H.R. 3150 Bankruptcy Reform Act of 1998

To amend title 11 of the United States Code, and for other purposes.
Analysis of Tax Proposals in H.R. 3150

Testimony before the House Judiciary Committee

March 18, 1998

Written by:

Grant W. Newton

Chair, ABI Bankruptcy Taxation Committee

Web prepared, posted and
Copyright © March 18,
1998, American Bankruptcy Institute.

H.R. 3150 contains several tax proposals that involve
modifications of the Bankruptcy Code. Most of the proposals were
recommendations made by the National Bankruptcy Review Commission
("NBRC"). However, several of the proposals contradict the
recommendations of both the NBRC and the Tax Advisory Committee
appointed by the Chairman of the NBRC. The objective of this analysis
is to explain the tax provisions that are in H.R. 3150 and identify
some of the issues that need to be addressed before these provisions
become law. H.R. 3150 contains no recommended changes to the Internal
Revenue Code because these provisions must originate in the House
Ways and Means Committee rather than the Judiciary Committee to which
H.R. 3150 has been referred. The proposed changes recommended by the
NBRC to the Bankruptcy Code that were not addressed by H.R. 3150 are
described in the final section.

The views expressed here are my own and not necessarily those of
the American Bankruptcy Institute.

Listed below is a summary of the recommended changes to H.R. 3150.

Subordination of Tax Liens (H.R. 3150, Section 501(a))

Section 724 of the Bankruptcy Code provides for the subordination
of tax liens to administrative expenses and other priority taxes.
H.R. 3150 would modify the subordination provision by not
subordinating perfected, unavoidable tax lien arising in connection
with an ad valorem tax on real or personal property, as recommended
by the NBRC. Additionally, administrative expense incurred after the
petition is filed is restricted to chapter 7 expenses unless the
claim is for wages, salaries or commissions. The subordination only
to chapter 7 expenses was not included in the recommendation of the
NBRC.

H.R. 3150, as recommended by the NBRC, would also add a subsection
(e) to section 724, providing that before a tax lien may be
subordinated, the trustee shall (1) exhaust the unencumbered assets
of the estate, and (2) in a manner consistent with section 506(c)
recover from property securing an allowed secured claim the
reasonable, necessary costs and expenses of preserving or disposing
of that property.

Subsection (f) provides that notwithstanding the exclusion of ad
valorem tax liens claims for wages, salaries, and commissions that
are entitled to a section 507(a)(3) priority and claims for
contributions to an employee benefit plan entitled to a 507(a)(4)
priority may be paid from property of the estate which secures a tax
lien, or the proceeds of such property.

Comment: The proposals to not subordinate property taxes,
to use unencumbered assets, and to subordinate property tax claims to
wage holders, appears fair.

However, the provision to limit the subordination to chapter 7
expenses will limit the recovery of assets for unsecured creditors. A
trustee appointed in a chapter 11 case, where there is a tax lien on
all assets, has no incentive to go after known or potential
recoveries because any costs that are incurred will not be allowed
unless the tax claims are paid in full. Trustees are often better
equipped to recover assets than the taxing authorities. Removing the
incentive for the chapter 11 trustee may in fact result in less
recovery to both the taxing authorities and to other creditors.

Studies have shown that state and local governments have suffered
losses because of the subordination of ad valorem tax liens. However
that generalization should not be applied to the IRS and other state
income taxing authorities by not allowing the tax lien to be
subordinated to chapter 11 administrative expenses. Abuses have
occurred where administrative expenses have been in excess of what
they should have been, resulting in less return to taxing
authorities. In most cases, the U.S. trustee appoints chapter 7 and
11 trustees. The activities of trustees are monitored by the U.S.
trustees and their involvement should help control the actions of the
appointed trustee. No doubt a much greater abuse occurs when a
chapter 11 case with no prospects of successful reorganization is
allowed to continue until all of the free assets are consumed by
professionals and then the case is converted to chapter 7. The change
to section 724 that limits subordination to chapter 7 administrative
expenses does nothing to deal with this abuse, however.

