5.17.10. Chapter 11 Bankruptcy (Reorganization)

(1) Reorganization. Chapter 11 bankruptcy is a rehabilitative case that gives the debtor a breathing period from the petition filing to plan confirmation, during which time business affairs can be reorganized and a plan devised for the orderly payment of creditors. Chapter 11 is frequently referred to as the reorganization bankruptcy. However, a debtor may choose to liquidate instead of reorganizing in a Chapter 11 bankruptcy. After a plan is confirmed, the creditors must monitor their receipt of payments under the terms of the plan. A Chapter 11 bankruptcy case can last for several years. For further information on Chapter 11 bankruptcies, see IRM 5.9.8, Processing Chapter 11 Bankruptcy Cases.

(1) The Insolvency program operates within the guidelines of the Title 11, United States Code (11 USC) and the Federal Rules of Bankruptcy Procedure.

(1) IRM 5.17.1.8, Revenue Officer’s Role, provides the duties and responsibilities of a Revenue Officer.

(1) IRM 1.4.50.8.2.1, Management Information Systems (MIS) Reports, contains guidance on Field Collection reports.

(2) National quality reviews and consistency reviews are conducted on a consistent basis. See IRM 1.4.50.12.1, EQRS, and IRM 1.4.50.12.2, NQRS, for more information.

(3) Operational and Program reviews are conducted on a yearly basis. See IRM 1.4.50.13.2, Operational Reviews, and IRM 1.4.50.13.5, Program Reviews, for more information.

(1) Managers are required to follow program management procedures and controls addressed in IRM 1.4.50.11, Group Controls, and IRM 1.4.50.12, Quality.

(2) Caseworkers and managers use the Integrated Collection System (ICS) for case management, assignment, and documentation.

(1) A glossary of terms used in this section can be found in Exhibit 5.17.8-1, Glossary of Common Bankruptcy Terms.

(2) Acceptable acronyms and abbreviations can be found in the ReferenceNet Acronym Database, which may be viewed at: http://rnet.web.irs.gov/Resources/Acronymdb.aspx.

(3) The following table lists acronyms and definitions used specifically in this IRM section.

(1) Procedural guidance on Insolvencies can be found throughout IRM 5.9, Bankruptcy and Other Insolvencies.

(2) The United States Bankruptcy Code and Rules, including Local Bankruptcy Court Rules.

(3) Pub 5170, Taxpayer Bill of Rights and Taxpayer Bill of Rights page https://www.irs.gov/taxpayer-bill-of-rights

(1) Within 14 days, a Chapter 11 debtor must file a number of standardized schedules, statements, and other specified documents with the court. It does not matter if the debtor filed a voluntary or involuntary case. (Bankruptcy Rule 1007(b) and (c)) These documents filed in Chapter 11 cases tend to be more voluminous than documents filed in other bankruptcy chapters.

(2) In a voluntary case involving an individual Chapter 11 debtor, the debtor must file the following documents with the petition:

1. A certificate indicating that the debtor has received credit counseling during the 180-day period before the filing of the petition, as required by 11 USC 109(h);

2. The debt repayment plan developed during that credit counseling, if any; or

3. A court determination excusing the debtor from the required credit counseling.

Note: See Bankruptcy Rule 1007(b)(3) and (c). Failure to file these documents can be grounds for dismissing the debtor’s bankruptcy case.

(3) A list of creditors is filed with the Chapter 11 case. The list may assist the United States Trustee in appointing members of the Unsecured Creditors’ Committee for the debtor’s case.

• When a voluntary petition is filed, the Chapter 11 debtor files a mailing matrix indicating the names and addresses of each of its creditors. Additionally, a list of creditors holding the 20 largest unsecured claims against the debtor is filed. (Bankruptcy Rule 1007(a)(1) and (d))

• In an involuntary case, the debtor must file the mailing matrix within 7 days after the entry of the order for relief. Within two days after the entry of the order for relief, the list of creditors holding the 20 largest unsecured claims must be filed. (Bankruptcy Rule 1007(a)(2) and (d))

(4) The debtor’s required schedules and Statement of Financial Affairs (SOFA) may help the IRS:

1. Identify some of its potential tax claims against the debtor;

2. Identify some of the IRS's setoff rights; and,

3. Compare debtor’s security interest schedules with the IRS records to ensure the schedules contain all applicable Notices of Federal Tax Lien (NFTLs) and evaluate the federal tax lien position.

(1) Many large Chapter 11 debtors have been able to file their proposed disclosure statements and plans with their bankruptcy petition or immediately after filing bankruptcy. These debtors may have negotiated restructuring of their debts and ownership with their major secured and general unsecured creditors and stockholders before filing Chapter 11. In doing so, they hope to obtain enough votes for confirmation of their Chapter 11 plan before going into bankruptcy. They hope to shorten the time they are under the supervision of the bankruptcy court. This type of Chapter 11 case is called a "prepackaged" Chapter 11. The "prepackaged" Chapter 11 case is more commonly filed in Delaware and the Southern District of New York. Prepackaged cases are filed pursuant to 11 USC 1126(b) and Bankruptcy Rule 3018(b).

(2) In a prepackaged Chapter 11 case, the debtor may seek consideration of its proposed disclosure statement and confirmation of its proposed plan at the same time. The debtor may request hearings to approve the disclosure statement and to confirm the proposed plan within a short time frame. Sometimes, the hearings may be held as little as 45 days after the filing of the petition. Prepackaged cases can be a problem for the IRS. Many times, the IRS is one of the debtor’s few major creditors that are not aware of the debtor’s plans to file a prepackaged bankruptcy. In the prepackaged case, confirmation of the proposed plan may occur before the bar date for the IRS and other governmental units to file a proof of claim. The IRS may have an ongoing audit of the debtor and may not have sufficient time to evaluate and file claims prior to confirmation. If the debtor filed a prepackaged case, and IRS was not a part of the plan negotiations, FI must take additional actions during the initial case review. This includes securing a copy of the proposed plan, reviewing it expeditiously, and consulting with Area Counsel if the plan is not adequate (IRM 5.9.8.4.2(12), Pre-packaged Chapter 11).

