As you know, the last two years have seen a somewhat improved, but by no means robust, business climate. At the same time, structural shifts in the law firm business model have been both highly publicized and memorably demonstrated.
Oregon’s $29 million corporate excise tax claim against the taxpayers’ parent company was held to violate both the Due Process and Commerce Clauses of the U.S. Constitution by the U.S. Bankruptcy Court for the District of Delaware. Oregon claimed that Washington Mutual, Inc. (WMI) was liable for its subsidiaries’ tax because WMI had (as the parent corporation) filed consolidated corporate tax returns on behalf of itself and its subsidiaries and therefore could be held jointly and severally liable for the tax due.
Tax-qualification requirements generally prohibit plan sponsors from eliminating optional methods of distribution under a retirement plan. This “anti-cutback” requirement is subject to only a limited number of exceptions. A recent modification to this rule adds a new exception for single-employer defined benefit plans maintained by employers in bankruptcy. Such employers may amend their plans to eliminate lump-sum distribution options if certain conditions are met.
The Anti-Cutback Rule
The IRS issued final regulations providing a limited exception to the anti-cutback rules under Code section 411(d)(6) for a plan sponsor that is a debtor in a bankruptcy proceeding. The anti-cutback rules generally prohibit amendments to qualified retirement plans that reduce or eliminate accrued benefits, early retirement benefits, retirement-type subsidies or optional forms of benefits.
Pinellas County Property Appraiser v. Read (In re Read), 692 F3d 1185 (11th Cir. 2012) –
Under Section 505(a)(1) of the Bankruptcy Code, generally a bankruptcy court may determine the amount or legality of any tax. However, under Section 505(a)(2)(C) of the Bankruptcy Code ad valorem real or personal property taxes cannot be contested if the applicable time period under non-bankruptcy law has expired.
In re Creekside Senior Apartments, LP, 477 B.R. 40 (6th Cir. B.A.P. 2012) –
In valuing a bank claim secured by a low-income housing project for purposes of a plan of reorganization, should the remaining federal low‑income housing tax credits allocated to the project be taken into consideration? In Creekside the bankruptcy court said yes, and the bankruptcy appellate panel agreed.
Pension issues in the American Airlines (AMR) bankruptcy1 have resulted in the Internal Revenue Service (IRS) issuing new final regulations, effective November 8, 2012 (Final Regulations), which broadly impact all debtors facing underfunded pension plan obligations. The Final Regulations provide chapter 11 bankruptcy debtors facing distress terminations of their tax-qualified defined benefit pension plans with the additional option of amending the plans to eliminate accelerated payment options.
Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit.
Under Section 436 of the Internal Revenue Code, a single employer defined benefit plan sponsored by a company in bankruptcy cannot pay any “prohibited payments” (e.g., lump sums, Social Security level income annuity payments) if the plan is less than 100% funded. In June 2012, the IRS issued proposed regulations permitting such a defined benefit plan to be amended to eliminate prohibited payment forms without violating the anti-cutback requirements of Internal Revenue Code Section 411(d)(6) if certain conditions are satisfied.
LTR 201240017 is the world’s longest letter ruling, 111 pages in PDF format. Not surprisingly, it is a Section 355 ruling. It was issued three-and-a-half months after the original submission, with those dates bridging Christmas and New Year’s Day. There were seven additional submissions from the taxpayer in the interim. The release of the ruling was delayed for a couple of months.