Determination of Tax Liability (H.R. 3150, Sections 501(b),
504 and 516))

H.R. 3150 modifies section 505(a)(2) to provide that the court may
not determine an ad valorem tax if the applicable period for
contesting or redetermining the amount under any law other than
bankruptcy law has expired. Some bankruptcy courts have redetermined
the tax because the bankruptcy court may determine all claims. The
NBRC did not recommend this change.

H.R. 3150 also provides that the debtor-in-possession or trustee
may request a determination of the tax at the time the tax return is
filed. Upon payment of the amount shown on the return, the trustee,
debtor, and any successor to the debtor is discharged unless the
governmental unit notifies the trustee or debtor-in-possession within
60 days that the return has been selected for examination and
completes the examination within180 days after the request was made.
Note that the wording in section 505(b) does not discharge the
estate. Courts have held that the IRS may assess additional taxes
against the estate but not against the trustee or debtor. Thus, even
though the estate received the letter stating that the taxes were
accepted as filed, additional taxes may be assessed against the
assets that remain in the estate. To correct this problem H.R. 3150
follows the recommendation of the NBRC and the Tax Advisory Committee
and proposes to amend section 505(b) of the Bankruptcy Code by
inserting "the estate."

Section 505(b) of the Bankruptcy Code would be amended by
providing that the request for tax determination must be made in the
manner designated by the governmental unit (see notice section
below). This was recommended by the NBRC.

Comment: By not allowing the bankruptcy court to determine
the ad valorem tax claim, the proposed change would allow a
governmental unit to collect a tax that is greater than the amount
allowed. If the tax were properly determined, the state will receive
its priority payment. For example, in one case where a chapter 11
trustee was appointed, the debtor allegedly borrowed millions of
dollars of debt under false pretense. The debtor did not file
business tax forms and the taxing unit determined the tax based on
values that were greater than the actual values of the assets. Under
this proposal, since the time for redetermining the tax expired, the
business tax would remain, even though all parties know the tax was
incorrectly calculated. Taxes already have a priority over all other
general unsecured claim holders and this change will allow the taxing
authority to collect or retain taxes for amounts that are greater
than the amount that should be allowed.

The inclusion of the "estate" in section 505(b) is a change that
is needed.

The modification to section 505(b) requiring notice be made
according to the manner designed by the governmental units seems
reasonable; however, the section should also be modified to provide
that a partnership and S corporation in bankruptcy and chapter 13
debtors are within the provisions of section 505(b). The IRS has
issued a policy statement stating that section 505(b) does not apply
to partnership and S corporations and has refused to apply section
505(b) to chapter 13 cases.

Use of Exempt Property (H.R. 3150, Section 502)

Section 522(c)(1) of title 11 is amended by inserting at the end
of the paragraph: "except that, notwithstanding any other Federal law
or State law relating to exempted property, exempt property shall be
liable for debts of a kind specified in section 523(a)(1) or (5) of
this title." This proposed change was not recommended by the NBRC.

Comment: The meaning of this section is not clear. Since
the impact this change will have is not known, it is difficult to
comment on the proposed change.

Effective Notice to Governmental Units (H.R. 3150, Section
503)

Section 342 of the Bankruptcy Code under H.R. 3150 would be
modified to establish standards for effective notice and provide
information about the taxpayer such as taxpayer identification
number, loan, account or contract number, or real estate parcel
number. H.R. 3150 also provides that the clerk shall keep and update
quarterly, in the form and manner as the Director of the
Administrative Office for the United States Courts prescribes, and
makes available to debtors, the register in which a governmental unit
may designate a safe harbor mailing address for service of notice in
bankruptcy cases.

H.R. 3150 directs the Advisory Committee on Bankruptcy Rules of
the Judicial Conference to adopt rules that provide notice to state,
federal and local governmental units that have regulatory authority
over the debtor and suggests selected items that should be included.

