Legal Updates & News
Legal Updates
Supreme Court Decides that Pre-Confirmation
Transfer Tax Exemptions are No Longer on the Menu
in Piccadilly Cafeterias
July 2008
by Lorenzo Marinuzzi, Jordan A. Wishnew
On June 16, 2008, the United States Supreme Court (the “Court”) held that section 1146(a)[1] of
Title 11, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”) only affords a stamp-tax exemption to
transfers made pursuant to a confirmed Chapter 11 plan of reorganization, thereby resolving a
conflict among several federal circuit courts.[2] While the bright-line rule established by the Court is
clear, its practical implications fail to comport with the realities of most Chapter 11 cases today. The
Bankruptcy Code is meant to preserve going concerns and maximize property available to satisfy
creditors. The Court’s narrow interpretation of section 1146(a) is inconsistent with these basic
tenets and, as a result, debtors must now think twice before conducting asset sales and transfers
prior to confirming a plan of reorganization.
Background
Section 1146(a) provides that “the issuance, transfer, or exchange of a security, or the making or
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.”[3] The Court of Appeals for the
Second Circuit defined the elements of a stamp tax:
(1) [it is] imposed only at the time of transfer or sale of the item at issue; (2) the amount due is
determined by the consideration for, par value of, or value of the item being transferred; (3) the
tax rate is a relatively small percentage of the consideration, par value, or value of the property;
(4) the tax is imposed irrespective of whether the transferor enjoyed a gain or suffered a loss on
the sale or transfer; and (5) in the case of state documentary transfer taxes, the tax must be paid
as a prerequisite to recording.[4]
Up until 2007, the only federal circuit courts to have decided the issue of whether a pre-confirmation
[5] transfer of assets was exempt, pursuant to section 1146(a), from the stamp tax imposed by state
taxing authorities were the Court of Appeals for the Third Circuit (the “Third Circuit”) and the Court of
A
ppeals for the Fourth Circuit (the “Fourth Circuit”). Both courts ruled that such transfers were not
exempt.[6] The landscape soon changed in April 2007 when the Court of Appeals for the Eleventh
Circuit (the “Eleventh Circuit”) in Florida Department of Revenue v. Piccadilly Cafeterias, Inc. held
that pre-confirmation transfers were exempt from stamp and similar taxes pursuant to section 1146
(a).[7] The Court granted certiorari in order to resolve the conflict among the federal circuit courts.
Split Among the Circuits
The “Temporal” Interpretation
In NVR, the Fourth Circuit held that a debtor’s pre-confirmation transfer of real estate did not fall
within the scope of section 1146(c)’s exemption provision prohibiting a stamp or similar tax on
transfers “under a plan confirmed.”[8] The debtor completed multiple real property transfers prior to
confirming its plan of reorganization. Years after its plan became effective, NVR filed a motion in the
bankruptcy court seeking a declaration that it was exempt from certain transfer and recordation
taxes paid in connection with its pre-confirmation real property transfers.[9] The lower courts held
Related Practices:
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& Restructurin
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MORRISON I FOERSTER
Legal Updates & News
Legal Updates
Supreme Court Decides that Pre-Confirmation
Transfer Tax Exemptions are No Longer on the Menu
in Piccadilly Cafeterias Related Practices:
July 2008 • Bankruptcy & Restructuring
by Lorenzo Marinuzzi, Jordan A. Wishnew
On June 16, 2008, the United States Supreme Court (the "Court") held that section 1146(a)[1] of
Title 11, 11 U.S.C. § 101 etseq. (the "Bankruptcy Code") only afords a stamp-tax exemption to
transfers made pursuant to a confirmed Chapter 11 plan of reorganization, thereby resolving a
conflict among several federal circuit courts.[2] While the bright-line rule established by the Court is
clear, its practical implications fail to comport with the realities of most Chapter 11 cases today. The
Bankruptcy Code is meant to preserve going concerns and maximize property available to satisfy
creditors. The Court's narrow interpretation of section 1146(a) is inconsistent with these basic
tenets and, as a result, debtors must now think twice before conducting asset sales and transfers
prior to confirming a plan of reorganization.
Background
Section 1146(a) provides that "the issuance, transfer, or exchange of a security, or the making or
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."[3] The Court of Appeals for the
Second Circuit defined the elements of a stamp tax:
(1) [it is] imposed only at the time of transfer or sale of the item at issue; (2) the amount due is
determined by the consideration for, par value of, or value of the item being transferred; (3) the
tax rate is a relatively small percentage of the consideration, par value, or value of the property;
(4) the tax is imposed irrespective of whether the transferor enjoyed a gain or suffered a loss on
the sale or transfer; and (5) in the case of state documentary transfer taxes, the tax must be paid
as a prerequisite to recording.[4]
Up until 2007, the only federal circuit courts to have decided the issue of whether a p-confirmation
[5] transfer of assets was exempt, pursuant to section 1146(a), from the stamp tax imposed by state
taxing authorities were the Court of Appeals for the Third Circuit (the "Third Circuit") and the Court of
Appeals for the Fourth Circuit (the "Fourth Circuit"). Both courts ruled that such transfers were not
exempt.[6] The landscape soon changed in April 2007 when the Court of Appeals for the Eleventh
Circuit (the "Eleventh Circuit") in Florida Department of Revenue v. Piccadilly Cafeterias, Inc. held
that pre-confirmation transfers were exempt from stamp and similar taxes pursuant to section 1146
(a).[7] The Court granted certiorari in order to resolve the conflict among the federal circuit courts.
Split Among the Circuits
The "Temporal" Interpretation
In NVR, the Fourth Circuit held that a debtor's pre-confirmation transfer of real estate did not fall
within the scope of section 1146(c)'s exemption provision prohibiting a stamp or similar tax on
transfers "under a plan confirmed." M The debtor completed multiple real property transfers prior to
confirming its plan of reorganization. Years after its plan became effective, NVR filed a motion in the
bankruptcy court seeking a declaration that it was exempt from certain transfer and recordation
taxes paid in connection with its pre-confirmation real property transfers.[9] The lower courts held
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