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State Tax Aspects of Bankruptcy (Portfolio 1540)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors address the state tax issues confronting practitioners faced with a bankruptcy case.

 

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DESCRIPTION

The State Tax Aspects of Bankruptcy Portfolio discusses thethree separate legal systems a practitioner must consider: the state tax law, the federal Bankruptcy Code, and the federal tax law to the extent the state tax system is federally based.

 

 

 

Of the three, the Bankruptcy Code is the most significant as it overrides competing state tax law in favor of its provisions and policies. This Portfolio addresses the effects of state tax laws on bankruptcy and provides planning tips on avoiding the pitfalls associated with these issues.

 


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AUTHORS

JEANNE E. GORRISSEN, ESQ.

Jeanne E. Gorrissen, Esq., was Deputy New Jersey Attorney General representing the New Jersey Division of Taxation before State Courts (both general jurisdiction and the Tax Court) and Federal Courts (both general jurisdiction and the Bankruptcy Court). She also served as law clerk to the Hon. Charles R. Simpson at the United States Tax Court from 1973 to 1975. Jeanne has published several articles concerning the state tax aspects of bankruptcy in the Journal of State Taxation, New Jersey Lawyer, Newsletter of the Debtor–Creditor Section of the New Jersey Bar Association, and Newsletter of the Tax Section of the New Jersey Bar Association. She is also the author of 1540 T.M., State Tax Aspects of Bankruptcy, another portfolio in the Multistate Tax Portfolio Series. She served as the 1991 Chairman of the Northeastern States Government Bankruptcy Attorneys Committee. In addition, she is a regular speaker on the topic of bankruptcy for numerous conferences and seminars.

 

 

 

Credentials / J.D., University of Pennsylvania Law School, LL.M in Taxation, Temple University School of Law.

 


TABLE OF CONTENTS

Detailed Analysis

1540.01. INTRODUCTION TO STATE TAXES AND BANKRUPTCY LAW

A. Development of State Tax Provisions in the Bankruptcy Law

B. Application of the Bankruptcy Law to State Tax Debts

1540.02. THE BANKRUPTCY COURT SYSTEM

A. Establishment of the Bankruptcy Court

B. Jurisdiction of the Bankruptcy Court

1. Case or Controversy

2. Bankruptcy Case/Bankruptcy Property

3. “Core Proceedings”/“Related Proceedings”

4. Litigating Before the Court

5. The Bankruptcy Court as a Court of Equity

6. Tax Injunction Act Limitation

1540.03. STATE SOVEREIGN IMMUNITY FROM FEDERAL COURT JURISDICTION

A. Introduction

B. 11 U.S.C. 106 - Congress’ Effort to Abrogate and Waive Sovereign Immunity

C. U.S. Supreme Court Affirmation of States’ Sovereign Immunity

D. Federal Courts’ Response to the U.S. Supreme Court

E. The U.S. Supreme Court's Decision in In Re Hood

F. Impact of the States’ Immunity

G. Predicates to State Immunity

1. Action Must Be Against the State

2. Action Must Constitute a “Suit”

3. Advisory Opinion Limitation

H. Limitations on States’ Immunity

1. Bankruptcy Court's In Rem Jurisdiction

2. Proceeding Does Not Involve a Suit

a. The Bankruptcy Case Itself

b. Action Brought as a “Motion” or “Suit”

3. State's Waiver of its Immunity

a. Introduction

b. Filing a Proof of Claim in the Case

(1) Offset by Debtor's Counterclaim

(2) Ancillary Relief

c. Failure to Assert Sovereign Immunity

d. Participation in Negotiations

4. Ex parte Young

1540.04. COMMENCEMENT OF THE CASE

A. Introduction

B. Filing the Petition With the Bankruptcy Court

1. Procedure

2. Contents of the Petition

3. Notice to the Tax Agency

1540.05. CREATION OF THE ESTATE

A. Comprised of all the Debtor's Property When the Petition is Filed

B. Return of Property to the Estate

1. Preferential Payments

2. State's Ownership of Trust Fund Taxes

3. Turnover of Property

C. Sovereign Immunity

1540.06. INTERPOSITION OF THE AUTOMATIC STAY

A. Collection Actions Barred

1. Action Void or Voidable

2. Reach of the Stay

3. Remedy for Violations of the Stay

B. State's Sovereign Immunity

1540.07. MANAGEMENT OF THE CASE

A. Post-Petition Compliance With State Tax Laws

B. Types of Cases

1. Corporations

a. Liquidation (“Chapter 7”)

b. Rehabilitating Reorganization (“Chapter 11”)

