SPECIAL BANK ACCOUNTS FOR POST-PETITION TAXES AND OTHER PAYROLL DEDUCTIONS

(COMMISSION TRACK NUMBER 315)

Present Law

Under present law, a trustee or debtor in possession is not required to set aside postpetition taxes and non-tax deductions from employee paychecks in a special bank account. Currently, trustees and individuals continue to treat post-petition taxes and deductions from employee paychecks in the same manner as any other business expenses.

Commission Proposal

Commission Track Number 315. The Small Business Working Group proposes to amend sections 704, 1106, 1202 and 1302 of the Bankruptcy Code to require that any small business establish and maintain a separate bank account for post petition taxes and non -tax deductions from employee paychecks. See also Santa Fe Discussion Issues, p. 20, Item 3F; Unnumbered Government Working Group Proposal.

Task Force Position

The Task Force generally agrees with the proposal that small businesses under the jurisdiction of the Bankruptcy Court should be required to set up special bank accounts for postpetition taxes and other deductions from employee paychecks.

Reasons for Position

By definition, debtors within the bankruptcy system are in severe financial trouble. Therefore, there is increased risk that the postpetition taxes and/or other deductions from employee paychecks might not be paid as required by law. Many of our members have observed these postpetition delinquencies by trustees and individual debtors during the bankruptcy process. We, therefore, believe that it would be prudent to require that a small business establish a special bank account to segregate any monies withheld from employee paychecks and for postpetition taxes. This method would clearly identify the monies as being in trust for the purposes for which they were set aside. It would decrease the possibility that trust monies would be used for the general operations of the estate. It would also protect employees from improper use of ERISA monies for company operations.

Section 7512 of the Internal Revenue Code should be amended to provide that in the event of a title 11 case a special bank account in accordance with section 7512(b) should be opened by the debtor and/or trustee. The Department of Treasury and/or Internal Revenue Service would not be required to give notice in accordance with section 7512(a) in the event of a bankruptcy filing, but instead the debtor and/or trustee would be required to set up a special bank account immediately upon filing a petition under the Bankruptcy Code. Internal Revenue Code Section 7215 currently contains criminal sanctions for failure to comply with its requirements. The Task Force suggests that any proposal include civil sanctions as an additional alternative to the criminal sanctions contained in Internal Revenue Code Section 7215.

Questions, comments or suggestions? kbercik@taxcounsellor.com

Last updated June 1, 1997