevented from seeking such information. For example, within a reasonable time after a case is commenced under the Bankruptcy Code, the United States Trustee convenes and presides over a meeting of the debtor's creditors. At this meeting, the creditors have an opportunity to orally examine the debtor. Moreover, if a creditor is unable to obtain from the debtor information in the debtor's possession which the creditor needs in order to complete its proof of claim or to determine whether or not it even has a claim, then the creditor can seek relief from the bankruptcy court. Further, Bankruptcy Code § 523(a)(1) provides that an individual debtor will not be discharged with respect to tax claims or customs duties under certain circumstances related to filing required returns.
Proposals Before the Commission
Commission Track Number 105. Commissioner Shepard proposes that either the Bankruptcy Code or the Bankruptcy Rules be amended to require a debtor to send all notices sent to creditors to certain government agencies at locations to be specified by the government agencies. In addition, he would amend either the Bankruptcy Code or the Bankruptcy Rules to require that any such notices: (a) contain meaningful and sufficient information to enable the government agency to determine why the notice is being sent; (b) include identifying information such as the employer identification number, taxpayer identification number, social security number, and license numbers; (c) include the name of the debtor, any predecessors in interest, merged corporations and all present and former a/k/a's and d/b/a's. Further, he would amend either the Bankruptcy Code or the Bankruptcy Rules to require that (a) any such notices related to claims specify the debtor, successor in interest or other named predecessor who incurred the obligation upon which the claim is based; (b) any such notices related to environmental clean-up costs specify each particular property involved; and (c) any such notices related to ad valorem property taxes specify each particular property involved. Finally, he would amend Bankruptcy Code §§ 342, 362 and 363 to include strong sanctions (such as allowing late claims and denying the debtor's discharge on claims) for failure to satisfy the above notice requirements. See Santa Fe Discussion Issues, p. 21, Item IVA1.
Commission Track Number 106. Commissioner Shepard proposes that Bankruptcy Code § 727(c) be amended to provide that if a debtor fails to provide notice to a creditor as required by the Bankruptcy Code and the Bankruptcy Rules, then the time limit in which a creditor must object to discharge or file a motion to revoke discharge will not begin to run until the affected creditor receives proper notice. Further, he would amend section 727(c) to provide that knowing or intentional failure to provide proper notice under the Bankruptcy Code and the Bankruptcy Rules is grounds for barring discharge. See Santa Fe Discussion Issues, p. 22, Item IVA2.
Commission Track Number 109. Commissioner Shepard proposes that either the Bankruptcy Code or the Bankruptcy Rules be amended to provide that a taxing authority is entitled to an exception to the bar date or to a nondischargeability determination if the debtor failed to provide the taxing authority with sufficient information to determine the nature and extent of potential claims. Further, he would amend either the Bankruptcy Code or the Bankruptcy Rules to provide an exception to the bar date if the debtor failed to timely file returns or provide required information. See Santa Fe Discussion Issues, p. 22, Item IVA3.
Task Force Position
Commission Track Number 105: The Task Force supports the proposal to amend either the Bankruptcy Code or the Bankruptcy Rules to require a debtor to send all notices sent to creditors to certain government agencies at locations to be specified by the government agencies, provided that the addresses are either incorporated into the Bankruptcy Rules, the local rules or are otherwise available from the bankruptcy court. With respect to the proposal to include additional information in the notice, the Task Force agrees that perhaps the notice should include some additional information; however, the Task Force does not support the sweeping requirements contained in the proposal.
Commission Track Number 106: The Task Force opposes this proposal.
Commission Track Number 109: The Task Force opposes this proposal.
See also our response to Commission Track Number 216, infra.
Reasons for Position
Commission Track Number 105: As noted above, the Task Force supports the proposal to amend either the Bankruptcy Code or the Bankruptcy Rules to require a debtor to send all notices sent to creditors to certain government agencies at locations to be specified by the government agencies, provided that the addresses are either incorporated into the Bankruptcy Rules, the local rules or are otherwise available from the bankruptcy court.