H.R. 3150 also provides that no sanction under section 362(h) of
the Bankruptcy Code or any other sanction that a court may impose on
account of violations of the stay under section 362(a) of this title
or failure to comply with section 542 or 543 of this title may be
imposed unless the action takes place after notice of the
commencement of the case has been received as required by section
342.

Comment: The NBRC adopted the Tax Advisory Committee's
recommendation that all issues affecting governmental unit notice be
in the form of proposed changes to the Bankruptcy Rules. H.R. 3150
codifies part of the notice provisions and includes the revision to
section 362(a) that was not part of the NBRC recommendations. This
provision is intended to somewhat codify for the benefit of taxing
authorities, In re Bloom, 875 F.2d 224 (9^th Cir.
1989), which held that "the statute provides for damages upon a
finding that the defendant knew of the automatic stay and that the
defendant's actions which violated the stay were intentional."

Section 342(g) is troublesome in that it appears that this section
would require the debtor to notify a governmental entity of a
potential trust fund tax (100 percent penalty) even though the debtor
was not aware of the potential liability.

Taxing authorities need to be notified of bankruptcy filings;
however, the requirements for such notice including content, timing
of notice, sanctions for non-compliance, etc. should be covered by
the Rules Committee.

Rate of Interest on Tax Claims (H.R. 3150, Section 505)

H R. 3150 would add a new section 511 to the Bankruptcy Code that
would provide for interest on claims existing before the order of
relief to be applied at the rate provided in section 6621(a)(2) of
the Internal Revenue Code of 1986. Section 6621(a)(2) provides that
the rate should be the federal-short-term rate determined under
subsection (b) plus 3 percentage points. Subsection (b) provides that
the Secretary shall determine the Federal short-term rate for the
first month in each calendar quarter. Subsection (c) provides that
the rate for large corporations should be increased by 2 percentage
points. It is assumed that subsection (c) would not apply.

Comment: The Bankruptcy Code does not specify the interest
rate that is to be used for tax claims that are entitled to interest.
Judicial consensus is that a market rate of interest should be used
and that the federal statutory rate is relevant in determining the
appropriate rate. To avoid the wasting of both judicial and debtor
resources by litigating the rate, the NBRC followed the
recommendation of the Tax Advisory Committee that the rate be fixed
at the statutory rate under section 6621(a)(2), without reference to
section 6621(c) and it should be the rate in effect as of the
confirmation date. H.R. 3150 ignores the comment of the NBRC that the
rate should not consider 6621(c) and that it should be set as of the
confirmation date of the plan. If the rate in section 6621(a)(2) is
allowed, it should be determined as of the confirmation date and
should not be allowed to fluctuate from quarter to quarter. Since all
other creditors generally must assume the risk of changes in the
market rate of interest, the same consideration should also apply to
the IRS. Regarding the rate under section 6621(c), since only the
rate in section 6621(a) is mentioned, it is not clear if the section
6621(c) rate would also apply. These changes are needed, if for no
other reason than to avoid the litigation necessary to clarify the
point.

Tolling of Priority of Tax Claim Time Periods (H.R. 3150,
Section 506)

The first changes would provide that the period of three years
before the filing of the petition under section 507(a)(8)(A)(i) would
be modified to provide for any time, plus 6 months, during which the
stay of proceedings was in effect under a prior case.

The second change would provide a revised section
507(a)(8)(A)(ii): "(ii) assessed within 240 days before the date of
the filing of the petition, exclusive of- (I) any time plus 30 days
during which an offer in compromise or installment agreement with
respect of such tax, was pending or in effect during such 240-day
period, and (II) any time plus 6 months during which a stay of
proceedings against collections was in effect in a prior case under
this title during such 240-day period."

Comment: The majority of courts (justifiably) have allowed
for tolling of priority time periods during prior bankruptcies
because the stay was in effect and the IRS was limited as to the type
of action it could take. This provision codifies the impact of the
tolling. The added time allows the IRS time to respond once the stay
has been removed. Thus, rather than extending the time period by six
months or 30 days (in case of an offer in compromise), the extension
should be the greater of any time during which the stay of
proceedings was in effect in a prior case (or offer in compromise
pending) or six months (or 30 days for an offer in compromise).

