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Pesky Uncle Sam: Tax Treatment in Chapter 11 Bankruptcy

Pesky Uncle Sam: Tax Treatment in Chapter 11 Bankruptcy

Uncle Sam, of the U.S. Treasury, is a pesky and persistent “family member” who inserts himself into every conceivable financial affair. Impossible to shake, his needs must be satisfied.  If not, he can make life extremely difficult.  Understanding tax treatment in Chapter 11 Bankruptcy is critical because of the stringent tax debt payback requirements imposed by Uncle Sam.

Why Is Tax Treatment Important in Chapter 11 Bankruptcy?

More often than not, persons (individuals, partnerships, and corporations) who are considering Chapter 11 bankruptcy relief have significant issues with Uncle Sam.  Tax obligations are typically the most tempting not to pay because neglecting to do so usually does not result in immediate shutdown of business operations, unlike non-payment of trade debt where creditors can disrupt or bring a screeching halt to business affairs. Those contemplating Chapter 11 must understand how tax debt is treated in the bankruptcy case because failing to account for this debt treatment could derail the entire reorganization effort before it even gets a solid footing on the track.

Certain categories of tax debt are given preferred (“priority” in bankruptcy lingo) treatment in Chapter 11 bankruptcy.  These include, in part, the last three years of income tax, property taxes assessed “and last payable without penalty” in the year before the bankruptcy filing, a tax required to be collected or withheld (typically encompassing withholding/sales/use tax), employment tax on wages, and excise tax.  There are intricate nuances on whether a particular tax falls within a given priority category under the Bankruptcy Code that exceed the scope of this discussion, so consultation on this topic with an experienced bankruptcy attorney is highly encouraged.

 

Understanding the repayment rules for priority tax creditors is therefore critical before plunging into a Chapter 11 bankruptcy.  Reorganization of debt through Chapter 11 is ultimately not feasible for many would-be-filers because they cannot satisfy through adequate cash-flow these stringent payback requirements. 

 

If you're looking for qualified and trusted Minneapolis/St. Paul bankruptcy lawyers, please call our Golden Valley office at 763-398-1676 or fill out this quick form to schedule a consultation.

This website features educational information based on general legal principles in Minnesota.  Specific legal advice is contingent upon the unique facts of each case.  Therefore, you should not rely only on this information for your particular legal issue.  Contact an attorney to obtain advice specific to your legal situation.  Read our full disclaimer.
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