APPENDIX C
Senate Proposed Amendments to H.R. 5043 (Bankruptcy Tax Act of 1980) Adopted by Both Senate and House
Congressional Record—Senate, December 13, 1980, S16489-S16493
BANKRUPTCY TAX ACT OF 1980
Mr. ROBERT C. BYRD. Mr. President, I ask unanimous consent that the Senate proceed to the consideration of H.R. 5043, Calendar No. 1167.
There being no objection,
The Senate proceeded to consider the bill (H.R. 5043) to amend the Internal Revenue Code of 1954 to provide for the tax treatment of bankruptcy, insolvency, and similar proceedings, and for other purposes, which had been reported from the Committee on Finance with amendments, as follows:
On page 5, after line 4, insert the following:
(E) Foreign tax credit carryovers.—Any carryover to or from the taxable year of the discharge for purposes of determining the amount of the credit allowable under section 33.
On page 5, line 16, strike “paragraph (2)(B)” and insert the following: “subparagraphs (B) and (E) of paragraph (2)”;
On page 6, line 9, strike “SUBPARAGRAPH (B)” and insert the following: “SUBPARAGRAPHS (B) AND (E) OF PARAGRAPH (2)”;
On page 6, line 15, strike “depreciable property” and insert the following: “the depreciable property”;
On page 9, after line 7, insert the following:
(5) Depreciable property.—The term “depreciable property” has the same meaning as when used in section 1017.
On page 9, line 11, strike “(5)” and insert “(6)”;
On page 9, line 15, strike “(6)” and insert “(7)”;
On page 9, line 24, strike “(7)” and insert “(8)”;
On page 10, line 14, strike “(8)” and insert “(9)”;
On page 11, line 20, after the period, insert the following: Such regulations shall provide for such adjustments in the treatment of any subsequent transactions involving the indebtedness as may be appropriate by reason of the application of the preceding sentence.
On page 12, line 11, strike “section 414(e)” and insert the following: “subsection (b) or (c) or section 414”;
On page 13, strike line 6, through and including page 15, line, and insert the following:
(6) Indebtedness contributed to capital.—For purposes of determining income of the debtor from discharge, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital—
(A) section 118 shall not apply, but
(B) such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness.
(7) Recapture of gain on subsequent sale of stock.—
(A) In general.—If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245—(i) such stock (and any other property the basis of which is determined in whole or
(i) in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property, and
(ii) the aggregate amount allowed to the creditor—
(I) as deductions under subsection (a), (b), or (c) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or
(II) as an ordinary loss on the exchange, shall be treated as an amount allowed as a deduction for depreciation.
The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange.
(B) Taxpayers on reserve method.—In the case of a taxpayer to whom subsection (c) of section 166 (relating to reserve for bad debts) applies, the amount determined under clause (ii) of subparagraph (A) shall be the aggregate charges to the reserve resulting from the worthlessness or partial worthlessness of the indebtedness.
(C) Special rule for cash basis taxpayers.—In the case of any creditor who computes his taxable income under the cash receipts and disbursements method, proper adjustment shall be made in the amount taken into account under clause (ii) of subparagraph (A) for any amount which was not included in the creditor’s gross income but which would have been included in such gross income if such indebtedness has been satisfied in full.
(D) Stock of parent corporation.—For purposes of this paragraph, stock of a corporation in control (within the meaning of section 368(c)) of the debtor corporation shall be treated as stock of the debtor corporation.
(E) Treatment of successor corporation.—For purposes of this paragraph, the term “debtor corporation” includes a successor corporation.
(F) Partnership rule.—Under regulations prescribed by the Secretary, rules similar to the rules of subparagraphs (A), (B), (C), (D), and (E) of this paragraph shall apply with respect to the indebtedness of a partnership.
(8) Stock for debt exception not to apply in de minimis cases.—For purposes of determining income of the debtor from discharge of indebtedness, the stock for debt exception shall not apply—
(A) to the issuance of nominal or token shares, or
(B) with respect to an unsecured creditor, where the ratio of the value of the stock received by such unsecured creditor to the amount of his indebtedness cancelled or exchanged for stock in the workout is less than 50 percent of a similar ratio computed for all unsecured creditors participating in the workout.
(9) Discharge of indebtedness income not taken into account in determining whether entity meets reit qualification.—Any amount included in gross income by reason of the discharge of indebtedness shall not be taken into account for purposes of paragraphs (2) and (3) of section 856(c).