(3) Prepackaged plans that propose a sale or transfer of substantially all of the debtors' assets are a particular problem for the IRS. The principal purpose of these transactions may be tax avoidance. (See In re Scott Cable Communications. Inc., 227 B.R.596 (Bankr. D. Conn. 1998)) For additional information on Chapter 11 cases involving major tax liabilities or significant issues for the IRS, refer to:

• The Chief Counsel Directives Manual (CCDM) at IRM 34.3.1.3, Significant Bankruptcy Case Program

• IRM 5.9.4.15.3, Significant Bankruptcy Case Referrals

• IRM 5.9.8.4.2(15), Significant Cases and Referrals to Area Counsel

(1) Prior to confirmation of a Chapter 11 plan, any interested party in the case may request the appointment of a trustee to replace the DIP. The party in interest may be an individual creditor, the Creditors’ Committee, or the United States Trustee (UST). The trustee appointed by the bankruptcy court manages the debtor's business and assets as well as administers the estate. (11 USC 1104(a) and Bankruptcy Rule 2007.1(a))

(2) The appointment of a trustee is rare because the change in management can disrupt the debtor's business. A trustee is only appointed for "cause." "Cause" includes fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by its current management either before or after the commencement of the case. (11 USC 1104(a) and (e))

(3) If the bankruptcy court does not order the appointment of a Chapter 11 trustee, an examiner may be appointed. Prior to confirmation of the plan, an interested party or the United States Trustee (UST) may make a motion for appointment of an examiner. An examiner may be appointed to investigate the debtor for various matters. The matters may include allegations of fraud, dishonesty, misconduct, or irregularity in managing the debtor's affairs. The allegations may be against current or former management of the debtor. (11 USC 1104(c) and Bankruptcy Rule 2007.1(a) and (c)) The examiner does not replace the DIP in the management of the debtor's affairs. The examiner does not deprive the DIP of their rights to propose a plan for the debtor.

(4) The court may determine that appointing a trustee or examiner serves the interests of creditors and the estate better than dismissal or conversion. In these instances, a trustee or examiner may be appointed instead of dismissing or converting the case, even though grounds exist for dismissal or conversion. (11 USC 1112(b)(1))

(1) The USBC provides a mechanism that allows unsecured creditors to oversee the debtors' operations and voice their concerns throughout the Chapter 11 case. The UST appoints a committee of unsecured creditors as soon as practicable after:

• A voluntary Chapter 11 petition is filed; or,

• An involuntary petition is filed by creditors and an order for relief is entered in the case.

(2) The powers of the Unsecured Creditors’ Committee in a Chapter 11 case are very significant and extensive (11 USC 1102 and 1103). The views of the Unsecured Creditors' Committee are important to the bankruptcy court.

(3) The Unsecured Creditors’ Committee ordinarily consists of the creditors who are willing to serve on the committee and that hold the seven largest unsecured claims against the debtor (11 USC 1102(b)).

(4) 11 USC 1103 authorizes the Unsecured Creditor's Committee to employ various parties to represent or perform services for the committee. These parties may include:

• One or more attorneys,

• Accountants, or

• Other agents.

(5) The IRS and most governmental units are not eligible to serve as members of the Unsecured Creditors’ Committee (11 USC 101(41)).

(1) When non-Insolvency IRS employees become aware that a taxpayer meeting "significant case" criteria has filed Chapter 11, they must notify Field Insolvency (FI). FI will refer cases meeting Significant Bankruptcy Case Program criteria to the appropriate Area Counsel office. It does not matter if the debtor has no outstanding pre-petition liability. Significant cases include cases in which the debtor has major tax liabilities, cases with significant audit issues, or there are other significant or sensitive issues for the IRS. (See IRM 5.9.4.15.3, Significant Bankruptcy Case Referrals, for a list of all circumstances that make a case meet "significant case" criteria. Also, see IRM 5.9.8.4.2(16), Significant Cases and Referrals to Area Counsel, for additional information.)

(2) FI is required to notify TEGE when a taxpayer files Chapter 11 and the case meets "significant case" criteria. FI also notifies TEGE when a nationally known company files Chapter 11. (See IRM 5.9.8.4.2(12), Notice to TEGE, for additional information.)

(1) In a Chapter 11 case, the DIP typically wants to continue running the business until it can be reorganized or sold as a going concern.

1. The DIP may automatically continue routine ("ordinary course") use, sale, or lease of most of its pre-petition property (other than cash collateral) without court approval. (11 USC 363(c)) However, the DIP must obtain court approval to use, sale, or lease property of the estate other than in the ordinary course of business. (11 USC 363(b))

2. Prior to the use of the cash collateral, the DIP must obtain consent to use cash collateral. Consent must be obtained from each creditor with an interest in such cash collateral or with bankruptcy court authorization. It does not matter if the proposed use of cash collateral is routine or otherwise. The court evaluates the DIP's request for authorization to use cash collateral. The court may only authorize the use of cash collateral when the creditors interest in the property is adequately protected against loss. (11 USC 363(a), (c)(2), and (e))

3. The DIP’s unauthorized use of cash collateral which causes substantial harm to one or more creditors is grounds for dismissal or conversion of the bankruptcy case. (11 USC 1112(b)(4)(D))

(2) The DIP often negotiates agreed first day orders for the use of its cash collateral with its significant pre-petition lenders before entering bankruptcy. However, the DIP may neglect to consider the secured position of the IRS in cash collateral after the IRS has filed NFTLs against the debtor.

1. When the IRS is a secured creditor because an NFTL was filed pre-petition, the IRS must frequently take initiative to protect its interest in the case. The IRS may need to point out to both the DIP and the court the DIPs use of cash collateral where the IRS’ interest is secured by an NFTL.

