Monday, May 10, 2004

Michelle Arnopol Cecil (Missouri-Columbia) has published Abandonments in Bankruptcy: Unifying Competing Tax and Bankruptcy Policies, 88 Minn. L. Rev. 723 (2004). Here is part of the Introduction:

…As the number of bankruptcy cases rises, the burden on the already overworked bankruptcy courts will continue to mount. In this situation it is imperative that the bankruptcy system operate effectively, which is impossible with so many bankruptcy issues left unanswered. This Article attempts to resolve one such issue: the tax consequences of property abandonments by the bankruptcy trustee.

….For example, if the debtor owns a factory with a fair market value of $450,000 that is encumbered by a nonrecourse mortgage of $500,000, the factory has no value to the debtor’s unsecured creditors; therefore, the trustee will abandon the factory either to the debtor or to the party holding the $500,000 mortgage on it (so long as the mortgage holder has a possessory interest in the factory at the time of the abandonment).

The issue that has perplexed the courts is whether the trustee’s abandonment of the factory should be a taxable event to the bankruptcy estate. For example, if the factory has a basis for tax purposes of $200,000, should the estate be liable for income taxes owed on the $300,000 gain triggered upon the factory’s abandonment, or should the abandonment instead be viewed as a nontaxable transfer, so that the debtor becomes liable for the income taxes due on the $300,000 gain when she later sells or disposes of the factory? This issue is governed by both the Bankruptcy Code and the Tax Code. Although each statute offers some guidance as to whether an abandonment is a taxable transfer, neither statute fully resolves this important issue. Courts have grappled with the issue with no greater success….

This Article not only resolves the issue of whether the trustee’s abandonment of property is a taxable transfer from a strict statutory construction standpoint, but it also attempts to provide a more comprehensive solution to the broader issue of who should bear the burden of the tax imposed on the gain inherent in an asset as of the commencement of a bankruptcy proceeding….