H.R. 3150 would extend the tolling to installment agreements.
During the time period prior to or at the time the IRS enters into an
installment agreement, the IRS has the right to place liens on the
debtor's property. Even during the installment period, the IRS may
reserve the right to place liens on the debtor's property and take
other actions to protect its interest. Some tax practitioners have
indicated that they will recommend a larger number of their clients
file bankruptcy rather than apply for an installment agreement if
this change goes into effect. This change penalizes those individuals
that in good faith extend the time period for payment of their
claims, and a major illness, loss of job or other unfortunate events
force them to file a bankruptcy petition. Prior years' taxes for this
individual would be a priority claim because of the tolling
provision, but if this individual had no interest in paying the taxes
and had not contacted the IRS to work out an installment payment
plan, the taxes may be discharged.

The IRS seeks this change because it has seen numerous cases where
a taxpayer entered into a minimal installment agreement to buy time
until the 240-day measuring period passed thereby making the tax
nondischargeable.

The NBRC stated in its report that the proposal for tolling during
the period of compromise did not extend to installment agreements.

Assessment Defined (H.R. 3150, Section 507)

There has been some conflict with state law as to the meaning of
the term "assessment." Section 101 of the Bankruptcy Code is amended
by inserting a definition for assessment: "(3) 'assessment'- (A) for
purposes of State and local taxes, means that action which is
sufficiently final so that thereafter a taxing authority may commence
an action to collect the tax, and (B) for Federal tax purposes has
the meaning given such term in the Internal Revenue Code of 1986; and
'assessed' and 'assessable' shall be interpreted in light of the
definition of assessment in this paragraph."

Comment: Assessment was defined in accordance with the
recommendations of the NBRC.

Making Chapter 13 Nondischarge Provision Consistent with
Chapter 7 (H.R. 3150, Section 508)

Section 1328(a)(2) of the Bankruptcy Code is amended by expanding
the dischargeability of taxes to cover those taxes that are
nondischargeable in chapter 7. Thus, the provisions for chapter 13
regarding tax discharge for fraudulent and unfiled tax returns under
this proposal would be equivalent to those in chapter 7.

Comment: In general, it can be argued that there should be
no difference between the dischargeability of taxes under chapter 7
and chapter 13. Chapter 13 facilitates the workout of tax claims and
is consistent with other provisions of H.R. 3150 that require
taxpayers to pay some of their claims over the plan period. Taxing
authorities collect substantial taxes because chapter 13 requires
that all priority taxes be paid during the plan period and it places
on the tax rolls individuals that have not paid taxes in several
years. On the other hand, in chapter 7, taxing authorities receive a
very small percent of the taxes due and probably less than would have
been received in chapter 13. This proposed change was debated by the
NBRC, but the Commission was unable to obtain enough votes to pass
the proposal. To assist the taxing authorities in determining the
tax, especially the priority taxes, the Tax Advisory Committee
recommended that tax returns for six years be filed as described
below. This author supported the six-year requirement on the
assumption that the discharge provisions in chapter 13 would not be
repealed.

Nondischarge of Corporate Taxes (H.R. 3150, Section 509)

Section 1141(d) of the Bankruptcy Code is amended by adding the
following provision: "(4) Notwithstanding the provisions of paragraph
(1), the confirmation of a plan does not discharge a debtor which is
a corporation from any debt for a tax or customs duty with respect to
which the debtor made a fraudulent return or willfully attempted in
any manner to evade or defeat such tax."

Comment: The NBRC recommended that section 1141(d) be
modified to deny a discharge to a corporation for which a fraudulent
return was filed. There is considerable opposition to this
recommendation on the basis that the management of the company that
was involved with the fraud is often replaced and a provision that
prohibits a nonpriority tax from being discharged limits the ability
of the creditors to reorganize the debtor. Because of the inability
to restructure the troubled business due to the inability to obtain a
discharge of nonpriority taxes, the Service may even collect less.
The Service should file criminal action against the corporate officer
that filed a fraudulent return, but the creditors should not be
punished because of the errors of prior management. It should,
however, be recognized that there is a significant difference between
what constitutes civil fraud and what constitutes criminal fraud.

