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April/May
2003 |
Taxes
Internal Revenue Service
Should restructuring charges be capitalized?
Maynes, Javaras and Evans of Kirkland &
Ellis, Chicago, in responding to the proposed regulations (REG
– 12563801) dealing with, among other topics, the capitalization
of costs associated with acquiring, creating, or enhancing intangible
assets recommend that special consideration be given to bankruptcy
restructuring costs. Specifically, special consideration is requested
for transaction costs incurred in bankruptcy restructurings, especially
those involving the resolution of mass tort claims. The writers
recommend that the costs incurred by a debtor in a bankruptcy
reorganization shouldn't be required to be capitalized when the
reorganization has been motivated by a desire to manage mass tort
claims. The writers urge the IRS to recognize in final regs that
not all bankruptcies are alike and that not all bankruptcy reorganizations
are reorganizations for purposes of the regs. They also recommend
that when the costs of bankruptcy reorganizations must be capitalized,
those costs should be amortized over 15 years. Costs that are
not necessarily incurred to facilitate the restructuring should
be ordinary and necessary business expenses.
(98 Tax Notes 1827).
Tax Notes reported on May 19 that the IRS is
looking at where to draw the line so as not to require capitalization
of fees associated with bankruptcies to resolve mass-tort claims,
Keyso said. Lawyers from Kirkland & Ellis (See above) have
argued that the proposed rules requiring capitalization of transaction
costs are broad enough to apply to all bankruptcy reorganizations,
regardless of the circumstances of the bankruptcy or of the debtor,
he said.
(99 Tax notes 693)
Bankruptcy Court
May IRS apply tax overpayments against
prepetition taxes in chapter 13?
The bankruptcy court held that the IRS may apply
debtors' income tax overpayment against their prepetition taxes
even though the offset was made after the plan not providing for
the offset had been confirmed. In 2002, Richard and Carol Bare
filed a chapter 13 bankruptcy petition. The IRS was listed as
an unsecured priority creditor for the Bares' 1993 and 1995 taxes
and as having a priority claim for taxes. The Bares filed their
2001 tax return. The IRS determined there was an overpayment available
in their account for that year. The Bares filed a modified plan
and provided no indication of the overpayment.
Bankruptcy Judge John H. Squires confirmed the
Bares' amended plan in 2002 without IRS objection. The IRS filed
a motion to lift the automatic stay to apply the overpayment to
the Bares' prepetition tax liability. The IRS also filed a second
proof of claim, claiming security in the Bares' 2001 tax overpayment.
The IRS sought to apply the overpayment to the unpaid tax claims
for 1993 and 1995. The Bares objected and argued that the IRS
lost the right to setoff because it waited until after the confirmation.
The Bares argued that the right should be limited to the amount
of the scheduled claim.
The bankruptcy court agreed with the IRS that
its right of setoff wasn't controlled by the Bares' plan. The
IRS claimed that 11 U.S.C. section 553, preserving a creditor's
right of setoff, takes precedence over sections 1327 and 1141
of 11 U.S.C., which establish that confirmation binds all creditors
and discharges prepetition debts, vesting all property of the
estate in the debtor. The bankruptcy court noted that the proper
reconciliation of the provisions is undecided. In United States
v. Munsun, 248 B.R. 343 (C.D. Ill. 2000), a district court favored
section 553, in which it was compelled by the Seventh Circuit's
analysis of setoff rights in bankruptcy. The Bankruptcy court
followed Munsun and concluded that confirmation of a debtor's
plan of reorganization doesn't extinguish prepetition setoff rights.
(In re Richard O. Bare, et ux., Bankruptcy No. 02 B 03767 (Bankr.
N.D. Ill. Nov. 12, 2002).
Sixth Circuit
Does interest on unimpaired
IRS tax claim run until taxes are paid?
The Sixth Circuit affirmed a
district court's order holding that a bankruptcy plan didn't alter
the IRS's right to interest payments on its secured claim and
its unsecured priority claim. Thus, interest accrues until the
claims are fully paid. Monclova Care Center Inc. filed a chapter
11 bankruptcy in 1993, and the IRS filed a $252,608 proof of claim
designating $238,766 as a secured claim and $13,842 as an unsecured
priority claim. The bankruptcy court confirmed the plan and found
that the secured claims and unsecured priority claims weren't
impaired under the plan.
The Sixth Circuit affirmed the
bankruptcy court's decision that Graham must pay the IRS interest,
noting that the plan didn't define "impaired." and that
a claim is impaired unless the plan leaves unaltered the legal,
equitable, and contractual rights of the holder of the claimed
interest. Judge Collier held that the plan would impair the IRS
claims if it didn't include interest. The court also affirmed
the district court's holding that interest accrues on the IRS
claims until the claims are paid in-full. Judge Collier noted
that the interest limitation in 11 U.S.C. section 506(b) doesn't
applyand that the IRS is entitled to interest on both of its claims
through the date when the claims are paid in full. In re Monclova
Care Center Inc., No. 01-3636 (6th Cir. Feb. 18, 2003).
