With all of the attention paid to BAPCPA's² new means test, credit counseling requirements and attorney sanctions, few people have noticed that Congress made an important change to the rules governing the taxation of income earned in the year of bankruptcy. To understand the effect of the change, one must delve into the technical and confusing pre-BAPCPA world of bankruptcy tax jurisprudence.

A Clash of Priorities

Prior to BAPCPA, the government's claim for taxes on income earned in the year of bankruptcy had the potential to be treated as a priority claim under two separate provisions. First, the claim could have been entitled to first priority as an administrative expense if the taxes were "incurred by the estate" and not entitled to priority under §507(a)(8).³ Second, the claim could have been entitled to eighth priority under §507(a)(8).⁴ Because claims for taxes entitled to eighth priority were statutorily excluded from administrative expense treatment, the two theories were mutually exclusive.

The first test for administrative priority—whether a claim for taxes on income earned pre-petition in the year of bankruptcy could be considered "incurred by the estate"—presents a clash between tax policy and bankruptcy policy. As a matter of tax policy, income is taxed on the basis of an annual system.⁵ Because a taxpayer's liability for annual taxes cannot be determined until the year is complete, the government's claim for taxes on both pre-petition and post-petition income earned in the year of bankruptcy could not arise for tax purposes until the end of the tax year—at the earliest.⁶ Because the debtor's tax year will always end on or after the date of the bankruptcy petition, the debtor's tax liability for the year of bankruptcy would arise under the tax rules post-petition.

On the other hand, bankruptcy policies require treating the pre-petition portion of the debtor's tax liability for the year of bankruptcy as a pre-petition claim. The Bankruptcy Code broadly defines a "claim" to include unliquidated, contingent and unmatured obligations.⁷ According to the legislative history, Congress intended this language to be interpreted in the broadest possible way.8 While applicable nonbankruptcy law determines whether a claimant has a substantive right to payment, when a claim arises for bankruptcy purposes is a question of federal bankruptcy law in all but the Third Circuit.⁹ The goal of bankruptcy policy is to properly match the timing of the claim to the benefits received by the bankruptcy estate. If the debtor received pre-petition benefits, then the debtor's liabilities incurred on account of those benefits should also be a pre-petition claim. To treat the pre-petition income upon which the tax was based as property of the bankruptcy estate while treating the tax liability arising out of that income as a post-petition administrative expense would violate the fundamental principles embodied in the definition of a "claim." The time in which the claim is ripe for adjudication under applicable nonbankruptcy law should be irrelevant for bankruptcy purposes.¹⁰ Therefore, as a matter of bankruptcy policy, the government's claim for taxes on income earned by the debtor pre-petition should be treated as a pre-petition claim, arising before the bankruptcy estate came into existence.

Congress further complicated the clash between bankruptcy and tax policy in the Bankruptcy Tax Act of 1980, which was supposed to clarify bankruptcy tax jurisprudence. The 1980 Act brought great clarity in one respect by allowing an individual debtor in a chapter 7 or 11 case to make an election to file separate tax returns for the pre-petition portion and the post-petition portion of the year of bankruptcy.¹¹ When a split-year election is made, the government's claim against the debtor for pre-bankruptcy partial-year taxes is properly treated as an eighth priority claim¹² and is excepted from discharge.¹³ The government's claim for the post-bankruptcy partial year is also properly treated either as a personal nonbankruptcy liability of the debtor (if based on income that did not become property of the estate), or as an administrative expense (if the income became property of the estate).¹⁴

Unfortunately, the 1980 Act did a poor job of explaining what happens when a debtor does not make, or is ineligible to make,¹⁵ a split-year election. Section 1398(d)(1) merely states that "the taxable year of the debtor shall be determined without regard to [the bankruptcy case]." The 1980 Act said nothing about the priority to be accorded to the government's claims. While, as discussed below, the courts have struggled with the meaning of the "single taxable year" language, I believe the language should be interpreted merely to require an allocation of the entire year's taxes based on the amount of time in the pre-petition and post-petition periods, rather than on the actual income and deductions occurring during the respective periods through the preparation of separate returns.¹⁶