Stay of Tax Proceedings (H.R. 3150, Section 510)

The stay under section 362(a)(8) would be revised to apply only to
a tax liability for a taxable period ending before the order for
relief. H.R. 3150 would revise section 362(b)(9) to provide that the
stay does not apply to the appeal of a decision by a court or
administrative tribunal that determines a tax liability of the
debtor.

Comment: Although designed to apply to postpetition taxes,
the stay as restricted in section 362(a)(8) would also apply to some
prepetition taxes. For example, the Eight and Ninth Circuits, In
re L.J. O'Neill Shoe Co., 64 F. 3d 1146 (8^th Cir.
1995) and In re Pac-Alt. Trading Co., 64 F.3d 1292
(9^th Cir. 1995), have held that the taxes of a corporation
can be bifurcated into two parts&2151;the part prior to the
filing of the petition (a prepetition tax with eighth priority) and
the tax incurred after the filing (an administrative expense). This
change would allow the taxing authorities to collect the prepetition
tax even before the plan is developed because the stay does not cover
these taxes. While it can be argued that both the O'Neill and

Pac-Alt. Trading Co. decisions are judge-made law and do not
follow the provisions of tax law, it is necessary for the bifurcation
issues to be settled before the proposed change becomes law.

Additionally, based on the provisions in section 507(a)(8) it has
become a common practice for employers' taxes and trust fund tax
withholdings that were made prior to the filing of the petition to be
classified as prepetition taxes even though the tax period may end
after the petition is filed. While this type of tax is not actually a
quarterly or yearly tax, but an each-pay-day- tax, it is important
that the proposed change is clear that it only applies to
postpetition taxes.

Thus, before this provision becomes effective, it needs to, at
least, be revised to provide that it only applies to postpetition
taxes.

Both the NBRC and the Tax Advisory Committee recommended that the
relevant event for triggering the application of section 362(a)
limitation is the filing of the petition and not the entry of the
order for relief as advocated by H.R. 3150 and recommended the
application of the stay to tax appeals as proposed in H.R. 3150.

Periodic Payment of Chapter 11 Taxes (H.R. 3150, Section
511)

H.R. 3150 proposes to amend the Bankruptcy Code to provide that
the payments under section 1129(a)(9) must be periodic and must be
"in at least quarterly installments designed to pay at least 15
percent of the claim in each of the first 5 years of the plan and no
more than 20 percent of the claim in the final year of the plan."

H.R. 3150 follows the recommendation of both the NBRC and the Tax
Advisory Committee in proposing that the requirements of section
1129(a)(9) should also apply to secured taxes that would be entitled
to priority absent their secured status.

Comment: Both the NBRC and the Tax Advisory Committee
suggested that the payments should be periodic, but did not define
periodic other than to suggest that the payments should be monthly or
quarterly and that balloon payments be prohibited. Because of the
difficulty of establishing the time of assessment, both the NBRC and
the Tax Advisory Committee recommend that the six-year period begin
with the date of the order for relief. H.R. 3150 only deals with the
issue of periodic and balloon payments. For some debtors, it is
difficult for large payments to be made in the first year or two
after emerging from bankruptcy. To facilitate that process, some
creditors agree to limit the payments the first year or two to
interest only or interest and limited principal payments. It seems
reasonable that under these conditions the tax authorities should
also receive less in the first year or two than is paid in the latter
years. Thus, the recommendation of the NBRC provides, under these
conditions, an opportunity for the court to approve payments that are
less than equal payments, but would not allow plans to be approved
that provide for one balloon payment at the end of the sixth year.

The 15 percent and 20 percent rule will not work. For example,
assume that the taxes were assessed one year before the petition was
filed and that the company was in chapter 11 for two years. Payments
under the plan would be made over three years.

