I. History of Tax Claims in Bankruptcy
B. Calls for Reform
In 1997, the National Bankruptcy Review Commission released its final report of the tax advisory committee. In this report, the committee recommended that numerous changes to the Bankruptcy Code. Included in these were changes to §§ 1129, 724, and 507.
I. 1129
While the advisory committee offered many suggested changes regarding § 1129, this section focuses on the recommendations related to chapter 11 filings.
The first such suggestion focused directly on the discrimination against secured tax claims. Put simply, the committee recommended secured tax claims receive the same treatment “as if the claims were merely priority.”[1] This simple change alone would help a great deal in evening out the treatment between a secured tax claim, and a tax claim that is merely a priority claim.
Next, the tax committee presented three proposals for changing § 1129(a)(9), specifically targeting the interest rate and deferred payments.[2]The first proposal recommended using the interest rate listed in § 6621(a)(2) at the time of the plan’s confirmation for the life of the plan.[3]In addition, the first proposal suggested prohibiting balloon payments, in favor of periodic payments over a course of time up to six years.[4]The committee recommended the first item in order to minimize the “unnecessary and time consuming litigation.”[5]The second item was intended to protect the taxing agencies that are already in a position of “prejudice” and “[great] risk of non-payment.”[6]Of the three proposals regarding § 1129(a)(9), this is the preferred choice by the committee.
The second proposal, or first alternative proposal, in the interest of not upsetting the current scheme, suggested that § 1129(a)(9) stay the same.[7]Any of the changes in the first proposal would do little more than “[weaken] the priority status of taxes.”[8]By permitting taxpayers to pay tax claims over the length of six years, it would be possible to use bankruptcy to extend payments over a much longer period of time than the originating statute intended.[9]This proposal, however, did not carry enough support by the committee to overcome the advantages of the first suggestion.[10]
The third proposal uses much of the same language as the first proposal.[11]It requires the interest rate to follow § 6621, although it does not limit it to 6621(a)(2) as the first proposal did.[12]This proposal does clarify the language of 1129 to prohibit balloon payments in favor of equal payments, at least every three months.[13]In contrast, the first proposal recommended monthly or quarterly.[14]Finally, the third proposal requires the six year payment window to start at the date of assessment for prepetition claims, and date of confirmation for postpetition claims, as opposed to the date of the order of relief in the first proposal.[15]
II. 724
The committee’s primary recommendation for § 724 centered on the potential repeal of subsection (b).[16]The committee argued both for and against the repeal, but ultimately recommended repealing it.[17]In the case for repealing 724(b), the committee argued that section was obscure and complicated.[18]It also argued that it put extra hardship on local school districts that depended on the revenue that may be avoided under 724(b).[19]It also argued that this subsection provided incentive to debtors and their attorneys to delay a conversion from chapter 11 to chapter 7, since any fees accumulated before the conversion would be paid prior to any tax claims.[20]
In contrast, the argument against the repeal claimed that governments should occasionally have to contribute, along with other debtors, to the payment of the bankruptcy administrators.[21]If the administrators do not get paid, then there will be no guarantee that the bankruptcy system will continue to work.[22]
III. 507
After examining § 507, the advisory committee recommended three changes. The first change focused on when the tolling of certain time limits starts when there are successive bankruptcy filings.[23]The example used in the proposal was the 240 day window in which tax claims that are assessed become priority and nondischargeable.[24]The problem arises when there are multiple filings within a short amount of time, creating a question if the date of the first filing tolls the timing for all the filings.[25]The committee recommended that the statute be clarified to suspend the periods for any time the government is prohibited from pursuing a claim.[26]
The second recommendation, similar to the first, deals with the 240-day assessment window and its interaction with offers in compromise.[27]Here again, the question is if a pending offer in compromise should suspend the 240-day time period.[28]The committee recommended that “any offer in compromise pending within the 240-day period should toll that period whether the offer in compromise was made before or after assessment.”[29]
The final recommendation was to create a definition that would be as universal as possible, regardless of the actual procedures used for the term “assessment.”[30]The definition was limited to only state and local purposes, and defined assessment to mean the “time at which a taxing authority may commence an action to collect the tax.”[31]
[1] Committee Report, supra note 1, at 332.
[2] Id. at 214.
[3] *Id.*
[4] *Id.*
[5] *Id.*
[6] *Id.*
[7] Committee Report, supra note 1, at 214.
[8] *Id.*
[9] *Id.*
[10] *Id.*
[11] *Id.*
[12] *Id.*
[13] Committee Report, supra note 1, at 214.
[14] Id.
[15] *Id.*
[16] Id. at 100.
[17] Id.
[18] *Id.*
[19] Committee Report, supra note 1, at 100.
[20] *Id.*
[21] *Id.*
[22] *Id.*
[23] Id. at 311.
[24] *Id.*
[25] Committee Report, supra note 1, at 311.
[26] *Id.*
[27] *Id.*
[28] *Id.*
[29] Id. at 313.
[30] Id. at 505.
[31] Committee Report, supra note 1, at 505.