My corporation emerged from Chapter 11 bankruptcy before Virginia could have assessed any 2020 corporate income tax, and the Department never filed a proof of claim -- doesn't that mean this later tax assessment is barred?

Plain-English summary

A Virginia corporation filed for Chapter 11 reorganization bankruptcy in June 2020. The Department received notice of the filing but declined to file a proof of claim, and the company's reorganization plan -- approved by the bankruptcy court -- did not account for any taxes owed to Virginia. The company emerged from bankruptcy in December 2020. The Department later audited the company's 2020 Virginia corporate income tax return, adjusted its net operating loss (NOL) carryforwards, and issued an assessment in June 2022. The company sought correction, arguing the Department was barred from collecting the tax because it never filed a proof of claim in the bankruptcy case.

How Chapter 11 works. A Chapter 11 case is often called a "reorganization" bankruptcy: the debtor typically stays "in possession," keeps operating its business with a trustee's powers, and proposes a plan of reorganization that affected creditors vote on and the court can approve if it meets certain legal requirements (11 U.S.C. §§ 1121-1129).

Why the missed proof-of-claim deadline didn't matter here. The company pointed out that the deadline for government agencies to file bankruptcy claims (the "Governmental Bar Date") fell on December 22, 2020 -- about a week before it emerged from bankruptcy on December 30, 2020 -- and argued that anything assessed "at this time" would be barred. But the Department explained that a corporation's income tax liability is not incurred until the CLOSE of its taxable year. For this company, that was January 3, 2021 -- AFTER it had already emerged from bankruptcy (citing United States v. Beskrone (In re Affirmative Ins. Holdings), 620 B.R. 73 (D. Del. 2020)). A debt that doesn't exist yet cannot be discharged by a bankruptcy proceeding that closes before the debt arises, so there was nothing for a proof of claim to have covered in the first place.

Outcome. Because the 2020 Virginia corporate income tax liability arose only after the company had already emerged from bankruptcy, the assessment was upheld, with an updated bill (including accrued interest) due within 30 days.

What this means for you

Any corporation emerging from Chapter 11 bankruptcy mid-taxable-year

A tax liability tied to the CLOSE of your taxable year isn't discharged just because your bankruptcy proceeding closed earlier in that same year -- if your tax year ends after your bankruptcy plan is confirmed and you emerge, that liability arises post-bankruptcy and remains fully collectible, proof of claim or not.

Anyone assuming a taxing authority's failure to file a proof of claim bars a later assessment

That failure only matters for debts that could have been discharged in the bankruptcy in the first place -- a liability that hadn't yet come into existence when the case closed was never dischargeable, so a missed proof-of-claim deadline is irrelevant to it.

Common questions

Q: My company emerged from Chapter 11 bankruptcy partway through its fiscal/tax year -- is the tax for that year dischargeable?
A: Not the portion of the liability incurred after emergence. A corporation's income tax liability arises at the CLOSE of the taxable year, so if that closing date falls after you emerge from bankruptcy, the liability wasn't dischargeable in that proceeding.

Q: Does it matter that the Department never filed a proof of claim in my bankruptcy case?
A: Only for debts that existed and could have been discharged during the bankruptcy. A tax liability that didn't yet exist at that point isn't affected by a missed proof-of-claim deadline.

Citations and references

Statutes: Title 11 U.S.C. §§ 1121-1129 -- the Chapter 11 reorganization plan process (proposal, creditor voting, and court confirmation).

Case law: United States v. Beskrone (In re Affirmative Ins. Holdings), 620 B.R. 73 (D. Del. 2020) -- a corporation's income tax liability is incurred at the close of its taxable year, not earlier.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-46-0

Original ruling text

March 29, 2024

Re: § 58.1 1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the “Taxpayer”), for the taxable year ended January 3, 2021. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a corporation operating in Virginia, filed for Chapter 11 bankruptcy in June 2020. A notice of Chapter 11 bankruptcy was sent to the Department, which declined to submit a proof of claim. The Taxpayer submitted * (the “Plan”) to the Bankruptcy Court that did not account for any taxes owed to Virginia. The Plan was approved by the Bankruptcy Court and the Taxpayer emerged from bankruptcy in December 2020.

The Department audited the Taxpayer’s 2020 corporate income tax return and adjusted its net operating loss (NOL) carryforwards, resulting in an assessment. The assessment was issued in June 2022. The Taxpayer filed an application for correction, contending that the Department was barred from collecting the tax because it did not file a proof of claim.

DETERMINATION

A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. Usually, the debtor that remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow additional financing. A plan of reorganization is proposed, creditors whose rights are affected may vote on the plan, and the plan may be confirmed by the court if it satisfies certain legal requirements. See Title 11 U.S.C. §§ 1121 through 1129.

The Taxpayer states that the deadline for governmental entities to file proofs of claim with the bankruptcy court, known as the “Governmental Bar Date,” was December 22, 2020, and that it emerged from bankruptcy on December 30, 2020. The Taxpayer claims that “any amounts being assessed at this time [i.e., the Governmental Bar Date] would be barred.”

While the bankruptcy was filed during 2020, the income tax liability was not deemed to have been incurred until the close of the taxable year, which for this Taxpayer was on January 3, 2021. See United States v. Beskrone (In re Affirmative Ins. Holdings ), 620 B.R. 73 (D. Del. 2020). Because the Taxpayer had already emerged from bankruptcy prior to incurring its 2020 Virginia corporate income tax liability, the debt could not have been dischargeable in that proceeding.

Because the liability occurred after the date the Taxpayer emerged from bankruptcy, the assessment of corporate income tax for the taxable year ended January 3, 2021 is upheld. A revised bill will be issued which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4236.B