2. The Automated Proof of Claim (APOC) program used by FI identifies Chapter 11 cases with an NFTL on file. Caseworkers in FI are required to determine if adequate protection is a consideration in a Chapter 11 case within ten calendar days of APOC identifying the NFTL. When necessary, FI contacts debtor's counsel to negotiate adequate protection for the IRS as a condition for the debtor's continued use of cash collateral. For additional information, see IRM 5.9.8.4.1(4), Aspects of the Review Requiring Action within Ten Calendar Days, IRM 5.9.14.2.7(1)(b), Time Frame Requirements; and, IRM 5.9.14.2.9(5), Period Flag Conditions and Resolutions, Secured Period Flag.

(3) 11 USC 361 discusses adequate protection in a bankruptcy case. The most common form of adequate protection to the IRS for a DIP’s use of its cash collateral usually includes periodic cash payments on the IRS’s secured claim. Payments to the IRS generally begin immediately on the secured claim. The IRS may also provided a replacement NFTL on property acquired by the DIP after the petition date. See the discussion on adequate protection in IRM 5.17.10.5.3, below, and in IRM 5.9.8.6, Adequate Protection. In all instances, referrals to Area Counsel for litigating adequate protection are subject to the tolerances set forth in ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

(1) A voluntary Chapter 11 filing by a debtor is often preceded by the IRS levying upon or seizing certain assets of the debtor. After filing bankruptcy, the debtor may immediately file a motion with the bankruptcy court for a release of the levy. The debtor may also file a motion for an order for the IRS to turn over the seized property to the debtor. (11 USC 542)

(2) In U.S. v. Whiting Pools, Inc., 462 U.S. 198 (1983), the Supreme Court affirmed a debtor’s right under 11 USC 542 to the return of tangible property seized by the IRS, subject to the requirement of 11 USC 363(e) that the debtor provide the IRS with adequate protection for the use of property to be turned over in which the IRS has a secured interest.

(3) The protection that is adequate to a creditor for turnover of property to the debtor depends on the factual circumstances of the case. This includes the type of property involved, tangible or intangible property. See IRM 5.9.8.7, Pre-petition Levies, and IRM 5.9.8.8, Cash Collateral/Property Depreciation of the Estate, for additional information.

(4) The IRS seldom seeks periodic cash payments as adequate protection for the turnover of seized real property as real property does not usually depreciate rapidly. However, the IRS does want the DIP to be required to maintain adequate insurance coverage for its buildings and other improvements to real property. On the other hand, the value of personal property may dissipate rapidly after turnover to the DIP by the IRS. This includes levied upon cash, accounts receivable, and inventory. In these situations, the IRS is interested in securing an adequate protection agreement that provides for:

1. The IRS retaining a portion of the cash received;

2. The IRS receiving future periodic payments (with post-petition interest) before a plan is devised or confirmed;

3. The IRS being provided replacement NFTLs on after-acquired assets; such as, the DIP’s inventory and accounts receivable

4. Providing for the DIP’s post-petition compliance with its continuing federal tax obligations; and,

5. Default provisions should the debtor not comply with the terms of the adequate protection order.

(1) The Section 341 Meeting in a Chapter 11 case is an opportunity for creditors (including the IRS) to question the debtor while under oath. Questions may cover a wide range of relevant matters concerning the debtor’s past behavior, its present finances, and the likely future of the bankruptcy case. (11 USC 341 and Bankruptcy Rule 2003) See IRM 5.9.8.4.2(2), 341 Meeting, for a list of examples of items that may be discussed at the Section 341 Meeting.

(2) Generally, FI caseworkers attend the Section 341 Meeting in Chapter 11 cases when issues are present that require a discussion at the meeting. In some areas, SCI may ask selected ROs for their assistance and expertise in listening to and questioning the debtor’s witnesses at the Section 341 Meeting.

(3) It may be advantageous for an RO or other non-Insolvency employee to question the debtor at the 341 Meeting. For example, an RO may question the debtor about issues regarding unpaid trust fund taxes to complete a TFRP investigation.

(4) Insolvency may ask Area Counsel to arrange a more thorough examination of the debtor or other witnesses under Bankruptcy Rule 2004. However, this is usually only requested when the debtor provides inadequate information or documentation for the IRS purposes at the Section 341 Meeting.

(1) In the course of many Chapter 11 cases, the IRS discovers that its pre-petition tax debts are secured even though it did not file an NFTL. The IRS may be secured due to setoff rights held by the IRS against carryback tax refunds for pre-petition years. The IRS may be secured against amounts owed the debtor by other federal agencies. All federal agencies are generally considered one creditor (the United States) for setoff purposes under the USBC. See In re Hal, Inc., 122 F.3d 851 (9th Cir. 1997) and Turner v. SBA, 84 F.3d 1294 (10th Cir. 1996).

(2) Rather than through ordinary refund procedures, Chapter 11 corporate debtors may request carryback tax refunds through tentative carryback procedures. The IRS commonly refers to these as "quickie refund procedures." Be aware of these "quickie refund" requests that may be filed immediately after the Chapter 11 case is filed.

(3) The IRS has the right to offset the quickie refund against federal tax liabilities of the taxpayer. This right of setoff becomes particularly important when the taxpayer is in bankruptcy. The dollar amounts of quickie refunds can be large. Setoff may be the only assured way of collecting liabilities owing from the taxpayer. Difficult mutuality issues are raised, however, when losses from post-petition periods are carried back to pre-petition years. Consult Area Counsel in such cases. See IRM 5.9.8.9, Quickie Refunds, for further discussion.

(4) The automatic stay in 11 USC 362(a)(7) prevents the actual making of a setoff of any pre-petition debt owed the debtor to any claim against the debtor. But, 11 USC 553 nevertheless preserves pre-petition setoff rights in bankruptcy. If a debtor is owed a pre-petition refund that could be credited against a liability owed by the debtor, the IRS should:

1. Freeze the refund until the stay is lifted;

2. Refer the case to Area Counsel to request an order lifting the stay and permitting setoff; and,

3. Setoff the refund once the stay is lifted.

(5) When the FDIC has taken over a bank, the bank's parent holding company often files for bankruptcy protection. The FDIC as well as the parent holding company may file a claim for refund if proper procedures are followed. (Treas. Reg. 301.6402-7) The FDIC's claim for refund does not affect the IRS's setoff rights. See IRM 5.9.20.3.1, Federal Deposit Insurance Corporation (FDIC) Receivership Proceedings of Insolvent Financial Institutions, for a discussion of receivership cases where the FDIC is appointed receiver of a financial institution.