The Code also denies administrative priority to taxes subject to the eighth priority rules. The eighth priority rules are some of the most complex rules in the Code, consisting of the three-year look-back rule, the 240-day assessment rule and the post-petition assessability rule.¹⁷ As a general matter,¹⁸ prior to the 2005 Act, only the post-petition assessability rule would be potentially applicable to taxes incurred in the year of bankruptcy.¹⁹ By its terms, the post-petition assessability rule covered most²⁰ taxes not assessed before but assessable under applicable nonbankruptcy law after bankruptcy.²¹

Under a literal reading of the pre-BAPCPA language, all year-of-bankruptcy taxes, whether pre-petition or post-petition, and indeed all post-petition taxes, would be covered by the post-petition assessability rule²² because the government has at least three years following the filing of a tax return to make an assessment.²³ A literal interpretation of the eighth priority rule would have precluded administrative priority treatment for all taxes. This literal interpretation of the statute is inconsistent with the legislative history²⁴ and has been repeatedly rejected by the courts with respect to taxes for purely post-petition tax years.²⁵ As is discussed below, the distinction between eighth priority for taxes on pre-petition income and administrative expense priority for taxes on post-petition income was not followed with respect to year-of-bankruptcy taxes.

Different Priorities for Different Debtors under Different Chapters

Before BAPCPA, the courts threw the conflicting bankruptcy and tax law policies, the ambiguous language of the 1980 Act, and the poorly drafted post-petition assessability rule into the meat grinder and made legal sausage. The courts applied different results to individual and corporate debtors, and to debtors filing for relief under different chapters. For nonelecting individual chapter 7 debtors, the courts relied on an unenacted statement made in a committee report on the 1980 Act²⁶ to hold that the government has no claim at all against the bankruptcy estate for the pre-petition portion of taxes incurred in the year of bankruptcy.²⁷ By treating the tax claim as a post-petition personal obligation of the debtor, the courts avoided any chance of the taxes being dischargeable, but also disenfranchised the government's claim against the bankruptcy estate by precluding any bankruptcy distribution on account of the claim. This ruling is troublesome from a bankruptcy policy perspective because the pre-petition debtor (and, if not spent, the estate) received the pre-petition income upon which the taxes were imposed, yet the post-petition debtor, otherwise entitled to a fresh start, bears the sole burden of paying the taxes.

The rulings for nonelecting individual chapter 11 debtors are less consistent. A Massachusetts bankruptcy court followed the individual chapter 7 cases in ruling that the government had no claim against the bankruptcy estate of a nonelecting individual debtor, even though the court determined that the taxes on pre-bankruptcy income arose pre-petition.²⁸ Curiously, the court also suggested that the debtor's estate would have to provide for full payment of the taxes in order to confirm a plan of reorganization²⁹—an odd result if the government did not have a "claim." On the other hand, a California district court recognized the dischargeability problem, but avoided the issue by stating that the tax liability, which the court had earlier ruled did not constitute a claim against the bankruptcy estate, would be excepted from discharge under §523(a)(1)—a provision only applicable to eighth priority claims against the estate.³⁰ These rulings simply did not make logical sense.

Corporate debtors, who were not eligible to make a split-year election, were treated entirely differently from nonelecting individual debtors. The courts in the corporate cases treated the pre-petition portion of year-of-bankruptcy taxes as an eighth priority claim under the post-petition assessability rule,³¹ but differed on whether the claim arose pre-petition or post-petition.³² The cases did not explain how the year's tax liability would be allocated between the pre-petition and post-petition periods.³³

The courts were confused about how to treat individual debtors in chapter 12 and 13 cases, who, like corporate debtors, were not eligible to make the split-year election. One bankruptcy court felt bound by its circuit's corporate precedent, even though it vehemently disagreed with it, holding that the pre-petition year-of-bankruptcy taxes were entitled to eighth priority.³⁴ Another bankruptcy court rejected the corporate analysis in favor of the nonelecting individual cases, holding that the debtor's tax liability on pre-petition income should be treated as arising post-petition, and therefore it would not constitute a claim against the estate unless the government chose to file a proof of claim to recover post-petition taxes.³⁵

Thus, prior to the BAPCPA amendments, the court had struggled, without much success, to reach a coherent rationale for the disparate treatment of year-of-bankruptcy tax claims owing by individual and corporate debtors under the different chapters of the Bankruptcy Code.