(1) Filing Predicates

(2) Bad Faith Filing

(3) Debtor Status and Responsibilities

c. Liquidating Reorganization (“Chapter 11”)

d. Special Tax Deductions Allowed to the Debtor

2. Individuals

a. Liquidation (“Chapter 7”)

b. Reorganization (“Chapter 11”)

c. Estate's Tax Status and Income in Chapter 7 and Chapter 11 Cases

d. Individual Debt Adjustment (“Chapter 13”)

(1) Filing Predicates

(2) Debtor Status and Responsibilities

1540.08. TAX DISPUTES

A. Characterization as a Tax

B. Pre-Petition Taxes

1. Unsecured Pre-petition Priority/Nondischargeable Taxes

a. Taxes Due Within Three Years of Petition

b. Assessed Taxes

c. Unassessed Taxes

d. Property Taxes

e. Employment Taxes

f. Excise Taxes

g. Customs Duties

h. Compensatory Tax Penalties

i. Trust Fund Taxes

2. Unsecured Non-priority/Non-dischargeable Taxes

a. Taxes on Delinquent Returns

b. Late Filed Returns

c. Taxes Evaded by Fraudulent Returns

d. Non-Compensatory Penalties

3. General Unsecured Pre-Petition Taxes

4. Secured Pre-petition Taxes

a. Secured, Unsecured, Undersecured

b. Priorities Between Federal and State Tax Liens

5. Interest

C. Post-Petition Taxes

1. Individual Debtor's Taxes

2. Estate's Administrative Taxes

a. Pre- or Post- Petition

b. Penalties and Interest

D. Claims for Tax Debts

1. Administrative Taxes

a. Request for Payment

b. Sovereign Immunity

2. Pre-Petition Taxes

a. Filing the Proof of Claim

b. The Bar Date

3. Litigating the Pre-Petition Claim

a. Procedure

b. Presumption of Validity/Burden of Proof

c. Estimated Claims

d. Abstention

(1) Permissive Abstention

(2) Mandatory Abstention

E. Declaratory Judgments

1. Background of 11 U.S.C. 505(a)

a. Reach of 11 U.S.C. 505(a)(1)

b. Exceptions to 11 U.S.C. 505(a)(1)

2. Sovereign Immunity

F. Prompt Determinations

1. Procedure

2. Sovereign Immunity

G. Assessment of Tax

H. Refunds

1. Procedure

2. Sovereign Immunity

1540.09. PAYMENT AND DISCHARGE OF TAX DEBTS

A. Collection of Trust Funds Taxes From Corporate Officers

B. Payment in the Case/Discharge

1. Corporations

a. Liquidation (Chapter 7)

b. Reorganization (Chapter 11)

(1) The Reorganization Plan

(a) Sound Business Purpose

(b) Payment Provisions

(2) Confirmation of the Plan

(3) Binding the State to the Plan

(4) Application of Payments to Trust Fund Tax Debts

(a) United States v. Energy Resources Co.

(b) Sovereign Immunity

(5) State Transfer Tax Exemption

(6) Ruling on the State Tax Consequences of the Plan

(7) Discharge on Confirmation of the Plan

2. Individuals

a. Liquidation (Chapter 7)

b. Reorganization (Chapter 11)

c. Individual Debt Adjustment (Chapter 13)

1540.10. CONSEQUENCES OF THE DISCHARGE

A. The Discharge

B. Tax Consequences of the Discharge

1. Deductions, Net Operating Losses and Basis

2. Transfer of Net Operating Losses From the Estate to the Individual Debtor

C. Post-Discharge Enforcement of Liens

D. Post-Discharge Collection of Non-Discharged Taxes

E. Enforcing the Discharge Against the States

1. Dischargeability Action

2. Injunctive Relief

3. Ex parte Young Equitable Relief

a. Prospective Relief

b. State Not the Real Party in Interest

c. Special Sovereign Interests of the State

d. Tax Injunction Act Limitation

4. State Administrative or Judicial Relief


WORKING PAPERS

Working Papers

Item Description Sheet

Worksheet 1 U.S. Bankruptcy Court-Voluntary Petition (Form 1)

Worksheet 2 U.S. Bankruptcy Court-Proof of Claim (Form 10)

Worksheet 3 Harry P. Begier, Jr., Etc., Petitioner v. Internal Revenue Service (496 U.S. 53 (1990))

Opinion

Worksheet 4 Hoffman, Trustee v. Connecticut Dept. of Income Maintenance, et al. (492 U.S. 96 (1989))

Opinion

Worksheet 5 11 U.S.C. 362

Worksheet 6 28 U.S.C. 157

Worksheet 7 Excerpt from BNA 2008 Survey - Bankruptcy Issues

Bibliography

Bibliography