If you are thinking about filing Chapter 11 for your corporation, there are numerous tax issues that should be considered before you file. With some careful tax planning, you might increase the chances that your Chapter 11 plan will be successful.
The issues can be complex, but familiarity with the concepts can help you work with your attorney more effectively and understand your case.
Corporate Structure and Shareholder Issues
There are a number of issues to review related to corporate structure and shareholders.
Corporate Structure
Determine and diagram the corporate structure of a related group of corporations that might file for Chapter 11. Look at key transactions between related groups, including payables and receivables.
It's often smart to simplify the corporate structure of groups of businesses. Liquidating a business may the right choice. An important issue to look at is whether a liquidation is going to be a tax-free event. A corporation's insolvency could mean an otherwise tax-free event becomes taxable.
Consolidated Tax Returns
Know whether corporations file federal and state consolidated (or combined) tax returns. For federal purposes, each corporation in a group filing a combined return can be liable for all taxes due.
Possible additional tax can be a key factor in deciding which business entities should file bankruptcy petitions. In any case, this information is needed to determine the tax impact of Chapter 11.
Controlling Shareholder Action
A court order may be needed to prevent a shareholder who owns 50 percent or more of the shares from taking a worthless stock deduction.
Tax and Timing Issues
Open tax issues and current tax liabilities can influence the timing of filing a bankruptcy case. Some issues to watch for include:
Open Tax Issues
Weigh any significant tax issues for open tax years. Open tax years are years for which the IRS can still assess additional tax and a taxpayer can file a timely claim for a tax credit or refund. Check for any outstanding tax liabilities, including tax liens or tax controversies.
Trust Fund Taxes
Find out if the corporation has any undeposited or unpaid trust fund taxes. Undeposited or unpaid trust fund taxes or state sales, excise and use taxes present special liability problems. Failure to pay these taxes can result in a 100 percent penalty on the parties who were responsible for making tax deposits and payments.
Employee Retirement Income Security Act (ERISA) Liabilities
Confirm whether or not there are any unfunded pension plan liabilities. This includes multi-employer plan exposure or fines for violations of laws on the operation of employee benefit plans.
End of Tax Periods
Look at whether or not filing a petition should wait until the current tax period ends. This can shift taxes from administrative claim status to prepetition status.
While this may not change the fact that the taxes must be paid, it can change payment terms. Timing may change a tax claim from a priority claim to a general unsecured claim or even eliminate liabilities such as penalties.
Also check for tax refunds issues. Bankruptcy law permits the setoff of prepetition taxes against refunds owed to a taxpayer-debtor while the automatic stay is in place when the setoff would be permitted under non-bankruptcy laws.
Tax Attributes and Bankruptcy
Tax attributes refer to certain losses or credits such as net operating losses, capital losses or tax credits. Look at the effect of the bankruptcy case on these tax issues. It's important that the tax amounts be determined and traced to each of the corporations involved.
Limits on Tax Attribute Use
It's important to review and identify tax law and regulation limits on tax attributes. Also focus on options, employee stock ownership plans, redemptions and employee stock purchase plans. Prior limitations on tax attribute use can affect tax planning for periods after a bankruptcy case is filed.