On page 20, line 25, strike “Any interest” and insert the following: “For purposes of this section, any interest”
On page 21, after line 4, insert the following: The preceding sentence shall apply only if there is a corresponding reduction in the partnership’s basis in depreciable property with respect to such partner.
(D) Special rule in case of affiliated group.—For purposes of this section, if—
(i) a corporation holds stock in another corporation (hereinafter in this subparagraph referred to as the ‘subsidiary’), and
(ii) such corporations are members of the same affiliated group which file a consolidated return under section 1501 for the taxable year in which the discharge occurs, then such stock shall be treated as depreciable property to the extent that such subsidiary consents to a corresponding reduction in the basis of its depreciable property.
(E) Election to treat certain inventory as depreciable property.—
(i) In general.—At the election of the taxpayer, for purposes of this section, the term depreciable property includes any real property which is described in section 1221(1).
(ii) Election.—An election under clause (i) shall be made on the taxpayer’s return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary. Such an election, once made, may be revoked only with the consent of the Secretary.
On page 22, strike line 20 through and including page 23, line 2;
On page 23, line 3, strike “(3)” and insert “(2)”;
On page 23, strike line 8, through and including line 13, and insert the following:
(1) In general.—For purposes of sections 1245 and 1250—
(A) any property the basis of which is reduced under this section and which is neither section 1245 property nor section 1250 property shall be treated as section 1245 property, and
On page 24, strike line 11, through and including page 25, line 7, and insert the following:
(d) Amendment of Section 382(b).—Subsection (b) of section 382 (relating to special limitations on net operating loss carryover), as in effect before its amendment by section 806 of the Tax Reform Act of 1976, is amended by adding at the end thereof the following new paragraph:
(7) Special rule for reorganizations in title 11 or similar Cases.—For purposes of this subsection, a creditor who receives stock in a reorganization in a title 11 or similar case (within the meaning of section 368(a)(3)(A)) shall be treated as a stockholder immediately before the reorganization.
On page 26, between lines 13 and 14, strike “108(f) (1)(B)” and insert “108(e)(6)”;
On page 26, strike line 14, through and including the material between lines 16 and 17;
On page 28, strike line 16 through and including line 24, and insert the following:
(d) Taxable years of debtors—
(1) General Rule.—Except as provided in paragraph (2), the taxable year of the debtor shall be determined without regard to the case under title 11 of the United States Code to which this section applies.
On page 29, line 5, strike “(3)” and insert “(2)”;
On page 30, line 19, strike “(4)” and insert “(3)”;
On page 30, strike line 24, through and including the material prior to line 1 on page 31;
On page 31, line 7, after the period, insert the following:
The preceding sentence shall not apply to any amount received or accrued by the debtor before the commencement date (as defined in subsection (d)(3)).
On page 31, strike line 16 through and including line 20;
On page 31, line 21, strike “(4)” and insert “(3)”;
On page 32, line 13, strike “transfer” and insert “DISPOSITION“;
On page 32, line 15, strike “transfer” and insert “disposition”;
On page 32, line 17, strike “transfer” and insert “disposition”;
On page 32, line 21, strike “TRANSFER“ and insert “DISPOSITION”;
On page 32, line 24, strike “transfer” and insert “disposition”;
On page 33, line 1, strike “transfer” and insert “disposition”;
On page 51, strike line 22, through and including page 53, line 2, and insert the following:
(g) Title 11 or Similar CASES.—If a corporation completely liquidates pursuant to a plan of complete liquidation adopted in a title 11 or similar case (within the meaning of section 368(a)(3)(A))—
(1) for purposes of subsection (a), the term ‘property’ shall not include any item acquired on or after the date of the adoption of the plan of liquidation if such item is not property within the meaning of subsection (b)(2), and
(2) subsection (a) shall apply to sales and exchanges by the corporation of property within the period beginning on the date of the adoption of the plan and ending on the date of the termination of the case.
On page 55, line 1, strike “exchange is” and insert “exchange are”;
On page 55, strike line 5, through and including line 11, and insert the following:
(f) Effect on Earnings and profits.—Section 312 (relating to effect on earnings and profits) is amended by adding at the end thereof the following new subsection:
(l) Discharge of Indebtedness Income.
(1) Does not increase earnings and profits if applied to reduce basis.—The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017.
(2) Reduction of Deficit in earnings and profits in certain cases.—If—
(A) the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), and
(B) there is a deficit in the earnings and profits of the corporation, then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished”.
