In Monday’s 7-2 decision in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., the Supreme Court of the United States held that the exemption from state transfer and stamp taxes in Section 1146(a) of the Bankruptcy Code does not apply to transfers that take place prior to the time the Bankruptcy Court confirms a reorganization plan. Section 1146(a) had been cited by bankruptcy debtors and their asset purchasers in seeking tax exemptions for Section 363 sales and other pre-confirmation transfers.
In the case of Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.,1 the United States Supreme Court ruled that the exemption from the payment of stamp taxes or similar taxes on transfers of property of a Chapter 11 debtor’s estate, contained in section 1146(a) of the Bankruptcy Code,2 does not apply to transfers of property made before a Chapter 11 plan is confirmed.
On June 16, 2008, the United States Supreme Court held that the stamp-tax exemption under 11 U.S.C. § 1146(a) does not apply to transfers made before confirmation of a Chapter 11 plan. This decision will impact the structuring of asset sales in Chapter 11 cases where the transfers involve significant stamp taxes or similar taxes. Full text of the opinion.
Debtors operating under Chapter 11 bankruptcy protection routinely sell some or all of their assets during the course of their bankruptcy case. As part of a bankruptcy court approved sale process, debtors often request that the court exempt such transfers from stamp taxes1 pursuant to Bankruptcy Code § 1146(a). The exemption generally reduces obligations encumbering a debtor’s property and allows for a greater portion of sale proceeds to be available for distribution to creditors.
The Friday, October 10, 2008, edition of The State newspaper (Columbia, South Carolina) carried an article about the possible Wells Fargo-Wachovia merger. The article stated the merger could cause “major job cuts.” In an economic downturn such as the current one, employees are going to suffer job losses. Any employment attorney will tell you that will result in more employment-related lawsuits being filed by former employees against their former employers. Any bankruptcy attorney will tell you that will result in increased bankruptcy filings.
In a case that has broad implications for trustees and taxing authorities embroiled in preference avoidance actions, the Bankruptcy Court for the Western District of Missouri weighed in on the parameters of a trustee’s ability to avoid preferential sales and use tax payments under section 547 of the Bankruptcy Code.
Overdue Tax Payments
With the country officially in a recession and the lack of available refinancing options continuing, more and more businesses are faced with the realities of foreclosure. While foreclosure often allows a business to wipe the debt slate clean with respect to the foreclosed property, it can also create unintended tax consequences as well as tax planning opportunities.
Recourse v. Non-Recourse Debt
Given the current state of the economy, it should come as no surprise that business related bankruptcy filings increased 41.6 percent and non-business bankruptcies increased 28.4 percent between June 30, 2007, and June 30, 2008, with more than one million Americans filing for bankruptcy during calendar year 2007, according to the Administrative Office of the U.S. Courts.
One of the most significant tax provisions contained in the recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) might prove helpful to certain taxpayers looking to restructure their balance sheets.
Debt-for-debt exchanges are not new, but are worth revisiting given the current economic climate. Furthermore, the recently enacted "Stimulus Act"1 provides some temporary relief to debtors from potentially harsh tax consequences of restructuring. The following discussion is relevant to issuers (also referred to as debtors) or holders (also referred to as creditors) of debt who are "US persons" (as defined in the US Internal Revenue Code).2
In order to illustrate some of the key US federal income tax consequences of a debt-for-debt exchange, consider the following example: