Shareholders of financially troubled S corporations may now be able to avoid the flow-through of taxes when the S corporation or its subsidiary files bankruptcy. In In re Majestic Star Casino, LLC, 716 F.3d 736 (3rd Cir. 2013), the Third Circuit Court of Appeals ruled that an S corporation shareholder, who may have received the benefit of years of flow-through income tax treatment from the S corporation, may avoid the flow-through of taxable gain or income in bankruptcy simply by revoking the S corporation election.
In the preparation of a comprehensive estate plan for a client, an attorney must consider the size of the estate, the manner in which assets are titled, transfer and income tax issues, and family dynamics. In light of the recent United States Supreme Court decision in Clark v. Rameker[1], ("Clark") there is now one more area of concern.
Before Clark
Bankruptcy Remote? Maybe Not
A California Franchise Tax Board (FTB) Chief Counsel Ruling concluded that a taxpayer’s sales of assets pursuant to a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code were not “occasional sales” within the meaning of 18 Cal. Code Regs. § 25137(c)(1)(A)2. Instead, the sales of assets were deemed to be part of the taxpayer’s normal course of business and occurred frequently. As a result, the taxpayer’s gross receipts from the asset sales were includable in its sales factor for apportionment purposes. Under 18 Cal. Code Regs.
In the case of United States of America v. Edward P. Bond, No. 12-4803 (2d. Cir. August 13, 2014), the United States Court of Appeals for the Second Circuit (the "Second Circuit") issued a decision that could have far-reaching effects on how liquidating chapter 11 bankruptcy cases will be handled in the future.
A bankruptcy court lacks subject matter jurisdiction to determine a tax refund claim under Section 505(a)(2)(B) of the Bankruptcy Code where the refund was requested by a liquidating trustee appointed pursuant to a plan, as opposed to a pre-confirmation bankruptcy trustee or debtor-in-possession, the Second Circuit held in United States v. Bond, Docket No. 12-4803 (2nd Cir. Aug. 13, 2014).
INTRODUCTION
Clinton County Treasurer v. Wolinsky, 511 B.R. 34 (N.D.N.Y. 2014)
A chapter 7 trustee sought to avoid a property tax foreclosure as a fraudulent transfer and then to recover damages from the foreclosing county. The bankruptcy court agreed that the transfer was a fraudulent conveyance, but awarded only about half of the damages requested by the trustee. Both the county treasurer and the trustee appealed.
Before Ruth Heffron passed away in 2001, she named her daughter, Heidi Heffron-Clark, as the beneficiary of her individual retirement account (“IRA”). What seemed like a simple part of Ruth’s estate planning resulted in a U.S. Supreme Court decision that would cause many to reconsider how to address IRA beneficiary designations for creditor protection purposes.
Facing the imminent bankruptcy of the federal Highway Trust Fund (the “HTF”) and the specter of delays and reductions in payments from the HTF to the States, the US Congress last week passed the Highway and Transportation Funding Act of 2014, which extended federal surface transportation programs and funding through May 2015. We summarize below the key elements of the Act.