On page 56, strike line 24, through and including page 57, line 4, and insert the following:
(b) Coordination of Deficiency Procedures with Title 11 Cases.—
(1) General.—Section 6213 (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by redesignating subsections (f) and (g) as subsections (g) and (h), respectively, and by inserting after subsection (e) the following new subsection:
On page 58, after line 4, insert the following:
(2) Clerical Amendment.—Subsection (d) of section 6404 (relating to abatement) is amended by striking out “section 6213(f)(2)(A)” and inserting in lieu thereof “section 6213(g)(2)(A).”
On page 68, in the material between lines 3 and 4, strike “554” and insert “545”;
On page 68, strike line 9, through and including page 71, line 16, and insert the following:
SEC. 7. EFFECTIVE DATES
(a) For Section 2 (Relating to Tax Treatment of Discharge of Indebtedness).—The amendments made by section 2 shall apply to any transaction which occurs after December 31, 1980, other than a transaction which occurs in a proceeding in a bankruptcy case or similar judicial proceeding (or in a proceeding under the Bankruptcy Act) commencing on or before December 31, 1980.
(b) For Section 3 (Relation to Rules Relating to Title 11 Cases for Individuals).—The amendments made by section 3 shall apply to any bankruptcy case commencing more than 90 days after the date of the enactment of this Act.
(c) For Section 4 (Relating to Corporate Reorganization Provisions).—
(1) In General.—The amendments made by section 4 shall apply to any bankruptcy case or similar judicial proceeding commencing after December 31, 1980.
(2) Exchanges of property for accrued Interest.—The amendments made by subsection (e) of section 4 (relating to treatment of property attributable to accrued interest) shall also apply to any exchange—
(A) which occurs after December 31, 1980, and
(B) which does not occur in a bankruptcy case or similar judicial proceeding (or in a proceeding under the Bankruptcy Act) commenced on or before December 31, 1980.
(d) For Section E (Relating to Miscellaneous Corporate Amendments.)—
(1) For subsection (a) (relating to exemption from personal holding company TAX.)—The amendments made by subsection (a) of section 5 shall apply to any bankruptcy case or similar judicial proceeding commenced after December 31, 1980.
(2) For subsection (b) (relating to repeal of special treatment for certain railroad redemptions).—The amendments made by subsection (b) of section 5 shall apply to stock which is issued after December 31, 1980 (other than stock issued pursuant to a plan of reorganization approved on or before that date).
(3) For subsection (c) (relating to application of 12-month liquidation rule).—The amendment made by subsection (c) of section 5 shall apply to any bankruptcy case or similar judicial proceeding commenced after December 31, 1980.
(4) For subsection (d) (relating to permitting bankruptcy estate to be subchapter‘s shareholder).—The amendment made by section (d) of section 5 shall apply to any bankruptcy case commenced on or after October 1, 1979.
(5) For subsection (e) (relating to certain transfers to controlled corporations).—The amendments made by subsection (e) of section 5 shall apply as provided in subsection (a) of this section.
(6) For subsection (f) (relating to effect of debt discharge on earnings and PROFITS).—The amendment made by subsection (f) of section 5 shall apply as provided in subsection (a) of this section.
(e) For Section 6 (Relating to Changes in Tax Procedures).—The amendments made by section 6 shall take effect on October 1, 1979, but shall not apply to any proceeding under the Bankruptcy Act commenced before October 1, 1979.
(f) Election To Substitute September 30, 1979, for December 31, 1980.—
(1) In general.—The debtor (or debtors) in a bankruptcy case or similar judicial proceeding may (with the approval of the court) elect to apply subsections (a), (c), and (d) by substituting “September 30, 1979” for “December 31, 1980” each place it appears in such subsections.
(2) Effect of election.—Any election made under paragraph (1) with respect to any proceeding shall apply to all parties to the proceeding.
(3) Revocation only with consent.—Any election under this subsection may be revoked only with the consent of the Secretary of Treasury or his delegate.
(4) Time and manner of election.—Any election under this subsection shall be made at such time, and in such manner, as the Secretary of the Treasury or his delegate may by regulations prescribe.
(g) Definitions.—For purposes of this section—
(1) Bankruptcy case.—The term “bankruptcy case” means any case under title 11 of the United States Code (as recodified by Public Law 95-598).
(2) Similar judicial proceeding.—The term “similar judicial proceeding” means a receivership, foreclosure, or similar proceeding in a Federal or State court (as modified by section 368(a)(3)(D) of the Internal Revenue Code of 1954).