After analyzing the various rationales, I concluded that the courts should have treated all nonelecting debtors the same way: the pre-petition portion of year-of-bankruptcy taxes should have been allocated on the basis of time between the pre-petition and post-petition periods, with the pre-petition portion entitled to eighth priority and the post-petition portion either entitled to administrative expense priority if the income belonged to the estate, or as a personal obligation of the debtor if the income did not belong to the estate. This approach is consistent with the split-year election because the pre- and post-petition portions are allocated on the basis of time rather than on the basis of actual income and deductions occurring during the respective periods. Granting eighth priority would also have assured that the government's claim would be excepted from discharge in an individual chapter 7 case,³⁶ and that the liability would have to be paid in full as part of a chapter 12 or 13 plan.³⁷ This treatment of the pre-petition portion of year-of-bankruptcy taxes would be consistent with the treatment of other pre-petition taxes incurred shortly before bankruptcy.³⁸

The BAPCPA Amendments

After BAPCPA, the eighth priority rules will only apply to taxes for years ending on or before the petition date.³⁹ The change will have only one effect: Taxes for the year of bankruptcy will be eligible for eighth priority treatment only if (1) the debtor makes the split year election or (2) the debtor files bankruptcy on the last day of the tax year. In all other cases, the debtor's year-of-bankruptcy tax liabilities will not have been incurred in tax years ending on or before the petition date. The change overturns the corporate cases and the chapter 13 case that followed them.⁴⁰ What follows from the change is unclear. Will the pre-petition portion of the year's taxes now be treated as an administrative expense, as a general unsecured dischargeable claim or as a nonbankruptcy obligation of the debtor?

Congress likely made the change at the behest of the Internal Revenue Service (IRS), which has long argued that all year-of-bankruptcy taxes should be treated as post-petition administrative priority obligations.⁴¹ However, the elimination of eighth priority does not mandate administrative expense treatment. Even if the claim is deemed to arise post-petition—a question that was and will continue to be debatable—the courts will have to conclude that the tax liability was "incurred by the estate" in order to grant administrative expense priority.⁴² None of the pre-bankruptcy cases concluded that the taxes on pre-petition income were administrative priority expenses "incurred by the estate," although some accepted the notion that the taxes arose post-petition.⁴³ Moreover, by losing eighth priority treatment, the government's claim will no longer be excepted from discharge under §523(a)(1)(A) of the Code.

The courts will therefore have two alternatives for treating the pre-petition portion of year-of-bankruptcy taxes for nonelecting individuals. First, the courts may ignore the language, history and intent of the Code's definition of a "claim" in order to treat the taxes as a personal obligation of the debtor outside of bankruptcy. This is the theory adopted before the BAPCPA amendments by the nonelecting individual chapter 7 cases. Second, the courts can accept the Code's definition of a "claim" and treat the pre-petition portion of year-of-bankruptcy taxes as a dischargeable general unsecured claim.

I believe that this second approach is the correct one. Administrative expense priority should only be given to obligations that resulted in or arose out of a benefit received after the bankruptcy estate came into being. The pre-petition income upon which the taxes were imposed did not benefit the post-petition estate. The change in the statute should be interpreted to subordinate what was an eighth priority nondischargeable claim into a dischargeable general unsecured claim.

What Should Debtors Do?

Until the courts are able to clarify the law, debtors will have a difficult time deciding whether to make the split-year election. If the courts adopt the approach that I believe is correct, most debtors would likely be better off not making the election and attempting to discharge the pre-petition portion of the year's tax liability. However, if the courts adopt the approach previously taken in the nonelecting individual cases, debtors would be better off making the election in the hope of having some portion of their personal tax liability paid by the estate. It is a game of chicken from which only those who benefit from unnecessary litigation will profit.

