The United States Supreme Court has granted certiorari to decide whether the sale of a debtor's assets prior to plan confirmation is exempt from state stamp or similar taxes. Florida Dept. of Rev. v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), 484 F.3d 1129 (11th Cir. 2007), petition for cert. granted, 128 S. Ct. 741 (U.S. Dec. 7, 2007).
The issue involved section 1146(a) of the Bankruptcy Code, which was section 1146(c) prior to passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amendments.
The Florida Department of Revenue petitioned the high court following an adverse ruling by the U.S. Court of Appeals for the Eleventh Circuit, which held that a pre-confirmation asset sale would qualify for section 1146(a)'s tax exemption provided that the sale was necessary to the consummation of the debtor's plan of reorganization. (See Commercial Restructuring & Bankruptcy Alert, June 2007, Vol. III, No. 2, p. 2, "Pre-Confirmation Sale Qualifies for State Stamp Tax Exemption.")
A decision on the issue by the United States Supreme Court will mend the split at the Circuit Court level among a number of appeals courts.
The U.S. Courts of Appeal for the Third and Fourth Circuits have imposed a bright line temporal restriction on the tax exemption, holding that a sale occurring prior to plan confirmation does not qualify for an exemption. The Eleventh Circuit has ruled that section 1146(a) does not contain a temporal restriction, and as a result, section 1146 (a)'s tax exemption may apply to all pre-confirmation transfers that are necessary to an ultimately confirmed plan.
In addition, while the Second Circuit has addressed certain aspects of section 1146(a), it has not definitively ruled on whether section 1146(a) imposes a temporal restriction.
If the Supreme Court rules in Florida's favor and reverses the Eleventh Circuit's decision, debtors and parties proposing to purchase assets may need to expedite plan confirmation with pre-bankruptcy preparation to obtain the benefits of the Bankruptcy Code's tax exemption in section 1146(a). For example, the debtor may organize a prepackaged chapter 11 case in which the disclosure statement and plan of reorganization contemplate a section 363(b) sale that already is largely agreed upon by the debtor's major parties-in-interest the day the chapter 11 bankruptcy case is filed.
This article is presented for informational purposes only and is not intended to constitute legal advice.