Karrie L. Bercik, JD, LLM

Summary of Principal Recommendations

The following is an enumeration of the Task Force's recommendations on the more significant issues discussed herein.

The Task Force opposes proposals to repeal the downgrading of tax liens currently contained in section 724 of the Bankruptcy Code. Any viable system must provide for the payment of administrative expenses. But we think that private secured creditors should bear the burden of ad valorem real property taxes. We oppose extension of the "deemed filed" rule from chapter 11 to other bankruptcy chapters. We support efforts to strengthen notice to governmental units so that taxing authorities will not lose their claims because the wrong governmental officials received notice of the claims. State and local taxing authorities should receive notice of pending federal tax audits. Once such amendments are made it will be unnecessary to go further and increase penalties for failure to comply with the notice requirements. We oppose as unduly onerous proposals which would require debtors to schedule the basis of their assets.

We generally support the government's position that the burden of proof in bankruptcy court should be on the taxpayer, but some room must be made for exceptions that would not place trustees and creditors at a disadvantage. We favor maintaining the superdischarge in chapter 13 as it presently exists.

In general, we agree that a chapter 11 debtor should not be able to "backload" priority tax payments under section 1129(a)(9)(C) of the Bankruptcy Code. We foresee the necessity for some exceptions, but we would not allow the debtor to pay other commercial creditors while backloading the stretched out tax payments. When section 1129(a)(9)(C) is invoked, we would fix the interest rate for measuring the value of deferred payments at the regular federal statutory deficiency rate for taxes.

We think the government does not need any statutory increase in its setoff rights. It is adequately protected now.

Many technical amendments need to be made to section 346 of the Bankruptcy Code. The taxable year provisions in the case of individuals must be conformed to the federal rule in the Internal Revenue Code, because the statutory disparity between federal and local taxable years as it exists today is a mistake that has never been corrected. For similar reasons, a separate taxable entity should not be created in chapter 12 family farmer cases, because no such taxable entity is created under the Internal Revenue Code.

We don't believe that a debtor should be required to conduct negotiations with a taxing authority before pursuing contempt sanctions. Taxing authorities must be required to observe the bankruptcy laws the same as any other creditors.

We agree that time periods that run against taxing authorities should be tolled during previous bankruptcy cases of the same debtor and that the 240-day period within which the government can make an assessment of taxes that will be protected in bankruptcy must be suspended during a period when an offer in compromise is pending. We also agree that small business debtors should maintain separate bank accounts for postpetition taxes and withholdings.

We strongly oppose any effort to overrule the Supreme Court's decision in the Energy Resources case. To protect the integrity of that decision, we think it is necessary to give the bankruptcy court authority to enjoin the collection of trust fund taxes from nondebtors during the period when payments under a plan are being made. When payments under a confirmed plan are not made, the rights of governmental taxing authorities should be protected.

We oppose provisions that would limit the jurisdiction of the bankruptcy court to the power of a nonbankruptcy tribunal. The strength of the bankruptcy system is that it provides a forum for the bankruptcy court to expeditiously adjudicate all claims against a debtor so that distribution can be made.

We support a wide array of proposals that would conform the letter of the bankruptcy law to its purpose, notwithstanding that these would strengthen the government's hand in collecting taxes. Thus, we would not give a bankruptcy trustee or debtor in possession the rights of a bona fide purchaser in avoiding tax liens. On the other hand, we oppose fundamental changes in the priority and discharge provisions of the Bankruptcy Code.

There are places in current law that give the government too much protection from bankruptcy court procedures and they must be changed. It is time that the bankruptcy courts were given full jurisdiction to issue declaratory judgments on the tax consequences of a plan of reorganization, and the failure by the government to respond to an appropriate section 505(b) request should protect not only the trustee, the debtor and a successor to the debtor, but the creditors and the estate as well. Also, the subordination of certain tax penalties should be restored.

We have also proposed some technical amendments to the Internal Revenue Code and the Bankruptcy Code in places where the current provisions do not work well or are in need of clarification. Thus, we would make clear a trustee's duty to file partnership information returns, and we would allow such trustee to serve as the tax matters partner to fill a void in present law. We would write a standard of willfulness that appropriately governs priority and discharge of certain individual tax debts. We would clarify the effect of a discharge of a partnership's debt on a partner's basis for his partnership interest. We have a new proposal to deal with the troublesome issue of the tax effect of abandonment on the debtor and his estate. We would clarify the jurisdiction of the bankruptcy court over consolidated returns where the common parent corporation, but not all members of its group, is a debtor. We would strengthen the position of all parties by requiring specific standards for discussion of tax issues in chapter 11 disclosure statements. Finally, we have endorsed a proposal which partially redresses the imbalance created by repeal of the stock for debt exception.

On one proposal, there was no consensus after discussion. Under present law, the tax liability of a corporation for the year of filing a petition is divided into a prepetition claim and an administrative claim. Taxing authorities generally seek to reverse this rule. Some of our members agree with these taxing authorities and others wish to retain present law. We have not made a Task Force recommendation on this question, but have set forth the present law and stated the basis for our division.

Some of our positions would work to the benefit of the government and others would work to the benefit of debtors and creditors. What is most important is that taken as a whole, these proposals present the kind of balance that would make the bankruptcy system work better, and that is why we believe that Congress created the Commission.

Questions, comments or suggestions? kbercik@taxcounsellor.com

Last updated March 30, 1998

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