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Chapter 11 | |||||||||
Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 11. Bankruptcy
Processing of Chapter 11 Cases
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25.17.11 Bankruptcy Processing of
Chapter 11 Cases
- 25.17.11.1
Introduction
- 25.17.11.2
The
Chapter 11 Debtor
- 25.17.11.3
Initial
Processing
- 25.17.11.4
Internal
Revenue Code § 1398 Issues
- 25.17.11.5
Disclosure
Statements and Plans of Reorganization
- 25.17.11.6
The
Chapter 11 Discharge and the Effects of
Confirmation
- 25.17.11.7
Post-Confirmation
Actions
- 25.17.11.8
Closing
Chapter 11 Bankruptcies
25.17.11.1 (09-01-2004)
Introduction
1.
Reorganization. Chapter
11 is a rehabilitative proceeding that gives the
debtor a "breathing period," from the
petition filing to plan confirmation, during which
time business affairs can be reorganized and a plan
devised for the orderly payment of creditors.
Chapter 11 is frequently referred to as the "reorganization
bankruptcy. " Chapter 11, like
Chapter 7, cases begin with the filing of a
bankruptcy petition.
·
a Chapter
11 bankruptcy petition may be filed voluntarily
by the debtor or involuntarily
by creditors
·
an
involuntary case may not be filed against a farmer
or a noncommercial corporation
2.
Debtor-in-Possession/Trustee. In
a Chapter 11 proceeding, the debtor usually operates
as a debtor-in-possession (DIP). However, a trustee
or an examiner may be appointed for cause, including
fraud, dishonesty, incompetence, or gross
mismanagement of the affairs of the debtor by
current management, either before or after the
commencement of the case. See 11 U.S.C. § 1104. The
duties of the trustee or DIP include administering
the estate and operating the debtor’s business.
See 11 U.S.C. §§ 1106,1108. In a timely fashion,
the DIP or trustee must either:
A.
file a plan or a report explaining why a plan
will not be filed; or
B.
recommend the case be converted to another
chapter or be dismissed.
3.
Complex/Long Duration. Chapter
11 cases are ordinarily more labor–intensive to
monitor and evaluate than other bankruptcies because
of the complexities of restructuring efforts that
comprise part of the process. After a plan is
confirmed, the creditors must monitor their receipt
of payments under the terms of the plan. A Chapter
11 bankruptcy case can last for several years.
25.17.11.2 (09-01-2004)
The Chapter 11 Debtor
1.
Eligibility.
Any entity eligible to file a Chapter 7 petition (individual, sole
proprietor, partnership, or corporation) can file
Chapter 11, except
a stockbroker or a commodity broker. A railroad,
which cannot file a Chapter 7 petition, may
file a Chapter 11 petition.
2.
Main Chapter for Business Debtors. Chapter
11 is the primary reorganization chapter of the
Bankruptcy Code for business debtors. Ideally, a
reorganizing Chapter 11 plan is acceptable to most
of the debtor's creditors because the plan is more
likely (over time) to pay a greater amount of the
debtor's pre-bankruptcy debts than if the business
were liquidated. A Chapter 11 bankruptcy allows the
debtor to continue business operations through a
plan of reorganization, which meets statutory
criteria. 11 U.S.C. § 1129. (Cooperation among the
various interests is crucial to a successful
reorganization.) Generally, reorganization, by
preserving jobs and assets, is preferable to
liquidation.
3.
Individuals and Chapter 11. An individual is eligible to file Chapter 11
even if the individual is not engaged in a business.
However, when individuals file for bankruptcy, but
want to retain the use of their non-exempt property,
they may opt for a Chapter 13 proceeding.
Note:
While an individual Chapter 7 debtor
must wait at least six years between Chapter 7 cases
to obtain a second Chapter 7 discharge of debt,
pursuant to 11 U.S.C. § 727(a)(8), no
similar limitation prevents a Chapter 11 debtor
obtaining successive discharges.
25.17.11.3 (09-01-2004)
Initial Processing
1.
Notice.
The bankruptcy courts provide the
2.
Opening Actions .
A case should be opened in accordance with
Reminder:
Bankruptcy
Freeze Code. To prevent violations of the
automatic stay, Transaction Code 520 must be input
by the Service within five
workdays of
the Service's receipt of notification of the
bankruptcy filing.
3.
Preventing Violations of Automatic Stay. If
research reveals no liabilities or pending
assessments, the case should be kept under TC 520
control until the potential for a violation of the
Bankruptcy Code expires. The freeze also allows for
monitoring of postpetition tax compliance.
