New
Bankruptcy Law
The new bankruptcy reform was signed into law by the president
in April, 2005. It will become effective on October 17,
2005. . Generally families earning more than the state
median, about $45,000 in Illinois, will be will face huge
roadblocks to filing a Chapter 7 bankruptcy on consumer
debts and only be allowed to file Chapter 13. Prior to
seeking the protection of bankruptcy debtors will be required
to pay for debt counseling as a first step. The following
is brief summary of the major tax related provisions of
the act.
IRS Allowable Expense Guidelines
Debtors will be required to use IRS expense guidelines
in most cases to determine their ability to make payments
pursuant a Chapter 13 plan. (Sec. 103) Expresses the
sense of Congress that the Secretary of the Treasury
has the authority to alter Internal Revenue Service
(IRS) standards established to set guidelines for repayment
plans as needed to accommodate their use under the Bankruptcy
Code. Instructs the Director of the Executive Office
for U.S. Trustees to report to certain congressional
committees regarding the use of IRS standards for determining
specified monthly debtor expenses and the impact of
such standards upon debtors and the bankruptcy courts.
Other Tax Related Provisions
(Sec 315) Requires dismissal of a Chapter 7 or 13
case upon debtor's failure to provide to the bankruptcy
trustee within seven days before the initial date for
the first meeting of creditors a tax return for the
latest taxable period prior to filing. It mandates that,
at the time of filing with the taxing authority, a Chapter
7 or 13 debtor file with the bankruptcy court specified
tax documentation pertaining to the period from case
commencement until case termination.
Title VII: Bankruptcy Tax Provisions – Tax Liens
(Sec. 701) Amends the bankruptcy code to modify the
treatment of certain tax liens.
Addresses for Notices
(Sec. 703) Requires the clerk of each district to
maintain a listing under which a governmental entity
responsible for the collection of taxes within such
district may designate an address for service of requests
and describe where further information for filing such
requests may be found.
IRS Statutory Rate
(Sec. 704) Prescribes the rate of interest to be paid
on mandatory interest payments on tax claims will be
the IRS statutory rate.
Tolling of Priority
(Sec. 705) Revises the specifications for income tax
claims receiving eighth priority (allowed unsecured
claims of governmental units). Provides for tolling
of the time periods covering such tax claims for stays
of proceedings in a prior bankruptcy case, and the pendency
or effect of offers in compromise or installment agreements.
Tougher to Discharge Taxes in Chapter 13
(Sec. 707) Prohibits a Chapter 13 discharge of any
debt for fraudulent tax payments.
Fraudulent Activities
(Sec. 708) States that confirmation of a bankruptcy
plan does not discharge a corporate debtor from any
debt for:
1) money or credit obtained by false representation
owed to a domestic governmental unit or to a person
as the result of an action filed with respect to certain
claims against the Federal or a State government; or
2) a tax or customs duty with respect to which the
debtor made a fraudulent return or willfully attempted
to evade or defeat such tax.
Stay and the U. S. Tax Court
(Sec. 709) Limits the automatic stay of U.S. Tax Court
proceedings to prepetition taxes.
Plan Provision for Taxes
(Sec. 710) Sets as a prerequisite for court confirmation
of a Chapter 11 bankruptcy plan that includes tax claims,
that the debtor make regular cash installment payments
over a period ending not later than five years after
the date of entry of the order for relief, and in a
manner not less favorable than the most favored nonpriority
unsecured claim provided for in the plan.
Avoidance of Tax Liens
(Sec. 711) Prohibits the avoidance of statutory tax
liens by certain purchasers. This provision makes it
much harder for trustees and debtors in possession to
avoid state and federal tax liens.
Payment of Taxes During Proceedings
(Sec. 712) Amends the Federal judicial code to require
officers and agents conducting any business under court
authority to pay all Federal, State, and local taxes
when due in the course of the business, unless it is
a property tax secured by a lien against estate property
which is abandoned by the bankruptcy trustee, or payment
of the tax is excused under a specific bankruptcy law.
Cites circumstances in which payment of such taxes may
be deferred in a case pending under chapter 7 until
final distribution is made.
Entitles to administrative expense priority payment
certain secured and postpetition unsecured taxes incurred
by the bankruptcy estate, including ad valorem property
taxes.
Declares that a governmental unit shall not be required
to file a request for the payment of administrative
expenses relating to a tax liability or tax penalty.
Allows a trustee to recover from property securing a
claim for the payment of all ad valorem property taxes
relating to such property.
Tardy Tax Claims
(Sec. 713) Requires as a condition for payment of
tardily filed priority tax claims that they be filed
either before the trustee commences distribution, or
ten days following the mailing to creditors of the summary
of the trustee's final report, whichever is earlier
(currently, before the trustee commences distribution
of the estate).
Sec. 6020(b) Returns
(Sec. 714) Returns involuntarily prepared by tax agencies
for a taxpayer are included in the definition of tax
returns.
Conditions for Chapter 13 Confirmations
(Sec. 716) Conditions court confirmation of a chapter
13 bankruptcy plan upon filing by the debtor:
1) of all prepetition tax returns for the prior 4 years;
and
2) before the day on which the first meeting of the
creditors is convened, of all tax returns for taxable
periods ending in the four-year period that ends on
the date of the filing of the petition. Directs the
court to dismiss a plan or convert it to chapter 7,
whichever is in the best interests of the creditors
and the estate, if a chapter 13 debtor fails to comply
with such time frame.
Expresses the sense of Congress that the Judicial Conference
of the United States should propose for adoption amended
Federal Rules of Bankruptcy Procedure pertaining to
objections to tax returns and to plan confirmation.
Chapter 11 Disclosure of Tax Consequences
(Sec. 717) Redefines "adequate disclosure,"
for Chapter 11 postpetition disclosure and solicitation
purposes, to include full discussion of the potential
material Federal and State tax consequences of the plan
to the debtor and to a hypothetical investor that is
representative of the holders of claims or interests
in the case.
Setoff of Tax Refunds
(Sec. 718) Denies an automatic stay (unless specified
conditions are met) to the setoff of an income tax refund
for a taxable period which ended before the order for
relief against an income tax liability for a taxable
period which also ended before the order for relief.
Conforms State and Federal Taxable Estate Rules
(Sec. 719) Revises special provisions related to the
treatment of State and local taxes, including the creation
of a separate taxable estate when such is done for Federal
tax purposes.
Conversion for Late Filed Returns
(Sec. 720) Permits a taxing authority to petition
the court to convert or dismiss a case if the debtor
fails to timely file a tax return or obtain an extension,
whichever is in the best interests of creditors and
the estate.
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