Transfer Taxes Post-Piccadilly

Many of our commercial clients ask us about the tax consequences of purchasing assets from Chapter 11 debtors. In order to encourage successful reorganizations, the Bankruptcy Code, at 11 USC §1146(a), prevents the taxation of transfers under a confirmed Chapter 11 reorganization plan. This section of the Code was at issue in a recently decided Supreme Court case, Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 2008 WL 2404077. The Court, in a 7-2 decision by Justice Thomas, held that the statute is applicable only to transfers made after the confirmation of a Chapter 11 plan of reorganization.

The case arose when Florida sought to tax the transfers from Piccadilly to others that were made before the Chapter 11 plan was confirmed by the Bankruptcy Court. The 11th Circuit held that the tax exemption could cover pre-confirmation transfers, while the 3rd and 4th Circuits previously held that §1146(a) applied only to post-confirmation transfers. Interestingly, Justice Alito drafted the 3rd Circuit opinion and held that §1146(a) applied only to post-confirmation transfers. Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243 (3d Cir. 2003). Had the Supreme Court found for Piccadilly and upheld the 11th Circuit's decision, it would have overruled one of its own Justices.

Piccadilly will impact state and local taxing authorities by providing additional revenue, but may also delay asset sales until after plan confirmation. However, depending on the facts, Chapter 11 debtors may also realize that the transfer tax exemption is less important where assets are depreciating.

For questions about transfer taxes, please contact Jim Shenwick of Shenwick & Associates.