Chapter 11 Case Procedures

Responsibilities and Authority. With the exception of initial clerical processing and some other clerical monitoring, Chapter 11 case work remains the responsibility of Field Insolvency units. See IRM 5.9.8 http://publish.no.irs.gov/getpdf.cgi?catnum=39964, Processing Chapter 11 Bankruptcy Cases.

Report from Insolvency Group. When a case is referred, Field Counsel should consider what information and data may be required in order for Field Counsel to properly perform its function. Any required information and/or data should be requested from the Field Insolvency unit.

Immediate Examination of Court Papers. After a file is opened, copies of court papers should be examined immediately upon receipt. In many cases, hearings are set with very short notice for the Government to act on proposed orders that affect its rights.

Schedules attached to the petitions should be examined to see whether taxes are shown to be due and to determine the financial condition of the debtor.

Schedules attached to the petitions should be examined to determine whether the Service should request adequate protection because a tax lien has attached to property that is depreciating or deteriorating.

Property Sold Free of Lien. If property is authorized by the court to be sold free and clear of liens, it is advisable to have the order of sale provide that the liens of the United States shall attach to the proceeds of sale in the same order and priority as they attached to the property.

Satisfactory Payment of Taxes under Plans of Reorganization. Insolvency should decide whether a plan is acceptable, but Field Counsel should advise the Insolvency staff to ensure that all relevant factors are considered. Generally, a plan of reorganization is referred for review by Field Counsel only after a defect has been identified with the plan. Local procedures may affect the nature and timing of referrals of reorganization plans for review.

Many of the plans submitted in reorganization cases fail to provide satisfactorily for the payment of federal taxes. If the proposed plan is unsatisfactory, consider notifying the attorney representing the trustee or debtor in possession that the proposed plan fails to comply with the provisions of Bankruptcy Code section 1129.

If the trustee or debtor can demonstrate that acceptance of a deficient plan is in the best interests of the Government, a determination may be made to accept the plan in lieu of filing an objection. See IRM 5.9.8.14.2(7), Processing Chapter 11 Bankruptcy Cases; Disclosure Statements and Plans of Reorganization; The Plan of Reorganization; Deficient Plans – Exceptions, and IRM 5.9.4.10, Common Bankruptcy Issues; Offers in Compromise and Bankruptcy. See CCDM 34.3.1.1.9, Procedures in Bankruptcy Cases; General Procedures in Bankruptcy Cases; Offers in Compromise in Bankruptcy. If compliance with the requirements of the Bankruptcy Code cannot be obtained and the trustee or debtor cannot demonstrate that acceptance of a deficient plan is in the best interests of the Government, Field Counsel should ensure that an objection to confirmation of the plan is timely filed.

Where the federal taxes at issue are secured or general unsecured taxes, and the proposed plan does not meet the minimum "cram-down" criteria of section 1129(b)(2)(A) and/or (B), a notice of rejection signed by the Associate Area Counsel should be filed by the U.S. Attorney pursuant to section 1126(a).

The notice of rejection should be filed before the hearing on confirmation under section 1128(a).

Associate Area Counsel in each POD can accept or reject plans where the claims of the United States are solely for Internal Revenue taxes. In "mixed" claims cases (i.e., claims of other federal agencies have been filed in addition to those of the Service), Field Counsel should contact the other government agency having a claim to determine the position of that agency. If agreement can be reached between the Chief Counsel, the Service, and the holder of a non-Treasury claim of the United States, the Field Counsel will review and sign an acceptance or rejection for all federal claimants. If no agreement can be reached between the Chief Counsel, the Service and the holder of a non-Treasury claim of the United States, Field Counsel should orally notify the Office of the Associate Chief Counsel (Procedure & Administration), Branch 5 immediately. Branch 5 will send a transmittal and the proposed acceptance or rejection to General Counsel of the Department of the Treasury for signature. In order to allow sufficient time in which to obtain the signature and review of the General Counsel, the proposed documents must be forwarded to the Office of the Associate Chief Counsel (Procedure & Administration), Branch 5 at least 10 working days prior to the last day for filing such notices.

The filing of a notice of rejection under section 1126(a) is permissive rather than mandatory. It is in the best interest of the Service that the Government file both an objection to the confirmation of the proposed plan of reorganization and a notice of rejection of the plan in every case where the secured and/or general unsecured tax claims are not properly provided for in the plan. The Service is not entitled to vote on a plan where there are only priority tax claims. See 11 U.S.C. §§ 1123(a)(1), 1124, & 1126(f).

The filing of the notice of rejection should prevent the confirmation of a plan that does not meet the minimum "cram-down" criteria of section 1129(b)(2)(A) and/or (B). Thus, such notice should provide the Government with a more substantial safeguard than merely the right to appeal an order of the bankruptcy court that overrules the Government’s objection to the plan. This is especially so when the plan is confirmed despite its failure to properly provide for the tax claims of the Service.

A sample copy of the document that may be used under section 1126(a) to accept or reject a plan of reorganization on behalf of the United States is provided in Exhibit 34.12.1-1http://publish.no.irs.gov/getpdf.cgi?catnum=29689. If some other document is used, the language in the exhibit showing the authority for filing the ballot on behalf of the United States should be added if possible.

In negotiating for the satisfactory payment of federal taxes, Field Counsel may be able to have certain supplemental provisions included in the plan of reorganization. Although these provisions are not mandatory, they are additional safeguards to protect the Service’s interest. Examples of these supplemental provisions can be found in Exhibit 34.12.1-2http://publish.no.irs.gov/getpdf.cgi?catnum=29689

Plan Seeking to Avoid Taxes. A special ground for objecting to the confirmation of a reorganization plan is that its principal purpose is the avoidance of taxes. See 11 U.S.C. § 1129(d).

Avoidance of taxes normally would occur through improper or fraudulent use of the Internal Revenue Code substantive tax provisions created or amended by the Bankruptcy Tax Act of 1980.

If information concerning such avoidance of taxes comes to the attention of Field Counsel, the U.S. Attorney should be requested to file an objection to the confirmation of the plan under section 1128(b). A request to file an objection under section 1129(d) must be pre-reviewed by the Office of the Associate Chief Counsel (Procedure & Administration), Branch 5.