Karrie L. Bercik, JD, LLM

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 (fn. 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.

(fn 1: See American Bar Association, Section of Taxation, Manual on Government Submissions (September 1996)

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Last updated March 30, 1998

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