I. History of Tax Claims in Bankruptcy
In 2005, the Bankruptcy Code experienced one of the largest revisions in its history. Part of this revision included a reevaluation of the treatment of secured tax claims in the bankruptcy process. In this section, the changes are examined by looking at how the Code existed prior to 2005, suggested changes by the American Bankruptcy Institute, and which changes were actually implemented with the 2005 amendment.
A. Pre-2005 Code
The Bankruptcy Code addresses tax claims in several sections. The three sections that are the focus of this paper, discussed below, include §§ 1129, 724, and 507.
I. 1129
Aptly named “Confirmation of Plan,”[1]section 1129 sets forth the minimum requirements of a plan before it being eligible for consideration by the court[2]including such requirements as being proposed in good faith,[3]minimum requirements concerning the acceptance of various classes,[4]and priority of claims based on status.[5]It is in this last requirement that the pre-2005 Code starts to unfairly discriminate.
In § 1129(a)(9)(C) specific treatment for priority tax claims in a Chapter 11 bankruptcy is set forth.[6]First, the plan must pay the total amount of the claim owed.[7]Second, the payments cannot extend beyond six years after the date of the plan.[8]In contrast, the Code is silent as to any specific treatment for secured tax claims. Instead, the plan must provide that the secured claims retain its lien in the property,[9]and is paid at least the allowed amount of such claim over a period of time.[10]However, there is no limit on how long the payments can extend.[11]
II. 724
Section 724 of the Bankruptcy Code describes the circumstances that a trustee may avoid a lien and treatment of unavoidable tax liens in bankruptcy.[12]While only certain liens are avoidable—specifically those found in §726(a)(4)[13]—any tax lien that is not avoidable is subject to the treatment described in § 724.[14]The distribution of the collateral, or proceeds of the collateral, must first go to any senior lien holders.[15]Next, the first seven classes of priority claim holders listed in § 507(a) are paid.[16]Only after that is the holder of the tax lien paid.[17]Any remaining property or proceeds is distributed to junior lien holders,[18]the tax lien holder if the lien did not secure the entire debt,[19]and finally, to the estate.[20]
III. 507
Section 507 lists specific claims and expenses that should receive priority in a bankruptcy.[21]Of the priorities, tax claims that meet specific requirements, are listed eighth behind other items such as administrative expenses and payroll.[22]It is in this position that a priority tax claim could still receive better treatment than a secured tax claim. However, to qualify for priority status, a tax claim must be either an income or gross receipts tax,[23]property tax,[24]tax that must be collected and the debtor is liable,[25]employment tax,[26]excise tax,[27]customs duty,[28]or a penalty related to a claim.[29]
If the tax is an income or gross receipts tax, to receive priority status the return must have been due within three years of the date of the filing, have been assed within 240 days before the date of filing, or assessable after the commencement of the case.[30]Property taxes must be assessed before the commencement of the case, and last payable with on year of the petition filing.[31]Employment taxes must be due within three years of the filing of the petition.[32]Excise taxes are given priority if it arises from a transaction that would trigger a return that is due within three years of the petition, or if no return is required, then the transaction occurred within three years of the filing.[33]Finally, customs duty must arise from the importation of merchandise that entered for consumption within on year of the filing date,[34]covered by an entry that was liquidated or reliquidated one year within the date of filing,[35]or entered for consumption within four years of the filing date, but not liquidated on that date.[36]
[1] 11 U.S.C. 1129 (2000).
[2] § 1129(a).
[3] § 1129(a)(3).
[4] §§ 1129(a)(7) and (8).
[5] § 1129(a)(9).
[6] § 1129(a)(9)(C)
[7] *Id.*
[8] *Id.*
[9] § 1129(b)(2)(i)(I).
[10] § 1129(b)(2)(i)(II).
[11] *Id.*
[12] 11 U.S.C. 724 (2000).
[13] § 724(a).
[14] § 724(b)
[15] § 724(b). In contrast, a senior lien holder in an Article 9 foreclosure sale receives none of the proceeds of the foreclosure sale. Instead, the lien holder continues to retain a lien in the property. U.C.C. § 9-608.
[16] § 724(b)(2).
[17] § 724(b)(3).
[18] § 724(b)(4).
[19] § 724(b)(5).
[20] § 724(b)(6).
[21] 11 U.S.C. 507 (2000).
[22] § 507(a)(8).
[23] § 507(a)(8)(A).
[24] § 507(a)(8)(B).
[25] § 507(a)(8)(C).
[26] § 507(a)(8)(D).
[27] § 507(a)(8)(E).
[28] § 507(a)(8)(F).
[29] § 507(a)(8)(G).
[30] § 507(a)(8)(A).
[31] § 507(a)(8)(B).
[32] § 507(a)(8)(D).
[33] § 507(a)(8)(E).
[34] § 507(a)(8)(F)(i).
[35] § 507(a)(8)(F)(ii).
[36] § 507(a)(8)(F)(iii).