The litigation that is likely to result from the change in the language of the statute should highlight the need for Congress to reform the bankruptcy tax rules. The rules are far too complex, and the cross-referencing between the priority, dischargeability and nonbankruptcy rules create unintended gaps and absurd results. In addition to simplifying the rules and eliminating the confusing cross-references, Congress should require all taxpayers to file split-year returns, which would result in the proper treatment of year-of-bankruptcy tax claims. The additional expense of preparing split-year returns would be minimal, because debtors must already keep separate records of their pre-petition and post-petition activities.

Footnotes

¹ I have written a lengthy law review article on this subject, "Income Tax Claims in the Year of Bankruptcy: A Congressionally Created Quagmire," forthcoming in The Tax Lawyer, Winter 2005. A draft of the article is available under my name at http://www.ssrn.com. Return to article

² Bankruptcy Abuse, Prevention and Consumer Protection Act of 2005 (BAPCPA), S. 256, Pub. L. No. 109-8, 199 Stat. 23 (2005). Return to article

³ 11 U.S.C. §§507(a)(1) and 503(b)(1)(B). Return to article

⁴ 11 U.S.C. §507(a)(8) (repealed 2005). Return to article

⁵ See, e.g., Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931) ("All the revenue acts which have been enacted since the adoption of the Sixteenth Amendment have uniformly assessed the tax on the basis of annual returns"); United States v. Lewis, 340 U.S. 590 (1951). Return to article

⁶ Indeed, one could argue that the government's claim does not arise until the taxpayer's return is due (generally April 15 of the following year for calendar-year taxpayers). I.R.C. §6072(a). Return to article

⁷ 11 U.S.C. §101(5). Return to article

⁸ See H.R. Rep. No. 95-595 at 309 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S. Rep. No. 95-989 at 21-2 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5807-08 ("By the broadest possible definition and by the use of the term throughout [the Code]...the bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case. It permits the broadest possible relief in the bankruptcy court"). Return to article

⁹ The Third Circuit has suggested that state law labels of when a claim "accrues" should be controlling in bankruptcy cases. See In re M. Frenville Co., 744 F.2d 332, 335-36 (3rd Cir. 1984), cert. denied, 469 U.S. 1160 (1985) (equitable indemnity claim arises only when claimant is sued); Jones v. Chemetron Corp., 212 F.3d 199, 206 (3rd Cir. 2000) ("[T]his court held [in Frenville] that in most circumstances a "claim" arises for bankruptcy purposes at the same time the underlying state law cause of action accrues. We are cognizant of the criticism the Frenville decision has engendered, but it remains the law of this circuit"). Courts in all of the other circuits have either specifically rejected Frenville or have adopted theories inconsistent with Frenville. See, e.g., In re Parker, 313 F.3d 1267, 1269 (10th Cir. 2002); In re Jastrem, 253 F.3d 438, 442 (9th Cir. 2001); In re Andrews, 239 F.3d 708, 710 n.7 (5th Cir. 2001) ("The Third Circuit has taken a narrower view of "claim," but this approach has been universally rejected"); In re Manville Forest Prods., 209 F.3d 125, 129 (2d Cir. 2000); Butler v. NationsBank N.A., 58 F.3d 1022, 1029 (4th Cir. 1995); In re Piper Aircraft Corp., 58 F.3d 1573, 1576 n.2 (11th Cir. 1995); In re Hemingway Transp., 954 F.2d 1, 8 (1st Cir. 1992); Signature Combs Inc. v. United States, 253 F. Supp. 2d 1028, 1033-34, 1038 (W.D. Tenn. 2003); Am Int'l. v. Datacard Corp., 146 B.R. 391, 405-06 (N.D. Ill. 1992); In re Transp. Sys. Int'l., 110 B.R. 888, 894 (D. Minn. 1990). Return to article

