Bankruptcy Reform: What's Tax Got to Do with it?
31 Pages Posted: 27 Jun 2006
When Congress passed sweeping bankruptcy reform legislation in 2005, it failed to resolve a number of important issues in the area of bankruptcy taxation, a critical but often overlooked area of bankruptcy law. This article addresses one such issue, the tax consequences of property abandonments in a bankruptcy proceeding. It deals with how to treat the gain that accrues with respect to an asset after a debtor files for bankruptcy protection. The article takes a two-pronged approach to the issue. First, it argues that all post-petition appreciation should be taxed to the debtor rather than to the debtor's bankruptcy estate because the debtor enjoys the benefits of the asset's appreciation in value and because, from a tax perspective, the results will be identical irrespective of whether the debtor or the bankruptcy estate is taxed on the asset's post-petition appreciation. Second, the article proposes that the gain accruing before the termination of the bankruptcy proceeding be treated as discharge of indebtedness income so that the debtor can defer recognition of the gain until she is better able to pay the resulting tax. The article concludes that congressional adoption of this proposal will harmonize competing tax and bankruptcy policies and ultimately improve the bankruptcy system.
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