(6) Refer to the following subsections in IRM 5.9, Bankruptcy and Other Insolvencies, for more detailed information on setoffs in bankruptcy cases:

• IRM 5.9.4.5, Credits, Refunds and Offsets;

• IRM 5.9.4.5.1, Addressing Credits, Refunds, and Offsets;

• IRM 5.9.4.5.2, Post-Petition Payments and Credits;

• IRM 5.9.4.5.3, Offsets to Other Agencies, and subsections;

• IRM 5.9.4.5.4, Federal Payment Levy Program (FPLP);

• IRM 5.9.4.5.5, Offsets, Payments, and the Individual Shared Responsibility Payment (SRP); and,

• IRM 5.9.13.19.2, Secured Claim.

(1) Chapter 11 non-individual debtors ordinarily continue to operate their businesses after filing for bankruptcy. They seldom file bankruptcy on the first day of a new tax reporting period. Frequently, there are federal tax liabilities owed by Chapter 11 non-individual debtors for taxes arising in the year in which the bankruptcy petition was filed. This may include employment and excise taxes due for the quarter in which the bankruptcy was filed.

1. Employment and some excise taxes are divisible or transactional taxes. Employment taxes are incurred when the wages reported on the employment tax return are paid. However, they are treated as pre-petition liabilities when the wages reported on the employment tax return were earned pre-petition. Excise taxes on fuel reported on Form 720, Quarterly Federal Excise Tax Return, are incurred when the tax (i.e., fuel tax) is collected. For divisible or transactional taxes, the IRS splits the taxes into the pre-petition and the post-petition portion of the tax due. The pre-petition taxes are priority tax debts. The post-petition portion of the tax debts are administrative tax debts. The IRS frequently refers to claims for these liabilities as "straddle period" or "split period" claims. (See IRM 5.9.13.18(2), Pre-petition versus Post-petition Employment Taxes.)

2. Income taxes are incurred on the last day of the income tax year. BAPCPA amended 11 USC 507(a)(8)(A) to clarify that only income taxes for tax years ending on or before the petition date will receive priority treatment in the bankruptcy case. Thus, income taxes that accrue for the non-individual debtor in the year in which the bankruptcy petition was filed are entirely administrative expense taxes. (See IRM 5.17.10.11, Individuals in Chapter 11, for information regarding income taxes in individual Chapter 11 cases.)

   Note: BAPCPA amended Section 507(a)(8)(A) to provide that income taxes will be considered pre-petition (priority) claims only when the tax year ended before the bankruptcy petition was filed. This overturned pre-BAPCPA case law that relied on that section to hold that the petition-year liability should be split into pre-petition and post-petition portions. See In re Pacific-Atlantic Trading Co., 64 F.3d 1292 (9th Cir. 1995).

(1) Assessments arising under IRC 4971 for failure to meet minimum funding standards of a pension plan are considered a "tax" in the IRC. However, the Supreme Court has ruled that the liability assessed under IRC 4971 is a penalty. For USBC proof of claim classification purposes, unsecured IRC 4971 liabilities are general unsecured claims. IRC 4971 liabilities may be a secured priority claim when the liability is secured by an NFTL or right of setoff. See United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996) and IRM 5.9.13.19.3, Unsecured Priority, for additional information.

(2) Chapter 11 debtors may incur post-petition IRC 4971 underfunding liabilities. The IRS may find it appropriate to assert that these liabilities were incurred as part of the actual and necessary costs of preserving the estate. As such, the IRS may argue that the liabilities are entitled to be claimed as an administrative priority claim under 11 USC 503(b)(1)(A). When there are outstanding IRC 4971 liabilities in a case, contact Area Counsel.

(1) The DIP or Chapter 11 trustee is required to file periodic reports and summaries of the operation of the business. The reports include a statement of receipts and disbursements as well as any other information required by the U.S. Trustee (UST) or the court. The reports must be filed with:

1. The bankruptcy court;

2. The UST; and,

3. Any governmental unit charged with the responsibility for collection or determination of any tax arising out of such business.

1. Payments made to employees;

2. The amount of taxes required to be withheld or paid for and on behalf of employees; and,

3. The place where these amounts are deposited.

(2) Chapter 11 cases require monitoring by Insolvency even if the IRS has not found any pre-petition taxes owed by the debtor. DIPs often become delinquent in paying withholding tax, FICA, and other taxes. This may be taxes incurred while the DIP operates the business after the petition date. It may be personal or estate income taxes incurred in cases filed by individual debtors after the petition date. Large dollar or chronically non-compliant taxpayers may merit manual monitoring by Insolvency. Manual monitoring may include putting the DIP on deposit verification regimes. Monitoring is not limited to business debtors.

(3) 11 USC 1112(b) requires the court to dismiss or convert a case to Chapter 7 on request of a party in interest for various reasons. Once cause is shown, the court must show that the failure to dismiss or convert the case is in the best interest of creditors and the estate. Reasons for dismissal or conversion include but are not limited to:

• Failure to file post-petition tax returns as they become due and no filing extension has been obtained

• Failure to pay post-petition taxes as they become due

• Failure to confirm a plan within the time frames established by the USBC

• Failure to file the periodic reports required by the court

• Failure to comply with an order of the court or pay a fee of the court

1. A farmer;

2. A corporation which is not moneyed, business or commercial; or,

3. An entity not eligible to file Chapter 7.

(4) Corporate Chapter 11 debtors frequently report net operating losses (NOLs) on income taxes. They may report a NOL for their recent pre-petition income tax year. They may report NOLs for their post-petition income year. In either instance, they may carryback these NOLs to earlier income tax years. In doing so, they seek to obtain refunds of the taxes they paid in the earlier tax years.

