TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, October 31, 2005

Williams & Todres on Tax Consequences of Postpetition Income in Chapter 11


Jack F. Williams (Georgia State) & Jacob L. Todres (St. John's) have posted Tax Consequences of Postpetition Income as Property of the Estate in an Individual Debtor Chapter 11 Case and Tax Disclosure in Chapter 11 on SSRN.  Here is the abstract:

In this article the authors discuss the tax consequences and ramifications of two changes to the Bankruptcy Code ("B.C.") made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("2005 Act"). One of the changes made by the 2005 Act is the addition of new B.C. Section 1115. B.C. Section 1115(a)(2) provides that during the pendency of a case in chapter 11, all earnings from services performed by a debtor who is an individual belong to the bankruptcy estate. As a result, the authors argue that Section 1398 of the Internal Revenue Code ("I.R.C.") which treats an individual and his/her bankruptcy estate as separate taxpayers is no longer symmetrical with the Bankruptcy Code and should be changed. Failure to change I.R.C. Section 1398 will also result in imposing substantial administrative burdens on the IRS. Another change made by the 2005 Act is the amendment of B.C. Section 1125(a)(1) to provide that adequate information in a chapter 11 disclosure statement requires the discussion of the material federal tax consequences of the plan. The authors argue that this change should not be interpreted to dispense with the need for discussion of state and local tax consequences of the plan in disclosure statements. The authors also point out that it is likely that the tax discussion in chapter 11 disclosure statements are now subject to the recently strengthened requirements of Treasury Department Circular 230.

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