4.
Proof of Claim. If
the debtor owes taxes above the tolerance specified
in Law Enforcement Manual (LEM) 5.5.3, a claim
should be prepared and timely filed in accordance
with
A.
11 U.S.C.
§ 1111(a) provides a claim is deemed to be filed
for any debt listed on the debtor’s schedules, except
a debt listed as disputed, contingent, or
unliquidated.
B.
If all
prepetition returns are not filed by the time the
claim is filed, the liabilities for any unfiled
returns should be shown as "unassessed"
(formerly listed as estimated). The unassessed
amount on the claim must have a factual basis.
Note:
The
5.
Trust Fund Taxes. If
a Trust Fund Recovery Penalty (TFRP) investigation
is in order, it should be addressed early in the
bankruptcy proceedings. If the TFRP is applicable,
and the case meets LEM criteria for field
assignment, but is unassigned, Insolvency should
issue ICS 01 or Form 2209 to field Compliance, or
assign the investigation to an Insolvency Advisor,
per local procedures, for a determination of the
TFRP liability.
25.17.11.3.1 (09-01-2004)
Contact Points
1.
Contact Points . Contact points have been established between
local Insolvency units and other
2.
Insolvency Assistance. When
Insolvency is contacted by other Service employees
on matters relating to bankruptcy, Insolvency will
perform the necessary research to assist in a
resolution. If appropriate, Insolvency will elevate
complex or unusual matters to Counsel.
3.
Postpetition Debts. Compliance
personnel should be familiar with
25.17.11.3.2 (09-01-2004)
Adequate Protection and Turnover
1.
Protection for Secured Creditors. Adequate protection safeguards a secured
creditor against a decrease in the value of a
creditor’s collateral during
the period prior to confirmation of the plan. During
this time, a creditor is stayed from taking
collection action and is not receiving plan
payments. Adequate protection may be requested to
protect the value of the creditor's interest in the
property being used by the DIP. See 11 U.S.C. §
361.
2.
Turnover/Adequate Protection. A voluntary Chapter 11 filing is sometimes
preceded by the
3.
Most Common Types. Adequate
protection usually includes periodic cash
payments (the most common form) on the
secured claim and/or replacement
liens on postpetition assets. Minimum
dollar criteria should be established for adequate
protection to be pursued. Local Insolvency
guidelines, with Counsel involvement, if
appropriate, should be followed.
4.
Examples of Adequate Protection:
·
retaining a
portion of any funds received
·
receiving
monthly payments (with postpetition interest) before
a plan is confirmed
·
obtaining
replacement liens on after-acquired assets (for
example, accounts receivable and inventory)
·
providing
for postpetition tax compliance
·
any other
appropriate relief
5.
Depreciating Equity and Financing Concerns. The
6.
Time Constraints. If
adequate protection is applicable, it must be
addressed quickly before the assets are dissipated.
Adequate protection for turnover of property to the
debtor varies depending on the unique circumstances
of the case, including the type of property
involved.
Note:
The court can deny a request for
adequate protection deeming the proposed arrangement
to be unsatisfactory or inadequate. The proposal may
be renegotiated, with court approval.
25.17.11.3.2.1 (09-01-2004)
Prepetition Levies
1.
Intangible Property. Under
11 U.S.C. § 542, unless the automatic stay is
lifted, the
2.
Avoidance.
If the
Note:
Voluntary payments of the trust
fund portion of employment taxes, and
other trust fund taxes, are not
subject to avoidance. These payments are
not transfers of property of the debtor.
3.
Tangible Property. Absent
extenuating circumstances, which may allow for the
automatic stay to be lifted, the
4.
Right to Adequate Protection. Although the property is generally required to
be turned over, the
5.
Release vs. Referral. Negotiations
involving adequate protection often involve both
field Compliance and Insolvency employees, and they
are generally conducted with the debtor's attorney.
Counsel should be consulted for local procedures.
A.
Release.
If the value of the property does not exceed
the minimum dollar criteria for relief from the stay
or adequate protection, the levy or seizure should
be released immediately.
B.
Referral.
If the value exceeds the minimum
amount, Insolvency should refer the case
expeditiously to Counsel to consider a motion for
relief from the stay, or to seek adequate protection
while the agreement is being negotiated with the
debtor.
6.
Urgency.
Issues surrounding the continuation of business operations may intensify the
need to resolve collection actions quickly; for
example, funds earmarked to meet payroll have been
levied, or equipment needed to conduct business has
been seized. Delays in settling the collection
activity could result in a violation of the
automatic stay and awards for damages against the
Service.
