Page 142 - Bankruptcy Volume 1

business (commonly known as "old and cold" creditors). fn 38 There is also a small shareholder presump-
tion that can, under certain circumstances, treat creditors that acquire less than 5% of the stock of the
loss corporation as having met the holding period. fn 39 As noted previously, courts often will enter or-
ders prohibiting or limiting creditors from trading their claims in order to preserve the availability of the
L5 exception for the debtor.

If a debtor wishes to take advantage of the benefits associated with the L5 exception, it is not without its
costs. The corporation must reduce its NOLs for the interest deducted on debts converted into stock for
the portion of its taxable year preceding the ownership change and the three prior taxable years. fn 40

If an ownership change occurs within two years following the ownership change under Section
382(l)(5), then any attributes available at the time of that second change would be subject to a limitation
of zero. fn 41 Because of the cost associated with a subsequent ownership change, debtor companies seek-
ing the benefits of unlimited use of their pre-change losses will normally seek to impose restrictions on
the transferability of stock within two years following the ownership change applying the L5 exception.
If the qualifications of the L5 exception are met and the debtor anticipates a second ownership change
within two years, it should consider electing out of the application of the L5 (that is, apply the L6 excep-
tion).

Tax Claims in Bankruptcy

The distinction between prepetition and postpetition claims, including tax claims, is fundamental to
bankruptcy. The automatic stay, which generally prevents creditors from attempting to collect on prepe-
tition liabilities, has the effect of freezing the prepetition claims until they can be provided for under a
confirmed plan of reorganization. However, prepetition tax claims enjoy special status in bankruptcy
(that is, they rank ahead of general unsecured claims and generally must eventually be paid in full, albeit
potentially over a deferred time period). In contrast, postpetition taxes are not subject to the automatic
stay and are paid or collected according to the same timing as outside of bankruptcy.

Although prepetition taxes generally enjoy the benefits associated with the automatic stay, consideration
should be given to any unpaid prepetition trust fund taxes to avoid any potential "responsible persons"
liability, as referenced previously, to assure that personal liability will not be imposed against the "re-
sponsible persons."

Like any other creditor, the IRS and other taxing authorities need to file proofs of claim with the bank-
ruptcy court for any unpaid prepetition tax in order to participate as a creditor in a bankruptcy case with
respect to such taxes. It is not uncommon for the amount stated in the initial proof of claim filed by the
IRS or other taxing authority to be inflated if any of the taxing authorities has been unable, or has had
insufficient time, to audit the debtor. As such, it is important to assess tax claims filed by the taxing au-

fn 38 IRC Section 382(l)(5)(E); Reg. Section 1.382-9(d).

fn 39 Reg. Section 1.382-9(d)(3)(i).

fn 40 IRC Section 382(l)(5)(B).

fn 41 IRC Section 382(l)(5)(D).

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