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 (fn. 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 Section 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 Section 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 Section 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.

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fn. 15: See Changes in Bankruptcy Tax Law Hearings on H.R. 9973 Before the House Comm. on Ways and means, Serial 95-61, 95th Cong; 2d Sess. (1978) at 116; The Bankruptcy Tax Act and Minor Tax Bills; Hearings on H.R. 5043 Before the Subcomm. on Select Revenue Measures of the House Comm. on Ways and Means, 96th Cong., 1st Sess (1979) at 175; Written Comments on Certain Aspects of H.R. 5043, Bankruptcy Tax Act of 1979 (Comm. Print 1980) at 5; Miscellaneous Tax Bills VII: Hearings on S.2484, S.2486, S.2500, S.2548 and H.R. 5043 Before the Subcomm. on Tax'n and Debt Management Generally of the Senate Comm. on Finance, 95th Cong. 2d Sess. (1980) at 5.

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Last updated July 3, 1997