Katrina Emergency Tax Relief Act Amendments and Bankruptcy Leniency Fail to Provide Relief Where Partnership Debts are Repaid With Insurance Proceeds Or Discharged in Bankruptcy PDF Download

Author: Susan Kalinka
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Languages : en
Pages : 0

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Book Description
The Hurricane Katrina Emergency Tax Relief Act of 2005 (the "Katrina Tax Act") includes a number of provisions designed to reduce the tax liability of victims of the hurricane that devastated New Orleans and other areas of the Gulf Coast. Section 405 of the Katrina Act extends the period of time taxpayers may have to replace involuntarily converted that was damaged or destroyed as a result of Hurricane Katrina property under Code Sec. 1033 without recognizing gain. In the wake of Hurricanes Katrina and Rita, the U.S. Trustee Program of the Department of Justice also announced that it has directed bankruptcy administrators to exercise "appropriate restraint and discretion favorable to hurricane victims" in applying some of the new, more restrictive requirements of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "2005 Bankruptcy Act") for natural-disaster victims. The 2005 Bankruptcy Act, which became effective on October 17, 2005, makes is harder and more expensive for persons to receive a full discharge of their debts under Chapter 7 of the Bankruptcy Code. On October 5, the Trustee Program announced a temporary waiver of the statutory requirement that bankruptcy filers take an instructional course in personal financial management. Other requirements that should be relaxed include the "means" test for determining whether debtors qualify to file for Chapter 7 relief. Bankruptcy trustees have been told to consider lost income, increased expenses, and other items resulting from the hurricanes to be "special circumstances" to be taken into account in the means test. Both the Katrina Act amendments to Code Sec. 1033 and the relaxation of the 2005 Bankruptcy Act requirements will offer welcome relief to many hurricane victims. However, partners and LLC members who own interests in partnerships that own damaged property subject to a mortgage or who receive a discharge of their shares of partnership debts may not enjoy the same relief afforded to other hurricane victims under the new rules. The problems facing such partners are not attributable to the new provisions and relaxed requirements. Instead, subchapter K provisions will trigger gain recognition to some partners who otherwise would enjoy the benefits of the Katrina Tax Act or the relaxed application of the bankruptcy laws. This article discusses the problems and suggests that the IRS should be generous in accepting offers in compromise from cash-strapped hurricane victims who suffer larger tax liabilities as a result of the decrease in their shares of partnership liabilities.