¹⁰ See Mabey, Ralph R. and Jarvis, Annette W., "In re Frenville: A Critique by the National Bankruptcy Conference's Committee on Claims and Distributions," 42 Bus. Law. 697, 704 (1987) ("state law labels established for an entirely different purpose should not be determinative of when a claim arose for purposes of its treatment in bankruptcy," citing Jackson, Thomas A., The Logic and Limits of Bankruptcy Law 48-49 (1986)). Return to article

¹¹ See I.R.C. §1398(d)(2). Return to article

¹² The claim would fall under both the look-back rule of §507(a)(8)(A)(i) and the post-petition assessability rule of §507(a)(8)(A)(iii) of the Code, both before and after BAPCPA, because the partial pre-petition tax year will end "on or before" the petition date. Return to article

¹³ 11 U.S.C. §523(a)(1)(A). Return to article

¹⁴ See I.R.C. §1398(e)(1), (e)(2). Return to article

¹⁵ Ineligible debtors include nonindividuals like corporations, as well as individuals in cases under chapter 12 and 13. See 11 U.S.C. §1398(a). Return to article

¹⁶ See Todres, Jacob L., "Tax Filing Year in Bankruptcy: Corporate Bankruptcy: Treatment of Filing Year Income Tax—A Suggested Approach," 9 ABI Law Review 523 (2001). Return to article

¹⁷ See 11 U.S.C. §507(a)(8)(A)(i)-(iii). Return to article

¹⁸ The look-back rule would apply to the pre-petition partial tax year of bankruptcy if a split-year election is filed, and the look-back rule would also apply to taxes in the year of bankruptcy if the debtor files bankruptcy on the last day of the debtor's tax year. In all other cases, the look-back rule would not apply to taxes incurred in the year of bankruptcy. Return to article

¹⁹ The look-back rule only applied if the debtor's taxable year ended on or before the petition date. 11 U.S.C. §507(a)(8)(A)(i) (repealed 2005). Therefore, if the debtor does not make the split-year election or file bankruptcy on the last day of the debtor's tax year, the look-back rule would not apply to year-of-bankruptcy taxes. Similarly, the 240-day rule requires that an actual assessment of the tax be made before bankruptcy. 11 U.S.C. §507(a)(8)(A)(ii). Taxes cannot be assessed until, at the earliest, a return is due. See I.R.C §§6201(a)(1) and 6213(a). Return to article

²⁰ The post-petition assessability rule excludes taxes "of a kind specified in §§523(a)(1)(B) and 523(a)(1)(C)." 11 U.S.C. §507(a)(8)(A)(iii). The referenced sections except from discharge taxes resulting from serious misconduct (debtor failing to file a return, filing a return late and within two years of bankruptcy, and tax fraud). The statute of limitations on assessment does not begin to run until a return is filed (I.R.C. §6201(a)(1)), and there is no statute of limitations on tax fraud (I.R.C. §6501(c)). Congress presumably did not want to grant priority to taxes solely because the debtor's misconduct would provide an unlimited assessment period under applicable nonbankruptcy law. The cross-referencing, however, is unfortunate because, as discussed in my paper (see supra note 1), it creates many unintended logical gaps. Return to article

²¹ 11 U.S.C. §507(a)(8)(A)(iii) (repealed 2005). Return to article

²² Assessment is the process by which the government officially records a tax liability. I.R.C. §6203 ("The assessment shall be made by recording the liability of the taxpayer in the office of the secretary in accordance with the rules or regulations prescribed by the secretary"). Following assessment, the government may proceed, following proper demand, to collect the unpaid taxes using its lien and levy powers. See I.R.C. §§6330 (levy and distraint procedures) and 6320 (specific lien procedure). Return to article

²³ I.R.C. §6501(a) (general three-year period). Return to article

²⁴ United States v. Redmond, 36 B.R. 932, 934 (D. Kan. 1984) ("‘The actual, necessary costs and expenses of preserving the estate, including wages...rendered after the commencement of the case, and any taxes on, measured by or withheld from such wages...are allowable as administrative expenses.' S.Rep. No. 95-989, 95th Cong., 2d Sess. 66, reprinted in 1978 U.S. Code Cong. & Ad. News 5787, 5852; H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 355, reprinted in 1978 U.S. Code Cong. & Ad. News 5963, 6311. The Senate Report, supra, further states that ‘[i]n general, administrative expenses include taxes which the trustee incurs in administering the debtor's estate'"). Return to article

