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October Term, 2007

June 16, 2008

Today the Supreme Court issued a decision, described below, of interest to the business community.

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, J., dissenting).



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