- Mr. LONG. Mr. President, H.R. 5043, the Bankruptcy Tax Act of 1980, deals with the Federal income tax aspects of bankruptcy, insolvency, and discharge of indebtedness.
This important bill has been carefully developed over the past 2 years on the basis of extensive hearings and in close consultation with bar association groups, accounting groups, bankruptcy attorneys, and others. The American Bar Association tax section, the American Institute of Certified Public Accountants, the New York City Bar Tax Committee, and other groups strongly support enactment this year of bankruptcy tax legislation.
Unless this bill is enacted this year, there will be a statutory void as to the tax treatment of discharge of debt in bankruptcy. This is because the 1978 bankruptcy statute (Public Law 95-598) repealed provisions of the old Bankruptcy Act which had contained rules for tax treatment of debt discharge in bankruptcy. In addition, Internal Revenue Code provisions on insolvency reorganizations and other topics now refer to repealed provisions of the old Bankruptcy Act. These Code provisions will be the subject of confusion and controversy, and other Code provisions will conflict with procedural rules in the new bankruptcy law, unless this legislation is enacted.
The development of bankruptcy tax legislation began with the 1973 report issued by the Commission on Bankruptcy Laws, established by the Congress. That report recommended changes and clarifications in both substantive rules and tax rules of bankruptcy. The House Judiciary Committee held hearings and likewise made recommendations for modifying the tax rules of bankruptcy, including recommendations for applying the amount of debt discharge to reduce net operating losses.
In 1978, the 95th Congress enacted legislation to revise and modernize the substantive law of bankruptcy as well as bankruptcy court procedures. During both the 95th Congress and this Congress, the tax committees held hearings on the recommendations for modifying and clarifying the tax rules of bankruptcy. H.R. 5043 now completes the process of revising and modernizing Federal bankruptcy laws by providing rules governing the tax aspects of bankruptcy.
Mr. President, I now want to briefly summarize the amendments made by the Senate Finance Committee to the House bill. First, the committee bill generally returns to the present law rule developed by the courts that no income is recognized and no attribute reduction is required if a corporation issues its stock to creditors in cancellation of outstanding debt. The committee believes that by providing for favorable tax treatment if stock is issued to creditors in discharge of debt, the committee bill will encourage reorganization, rather than liquidation, of financially distressed companies that have a potential for surviving as operating concerns.
Second, the Finance Committee also modified the effective date provisions of H.R. 5043. Under the committee bill, the provisions relating to debt discharge in bankruptcy, tax-free bankruptcy reorganizations, and certain miscellaneous corporate amendments will apply to bankruptcy cases beginning after December 31, 1980.
Mr. President, I urge the adoption of H.R. 5043 as reported by the Finance Committee.
The following is a more detailed description of the amendments made by the Senate Finance Committee to the House bill.
The Committee agreed to amend certain rules in the House bill with respect to the income tax treatment of discharge of indebtedness. The House bill provided that if a corporation issues stock in cancellation of short-term debt or trade credit, the corporate debtor would be required to reduce tax attributes by an amount equal to the excess of the indebtedness over the value of the stock. Under the Committee amendment, no income would be recognized and no attribute reduction would be required when stock is issued for outstanding debt, whether or not the debt constitutes a “security” for tax purposes. Therefore, no tax consequences would result to the debtor on issuance of stock worth less than the face amount of the obligation satisfied. This stock-for-debt rule under the amendment would not apply if only a de minimis amount of stock is issued for the outstanding debt.
The amendment also changes rules of the House bill with respect to issuance of a package of stock and other property in cancellation of debt. Under the House bill, the stock would be treated as issued for a proportion of the debt equal to its proportion of the value of the total consideration. Under the amendment, the cash or other property would be treated as satisfying an equal amount of debt, and the stock as satisfying the remainder of the debt. Consequently, there would be no tax consequences to the debtor (subject to the de minimis exception stated above).
The amendment also provides that if a creditor receiving stock for debt has taken an ordinary bad debt deduction, any gain on a later sale of the stock by the creditor would be “recaptured” as ordinary income up to the amount of the creditor’s prior deduction against income.
Under the Committee amendment, the provision of the House bill excepting stock for debt exchanges in a bankruptcy or similar case from Code Section 382(a) would be deleted.
The Committee also amended certain effective date provisions of the House bill. Specifically, under the House bill, the provisions relating to tax treatment of debt discharge (section 2), corporate reorganizations in bankruptcy (section 4), and certain miscellaneous corporate amendments (section 5) would apply for bankruptcy cases (or receivership, foreclosure, or similar judicial proceedings) commenced on or after October 1, 1979.