²⁵ See, e.g., In re Westholt Mfg. Inc., 20 B.R. 368, 371 (Bankr. D. Kan. 1982) ("a tax given priority status under §507(a)(6) and predicated on pre-petition liability incurred by the debtor before the filing of the petition should not be promoted to a first-priority administrative expense merely because it is assessed after the petition is filed. On the other hand, actual, necessary costs and expenses of preserving the estate...should not be denied administrative status merely because in character the claims resemble claims for taxes described in §507(a)(6)"), aff'd., United States v. Redmond, 36 B.R. 932, 934 (Bankr. D. Kan. 1984) (stating that taxes are "incurred" when they accrue); In re L.J. O'Neill Shoe Co., 64 F.3d 1146, 1151 (8th Cir. 1995) ("We believe that subsection (iii) can be read, like the other subsections of 507(a)(7)(A), to address only pre-petition taxable activity or events"); In re Pacific-Atlantic Trading Co., 64 F.3d 1292, 1303 (9th Cir. 1995) (rejecting government's argument that the panel's interpretation of §507(a)(8)(A)(iii) would apply to all post-petition taxes: "[W]e will not presume Congress intended an absurd result... Taxes for periods which occur entirely post-petition are afforded an administrative expense priority under §503(b)(1)(B). Congress certainly did not intend for taxes earned entirely post-petition to be ‘relegated' to seventh-level priority") (citations omitted); In re EMC Indus. Inc., 27 B.R. 696 (Bankr. D. S.C. 1983). Return to article

²⁶ S. Rep. No. 96-1036 at 26, 1980-2 C.B. 620, quoted in In re Prativadi, 281 B.R. 816, 819 (Bankr. W.D.N.Y. 2002); In re Johnson, 190 B.R. 724, 727 (Bankr. D. Mass. 1995) ("If the debtor does not make the [§1398 split-year] election, no part of the debtor's tax liability from the year in which the bankruptcy case commences is collectible from the estate, but is collectible from the individual debtor"). Return to article

²⁷ See, e.g., In re Haedo, 211 B.R. 149, 152 (S.D.N.Y. 1997) (if debtor does not make the split-year election, "the entire liability for the year of the bankruptcy filing is a claim against the debtor but is not collectible from the estate"); In re Prativadi, 281 B.R. 816, 819 (Bankr. W.D.N.Y. 2002); In re Johnson, 190 B.R. 724, 726 (Bankr. D. Mass. 1995); In re Pflug, 146 B.R. 687, 689 (Bankr. E.D. Va. 1992); In re Moore, 132 B.R. 533 (Bankr. W.D. Pa. 1991); In re Mirman, 98 B.R. 742, 744-745 (Bankr. E.D. Va. 1989); In re Turboff, 93 B.R. 523, 525 (Bankr. S.D. Tex. 1988); see, also, In re Canon, 130 B.R. 748, 751 (Bankr. N.D. Tex. 1991); In re Weir, No. 85-40456-7, 1990 Bankr. LEXIS 778, *9, 71 A.F.T.R.2d (RIA) 4724 (Bankr. D. Kan. 1990). Return to article

²⁸ In re Johnson, 190 B.R.724 (Bankr. D. Mass. 1995). The court in In re Smith, 210 B.R. 689, 692 (Bankr. D. Md. 1997), followed Johnson in holding that a trustee could recover year-of-bankruptcy tax payments made by the debtor while a debtor-in-possession because the bankruptcy estate was not liable for the taxes. Return to article

