Corporate Reorganizations
3/14/2008 12:23:51 PM EST
FREE DOWNLOAD: American College of Bankruptcy on the Tax Considerations of First-Day Order Practices
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In a corporate reorganization, the extent to which the first-day orders address certain tax considerations can have enormous impact on the reorganized corporation and its officers. An Emerging Issue Commentary prepared by the American College of Bankruptcy, and adopted from a Best Practices Report of the College, provides guidance on three crucial taxation issues in the context of first-day orders: whether a first-day authorization to pay prepetition taxes should extend beyond trust fund taxes; whether to seek permission to pay oversecured property taxes; and what steps should be taken during first-day order practice to protect the debtor s tax attributes during bankruptcy.
Excerpt:
Filing for bankruptcy radically changes a corporation’s ability to manage its affairs. First, until the debtor corporation is given permission by the bankruptcy court (after scrutiny and possible objection from the creditors’ committee), the debtor is prohibited from taking any steps that are not in the ordinary course of business. Second, the automatic stay has the effect of freezing pre-petition claims—including claims for taxes—until they can be examined (and possibly contested) and then provided for under a confirmed plan of reorganization. If these rules were applied literally to a recently filed debtor corporation, they might well prevent the corporation from paying pre-petition trust fund taxes, thereby exposing the debtor’s officers to personal liability. To prevent this from happening, corporations filing for bankruptcy should always seek a first-day order from the bankruptcy court that authorizes the debtor to pay all trust fund taxes that were incurred pre-filing. The most important decision that the debtor-to-be must make in this connection is whether the scope of the authorization to be sought should extend beyond trust fund taxes. [footnotes omitted]
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