With respect to the proposal regarding information to be included in any notices, Bankruptcy Code § 342 already requires the debtor to include its taxpayer identification number in any notices. To the extent other information is readily available to the debtor, such as the debtor's employer identification number, social security number, license number, known present and former a/k/a's and d/b/a's and the location of real property subject to ad valorem taxes, then the Task Force supports expanding the requirement under § 342(c) to require that notices include this information. However, the Task Force believes that the provision in Bankruptcy Code § 342(c) that the failure to include this information in a notice "shall not invalidate the legal effect of the notice" should continue in effect. While a debtor should be required to provide this information if it is available, the debtor should not be penalized for failure to provide this information if it is not readily available. If the debtor deliberately excludes available information, then a creditor or other party in interest may request that the bankruptcy court sanction the debtor in a suitable manner. Such sanctions should be determined by the bankruptcy court in light of the applicable circumstances.
The Task Force does not support the proposal that (a) notices should contain meaningful and sufficient information to enable the government agency to determine why the notice is being sent; and (b) any notices related to claims specify the debtor, successor in interest or other named predecessor who incurred the obligation upon which the claim is based.(25) It is unclear what is intended by "meaningful and sufficient information". Moreover, this proposal appears to require a debtor to suggest potential areas of tax and environmental liability, regardless of whether the debtor believes such claims are valid. Further, the purpose of a notice is to allow a creditor to participate in the process. Debtors should not be required to determine the nature, extent, validity and amount of a governmental agency's claims. So long as the government agency has notice of the filing, basic information regarding the debtor (such as the debtor's taxpayer identification number and the location of its real property), then the government agency should be able to determine the nature, extent, validity and amount of its claim, if any.
Finally, the Task Force does not support the requested sanctions for failure to comply with notice requirements. Bankruptcy courts should have the discretion, as they do now, to sanction a debtor by allowing a late claim or disallowing the discharge of a claim under appropriate circumstances. This should not be mandated by the Bankruptcy Code.
Commission Track Number 106: The Task Force believes that this proposal raises several concerns. First, with respect to extending the time in which a creditor must object to discharge or file a motion to revoke a discharge, the proposal does not impose a time limit. Accordingly, a debtor will never achieve a fresh start. Conceptually, under this proposal, a creditor who was not noticed could come forward twenty years after a bankruptcy case has been closed and file a motion to revoke the discharge. As a result, following a bankruptcy filing, no one would be safe doing business with or loaning money to a debtor. Second, the proposal is overly broad with respect to amending Bankruptcy Code § 727(c). Essentially, the proposal contemplates turning the denial of discharge provision in Bankruptcy Code § 523(a)(3) with respect to specific claims into a blanket denial of discharge under Bankruptcy Code § 727(c). This expansion of the denial of discharge is simply unwarranted. Third, if a creditor has not received formal notice of a bankruptcy filing but has actual knowledge of the filing, then the creditor should be required to come forward and participate in the bankruptcy case. The proposal contemplates that a creditor without formal notice, but with actual knowledge, could wait until the bankruptcy case has been closed and then seek to revoke the debtor's discharge. This is patently unfair. A creditor should not be allowed to sit on its rights and then, perhaps even years later, seek revocation of the discharge.
Commission Track Number 109: This proposal is simply unjustified. If a debtor fails to provide a taxing authority with sufficient information to determine the nature and extent of potential claims, then the taxing authority should seek relief from the bankruptcy court in the form of a motion to compel the production of documents, a subpoena duces tecum or a 2004 examination. If the debtor continues to fail to provide the requisite information, then it is within the bankruptcy court's discretion to award sanctions. Further, Bankruptcy Code § 523(a)(1) provides that an individual debtor will not be discharged with respect to tax claims or customs duties under certain circumstances related to filing required returns.
With respect to contingent claims, such as a bankruptcy involving an individual responsible person who could be liable for unpaid employment taxes, the government agency is entitled to file a contingent claim in the individual's bankruptcy case. The proposal contemplates that the individual debtor must not only notify the government agency of the bankruptcy filing, but also of this contingent claim. It is impractical and unduly burdensome to require an individual debtor to review the tax laws and identify every conceivable tax claim, including contingent claims. While the Task Force does not support the proposal, the Task Force recognizes that perhaps governmental agencies need some additional information to enable them to identify these types of contingent claims. Accordingly, the Task Force proposes that the Official Forms be amended to require an individual debtor to state whether or not he is an officer, director or employee and identify the business entities for which he holds such positions.
Other Institutional Positions
The Association of the Bar of the City of New York agrees that state and local taxing authorities should be permitted to designate an address for serving notices. A focus group of the American College of Bankruptcy supports changes requiring a debtor to list the specific agency that is a creditor in a bankruptcy case.