Under the amendment, the provisions of sections 2, 4, and 5 of the bill would apply to bankruptcy cases (or receivership, etc. proceedings) commenced after December 31, 1980. However, some taxpayers may have entered into bankruptcy reorganizations with the expectation that the bill would be enacted with the original retroactive effective dates. Accordingly, the amendment allows a bankrupt or insolvent debtor to elect to have all the debt discharge and related provisions of the bill apply retroactively (in the case of proceedings commenced on or after October 1, 1979).
In the case of transactions outside bankruptcy (or receiverships, etc.), the rules of the bill generally would apply to transactions after December 31, 1980, and the amendment does not change this provision.
The Committee also adopted the following technical and clarifying amendments to the House bill.
SECTION 2 (TAX TREATMENT OF DISCHARGE OF INDEBTEDNESS)
1. Election to reduce basis in depreciable assets held by certain subsidiaries (modification to sec. 2(b) of the bill, amending Code sec. 1017):
Under the House-passed bill, a debtor in bankruptcy or an insolvent debtor could elect to apply the amount of discharged debt first to reduce basis in depreciable property, before applying any remaining amount to reduction of specified tax attributes. Similarly, a solvent debtor outside bankruptcy could elect to reduce basis in depreciable assets instead of recognizing current income from debt cancellation. To insure that ordinary income treatment eventually would be given to the full amount of basis reduction, the bill provides that any gain on a subsequent disposition of reduced-basis assets would be subject to “recapture” as ordinary income.
The amendment would expand these election provisions to provide also that if the debtor is a parent holding company which files a consolidated return with a subsidiary, the debtor could elect to apply the debt discharge amount, in accordance with Treasury regulations, to reduce the basis of the stock of the subsidiary to the extent the subsidiary consents to reduce the basis of its depreciable assets. The “recapture” rule stated above would apply to a disposition of the reduced-basis assets.
2. Election to reduce basis in realty held as inventory (modification to sec. 2(b) of the bill, amending Code sec. 1017):
The election provisions summarized in paragraph 1 above would be further expanded by the amendment to also allow application of the debt discharge amount to reduce basis in real property held primarily for sale to customers in the ordinary course of a trade or business (within the meaning of Code sec. 1221(1)). To the extent the debtor elects to reduce basis in such realty, the particular real properties the bases of which would be reduced are to be determined pursuant to Treasury regulations. A subsequent disposition of reduced-basis realty would result in recognition of a larger amount of ordinary income, just as reduction in basis of depreciable assets in lower depreciation deductions to offset ordinary income.
3. Discharge of partnership debt (modification to sec. 2(b) of the bill):
The House-passed bill provides that if a taxpayer must account for a debt discharge amount because indebtedness is cancelled, the taxpayer’s interest in any partnership may be treated as depreciable property to the extent of his interest in depreciable property of the partnership. Under the bill, in the case of discharge of partnership debt, the partner could elect to reduce the basis of his partnership interest (in lieu of attribute reduction or income recognition) only if the partnership makes a corresponding reduction in the basis of depreciable assets of the partnership with respect to such partner.
The amendment would clarify that a partner’s interest in any partnership (whether or not that partnership debt was discharged) may be treated as a depreciable asset only if the partnership makes a corresponding reduction in the basis of depreciable assets of the partnership with respect to such partner. Also, the amendment would state that the amount of reduction in the partner’s basis in the partnership interest, and the particular depreciable assets of the partnership the bases of which are to be reduced, are to be determined pursuant to Treasury regulations.
4. Debt acquired by related parties (modification to sec. 2(a) of the bill, amending Code sec. 108):
The House-passed bill provides that, for purposes of the debt discharge rules, acquisition of a debt by a related party would be treated as acquisition by the debtor. The Ways and Means Committee report states that the income tax consequences of repayment or capital contribution of a debt which had been acquired by a related party are to be provided in Treasury regulations. The report further indicates that the tax consequences would include allowing the debtor a deduction equal to the amount of any gain or income recognized by the regulated party if the debt is repaid or contributed to capital (House Rep. 96-833, p. 16).
