Supreme Court issued a decision, described below, of interest to the
Florida Department of Revenue v. Piccadilly Cafeterias, Inc.,
No. 07-312 (previously discussed in the
December 7, 2007 Docket Alert).
The Supreme Court today held that the stamp-tax exemption in Section
1146(a) of the Bankruptcy Code applies only to asset transfers made after a
taxpayer’s Chapter 11 reorganization plan has been confirmed by a Bankruptcy
Court. The decision allows states to impose stamp taxes on all
preconfirmation asset sales, including those deemed necessary to a
subsequently confirmed plan of reorganization.
Section 1146(a) of the Bankruptcy Code exempts from stamp or other
similar taxes any asset transfer “under a plan confirmed under” Chapter 11
of the Code. 11 U.S.C. § 1146(a). During Piccadilly Cafeterias’ Chapter 11
proceedings, but before submission and confirmation of its reorganization
plan, the bankruptcy court approved the sale of Piccadilly’s assets to a
third party and held that Section 1146(a) exempted the sale from stamp
taxes. On appeal, both the district court and the Eleventh Circuit affirmed.
The Eleventh Circuit reasoned that Section 1146(a) was ambiguous and that it
should be interpreted to apply to “pre-confirmation transfers that are
necessary to the consummation of a confirmed plan of reorganization.” In
re Piccadilly Cafeterias, Inc., 484 F.3d 1299, 1304 (2007) (per curiam).
In an opinion by Justice Thomas, the Supreme Court reversed. The Court
found that “the more natural reading of § 1146(a) is that the exemption
applies only to postconfirmation transfers.” Slip op. at 7. In other words,
“§ 1146(a) specifies not only that a tax-exempt transfer be ‘under a plan,’
but also that the plan in question be confirmed pursuant to” the Bankruptcy
Act. Id. Assuming arguendo that the provision is
ambiguous, the Court held that interpreting it to allow taxation of
preconfirmation asset sales was required by the canon of statutory
construction that directs courts to “proceed carefully when asked to
recognize an exemption from state taxation that Congress has not clearly
expressed.” Slip op. at 14 (internal quotation omitted).
Justice Breyer, joined by Justice Stevens, dissented. Arguing that the
statutory language was ambiguous and could well encompass preconfirmation
asset sales, the dissent maintained that interpreting Section 1146(a) to
allow the imposition of stamp taxes on all preconfirmation asset sales would
thwart what the dissent characterized as Chapter 11’s purposes of
“preserving going concerns” and “maximizing property available to satisfy
creditors” by possibly delaying the sale of a distressed concern and by
“reduc[ing] the funds made available” to creditors. Slip op. at 4, 6 (Breyer,