Bankruptcy Court challenges Eighth Circuit on taxation of estate's assets abandoned to debtor.

• Author: Price, Richard G.

Under Bankruptcy Code Section 554{a}, an estate's trustee "may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." In re A. J. Lane & Co., Inc., 133 B.R. 264 (Bankr. Dist. Mass. 1991), found the Bankruptcy Court deciding whether a Chapter 11 trustee's abandonment of debt-encumbered property to the debtor was a taxable event to the estate. Another Bankruptcy Court had previously addressed this issue in both In re McGowan, 95 B.R. 104 (Bankr. N.D. Iowa 1988), and In re Olson, 100 B.R. 458 (Bankr. N.D. Iowa 1989), aff'd, 121 B.R. 346 (N.D. Iowa 1990), aft'd, 930 F2d 6 (Sth Cir. 1991), and concluded that abandonment was not a taxable event to the estate. Both McGowan and Olson were Chapter 7 liquidation proceedings.

Sec. 1398(f)(1)provides that there is no disposition on the transfer of an individual debtor's assets to a bankruptcy estate, unless it is a sale or exchange. Sec. 1398(f)(2) provides that the transfer of assets back to the debtor "[i]n the case of a termination of the estate" is also not a disposition, absent a sale or exchange. The debtor's tax attributes (e.g., loss carryovers), if any, transfer to butes, in turn, return back to the debtor at the bankruptcy estate's termination under Sec. 1398(g) and (i).

In McGowan, the Bankruptcy Court interpreted "termination of the estate" broadly enough to include abandonment. It also concluded that, under bankruptcy law, there was no benefit to the estate to create a sale or exchange from the abandonment. This allowed the court to apply the "no disposition" rule of Sec. 1398(f)(2), and the trustee shifted the tax consequences of foreclosure to the debtor by abandoning the property. The Bankruptcy Court noted that this removed the tax burden from the unencumbered assets available to distribute to unsecured creditors; at the same time, there was no proof that the shift inhibited the debtor's "fresh start" under bankruptcy.

The same judge refined his approach in 01son. Even if the definition of "termination" in McGowan was too broad, the judge saw no reason to treat abandonment during administration differently from abandonment at the end of the case. Both the district court and the Eighth Circuit affirmed.

In A.J. Lane & Co., the trustee of an estate in a Chapter 11 proceeding was faced with three parcels of real estate subject to imminent foreclosures that would lead to a tax liability of $3.27 million after...