The related party rules in the bill would be amended to add a provision stating that the tax treatment of a repayment or a capital contribution of a debt which had been acquired by a related party would, pursuant to Treasury regulations, be substantially the same as if the debtor itself had originally acquired the debt. For example, assume a parent corporation purchases for $900 on the open market a $1,000 bond issued at par by its wholly owned subsidiary. Under the bill, the subsidiary has a debt discharge amount of $100. If the subsidiary pays its parent the full principal amount ($1,000) when the debt matures, the Treasury regulations would treat the $100 difference as a dividend to the parent, against which the dividends received deduction would be available as provided by present law (Code sec. 243–246). The repayment would not have any tax consequences to the subsidiary. Likewise, if the debt were later cancelled, the parent would be treated as having contributed $900 to the subsidiary (with no tax consequences).
5. Reduction of certain credit carryovers on debt discharge in bankruptcy or insolvency (modification to sec. 2(a) of the bill, amending Code sec. 108):
Unless the taxpayer elects first to reduce basis in depreciable assets or in section 1221(1) realty, the amount of debt discharge in bankruptcy (or in the case of an insolvent debtor) would be applied under the House-passed bill to reduce net operating losses or carryovers, carryovers of certain tax credits, capital losses and carryovers, and the basis of the taxpayer’s assets. These provisions would be modified also to provide that if any debt discharge amount remains after reduction of such attributes (including any debt discharge amount which remains unapplied solely by virtue of the limitation in the bill with respect to basis reduction), such remaining amount would be applied to reduce carryovers of the foreign tax credit.
6. Real estate investment trusts (modification to sec. 2 of the bill):
To qualify as a real estate investment trust (REIT), an organization must satisfy, among other requirements, source-of-income tests establishing that it has primarily passive income from real estate investments (Code sec. 856). In light of the bill’s rules governing the tax consequences of debt discharge, the amendment would add a provision specifying that income from cancellation of indebtedness is not to be taken into account for the source-of-income tests. For example, if a solvent REIT investing primarily in mortgages has debt cancellation on redemption of bonds, and such amount would be includible in gross income under the rules of the bill (absent an election to apply such amount to reduce the basis of depreciable assets), the amount of such income would not be taken into account for purposes of Code section 856.
7. Amendment to Code section 382(b) (modification of sec. 2(d) of the bill, amending Code sec. 382):
The House-passed bill provides that creditors of a debtor corporation would be treated as shareholders in applying the continuity rules of Code section 382(b) to a “G” reorganization. The amendment would extend this rule to apply to any reorganization in a bankruptcy or similar case, rather than solely in a “G” reorganization.
SECTION 3 (RULES RELATING TO TITLE CASES FOR INDIVIDUALS)
1. Taxable year of the estate (prop. Code sec. 1398(d)(1)):
The House-passed bill provides that the first taxable year of the bankruptcy estate of an individual debtor ends on the same day as the debtor’s taxable year which includes the date on which the bankruptcy case commences. This rule has been developed as a part of a prior version of the bill, which would have required that the estate report certain income recognized prior to commencement of the case. Inasmuch as the bill has been changed and now permits the debtor to close his or her taxable year on commencement of the case, the rule relating to the estate’s taxable year no longer is necessary and accordingly would be deleted by the amendment.
2. Estate’s share of the debtor’s income (prop. Code sec. 1398(e)(1)):
The House-passed bill provides that the gross income of the bankruptcy estate of an individual debtor would include any gross income of the debtor to which the estate is entitled under bankruptcy law. The amendment would clarify that only such income which is recognized after commencement of the case would be includible in the estate’s gross income.
3. Allocation of deductions and credits (prop. Code sec. 1398(e)(3)):
In cases where the bankruptcy estate of an individual would be treated as a separate taxable entity, the House-passed bill provides rules for allocating deductions and credits between the debtor and the estate. The amendment would modify these rules to make clear that only those expenses paid or accrued by the debtor which are not properly allowable to the debtor would be allocated to the estate. For example, an expense paid by a cash basis debtor before commencement of the bankruptcy case would be allowed to the debtor, even if such deduction could be considered to be associated with income which is allocated to the estate under the rules of the bill. Also, an expense paid or accrued by the debtor after commencement of the bankruptcy case would be allocated to the debtor, and not to the estate.
4. No-disposition rules (prop. Code sec. 1398(f)):
The bill provides that a transfer (other than by sale or exchange) of an asset from an individual debtor to the bankruptcy estate, or from the bankruptcy estate to the debtor on termination of the estate, would not be treated as a “transfer” giving rise to recognition of gain or loss, recapture of deductions, or acceleration of income or deductions. To conform with language used in related Code provisions, these provisions would be modified to provide that such a transfer would not be treated as a “disposition” for tax purposes.
