November 01, 2019

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

IRS Claim For Straddle Year Taxes Should Be Bifurcated

By Michael Enright

The priority of IRS claims in bankruptcy cases can be controversial, and the allowance of a priority claim may greatly affect how much is available to distribute to other creditors. The Bankruptcy Court’s decision in In re Affirmative Insurance Holdings, Inc. (Bankr. D. Del. Oct. 15, 2019) sheds light on some of the issues involved.  The debtors in this case filed their petitions in October, 2015. The IRS asserted a claim for taxes for the 2015 calendar year (a tax year which straddled the petition date) of more than $800,000.  The court considered whether the IRS claim for the “Straddle Tax Year” should be treated as an administrative expense under Section 503(b), a priority claim under Section 507(a)(8), or a general unsecured claim. The court first concluded that treatment as a Section 507(a)(8) claim was improper, because BAPCPA’s amendment to Section 507(a)(8) clarified that a tax year that ended after the petition date was outside the scope of Section 507(a)(8). The court then turned to consideration of whether the Straddle Tax Year claim should be bifurcated into an administrative claim portion and a general prepetition claim portion, or treated entirely as an administrative claim, as asserted by the IRS. Although two other post-BAPCPA decisions both held that Straddle Tax Year claims should be treated entirely as administrative expenses, the court in Affirmative disagreed. Instead, the court reasoned that pre-petition events that incur tax liability during a Straddle Tax Year are to be afforded general unsecured status, and post-petition events that incur tax liability during the same Straddle Tax Year must be afforded administrative priority, in effect bifurcating the treatment of the tax obligation incurred in that year.  Although this will cause an administrative burden on the debtors and the IRS to parse out the pre- and post-petition events, it was mandated by the plain meaning of Section 503(b), which requires that the tax have been incurred by the estate in order to qualify for administrative expense status.  Given the disparate decisions on this issue post-BAPCPA, the IRS undoubtedly will continue to litigate this issue until it is resolved by the appellate courts. 

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.