NOTICE REQUIREMENTS UNDER SECTION 505(b) OF THE BANKRUPTCY CODE

(COMMISSION TRACK NUMBER 216)

Present Law

Bankruptcy Code Section 505(b) provides a method to invoke the Bankruptcy Court's jurisdiction to determine the amount of tax due by, or refund due to, a debtor. In a title 11 case, the trustee or debtor may file a tax return, pay the tax set forth and request the Internal Revenue Service or other taxing authority to determine the proper tax liability. The Internal Revenue Service or other taxing authority has 60 days to notify the trustee or debtor the return has been selected for examination and 180 days (subject to extensions granted by the Bankruptcy Court) to complete the audit. Absent fraud or material misrepresentation, the passing of the 60 days or 180 days will discharge the debtor from any further tax liability (fn. 84).

To invoke Bankruptcy Code Section 505(b), the request for a determination must be to the governmental authority. In at least two cases, the question of what constitutes appropriate notice to the Internal Revenue Service has been raised and resolved in a conflicting manner. Compare, In re Carie Corp., 128 B.R. 266 (D. Alaska 1989) and In re Flaherty, 169 B.R. 267 (Bankr. D.N.H. 1994). In each of those cases, a tax return was mailed to an Internal Revenue Service Center, rather than to the Special Procedures Unit of the Internal Revenue Service District Director's office in the district where the bankruptcy proceeding was in process.

Proposals Before the Commission

Commission Track Number 216. The Government Working Group proposes to amend the Bankruptcy Rules notices demanding the benefits of rapid examination under section 505(b) be sent to the office specifically designated by the applicable taxing authority for such purpose, in any reasonable manner prescribed by such taxing authority. See Government Working Group Proposal No. 17; See also Santa Fe Discussion Issues, p. 24, Item IVC5; IRS Proposal, p. 38.

Task Force Position

The Task Force supports the Government Working Group Proposal, provided the notification procedure has been filed by the taxing authority with the Bankruptcy Court in a manner that will provide the debtor sufficient notice of the procedural requirements.

Reasons for Position

We believe the proposal raises legitimate concern. The taxing authority should be entitled to "real" notification of the request for expedited audit procedure. But, we are also mindful of the difficulty in obtaining reliable directions as to where and how requests for expedited audit tax claims should be filed, particularly with state and local taxing authorities. The rules for those filings, to the extent they exist, are not easily located in the available tax services or through other means readily available to debtors, trustees and their legal advisers. Thus, to accomplish the legitimate goals of the taxing authority and the legitimate needs of the tax paying debtors and their successors, we recommend the rules provide for notice to the taxing authority in the manner set forth in procedures on file with the Bankruptcy Court in which the proceeding is proceeding. Applicable procedures for expedited filings with federal, state and local taxing authorities would be accepted for filing by the Bankruptcy Courts of the United States unless the Bankruptcy Court Chief Judge for each district who receives a proposed notice requirement from a taxing jurisdiction determines the notice requirement is inappropriate (for whatever reason the Chief Judge determines) within 60 days after the submission of the notice procedures to the respective Bankruptcy Court. In the absence of any filing, any notice request to the affected governmental taxing authority would suffice.

Alternatively, the filings could be accomplished by requiring each taxing jurisdiction to file its notice procedures with the clerk of each United States Court of Appeals or some appropriate national registry to be created. The Circuit Court Clerks would provide copies to all Bankruptcy Courts in the circuit for dissemination to affected debtors.

We would anticipate that each taxing jurisdiction would file its procedures with all of the Bankruptcy Courts and that, in general, those procedures would be accepted as filed, particularly if they provide rules similar to those published in Rev. Proc. 81-17, 1981-1 C.B. 688. We further anticipate the Bankruptcy Courts would incorporate these tax authority filing notices as appendices to the local Bankruptcy Court rules and would thus make the filing requirements readily available and knowable to all debtors and their counsel.

See also our response to Commission Track Numbers 105, 106 and 109, supra.

***************************FOOTNOTES***************************************

fn. 84: If the taxing authority assesses the tax against the estate, debtor or trustee, if the assessment is not satisfied out of the estate's assets or discharged on the termination of the title 11 case, they may be collected from the debtor thereafter. Bankruptcy Code Sections 505(a)(2)(B), 505(c) and 523.

Questions, comments or suggestions? kbercik@taxcounsellor.com

Last updated June 1, 1997