However, payments could not be evenly distributed because only 20
percent of the claim could be paid in the third year. Another
problem, in using the word "claim", does it include interest that
begins to accrue on the allowed claim as of the effective date of the
plan? If not, would the service allocate the first part of the
payment as interest and the balance as payment on the claim? If so,
then the payments in the first year would involve interest on the
full amount of the claim plus a payment of 15 percent of the
principal (claim). Thus, payments spread over six years may be
required to be larger in the first year than in any other year. This
proposal in its current conditions will create more problems than
solutions and should not become law.

Tax Avoidance of Statutory Tax Liens (H.R. 3150, Section
512)

H.R. 3150 amends section 545(2), as recommended by the NBRC and
the Tax Advisory Committee, to overrule cases that penalize the
government due to certain benefits for purchasers provided for in the
lien provision of the IRC or similar provisions of state or local
law.

Course of Business Payment of Taxes (H.R. 3150, Section
513)

Payment of postpetition taxes is required when taxes are due in
the course of such business unless the tax is a property tax secured
by a lien against property that is abandoned by the trustee under
section 554 of the Bankruptcy Code within a reasonable time after the
lien attaches as provided for in H.R. 3150. Also H.R. 3150 modifies
section 503 to provide that property taxes are to be paid as an
administrative expense and that it is unnecessary for a governmental
unit to make a request to the debtor to pay taxes that are entitled
to payment as administrative expenses.

Comment. These provisions were recommendations by both the
NBRC and the Tax Advisory Committee.

2. Tardily Filed Priority Tax Claim (H.R. 3150, Section
514)

H.R. 3150 provides, as recommended by both the NBRC and the Tax
Advisory Committee, that a taxing authority must file a claim for
priority tax before the final order approving the trustee's report is
entered by the court.

Comment: It is important that the claim be filed before the
final order approving the trustee's report is entered to avoid
requiring the trustee to recalculate the amount paid to creditors and
equity holders, to rewrite the report, and to reschedule the hearings
to approve the report. Filing a claim after the report is filed
clearly impacts the efficient court administration of the case. See
Pioneer Investment Servs. Co. v. New Brunswick Assocs. Ltd.
113 S. Ct. 1489 (1993).

Income Tax Returns Prepared by Tax Authorities (H.R. 3150,
Section 515)

H.R. 3150 amends section 523(a)(1)(B) by providing a definition of
a tax return for purposes of dischargeability as follows:

(iii) for purposes of this subsection, a return-

(I) must satisfy the requirements of applicable nonbankruptcy law,
and includes a return prepared pursuant to section 6020(a) of the
Internal Revenue Code of 1986, or similar State or local law, or a
written stipulation to a judgment entered by a nonbankruptcy
tribunal, but does not include a return made pursuant to section
6020(b) of the Internal Revenue Code of 1986, or similar State or
local law, and

(II) must have been filed in a manner permitted by applicable
nonbankruptcy law.

The last provision "(II) must have been filed in a manner
permitted by applicable nonbankruptcy law" is confusing; it muddles a
provision that was clarified in (I) above.

Comment: Both the Tax Advisory Committee and the NBRC
recommended that a return filed under IRC section 6020(b) or similar
federal, state, or local law provisions, should constitute a filed
return for Bankruptcy Code dischargeability purposes where the
taxpayer has taken reasonable steps to sign and file the return, even
though the taxing authorities fail to accept such return for filing.

Tax Returns Required to Confirm Chapter 13 Plans (H.R. 3150,
Section 517)

Section 1325 of the Bankruptcy Code is amended by H.R. 3150 to
provide that one of the requirements for plan confirmation is the
filing of income tax returns required under section 1308 of the
Bankruptcy Code. The proposed section 1308 is as follows:

11308. Filing of prepetition tax returns

(a) On or before the day prior to the day on which the first
meeting of the creditors is convened under section 341(a) of this
title, the debtor shall have filed with appropriate tax authorities
all tax returns for all taxable periods ending in the 6-year period
ending on the date of filing of the petition.