7.
Adequate Protection Agreement. The
Adequate Protection Agreement should provide for
protection to replace the property being released.
This can include:
A.
the
B.
periodic
payments, including payment of postpetition
interest;
C.
a
replacement lien on after-acquired assets, such as
inventory or accounts receivable;
D.
timely tax
deposits and filing of returns; and, most
importantly,
E.
default
provisions.
8.
Default provisions. Adequate protection agreements should include
language outlining actions to be taken in the event
of default. Those provisions can include:
A.
notice of
default to the debtor and debtor's attorney with a
short "cure" timeframe;
B.
a
"drop dead" clause providing for unopposed
conversion to Chapter 7 if the default is not cured;
C.
an
automatic lifting of the stay against collection if
the default is not cured; or
D.
any other
appropriate remedy.
25.17.11.3.3 (09-01-2004)
Cash Collateral/Property Depreciation of the Estate
1.
"
Ordinary
Course of Business.
" In a Chapter 11 case, the
debtor-in-possession typically wants to continue
running the business until it can be reorganized or
sold. The debtor may automatically continue its
routine ( "ordinary
course" ) use, sale, or lease of
most of its prepetition property pursuant to 11
U.S.C. §§ 363(c)(1) and 1107(a).
2.
Cash Collateral .
The Bankruptcy Code can significantly limit a
debtor's ability to use its cash
collateral without the consent of
creditors with secured interests in such property.
Cash collateral includes cash and cash equivalents,
such as negotiable instruments and funds in
depository accounts. Also, see
Note:
The limitations in the Bankruptcy Code
on the debtor's use of cash collateral and
restrictions are significant in Chapter 11 cases.
This is because operating businesses in bankruptcy
are found most typically in Chapter 11 cases and
have the greatest need for immediate cash to
continue running.
3.
Property Devaluation. The
time required to reorganize the business and
construct a payment plan may take a year or longer.
During this time, a secured creditor can experience
a devaluation of the property through depreciation,
or the cash collateral may disappear or be consumed
through normal business operations. The creditor can
do nothing because of the automatic stay.
4.
Adequate Protection Negotiations. To
protect the creditor against this scenario and guard
against the risk of losing the security for the
debt, the creditor is entitled to adequate
protection. As soon as possible after a Chapter 11
is filed, Insolvency should identify any secured
claims it has against the debtor, make prompt
contact with the debtor's counsel, and begin
negotiations for adequate protection as a condition
for the debtor's continued use of cash collateral.
5.
Lien Rights.
The
6.
Superpriority Liens in a Chapter 11 Proceeding. 11 U.S.C. § 364 provides debtors may, with court approval, obtain
postpetition financing. To induce lenders to grant
this financing, superpriority liens can be offered. Such
liens become senior to all other liens.
Note:
In accordance with 11 U.S.C. § 364(d),
superpriority liens can be provided only if the
holder of the previous lien, including the
7.
Real Property and Adequate Protection. Adequate
protection is seldom sought by the
8.
Insolvency Actions. If
the
a.
send AIS
Letter 2173, or an equivalent local letter, to the
debtor with a copy to the debtor’s attorney,
advising the
b.
based on
response(s) received, attempt to reach an agreement;
negotiations for adequate protection of the
government's lien interests will follow guidelines
similar to those used when the
c.
make a
prompt referral to Counsel, asking for a motion to
provide adequate protection to the
25.17.11.3.4 (09-01-2004)
Collection Statute of Limitations and Chapter 11
Plans
1.
Tax Collection Waivers. Pursuant
to I.R.C. § 6502(a), as amended by the
2.
Chapter 11 Plans Are Not Installment Agreements. Although
Chapter 11 plans make a series of periodic
(installment) payments to the Service, typically
toward the taxpayer's priority and secured tax
debts, with interest, the Chapter 11 plan differs in
many respects from an installment agreement under
I.R.C. § 6159, and is, therefore, not considered as
such.
3.
Collection Statute Expiration Date (CSED) and Confirmed Plans. The
limitation period for collecting a tax provided
for by a confirmed Chapter 11 plan is
generally suspended automatically via I.R.C. §
6503(h)(2) while the
taxpayer is current on Chapter 11 plan payments up
to the time the taxpayer is in substantial default
on the plan payments, plus six months.
4.