Third Circuit
Does the fact that collections are
prohibited deprive the Bankruptcy court of jurisdiction to deal
with an overpayment?
The taxpayer failed to file his 1984-1987
tax returns, and his attorney remitted money to the IRS, saying
it was to be applied toward taxpayer’s tax liabilities.
The returns were filed in 1991 and 1992, showing an overpay-ment
in 1984-1985 that he wanted applied to his 1986-1987 taxes.
The IRS disallowed the credits because they were time-barred
refund requests. In 1997 the taxpayer filed a bankruptcy petition.
The IRS filed a proof of claim for his 1987 taxes and requested
the bankruptcy court to determine his tax liability for 1984-1987.
The bankruptcy court held that the remittances were deposits,
that the statute of limitations didn't bar an adversary proceeding,
and that the remittances didn't commit the taxpayer to any defined
tax liability. The district court reversed the decision of the
bankruptcy court and held that the bankruptcy court lacked jurisdiction
over the 1984-1985 taxes. The Third Circuit agreed with the
decision of the district court by holding that, to the extent
to which the taxpayer seeks consideration of his 1984-1985 taxes,
they are limited by section 6532's limitations period. The Third
Circuit noted that the district court correctly concluded that
the bankruptcy court lacked jurisdiction over the 1984-1985
taxes. In re Roger Pransky, No. 01-2132 (3d Cir. Jan. 29, 2003).
Federal Circuit
Are capitalized bankruptcy
fees subject to carryback by liquidation trust?
In a reply brief for the Federal
Circuit, a liquidating trust has argued that the Court of Federal
Claims erred in holding that the deduction for capitalized bankruptcy
costs was not a specified liability loss under section 172(f)(1).
Standard Brands Paint Co. and subsidiaries distributed and sold
paint in retail stores. Standard Brands filed a chapter 11 bankruptcy
in 1992 and had a reorganization plan con-firmed in 1993. In
1993, Standard Brands deducted some of the fees incurred in
the chapter 11 cases and capitalized a total $5,429,186. A second
chapter 11 plan was filed in 1995 and Standard Brands ceased
its retail operations in 1996, filing a liquidation plan that
transferred its property and actions to a Liquidating Creditor
Trust (Creditor Trust). Standard Brands filed a refund claim
in 1998 claiming a net operating loss deduction of $5,429,186
for the capitalized bankruptcy costs as a specified liability
loss and carried it back to 1987 under section 172(f). The requested
refund was for $2,497,426. The IRS denied a loss deduction and
Standards Brands and the creditor trust filed a complaint seeking
a refund plus interest. The Court of Federal Claims determined
that SBPC's capitalized bankruptcy costs are deductible and
subject to a carryback of up to three years. The court then
found that the bankruptcy expenses cannot be deducted as specified
liability losses under section 172(b)(1)(C) and granted the
government's motion for summary judgment.
Standard Brands argued before
the Federal Circuit that the Federal Claims Court erroneously
held that the deduction for capitalized bankruptcy costs was
not a specified liability loss under section 172(f)(1). The
company emphasizes that the liability for the capitalized bankruptcy
costs arose under federal law and the acts giving rise to the
liability for the capitalized bankruptcy costs occurred not
later than January 26, 1993. Standard Brands also insists that
the government may not try to minimize a tax benefit by ignoring
the plain language of the statute. Major Paint Co., et al. v.
United States, Fed. Cir. Dkt. No. 02-5153 (Filed: Jan. 6, 2003).
98 Tax Notes 1370 (Mar. 3, 2003)
Bankruptcy Court
Is a settlement award
granted a couple for economic damages excludable from income?
The bankruptcy court held
that a couple's settlement award for economic damages wasn't
excludable from income and allowed the IRS's proof of claim
for the tax deficiency in their bankruptcy case.
The taxpayers objected to the
IRS's proof of claim for $1.7 million, plus interest and penalties,
arising from a 1993 tax return in which the couple contended
they were entitled to exclude a settlement award the husband
received from Southeast Toyota Distributors and others "on
account of personal injuries or sickness," as defined under
section 104(a)(2). The IRS countered that the settlement funds
weren't received from a personal injury or sickness and that
the amount shouldn't have been excluded from income. The couple
challenged the determination in the Tax Court, and they filed
a chapter 11 petition while the Tax Court petition was pending.
The bankruptcy court held that
the couple had to include the settlement award in income because
they failed to show that the award was on account of personal
injuries or sickness. The court noted that the agreement provided
for the payment of a fixed amount and didn't identify the purpose
for the payment and also found that the Joneses didn't allege
any personal injuries in their amended complaint. Because the
settlement award was includable in income, the court overruled
the Joneses' objection and allowed the IRS's proof of claim
in their bankruptcy case. In re David B. Jones, No. 99-5737-8G1
(Bankr. 2001).
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