5. Carryover of attributes to debtors (prop. Code sec. 1398(i)):
The bill provides that on termination of a bankruptcy estate, the debtor would succeed to various tax attributes of the estate. This provision would be modified to make clear that the carryover includes attributes first arising during administration of the estate (other than the new administrative expense deduction which would be provided under the bill).
SECTION 5 (MISCELLANEOUS CORPORATE AMENDMENTS)
1. Application of section 337 liquidation rule to insolvent corporations (modification to sec. 5(c) of the bill, amending Code sec. 337):
The House bill expands the nonrecognition provisions under Code section 337 to allow a liquidating corporation in a bankruptcy or similar case generally to sell its assets taxfree during the entire duration of the proceeding. The amendments would make this provision applicable whether or not any shareholder receives any consideration for his stock and also would clarify that assets may be retained to pay administrative claims following the close of the case.
2. Effect of discharge of indebtedness on earnings and profits (modification of sec. 5(f) of the bill, amending Code sec. 312):
The House bill provides that to the extent income from discharge of indebtedness (including an amount excluded from gross income pursuant to Code section 108, as amended by the bill) is applied to reduce basis under Code section 1017, such basis-reduction amount does not affect the debtor corporation’s earnings and profits. Otherwise, discharge of indebtedness income, including amounts excluded from gross income (pursuant to Code section 108, as amended by the bill), increases the earnings and profits of the corporation (or reduces a deficit). The amendment would provide also that any deficit in earnings and profits would be reduced by the capital account of any shareholder whose interest is eliminated in a bankruptcy proceeding.
- Mr. DOLE. Mr. President, the Bankruptcy Tax Act is the product of years of effort and addresses the needs and interests of debtors, creditors, and bankruptcy practitioners alike.
In 1978, Congress repealed the laws providing the income tax consequences involved when a creditor forgives indebtedness in a bankruptcy situation. Since that time, debtors and creditors, as well as their advisers, have had to live with uncertainty as to the tax consequences of their actions in attempting to restructure their rights and obligations. It is obviously very difficult to determine the real economic consequences of a transaction without knowing how it will be taxed.
PROVIDING CERTAINTY IN THE TAX LAWS
The Bankruptcy Tax Act will provide certain and balanced tax rules for treatment of debt discharge in the case of bankrupt or insolvent debtors and make coordinating changes in the rules for cancellation of indebtedness in the case of solvent taxpayers. The legislation also clarifies the tax rules governing insolvency reorganizations for corporations and the bankruptcy estate of individual debtors. It also makes other changes in administrative provisions of the tax laws to coordinate with the substantive bankruptcy law changes enacted in 1978.
This legislation represents a much needed package of technical amendments to the income tax laws in a very sensitive part of the economy. Astronomical interest rates and inflation are placing great strain on many taxpayers who are being forced into bankruptcy.
FINANCE COMMITTEE PRO-DEBTOR AMENDMENT
The Finance Committee, however, was concerned that the legislation as referred to the committee was not balanced sufficiently to allow debtors to reorganize and survive economic distress. We, therefore, amended certain rules relating to the exchange of debt for stock of the debtor. Under the committee amendment, a debtor corporation will neither recognize income, nor will be required to reduce tax attributes such as net operating loss carryovers when it issues its stock to a creditor in exchange for outstanding debt.
This amendment has been strongly supported by practitioners including the tax section of the American Bar Association. We expect that this provision will be very effective in helping financially distressed debtors to regain economic health and keep their employees from losing their jobs.
TIME FOR FINE TUNING NEXT YEAR
It may be necessary to fine tune other portions of this legislation to make sure that the tax laws facilitate, rather than hinder, the policies of the bankruptcy laws.
We must review the general rules relating to limitations on net operating loss carryovers in reorganization situations this coming year. As you know, the Congress enacted legislation to postpone the effective date of these limitations. This postponement ends December 31, 1981. It would, therefore, be appropriate to review the limitations on net operating loss carryovers in bankruptcy reorganization situations next year if it proves to be necessary.
In the meantime, this legislation provides much improvement in the tax laws and should be enacted without further delay.
- Mr. ROBERT C. BYRD. Mr. President, I ask unanimous consent that a technical amendment to the bill be considered and agreed to; that an amendment by Mr. DeConcini delaying the effective date of one section be agreed to; that the measure be advanced to third reading, adopted, and a motion to reconsider be laid on the table.
Mr. CHAFEE. Mr. President, that is agreeable to this side.
