June 27, 2008

The Supreme Court Disallows Transfer Tax Exemption for Asset Sales Conducted Prior to Plan Confirmation

On June 16, 2008, the United States Supreme Court held that the stamp-tax exemption under 11 U.S.C. § 1146(a) does not apply to transfers made before confirmation of a Chapter 11 plan. This decision will impact the structuring of asset sales in Chapter 11 cases where the transfers involve significant stamp taxes or similar taxes. Full text of the opinion.

11 U.S.C. § 1146(a) provides, in part, that the delivery of an instrument of transfer "under a plan confirmed under Section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax." A split of authority had developed among circuit courts as to whether or not the stamp tax exemption applied to asset sales approved and held under 11 U.S.C. § 363 prior to confirmation of a plan of reorganization. On March 26, 2008 the Supreme Court heard oral argument in State of Florida Dep't of Revenue v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), on certiorari from the Eleventh Circuit Court of Appeals, to resolve the split. The Eleventh Circuit had affirmed the lower court holding that the stamp tax exemption under § 1146(a) applied to a sale held prior to plan confirmation where the sale was necessary to the subsequent consummation of the plan.

The Supreme Court reversed the Eleventh Circuit's decision in a 7-2 ruling. Justice Thomas, writing for the majority, held that the "most natural reading" of the provision excluded pre-confirmation transfers from the benefit of the exemption. This decision is likely to lead to the structuring of sales as part of a reorganization plan whenever possible, but asset sales in Chapter 11 cases cannot always wait until the plan confirmation stage. The additional costs imposed upon such pre-confirmation sales are likely to be borne by unsecured creditors at the end of the day.

This E-alert was prepared by Kenneth C. Johnson. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.