1. Corporate Chapter 11 debtors often need large cash infusions to keep their businesses operating. Rather than go through ordinary refund procedures, they may request immediate carryback tax refunds from the IRS through tentative carryback (quickie refund) procedures. Usually, the refunds are issued within 45 days of filing a Form 1139, Corporation Application for Tentative Refund. But, the tentative refund should be frozen until the stay can be lifted when the IRS has a right of setoff.

2. The IRS may audit a loss year return and find that a quickie refund was excessive. If the quickie refund was paid to the DIP post-petition, IRS is entitled to file an administrative expense claim for the excess refund amount. (11 USC 503(b)(1)(B)(ii))

3. The IRS is not required to file requests for payment of administrative expenses. However, it is the policy of the IRS to file administrative expense claims to put the debtor and creditors on notice of the liability and amount due.

(5) Corporate Chapter 11 debtors sometimes use a Chapter 11 case to liquidate substantially all of their assets. The liquidation may be through mid-stream asset sales that are approved by the bankruptcy court under 11 USC 363. The debtor may also seek confirmation of a liquidating plan. The liquidating plan may provide for the sale of the debtor’s assets to a third party. The liquidating plan may also provide for the transfer of substantially all of the debtor’s assets to a Liquidating Trust. In any of these liquidations, the bankruptcy estate may realize substantial capital gains income after considering the debtor's adjusted basis in the property. Income is generated for the bankruptcy estate because the debtor’s property was either sold or there was a taxable transfer to a third party. There may be a federal income tax liability for the bankruptcy estate. However, the debtor's other taxable events in the year and available NOL carryovers from prior years are considered in calculating the tax.

(1) Ordinarily, Chapter 11 debtors enjoy the exclusive right to propose their Chapter 11 plans for the first 120 days after the petition date. The bankruptcy court may extend or reduce the debtor's 120-day exclusivity period "for cause" upon the request of any party in interest. A party in interest party may be the debtor, creditors, or the U.S. Trustee. (11 USC 1121(d)(1)) The court may not extend the debtor’s exclusivity period to a date that is more than 18 months after the petition date.

(2) "Small business" Chapter 11 debtors have the exclusive right to file a Chapter 11 plan during the first 180 days following the entry of the order for relief (11 USC 1121(e)(1)).

(1) Small business treatment is mandatory for all debtors that fall within the small business debtor definition in 11 USC 101(51C) and (51D). Debtors who file a voluntary Chapter 11 petition must state in the petition whether they are a small business debtor (Bankruptcy Rule 1020). The small business provisions are designed to:

• Prevent abuses of the bankruptcy system in small business cases,

• Make small business cases less costly for the small business debtor, and

• Move the small business case more quickly toward confirmation.

(2) A small business debtor is defined as a business debtor whose non-contingent, liquidated debts do not exceed $3,024,725, per the debt adjustment effective on April 1, 2022. The debt total cannot include debts owed to affiliates and insiders. The small business treatment only applies in a case:

• Where the U.S. Trustee has not appointed a committee of unsecured creditors, or

• Where the court has determined that the committee is not sufficiently active and representative to provide effective oversight of the debtor.

(3) The small business debtor has the exclusive right to file a plan during the 180 days after the petition date. Chapter 11 debtors who do not meet small business criteria are only guaranteed a 120-day exclusivity period. (11 USC 1121(b) and (e))

1. However, the small business debtor must file its plan and disclosure statement within 300 days after the petition date (11 USC 1121(e)).

2. The 180-day and 300-day periods may only be extended if the debtor demonstrates that it is more likely than not that the court will confirm a plan within a reasonable period of time. Failure to timely file or confirm a plan or file a disclosure statement is a basis for conversion or dismissal of a Chapter 11 case under 11 USC 1112.

3. In a small business case, the court must confirm a plan that complies with the USBC no later than 45 days after the plan was filed. (11 USC 1129(e))

(4) The IRS employees should be aware that the automatic stay will not apply in a small business case in the following situations:

1. The debtor already has a small business case pending at the time the current petition was filed;

2. The debtor was in a prior small business case that was dismissed for any reason, by a court order, within the two-year period ending on the petition date;

3. The debtor was in a prior small business case in which a plan was confirmed in the two-year period ending on the date of petition; or

4. The debtor is an entity that has acquired substantially all of the assets or business of a small business debtor described in a), b), and c) above. However, the stay will apply if the debtor can demonstrate that it acquired the assets or business of such small business debtor in good faith and not for the purpose of avoiding the application of 11 USC 362(n).

(5) 11 USC 1116 lists a number of duties required of small business debtors. The small business debtor is required to file a copy of the most recent federal tax return with a voluntary petition. In an involuntary case, the debtor must provide a copy of the return within seven days after the entry of the order for relief. Small business debtors must also timely file and pay post-petition taxes. Failure to comply with any of these requirements is a basis for conversion or dismissal of the case. (11 USC 1112(b)(4)(I))

(1) The USBC does not specify all of the information that needs to be included in the disclosure statement. However, it does require the disclosure statement to discuss the potential federal tax consequences of the plan to the debtor, any successor of the debtor, and a "hypothetical investor." (11 USC 1125(a))

(2) Generally, the disclosure statement discusses:

• The recent history of the debtor,

• The reasons why the debtor filed a bankruptcy petition, and

• The measures the debtor has undertaken to reverse financial setbacks.