The PRESIDING OFFICER. Is there objection to the unanimous-consent request of the majority leader?
Mr. ROBERT C. BYRD. With the reported committee amendment agreed to. The PRESIDING OFFICER. Without objection, it is so ordered. The amendment proposed by Mr. Long (UP No. 1929) is as follows:
(Purpose: Making technical corrections.)
On page 55, strike lines 8 through 11.
On page 58, strike lines 5 through 8, and insert in lieu thereof the following:
(2) Clerical amendment.—Subsection (d) of section 6404 (relating to abatements) is amended by striking out “section 6213(f)(2)(A)” and inserting in lieu thereof “section 6213(g)(2)(A)”.
Mr. DeConcini’s amendment (UP No. 1930) is as follows:
(Purpose: Relating to the effective date.)
On page 71, strike out lines 18 through 24, and insert in lieu thereof the following:
(a) For Section 2 (Relating to Tax Treatment of Discharge of Indebtedness).—
(1) In general.—Except as provided in paragraph (2), the amendments made by section 2 shall apply to any transaction which occurs after December 31, 1980, other than a transaction which occurs in a proceeding in a bankruptcy case or similar judicial proceeding (or in a proceeding under the Bankruptcy Act) commencing on or before December 31, 1980.
(2) Transitional Rule.—In the case of any discharge of indebtedness to which subparagraph (A) or (B) of section 108(a)(1) of the Internal Revenue Code of 1954 (relating to exclusion from gross income), as amended by section 2, applies and which occurs before January 1, 1982, or which occurs in a proceeding in a bankruptcy case or similar judicial proceedings commencing before January 1, 1982, then—
(A) section 108(b)(2) of such Code (relating to reduction of tax attributes), as so amended, shall be applied without regard to subparagraphs (A), (B), (C), and (E) thereof, and
(B) the basis of any property shall not be reduced under section 1017 of such Code (relating to reduction in basis in connection with discharges of indebtedness), as so amended, below the fair market value of such property on the date the debt is discharged.
Mr. CHAFEE. Mr. President, I ask unanimous consent that Senator Wallop be added as a cosponsor to Mr. DeConcini’s amendment.
The PRESIDING OFFICER. Without objection, it is so ordered.
- Mr. DeCONCINI. The amendment postpones for 1 year the requirement under the Finance Committee bill that a bankrupt or insolvent debtor must reduce net operating losses by the amount of debt discharge (or alternatively, must reduce basis in depreciable assets). Under the Finance Committee bill, this attribute reduction requirement generally would have applied to debt discharge occurring after December 31, 1980. Under the amendment, however, this attribute reduction requirement will not apply, in the case of a bankrupt or insolvent debtor, to debt discharge which occurs before January 1, 1982, or which occurs in a bankruptcy case or similar judicial proceeding beginning before January 1, 1982.
Thus, under the amendment, a bankrupt or insolvent debtor will apply the amount of debt discharge to reduce basis in assets in the case of a debt discharge to which the bill applies occurring before January 1, 1982, or occurring in a bankruptcy case or similar proceeding commencing before January 1, 1982.
Furthermore, such a debtor will not be required to reduce asset basis below fair market value. Under the amendment, any amount of debt discharge remaining after asset basis is so reduced will not have any tax consequences—that is, the remaining amount will not be included in income and will not result in reduction of net operating losses or other tax attributes.
Thus, in the case of debt discharge before 1982, or bankruptcy cases or similar judicial proceedings beginning before 1982, bankrupt or insolvent debtors will be subject to a basis reduction rule like that in the now repealed provisions of the Bankruptcy Act.
The rules of the Senate Finance bill not covered by this amendment will become effective as provided in the bill reported by the Finance Committee. For example, the rules providing that basis reduction does not trigger investment credit recapture tax (thereby overturning a contrary Internal Revenue Service ruling) and the rules relating to indebtedness acquired by a related party will become effective for transactions in bankruptcy cases which commence after December 31, 1980. As another example, the rules of the bill relating to tax-free insolvency reorganizations will become effective, as under the Finance Committee bill, for bankruptcy cases commencing after December 31, 1980. Also, in the case of solvent taxpayers outside bankruptcy, the attribute reduction rules of the Finance Committee bill will become effective for debt discharges occurring after December 31, 1980.
The postponement made by the amendment in the effective date of the attribute reduction requirements for bankrupt or insolvent debtors will permit the Congress to give due consideration to any additional comments that the public may wish to make concerning such requirements.