(b) If the tax returns required by subsection (a) have not been
filed by the date on which the first meeting of creditors is convened
under section 341(a) of this title, the trustee may continue such
meeting for a reasonable period of time, to allow the debtor
additional time to file any unfiled returns, but such additional time
shall be no more than-

(1) for returns that are past due as of the date of the filing of
the petition, 120 days from such date, and

(2) for returns which are not past due as of the date of the
filing of the petition, the later of 120 days from such date or the
due date for such returns under the last automatic extension of time
for filing such returns to which the debtor is entitled, and for
which request has been timely made, according to applicable
nonbankruptcy law,

(3) upon notice and hearing, and order entered before the lapse of
any deadline fixed according to this subsection, where the debtor
demonstrates, by clear and convincing evidence, that the failure to
file the returns as required is because of circumstances beyond the
control of the debtor, the court may extend the deadlines set by the
trustee as provided in this subsection for-

(A) a period of no more than 30 days for returns described in
paragraph (1) of this subsection, and

(B) for no more than the period of time ending on the applicable
extended due date for the returns described in paragraph (2).

(c) For purposes of this section, a return-

(1) must satisfy the requirements of applicable nonbankruptcy law,
and includes a return prepared pursuant to section 6020(a) of the
Internal Revenue Code of 1986, or similar State or local law, or a
written stipulation to a judgment entered by a nonbankruptcy
tribunal, but does not include a return made pursuant to section
6020(b) of the Internal Revenue Code of 1986, or similar State or
local law, and

(2) must have been filed in a manner permitted by applicable
nonbankruptcy law.".

Section 1307 of the Bankruptcy Code would be amended under H.R.
3150 to provide that upon the failure of the debtor to file the
returns required under section 1308, on request of a party in
interest or the U.S. trustee and after and a hearing, the court shall
dismiss or convert the chapter 13 case to chapter 7, whichever is in
the best interest of the estate.

H.R. 3150 proposes to amend section 502(b)(9) to provide that an
objection to the confirmation of a plan is considered to be timely if
it is filed within 60 days after the debtors' tax returns were filed
under section 1308. Additionally, H.R. 3150 proposes that Congress
direct the Advisory Committee on Bankruptcy Rules of the Judicial
Conference to propose rules that provide for an opportunity for
governmental units to object to (1) the confirmation of a plan on or
before 60 days after the debtor files all tax returns required under
sections 1308 and 1325(a)(7) of the Bankruptcy Code and (2) that no
objection can be filed in reference to a tax of a return required to
be filed under section 1308 until such return has been filed as
required.

Comment: The Tax Advisory Committee concluded that this
provision would help reestablish the chapter 13 debtor as a
"taxpayer" and would determine the priority tax that must be paid for
a debtor to qualify for the chapter 13 super discharge. The Tax
Advisory Committee concluded, after discussion with federal and local
taxing authorities and with attorneys and accountants that render
services for chapter 13 debtors, that requiring the chapter 13 debtor
to file tax returns for six years, pay through the chapter 13 plan
all of the priority taxes, and provide for some payment of the
nonpriority taxes (realizing that some courts approve a zero plan for
unsecured claim holders) along with other general unsecured claim
holders will most likely result in the taxing authorities collecting
more taxes now and in the future than would be collected with the
filing of a chapter 7 petition. With the proposed repeal of the
chapter 13 tax discharge provisions, tax professionals generally will
not recommend that clients file chapter 13. As a result, this
provision will not have the impact that was intended. This writer
would not have supported the six-year chapter 13 filing requirement
on the Tax Advisory Committee with a repeal of the chapter 13
discharge provisions.

As noted above, both the Tax Advisory Committee and the NBRC
recommended that a return filed under IRC section 6020(b) or similar
federal, state, or local law provisions, should constitute a filed
return for Bankruptcy Code dischargeability purposes. H.R. 3150 would
not treat a return filed under section 6020(b) as a filed return for
tax discharge purposes.

