Treatment of Taxes in Chapter 11 Plans

Has anybody succeeded in getting the IRS to agree to a term longer than 5 years from petition date? I’d like to speak with that person to enhance my negotiating skills as I haven’t been able to get the IRS to budge.

— Giovanni Orantes, Esq.

Hello Giovanni:
When I was at IRS, it was pretty well understood that you couldn’t agree to this treatment. A quick explanation of the bureaucracy is in order here: Most attorneys representing the IRS in bankruptcy court are from IRS Counsel: they work for the Department of the Treasury.  However, an executive order dating to Roosevelt says that only attorneys from the Justice Department may represent the IRS in federal courts except for Tax Court.  The government gets around this by deputizing IRS Counsel attorneys as “Special Assistant US Attorneys,” (or SAUSAs) who report to Justice on those particular cases.  SAUSAs generally spend about a quarter to half their time in bankruptcy court, the rest in Tax Court.  To get special treatment on a chapter 11 payoff, then, you need to approach the SAUSA.  That person needs to clear everything with a contact at the US Attorney’s Office (I used to have Bob Kwan review everything before he became a judge).

The US Attorney’s Office supervisor doesn’t have authority to agree to a longer payoff.  He has to go to a chapter 11 contact at the Justice Department in Washington DC, with whom he may have absolutely no relationship (people change desks there frequently, and the local assistant US Attorneys do a lot more than deal with chapter 11 bankruptcies).  So the local AUSA won’t bring the longer payoff scenario to Justice unless there is a good reason that enhances tax enforcement (and not tax collections).  The argument that a longer payoff will result in more taxes paid because the company will stay alive to pay them, rather than going under and paying nothing, gets nowhere. IRS personnel see their job as law enforcement first, and collections second. No one keeps score of the amount of money collected.

The Justice Department attorney works in an ivory tower surrounded by other attorneys who are convinced that the vast majority of American citizens are not tax cheats only because of Justice’s assiduous efforts; my contacts with Justice attorneys convinced me that they were much more hard-nosed about tax collection than the average IRS attorney.

In short, don’t be down on your negotiating skills if you’ve never gotten this special treatment. The bar here is awfully high.

John D. Faucher
Hurlbett & Faucher, LLP

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