Asset sales are an integral part of bankruptcy cases. When considering a sale’s benefit to an estate, the potential benefit to “Uncle Sam” should also be considered. Will the debtor owe income taxes or incur a loss? Tax planning should be considered as part of the sales process.
Depending on the circumstances and the sale’s magnitude, developing the tax strategy and minimizing the tax impact could provide additional funds for the estate that can go towards the payment of other creditors. For instance, stock held by a corporation is taxed differently than that held by an individual. A building and land, usually sold as one unit, will prompt different tax treatments and need to be accounted for separately.
If the debtor is a pass-through entity, such as a Subchapter S corporation or a partnership, the shareholders, partners or members are responsible for any income tax due. Will they be prepared for or surprised by a potential tax burden that could place them in an unexpected financial bind? The debtor’s entity type and the nature of the assets being sold are important components to consider when addressing certain tax issues.
In some circumstances, the debtor’s and buyer’s tax returns must disclose certain aspects of the sale. It is imperative in those instances that the sale document addresses the tax issues so that there is no misunderstanding and the information is consistent.
Another overlooked, but key consideration is state income taxes. If the debtor is a New Jersey resident, but real property in Pennsylvania will be sold, what returns are needed and how will the sale be treated in that jurisdiction?
When the records are lacking (which is usually the case), forensic accounting and investigative consulting services may be needed to determine the asset’s tax basis, or to come up with a reasonable estimate, among other things. In such cases, any estimated amounts on the return require a statement to be attached to the debtor’s tax return disclosing the estimate and the method used to arrive at that amount.
Therefore, an efficient asset sale plan includes tax compliance and any potential income tax in determining the net proceeds available to a debtor’s bankruptcy estate.