SCHEDULING THE TAX BASIS OF ASSETS
(COMMISSION TRACK NUMBERS 107 and 108)
Present Law
The Bankruptcy Code and the Internal Revenue Code contain no requirement for basis information to be provided when a debtor files a bankruptcy petition. See generally Bankruptcy Code § 521(1), Rule 1007 F. R. Bankr. P., and Forms 6 and 7, Official and Procedural Bankruptcy Forms (as amended to November 1, 1995).
Proposals Before The Commission
Commission Track Numbers 107 and 108. Commissioner Shepard proposes that the bankruptcy forms be amended to require debtors to include information to determine tax consequences of liquidation with specific requirements that:
- basis information, original and adjustments, be provided for all of the
debtor's assets;
- copies of tax returns, state and federal, are filed with the bankruptcy
schedules; and
- a statement be made by the debtor that no returns are required for those
time periods for which returns have not been filed.
See Santa Fe Discussion Issues, p. 26, Item IVE5;
The Advisory Committee has recommended that these proposals be withdrawn as unimportant.
Task Force Position
The Task Force opposes any amendment creating requirements for (i) basis information to be furnished as part of either the debtor's schedules or statement of affairs and (ii) copies of returns to be attached to the schedules.
The Task Force recommends that Official Form 7 be amended to add a title "Tax Matters" including only (i) a statement that all tax returns (state and federal) for the three years prior to the filing of the bankruptcy petition have been filed and whether the debtor has copies; and (ii) if all such returns have not been filed, identify the returns not filed.
Reasons for Position
In addressing any question in a bankruptcy context, the process must balance the debtor's right to a fresh start and every creditor's concomitant right to obtain its fair share of the assets. Nowhere does that balance become more difficult to conceptualize, much less implement, than in addressing taxation in a bankruptcy context.
The suggestion which would require the "furnishing of information necessary to compute the tax consequences of a liquidation" in the schedules could easily crush the ability of most consumers to obtain the fresh start afforded by filing for Chapter 7 relief. Requiring any potential debtor to state that tax returns have been filed imposes no additional burdens. Such a disclosure affords ample opportunity for trustees and creditors to make further inquiry. More importantly, every debtor, and particularly all debtors' counsel, should consider which returns have been filed and which have not.(26) A disclosure stating whether returns have been filed simply formalizes the due diligence that should occur without such a disclosure.
Currently, the schedules and statement of financial affairs required to be filed in a case under the Bankruptcy Code contain no "basis" data for the assets of the potential debtor. None of the specific questions in either set of documents contains any reference to the basis of any assets of the debtor.(27) The Internal Revenue Code establishes only one clear and direct basis consequence for bankruptcy matters: Section 108's adjustment to basis for debt discharged.(28)
What reason supports any requirement that a debtor submit basis information as a part of the initial filing requirements? We can think of none. Filing a bankruptcy petition does not occur with a wealth of well organized tax information at the fingertips of the petitioner. The need for immediate and instant relief under Title 11 greatly outweighs any need for basis information. Simply stated, imposing a basis information requirement as a condition for filing a bankruptcy petition enables tax information rarely needed in the bankruptcy context to act as an impediment to the fundamental policy of bankruptcy: a fresh start! No balance exits. The information necessary to determine liquidation consequences can be obtained by anyone that wants it at any time.(29)
In the overwhelming majority of consumer bankruptcy filings, the tax consequences of a liquidation of the debtor's assets does not and should not constitute even a minor "blip" on the radar screen of matters to consider before filing. Proceedings under Chapter 11, 12, or 13 simply do not present a basis problem; the debtor will continue to file returns and must report gain or loss in the ordinary course.(30) Even in the rare case where liquidation consequences should be addressed, in either business or consumer cases, the debtor or debtor's counsel should, and in most cases will, address the tax issues. Where not addressed prior to filing, the trustee and the taxing authorities can examine the debtor and obtain the information needed.(31)
Basis information must be obtained for one principal and not insignificant reason: a trustee's sale of assets. A bankruptcy trustee must file tax returns and report gain from the sale of assets.(32) Before any potential sale, a trustee should, if not must, determine the actual cash benefit to the estate on an after tax basis. If the tax on the gain from the sale eliminates any cash flow to the b