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ROBERT
E. MCKENZIE, ESQ. ARNSTEIN & LEHR LLP |
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The
new bankruptcy reform was signed into law by the president in April, 2005. It
will become effective on October 17, 2005. . Generally families earning more than the state median, about
$45,000 in Illinois, will be will face huge roadblocks to filing a Chapter 7
bankruptcy on consumer debts and only be allowed to file Chapter 13. Prior to
seeking the protection of bankruptcy debtors will be required to pay for debt
counseling as a first step. The following is brief summary of the major tax
related provisions of the act.
IRS Allowable Expense Guidelines
Debtors
will be required to use IRS expense guidelines in most cases to determine their
ability to make payments pursuant a Chapter 13 plan. (Sec.
103) Expresses the sense of Congress that the Secretary of the Treasury has the
authority to alter Internal Revenue Service (IRS) standards established to set
guidelines for repayment plans as needed to accommodate their use under the
Bankruptcy Code. Instructs the Director of the Executive Office for U.S.
Trustees to report to certain congressional committees regarding the use of IRS
standards for determining specified monthly debtor expenses and the impact of
such standards upon debtors and the bankruptcy courts.
Other Tax Related Provisions
(Sec 315) Requires dismissal of a Chapter 7
or 13 case upon debtor's failure to provide to the bankruptcy trustee within
seven days before the initial date for the first meeting of creditors a tax
return for the latest taxable period prior to filing. It mandates that, at the
time of filing with the taxing authority, a Chapter 7 or 13 debtor file with
the bankruptcy court specified tax documentation pertaining to the period from
case commencement until case termination.
Title
VII: Bankruptcy Tax Provisions – Tax
Liens
(Sec. 701) Amends the bankruptcy code to
modify the treatment of certain tax liens.
Addresses
for Notices
(Sec. 703) Requires the clerk of each
district to maintain a listing under which a governmental entity responsible
for the collection of taxes within such district may designate an address for
service of requests and describe where further information for filing such
requests may be found.
IRS
Statutory Rate
(Sec. 704) Prescribes the rate of interest to
be paid on mandatory interest payments on tax claims will be the IRS statutory
rate.
Tolling
of Priority
(Sec.
705) Revises the specifications for income tax claims receiving eighth priority
(allowed unsecured claims of governmental units). Provides for tolling of the
time periods covering such tax claims for stays of proceedings in a prior
bankruptcy case, and the pendency or effect of offers in compromise or installment
agreements.
Tougher
to Discharge Taxes in Chapter 13
(Sec. 707) Prohibits a Chapter 13 discharge
of any debt for fraudulent tax payments.
Fraudulent
Activities
(Sec.
708) States that confirmation of a bankruptcy plan does not discharge a corporate
debtor from any debt for:
1)
money or credit
obtained by false representation owed to a domestic governmental unit or to a
person as the result of an action filed with respect to certain claims against
the Federal or a State government; or
2)
a tax or customs duty
with respect to which the debtor made a fraudulent return or willfully
attempted to evade or defeat such tax.
Stay
and the U. S. Tax Court
(Sec. 709) Limits the automatic stay of U.S.
Tax Court proceedings to prepetition taxes.
Plan
Provision for Taxes
(Sec. 710) Sets as a prerequisite for court
confirmation of a Chapter 11 bankruptcy plan that includes tax claims, that the
debtor make regular cash installment payments over a period ending not later
than five years after the date of entry of the order for relief, and in a
manner not less favorable than the most favored nonpriority unsecured claim
provided for in the plan.
Avoidance
of Tax Liens
(Sec. 711) Prohibits the avoidance of
statutory tax liens by certain purchasers. This provision makes it much harder
for trustees and debtors in possession to avoid state and federal tax liens.
Payment
of Taxes During Proceedings
(Sec. 712) Amends the Federal judicial code
to require officers and agents conducting any business under court authority to
pay all Federal, State, and local taxes when due in the course of the business,
unless it is a property tax secured by a lien against estate property which is
abandoned by the bankruptcy trustee, or payment of the tax is excused under a
specific bankruptcy law. Cites circumstances in which payment of such taxes may
be deferred in a case pending under chapter 7 until final distribution is made.
Entitles
to administrative expense priority payment certain secured and postpetition
unsecured taxes incurred by the bankruptcy estate, including ad valorem
property taxes.
Declares
that a governmental unit shall not be required to file a request for the
payment of administrative expenses relating to a tax liability or tax penalty.
Allows a trustee to recover from property securing a claim for the payment of
all ad valorem property taxes relating to such property.
Tardy
Tax Claims
(Sec. 713) Requires as a condition for
payment of tardily filed priority tax claims that they be filed either before
the trustee commences distribution, or ten days following the mailing to
creditors of the summary of the trustee's final report, whichever is earlier
(currently, before the trustee commences distribution of the estate).
Sec.
6020(b) Returns
(Sec.
714) Returns involuntarily prepared by tax agencies for a taxpayer are included
in the definition of tax returns.
Conditions
for Chapter 13 Confirmations
(Sec.
716) Conditions court confirmation of a chapter 13 bankruptcy plan upon filing
by the debtor:
1)
of all prepetition tax
returns for the prior 4 years; and
2)
before the day on which
the first meeting of the creditors is convened, of all tax returns for taxable
periods ending in the four-year period that ends on the date of the filing of
the petition. Directs the court to dismiss a plan or convert it to chapter 7,
whichever is in the best interests of the creditors and the estate, if a
chapter 13 debtor fails to comply with such time frame.
Expresses
the sense of Congress that the Judicial Conference of the United States should
propose for adoption amended Federal Rules of Bankruptcy Procedure pertaining
to objections to tax returns and to plan confirmation.
Chapter
11 Disclosure of Tax Consequences
(Sec. 717) Redefines "adequate
disclosure," for Chapter 11 postpetition disclosure and solicitation
purposes, to include full discussion of the potential material Federal and
State tax consequences of the plan to the debtor and to a hypothetical investor
that is representative of the holders of claims or interests in the case.
Setoff
of Tax Refunds
(Sec. 718) Denies an automatic stay (unless
specified conditions are met) to the setoff of an income tax refund for a
taxable period which ended before the order for relief against an income tax
liability for a taxable period which also ended before the order for relief.
Conforms
State and Federal Taxable Estate Rules
(Sec.
719) Revises special provisions related to the treatment of State and local
taxes, including the creation of a separate taxable estate when such is done
for Federal tax purposes.
Conversion
for Late Filed Returns
(Sec. 720) Permits a taxing authority to
petition the court to convert or dismiss a case if the debtor fails to timely
file a tax return or obtain an extension, whichever is in the best interests of
creditors and the estate.