²⁹ Id. at 628. Return to article

³⁰ In re Wood, 240 B.R. 609 (C.D. Cal. 1999). Return to article

³¹ 11 U.S.C. §507(a)(8)(A)(iii) (repealed 2005). Return to article

³² Compare In re Pacific-Atlantic Trading Co., 64 F.3d 1292 (9th Cir. 1995) (taxes on income earned pre-petition in the year of bankruptcy arose post-petition, but would be treated as eighth priority claims under the post-petition assessability rule rather than as administrative expenses); In re L.J. O'Neill Shoe Co., 64 F.3d 1146 (8th Cir. 1995) (while not deciding whether taxes on pre-petition year-of-filing income would arise pre-petition or post-petition, the panel's analysis of the issue suggests that the taxes arose pre-petition); In re Hillsborough Holdings Corp., 116 F.3d 1391, 1396 (11th Cir. 1997); In re Quid Me Broadcasting Inc., No. 95-03876, 1996 U.S. Dist. LEXIS 7581, *14-15, 78 A.F.T.R.2d (RIA) 5039 (W.D.N.Y. 1996). See, also, In re Bayly Corp., 163 F.3d 1205, 1208 (10th Cir. 1998) (holding that the Pension Benefit Guaranty Corp.'s claim against the debtor for underfunding its pension plan was not an obligation "incurred by the estate" within the meaning of §503(b)(1)(B), and therefore the panel did not address whether the obligation constituted a "tax." The panel suggested that it would follow In re O.P.M. Leasing Services Inc., 68 B.R. 979, 983-84 (Bankr. S.D.N.Y. 1987) (taxes arise upon accrual) rather than Pacific-Atlantic if the obligation was a tax). Id. at 1209. Return to article

³³ In a law review article on the subject, Prof. Jacob Todres identified two possible apportionment methods—the "closing of the year" method in which the tax liability for transactions which occurred pre-petition would be determined separately from the tax liability for transactions which occurred post-petition, and the allocation-based-on-time method in which the final year of bankruptcy tax liability is apportioned based on the length in time in the pre-petition and post-petition periods. Todres, Jacob L., "Tax Filing Year in Bankruptcy: Corporate Bankruptcy: Treatment of Filing Year Income Tax—A Suggested Approach," 9 ABI Law Review 523 (2001). The closing-of-the-year method would directly conflict with the method used for the split-year election, for which corporate debtors are not eligible. Therefore, the only conceivable allocation method that would not do violence to the statutory scheme would appear to be the allocation-based-on-time method. Return to article

³⁴ In re Mitchaelson, 200 B.R. 862, 866 (Bankr. D. Minn. 1996) (following circuit court precedent from O'Neill Shoe). Return to article

³⁵ In re Wilkoff, No. 98-34354, 2001 Bankr. LEXIS 124, *18, 24-27, 87 A.F.T.R.2d (RIA) 2266, 2001-1 U.S. Tax Cas. (CCH) ¶50,289 (Bankr. E.D. Pa. 2001). The court in Wilkoff held that creditors have a special election in chapter 13 cases to file a claim for taxes that "become payable" post-petition under §1305(a). Return to article

³⁶ 11 U.S.C. §523(a)(1)(A). Return to article

³⁷ 11 U.S.C. §§1222(a)(2) and 1322(a)(2). Return to article

³⁸ See 11 U.S.C. §507(a)(8)(A)(i) (look-back rule). Return to article

³⁹ See 11 U.S.C. §502(a)(8) (flush language) (2005). The change has no effect on the look-back rule, which previously contained the same language, or on the 240-day rule, which applied only to taxes assessed pre-petition (an act that could occur only after the end of the tax year). Return to article

⁴⁰ See supra notes 31 and 34. Return to article

⁴¹ See, e.g., Memorandum for Associate Area Counsel, 2002 IRS CCA LEXIS 67, *11-13 (2002) ("[o]ur position is that no provision of §507(a)(8) includes the pre-petition portion of income tax liability for the straddle year"); In re Pacific-Atlantic Trading Co., 64 F.3d 1292 (9th Cir. 1995); In re L.J. O'Neill Shoe Co., 64 F.3d 1146 (8th Cir. 1995). Return to article

⁴² 11 U.S.C. §503(b)(1)(B)(i). Return to article

⁴³ See In re Pacific Atlantic Trading Co., 64 F.3d at 1301. Return to article