Waiver Expiration Date. Collection limitation waivers (Form 900)
obtained from taxpayers before December 31,1999,
outside of the context of an installment agreement,
expired automatically on or before
Note:
The automatic suspension of the
collection limitation period pursuant to I.R.C. §
6503(h)(2), while the automatic stay is in effect
and while a confirmed Chapter 11 plan providing
fully for the tax is in effect, is not shortened by
a collection limitation waiver between the debtor
and the Service that expires at an earlier date.
5.
CSED and Corporate Cases in Chapter 11. In
corporate cases, and other cases where the debtor is
not an individual, the Service may generally rely on
the suspension of the limitation period provided for
in I.R.C. § 6503(h)(2) to collect tax payments
after confirmation of Chapter 11 plans. The Service
should, nevertheless, insist Chapter 11 plans be
paid in full within the timeframes required by the
Bankruptcy Code.
6.
CSED and Individuals in Chapter 11. In
cases where the debtor is an individual, and the
plan provides for the full payment of a particular
tax, the Service may also generally rely on I.R.C.
§ 6503(h)(2) for the suspension of the collection
period.
Caution:
However,
the Service cannot rely on the I.R.C. § 6503(h)(2)
suspension in cases where the debtor is an
individual with respect to taxes that are both (1) non-dischargeable, and (2) for which
full payment is not provided in the plan.
7.
CSED — Individuals and Secured Claims. Similarly, in cases where the debtor is an individual, the Service cannot
rely on the suspension of the collection statute
regarding secured claims if
the plan does not provide for full payment of the
secured claim. The following situations
apply these principles:
A.
The tax is
non-dischargeable, and the Service did not file a
proof of claim (for example, the Service was not
aware of the claim before the bar date).
B.
The tax or
tax penalty is non-dischargeable but is not entitled
to priority claim treatment (for example,
non-priority taxes and tax penalties described in 11
U.S.C. §§ 523(a)(1)(B), 523(a)(1)(C), or
523(a)(7)), and the Service filed a general
unsecured claim for these taxes or penalties; the
plan provided for less than full payment of these
claims).
C.
The tax,
though otherwise dischargeable, was secured by
property that was excluded, exempted, or abandoned
from the bankruptcy estate.
8.
CSED Protection for the
25.17.11.3.5 (09-01-2004)
Trust Fund Considerations in Chapter 11
1.
Policy Statement P-5–60. Absent statute of limitations considerations,
the general policy of the Service is to
refrain from asserting the TFRP against non-debtor
responsible persons in cases where the corporate
debtor's Chapter 11 plan provides for full payment
of trust fund taxes, as long as the plan is not in
default.
2.
RO Assigned Accounts. When
the trust fund balance due accounts (e.g., corporate
Forms 941) are assigned to field Compliance at the
time of the bankruptcy petition, the revenue officer
(RO) manager is responsible for issuing an ICS Other
Investigation to an RO to conduct the
investigation as soon as possible. The RO should
periodically update Insolvency on the progress of
the investigation.
3.
Non-RO Assigned Balance Due Accounts. Insolvency
is responsible for initiating the TFRP investigation
in bankruptcies, not involving balance due accounts
already assigned to field Compliance as of the
bankruptcy petition filing date. Insolvency may
either issue an ICS Other
Investigation or Form 2209 to the field
or assign the TFRP investigation to an Insolvency
Advisor. Also, see
4.
LEM-TFRP Criteria. Generally,
Insolvency should initiate a TFRP investigation
based on the TFRP criteria in the Law Enforcement
Manual (LEM), considering tolerance and
collectibility factors.
5.
Withholding of TFRP Investigation. If
a TFRP investigation is withheld based on LEM
criteria, expiration of the assessment statute may
be allowed without Insolvency intervention. In that
circumstance, established procedures must be
followed and clearly documented on AIS explaining
the reason the TFRP investigation was withheld.
Caution:
If
less than six months remain before the ASED, the
case should not be forwarded for a TFRP
investigation.
6.
In Chapter 11 – Withholding Assessment Against Responsible Persons.
A.
If the
debtor is a corporation responsible for unpaid trust
fund taxes, assertion of the TFRP against
responsible persons will normally be withheld while
the proceeding is pending prior to confirmation of a
plan of reorganization. However, note (7), Indicators
to Consider — Doubtful Collection,
below.
B.
If the
corporate debtor has a confirmed reorganization plan
providing for full payment
of the trust fund taxes, assertion and
collection of the TFRP is normally deferred as long
as the corporate debtor is current with plan
payments.
7. Indicators to Consider – Doubtful Collection.