(3) Bankruptcy courts have required that a disclosure statement contain a discussion of the following matters:

1. The debtor’s available assets and their value;

2. Claims made against the estate;

3. A liquidation analysis, setting forth the estimated return that creditors would receive if the debtor was in a Chapter 7 case;

4. The future management of the debtor;

5. The risks being taken by creditors and interest holders under the proposed plan; and

6. The existence, likelihood, and possible success of litigation involving the debtor.

(4) A careful review of the proposed disclosure statement may lead Insolvency to conclude that a referral to Area Counsel for assistance is appropriate. The case may or may not meet Significant Case procedures. A referral may be necessary because the disclosure statement does not include adequate information for the IRS to decide if the plan should be accepted. Or, a referral may be necessary because the case meets Significant Bankruptcy Case handling procedures. For instance, the proposed disclosure statement may indicate that the plan will create a Liquidating Trust to pay creditors’ claims. The disclosure statement may indicate that the plan will effect a sale of substantially all of the debtor’s assets to a third party. Insolvency may conclude that Area Counsel’s assistance is required to evaluate the potential tax consequences of the plan. Insolvency may need Counsel's assistance in devising appropriate procedures to protect the IRS interests under the proposed plan. See the following citations for additional information:

• Chief Counsel Directives Manual (CCDM) at IRM 34.3.1.3.5, Disclosure Statement and Plan Review

• IRM 5.9.4.15.3, Significant Bankruptcy Case Referrals

• IRM 5.9.8.17, Disclosure Statements and Plans of Reorganization

(1) After a plan proponent files a proposed disclosure statement with the bankruptcy court, the court typically enters an order that a hearing will be held. The notice of hearing is given to the debtor, all creditors, and other interested parties. (Bankruptcy Rule 3017(a))

(2) When the disclosure statement notice order is served on the IRS, Insolvency uses the event as an opportunity to:

• Fine tune and amend the amount of any IRS claims;

• Re-evaluate the security for any claims the IRS has filed as secured and amend the characterization of its secured claim (to priority or general unsecured status), if appropriate, and

• Conduct updated post-petition tax compliance reviews for the debtor to see if any further administrative expense claims should be filed.

(3) The general purpose of the disclosure statement approval process is informational. The Government has limited resources for litigating cases in the bankruptcy court. Ultimately, the IRS does not object to a disclosure statement unless it is grossly deficient and the IRS plans on objecting to the proposed plan. However, an objection to a proposed disclosure statement should be considered if it incorrectly describes the IRS's claim as this will affect other creditors.

(1) For the purpose of determining the treatment of creditors in a Chapter 11 plan, the USBC requires "classification" of claims. Classification is based on the nature of the creditor's claims. Most plans group creditors into Class 1, Class 2, etc. (11 USC 1123). Claims or interests may be included in a particular class only if such claims or interests are substantially similar to the others in that class. (11 USC 1122(a))

(2) In practice, each secured claim is commonly placed in its own class or subclass. This is because of:

• A secured creditor’s often unique interest in certain property of the debtor’s bankruptcy estate;

• The extent and priority of the creditor's NFTL; or,

• The specific mutual debt subject to offset.

(3) Administrative expense claims, gap period claims, and priority tax claims should not be classified by a Chapter 11 plan (USC 1123(a)(1)).

(1) A Chapter 11 plan must specify any class of claims or interests that is not impaired under the plan (11 USC 1123(a)(2)).

1. A class of claim or interest holders is impaired unless the plan leaves the claim or interest holders’ non-bankruptcy legal, equitable, and contractual rights unaltered. (11 USC 1124(1))

2. In general, the IRS’s secured claims and general unsecured claims are almost always impaired by a Chapter 11 plan.

(2) Unless a claim or interest holder agrees to less favorable treatment, the plan must provide the same treatment for all parties within a particular class. (11 USC 1123(a)(4)) This is one reason why general unsecured creditors may be placed in several different classes in a complex Chapter 11 case.

(3) When the debtor or other plan proponent disputes the IRS’s claim, the dispute should be resolved in a contested proceeding outside the confirmation process. It does not matter if the dispute is to the classification or the amount of the disputed tax claim. It is improper for a plan proponent to dispute the IRS’s claim by providing for a different claim amount or classification in the proposed plan. See In re Taylor, 132 F.3d 256 (5th Cir. 1998). When a proposed plan contains language disputing the IRS's claim, such language should not be ignored. A referral to Counsel may be necessary to object to confirmation of the plan.

(1) In Chapter 11 cases, most of a debtor’s creditors and interest holders may "vote" to accept or reject a proposed plan. They may also file an objection to the proposed plan. In the USBC, voting on acceptance or rejection of a plan most commonly occurs in Chapter 11 cases.

(2) Classes of creditors and interest holders who are unimpaired are deemed to have accepted the plan (11 USC 1126(f)). A class is deemed not to accept the plan if it receives no property under the plan. A class is deemed not to accept the plan if the class is not entitled to retain property under the plan. (11 USC 1126(g))

(3) An impaired class of creditors is considered to have accepted the plan:

1. Other than an entity whose acceptance or rejection of the plan was not in good faith as determined by the court,

2. The plan is accepted by creditors holding at least two-thirds of the amount of the combined claims, and

3. The plan is accepted by more than one-half in number of the allowed claims of those in the class who vote.

(4) Administrative expense claims, gap period claims, and priority tax claims should not be classified by a Chapter 11 plan. Ordinarily, the IRS does not vote with respect to these types of claims. However, Field Insolvency (FI) may refer the case to Area Counsel to request an objection to confirmation of the plan. Referrals to Area Counsel are subject to the tolerances in IRM 5.9.4.15.4, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

(5) However, IRS claims that are secured or general unsecured should be classified. These secured or general unsecured claims are frequently impaired by the plan. The IRS should have an opportunity to vote to accept or reject a plan with respect to these types of claims.

1. 11 USC 1126(a) gives the Secretary of the Treasury authority to accept or reject a Chapter 11 plan on behalf of the United States. This includes Chapter 11 plans where the IRS or other agencies of the United States are creditors in the case.

2. Chief Counsel was given the authority to accept or reject plans where the U.S. is a creditor by General Counsel Order No. 4 (Jan. 19, 2001). See CCDM 30.2.2, Exhibit 30.2.2-6, for additional information. This delegation covers proceedings where the U.S. has only a tax claim. It also covers proceedings in which there are other claims of the U.S., in addition to the claim of the IRS.

