| ||Aspects of the Consolidated Group in Bankruptcy: Tax Sharing and Tax Sharing Agreements|
Russell J. Kestenbaum * and Dale L. Ponikvar **
*Partner, Tax Department, Milbank, Tweed, Hadley & McCloy LLP, New York, New York; Yale College, B.A. 1971; New School for Social Research, Ph.M. 1976; New York University, J.D. 1980.
**Associate, Milbank, Tweed, Hadley & McCloy LLP; State University of New York at Albany, B.A. 1994; Benjamin N. Cardozo School of Law, J.D. 1997.
This article takes note of numerous difficult fact patterns bankruptcy tax attorneys face today in dealing with the liability for taxes and the ownership of tax attributes of member corporations that are either bankrupt members of a consolidated federal income tax group or are in such a group with other members who are bankrupt. Since its inception, the consolidated return has born the burden of conceptual ambiguity: is it a collection of separate corporate taxpayers, an aggregate, or is it an entity above or superseding its corporate members? Or is it both? Sometimes this Janus face of the consolidated return is of benefit to the taxpayer (or one taxpayer over another) and sometimes it benefits the United States Treasury. Over the past decade, cases and rulings have addressed the question of which is the right face to wear in interpreting one section or another of the Code. Some of this authority does not deal directly with bankrupt corporations in a consolidated group, but nonetheless it can have an impact on the tax treatment of bankrupt corporations. For example, the Supreme Court’s holding in United Dominion1 was cited by the bankruptcy court in In re Marvel Entertainment Group, Inc.2 as overturning the holding of In re Prudential Lines Inc.3 , which was becoming accepted doctrine, that a member of a group had a defendable property interest in its “separate” net operating loss carryovers. The cases and the rulings on this issue have not only left bankrupt corporations unsure of their position vis-à-vis the government but also vis-à-vis other members of their consolidated groups. As a result, an analysis of the value of written, unwritten, or imputed tax sharing agreements has become an increasingly commonplace aspect of bankruptcy reorganizations wherever there are conflicting interests among various creditor groups (a virtual commonplace). That analysis to date is incomplete. This article attempts to deal with two key preliminary issues. First, what is the liability of a member of a consolidated group over and against the government and over and against its fellow group members? Part II presents an analysis of the Treasury’s consolidated return regulations under section 1502, particularly Regulation section 1.1502-6 and its predecessor which reveal a few interesting results relevant to the cases being decided in the courts, including the bankruptcy courts. The second issue, discussed in Part II, is to identify “who is the taxpayer?” Here too, the consolidated return regulations are examined, as are those cases that address Code provisions such as sections 172 and 108 and their interaction with the consolidated return, within and without the bankruptcy context. The Janus character of the consolidated group is nowhere made more apparent. Part III discusses tax sharing agreements, written, unwritten, implied, or completely absent. It addresses the rights of bankrupt entities against other group members, whether bankrupt or not, for taxes or tax attributes. Since the court’s decision in Prudential Lines, practitioners have been pursuing recoveries for
their clients based on the presumption that certain tax attributes are property of the bankrupt estate. The examples discussed are largely drawn from practice and, as will be seen, do not all have clear or easy answers.
1United Dominion Indus., Inc. v. United States, 532 U.S. 822 (2001).
2 In re Marvel Entm’t Group, Inc., 273 B.R. 58, 85 (D. Del. 2002).
3 In re Prudential Lines Inc., 928 F.2d 565, 571 (2d Cir. 1991).