1. Standard for Tax Disclosure (H.R. 3150, Section 518)

Section 1125(a) of the Bankruptcy Code dealing with the disclosure
requirements is expanded by requiring the proponent of the plan to
include full discussion of the potential material Federal and State
tax consequences of the plan to the debtor, any successor to the
debtor, and a hypothetical investor typical of the holders of claims
or interests in the case.

Comment: In general, the disclosure requirements for income
tax impact of the plan has not generated the desired results. Often,
interested parties have been told to talk with their tax specialists
to find out the income tax impact of the plan. Time will only tell if
this requirement, if enacted, would result in the tax impact of the
plan being explained in such a manner that readers of the disclosure
statement would understand tax consequences. The purpose of the
amendment is not to change existing law, but to make plan proponents
adhere to the original intent of the law to effectively disclose the
tax ramifications of the plan on the debtor.

Setoff of Tax Liability against Tax Refund (H.R. 3150, Section
519)

Section 362(b) of the Bankruptcy Code would be amended to provide
that the setoff of an undisputed prepetition tax liability against an
income tax refund does not violate the automatic stay. Setoff could
not be taken if, prior to the setoff, an action was commenced under
section 505(a) to determine the amount or the legality of the tax.
However, if the setoff is tolled during the 505(a) hearing, the
taxing authority may hold the refund.

Comment: The writer supported the recommendation of the Tax
Advisory Committee. However, it has been pointed out by some writers
that the impact of Seminole Tribe of Florida, 116 S. Ct. 1114
(1996), suggests that no change should be made regarding the tax
setoff be considered because the debtor may be unable to recover tax
refunds that were setoff improperly by a state taxing authority.

Summary of NBRC recommendations not included in H.R. 3150

Listed below are some of the changes that were recommended by the
NBRC that were not a part of H.R. 3150 that should be considered.

Conform State and Local Tax Issues to Federal Laws

Conform section 346 of the Bankruptcy Code to the 1398(d)(2)
election and conform state and local tax attributes that are
transferred to the estate to those transferred for federal income tax
purposes. Conform treatment of state and local claims to that
provided for federal tax claims, including confirming state and local
tax attributes to the federal list. Considerable conflicts exist
between state and local taxes and federal taxes. Congress indicated
at the time the Bankruptcy Reform Act of 1978 became law that the
state and local tax issues would be changed when the Congress passed
the federal bankruptcy tax laws. A few years later Congress passed
the Bankruptcy Tax Act of 1980 and no action has been taken to
eliminate the tax problems that arise because of the differences
between the two federal laws. To correct these problems, changes need
to be made only in the Bankruptcy Code, which means that these
changes should be a part of the Bankruptcy Bill and not a Tax Bill.
(NBRC Proposals 4.2.4, 4.2.16-4.2.17)

Bifurcation Corporate Taxes that Straddles the Petition
Date

The NBRC recommended that corporations have the same right as
individuals to elect to have taxes incurred prior to the filing for
tax years that straddle the petition date to be considered a
prepetition tax and tax incurred for the balance of the tax year
after the petition is filed to be classified as an administrative
expense. The Eighth and Ninth Circuits allow the debtor to bifurcate
the taxes.

Tax Impact of Plan

Currently, section 1146(d) of the Bankruptcy Code gives the
bankruptcy court the power to determine the tax impact of a plan for
state and local tax purposes. The NBRC recommended that this power
also be extended to cover federal income taxes as well. Section
1146(d) should be modified by removing the "state or local."

Subordination of Tax Penalties

The NBRC recommended that the payment of prepetition tax penalties
in chapters 11, 12 and 13 be subordinated to payment of general
unsecured claims the payment is in chapter 7 cases. The NBRC noted
that granting a priority to penalties works unfairness on general
unsecured creditors by, in effect, punishing them for the debtor's
misconduct. This is, according to NBRC, inequitable, especially where
creditors have limited access and ability to monitor a taxpayer's
compliance with tax reporting requirements.