(6) When the U.S. has claims for taxes owed to the IRS and there are debts owed to other agencies, the different agencies must coordinate their votes. Disagreements on voting may be referred to the General Counsel of the Treasury Department for resolution. See Chief Counsel Directives Manual (CCDM) at Exhibit 30.2.2-6, General Counsel Order No. 4, Delegation of Authority to Chief Counsel.

(1) Once eligible creditors have voted on the plan and any modifications are made, the court notices creditors and holds a confirmation hearing (11 USC 1128). The plan is finalized at the confirmation hearing.

(2) Under procedures commonly referred to as "cram down" procedures, a plan can be confirmed over the dissenting vote of an impaired class. However, the plan cannot "discriminate unfairly." It must be "fair and equitable" with respect to each impaired, dissenting class. (11 USC 1129(b)) Thus, a plan can be "crammed down" over the vote of a dissenting class of creditors as long as one impaired class has voted to accept the plan.

(3) The USBC describes how each classification a creditor may have against a Chapter 11 debtor should be treated for the plan to be confirmed. This includes the claims of the IRS. The IRS should ensure that its various claims are properly treated under a plan. The IRS should object to confirmation of the plan if it fails to provide for such treatment. Failure to object to a plan’s proposed treatment of a claim may be interpreted as consent to that treatment.

(4) The IRS should attempt to ensure the Chapter 11 plan includes specific default provisions. The provisions should specify the manner in which the IRS notifies the debtor of the default. The provisions should clarify the opportunities the IRS affords the debtor to cure the default. The default provisions may clarify that the IRS can exercise administrative collection provisions of the IRC to collect amounts due under the plan.

(5) Once a plan is confirmed, it is binding on the debtor and all interested parties. (11 USC 1141(a))

(1) UA Chapter 11 plan should not be confirmed unless it proposes liquidation or further reorganization by the debtor or a successor to the debtor. For example, a plan should not be confirmed if further reorganization will be required by the filing of another bankruptcy case. (11 USC 1129(a)(11)) This is commonly referred to as the "feasibility" test.

(2) Common Chapter 11 feasibility concerns and objections of the IRS have included the following types of plan proposals:

1. Balloon payments of the IRS priority tax claims.

2. The effective date of the plan is an unreasonable period of time after confirmation.

3. The debtor remains in possession and control of the business.

4. The plan does not provide for full payment of the IRS administrative expense or gap period claims on the effective date of the plan.

5. Extended deferred payment periods for the IRS secured claims.

(3) Identifying other IRS feasibility concerns with a proposed Chapter 11 plan may require a closer review of the entire structure of the proposed plan. For example:

1. A proposed Chapter 11 plan provides that the reorganized debtor will pay the entire allowed priority tax claims of the IRS in regular even installments within five years of the petition date. However, a careful review of other provisions of the plan may show that this promise is empty.

2. Parts of the proposed plan provide that the debtor will transfer substantially all of its assets to a new entity. The entity is separate from the reorganized debtor. The debtor does not receive sufficient funds from the transfer of assets to pay the claims of creditors.

3. The debtor's pre-confirmation debts assumed by the new entity are limited to claims of certain categories of creditors. For example, debts assumed represent secured debts and unsecured trade creditor debts. The debts do not include the tax debts to the IRS. There will never be sufficient funds to pay outstanding IRS claims.

4. Payments are not required to many pre-petition creditors after the bankruptcy petition is filed and until confirmation. The IRS has a significant administrative claim for post-petition taxes. The taxpayer could not pay their current taxes as they became due. Is it "feasible" that the debtor can make plan payments on pre-confirmation IRS tax debts and pay their current taxes as they become due?

(1) The overwhelming majority of debtors with confirmed and effective Chapter 11 plans are non-individual debtors (e.g., corporations, partnerships, limited liability companies, etc.). The discharge granted a non-individual debtor in a Chapter 11 case is substantially different from the discharge granted an individual debtor. See IRM 5.17.10.11, Individuals in Chapter 11, for a discussion on the Chapter 11 discharge for individual debtors. When the Chapter 11 debtor is an individual, the exceptions to discharge in 11 USC 523(a) apply. The provisions of a confirmed plan cannot affect the dischargeability of tax liabilities of individuals when the liabilities are excepted from discharge under 11 USC 523(a)(1).

(2) Unless otherwise provided for in the plan or confirmation order, non-individual Chapter 11 debtors generally receive a "super discharge" of all of their pre-confirmation debts (11 USC 1141(d)(1)(A)). However, BAPCPA made tax debts for which the debtor filed a fraudulent return non-dischargeable. BAPCPA also made tax debts non-dischargeable when the debtor willfully attempted to evade payment of the taxes. The fraud and willful evasion exceptions to discharge are applicable to non-individual debtors; as well as, to individual debtors (11 USC 1141(d)(6)(B) and 11 USC 523(a)(1)(C)).

(3) In general, a debtor’s Chapter 11 plan is required to provide for full payment of allowed claims for administrative expense taxes, gap period taxes, priority taxes, and secured taxes. Governmental units are not required to file requests for payments of administrative expenses (11 USC 503(b)(1)(D)). The plan should not require the IRS to file a claim for administrative expense taxes. The plan should not discharge pre-confirmation administrative expense liabilities that are not included on an administrative expense claim, Form 6338-A(C) , Request for Payment of Internal Revenue Taxes.For additional information on plans and administrative expense claims, see IRM 5.9.8.17.1(4)(a), The Plan of Reorganization, Plan Provisions, Administrative Expenses, and IRM 5.9.8.17.1(4)(b), Plan Provisions, Administrative Expenses -Proofs of Claim. For a discussion of plan requirements in an individual case, see IRM 5.17.10.11, Individuals in Chapter 11.

(4) When the IRS has a secured claim, the IRS should ensure that a plan provides for retention of tax NFTLs on the debtor’s property securing the IRS's claim. Otherwise, the NFTLs may be stripped from all of the debtor’s property when the plan becomes effective (11 USC 1141(c)).

