Post-Holywell: a liquidating trustee's personal liability.

• Author: Billion, Michael M.

The treatment of tax liabilities in a bankruptcy involves the balancing of conflicting objectives. Tax collection is essential for the orderly operation of the Government. Bankruptcy exists to provide an opportunity for the financial rehabilitation of the debtor. This cannot be accomplished unless the debtor is provided some relief from tax liabilities. These competing interests often strain the relationship between tax administration and orderly bankruptcy administration.

In many bankruptcy cases, the tax aspects are inadequately addressed or even ignored by both the bankruptcy and tax counsel. In Holywell Corp., Sup. Ct., 2/25/92, rev'g 911 F2d 1539 [11th Cir. 1990], the liquidating trustee in a Chapter 11 case did not file Federal tax returns. The liquidating plan consolidated the debtor's estate, established a liquidating trust and appointed a liquidating trustee. The plan encompassed all of the debtor's assets, including the proceeds of preconfirmation sales. There was no provision directing the liquidating trustee to either file tax returns or pay income taxes. Furthermore, the reorganization plan made no express provision for the payment of Federal income taxes. The corporate debtor filed a delinquent tax return reporting the gains on the preconfirmation sale. Neither the corporate debtor nor the liquidating trustee filed a tax return for the subsequent fiscal year. Such a return, if filed, would have reported gains on postconfirmation sales.

In the reorganization plan, the Service was listed as a creditor, and received copies of the plan and the disclosure statement. The IRS had an opportunity to object to the proposed plan, which did not provide for the payment of capital gains taxes, but did not.

Subsequent to the confirmation, the debtor sued to determine the responsibility of the trustee to file and/or pay Federal income taxes on the postconfirmation gain. The bankruptcy court, reasoning that the trustee had only limited powers, found that the trustee had the responsibility neither to file a return nor to pay the tax. Additionally, the liquidating trustee was not an assignee within the meaning of Sec. 6012{b){3) and thus was not compelled to file a return.

On appeal, the Service argued that the postconfirmation taxes were administration expenses. The Eleventh Circuit rejected this argument, holding that administration expenses did not include postconfirmation taxes because administration of the estate ceased on confirmation of a...