(5) Prepackaged Chapter 11 plans sometimes provide for most of a debtor’s unsecured debts to pass through confirmation with no alteration. This may include some or all of the debtor's potential tax debts. A prepackaged Chapter 11 plan may provide pass-through treatment for many unsecured debts because the debtor is only concerned with restructuring its most significant debts. The debtor may be concerned with restructuring stock ownership in a pre-agreed manner. Involving all of its creditors in the bankruptcy proceeding could slow down approval of its narrowly drawn prepackaged plan. Nevertheless, the IRS should carefully review the proposed terms of a prepackaged plan that provides for pass-through treatment of some of a debtor's unsecured debts. The IRS should be sure that the pass-through terms of the proposed plan actually cover all of the potential claims of the IRS against the debtor.

(6) A non-individual may not receive a discharge because the non-individual may not be eligible for discharge. See IRM 5.9.8.18(6), The Chapter 11 Discharge and the Effects of Confirmation, Non-Discharge. The non-individual debtor is not eligible for discharge if the confirmed plan provides for liquidation of all or substantially all property of the estate and the debtor will not engage in business after the plan is confirmed. The debtor may be denied a discharge in the current Chapter 11 case because they were granted a discharge in a prior bankruptcy case (IRM 5.9.5.7.1(5), Discharge Limitations, and IRM 5.9.5-3, Allowable Elapsed Time Between Bankruptcy Filings and Discharges). They may also be denied a discharge when they have committed fraud or they have not been open and truthful during the bankruptcy (11 USC 1141(d)(3) and (6)).

1. In many liquidating Chapter 11 cases, the Chapter 11 plan may provide for the non-individual debtor’s pre-confirmation debts to be discharged. The plan may provide for pre-confirmation debts to be released under the plan.

2. Creditors of the debtor may choose not to object to the discharge or release provided by the plan. They may feel that there is little collection potential for their debts apart from the liquidating Chapter 11 plan.

3. When the plan contains language that discharges debts contrary to the provisions in 11 USC 1141, the IRS refers that case to Area Counsel for an objection to confirmation. The referral is subject to the tolerances in IRM 5.9.4.15.4, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

(7) Small Business debtors under SBRA have discharge limitations. The court must grant the debtor a discharge after completion of all payments due within the first three years of the plan, or a longer period as the court may fix (not to exceed five years). The discharge relieves the debtor of personal liability for all debts provided under the plan except any debt: 

1. on which the payment is due after the first three years of the plan, or such other time as fixed by the court (not to exceed five years); or

2. that is otherwise non-dischargeable

(1) The provisions of a confirmed Chapter 11 plan generally bind the debtor, any entity acquiring property under the plan, and any creditor (including the IRS). It does not matter whether or not the claim of such creditor is impaired under the plan. It does not matter whether or not the creditor has accepted the plan (11 USC 1141(a)). The IRS should object to any proposed plan with inappropriate provisions.

(1) When a Chapter 11 plan becomes effective, the non-individual, non-liquidating debtor generally receives a discharge of at least some of its debts. Pursuant to 11 USC 362(c), the stay of acts against property of the estate ends only when the property is no longer in the estate. Property of the estate typically revests in the debtor upon confirmation of a plan. Section 362(c) provides that the stay of any other act remains in effect until the earliest of three events:

• Granting or denial of discharge,

• Closing of the case, or

• Dismissal.

(2) In a non-individual Chapter 11 case, the discharge is typically granted or denied when the plan is confirmed.

(3) The plan is binding upon the debtor and all creditors (11 USC 1141(a)). The automatic stay generally lifts at confirmation of the plan. However, the IRS is not free to resume its normal collection activity for the debtor’s pre-confirmation tax debts. This prohibition is due to the discharge injunction which typically takes effect when the plan is confirmed and the discharge is granted. (11 USC 524(a)) However, the discharge injunction does not prohibit:

1. The commencement or continuation of proceedings concerning the debtor before the U.S. Tax Court, or

2. The setoff of discharged tax liabilities against pre-petition refunds.

(4) When a Chapter 11 plan provides for full payment of pre-confirmation tax debts, the IRS is generally precluded from attempting to collect these tax debts outside the plan. This includes pre-confirmation tax debts for:

• Administrative or gap period liabilities,

• Secured tax claim liabilities,

• Unsecured priority tax claim liabilities, and

• Unsecured general tax claim liabilities.

(5) The CSED on pre-confirmation tax liabilities is suspended after a Chapter 11 plan becomes effective and the automatic stay is lifted. Pursuant to IRC 6503(h)(2), the CSED remains suspended until the debtor substantially defaults on making plan payments plus six months. See United States v. Wright, 57 F.3d 561 (7th Cir. 1995); United States v. McCarthy, 21 F. Supp.2d 888 (S.D. Ind. 1998).

(1) Many Chapter 11 plans specify the procedures applicable to all creditors for addressing defaults on payments under the bankruptcy plan. If the plan does not contain provisions, FI attempts to negotiate default provisions in the proposed plan. The terms negotiated depend upon whether the debtor is an individual or a non-individual debtor. It may also depend upon when an individual Chapter 11 case was filed.

(2) When the taxpayer is non-compliant with the terms of a confirmed plan, FI reviews the plan for default provisions. The FI caseworker must comply with the default provisions in the confirmed plan. IRM 5.9.8.19.3, Plan Default, discusses plan default in detail.

(3) In the case of a default, Insolvency may refer the case to a revenue officer to resume administrative collection activity. The IRS can usually collect the full amount of the liabilities provided for in the Chapter 11 plan. The IRS may not be able to collect liabilities not provided for in the plan. They may have been discharged upon confirmation.

(4) Insolvency may also refer the case to Area Counsel to file a motion to dismiss or convert the debtor’s Chapter 11 case to a Chapter 7 case. However, dismissal or conversion is usually only appropriate if the bankruptcy estate retained property after confirmation. Or, it may be because the confirmed plan requires creditors to address plan defaults through the filing of a motion for dismissal or conversion. There is no provision that reinstates the automatic stay upon conversion.