Tim’s Tax News on the Tenth – April 2020

The Treasury Department and Internal Revenue Service announced late last month that the federal income tax filing due date of April 15, 2020, is automatically extended to July 15, 2020. In addition to that step, the IRS is easing payment guidelines and postponing compliance actions until July 15, 2020. Also, the Coronavirus Aid, Relief, and Economic Security Act, (“CARES Act”), is a law meant to address the economic fallout of the 2020 coronavirus pandemic in the United States of which much has been written and will not be addressed here. 

If the several steps taken by the IRS and the CARES Act do not allow a business to continue, a Chapter 11 bankruptcy may be a viable aid for a company to continue to operate. Chapter 11 bankruptcies used to be a strategy used by larger multi-million dollar Fortune 500 companies because smaller companies could not avail themselves of it because of the need to have a lot of cash flow to make the Chapter 11 bankruptcy protection successful. However, that appears to have changed. 

The Small Business Reorganization Act of 2019 (SBRA) took effect on February 20, 2020. The SBRA adds a new subchapter, Subchapter V, to Chapter 11 of the Bankruptcy Code. It provides small business debtors greater flexibility to reorganize under Chapter 11. Subchapter V reorganizations are more streamlined and accessible than traditional Chapter 11 cases. They also provide small business debtors more control over the structure and payment of their reorganizations. Importantly, Subchapter V may also provide small businesses much-needed relief, in light of the ongoing COVID-19 pandemic.

To qualify for Subchapter V, a small business debtor must be a person or entity engaged in commercial or business activity (other than single asset real estate operators) with aggregate secured and unsecured debts up to $2,725.625. The CARES Act recently increased that limit to $7,500,000.00. The debtor must show that at least fifty percent of its pre-petition debt came from such commercial or business activities.

• Commercial Lease: A business can pay the back rent over three to five years. 
• Bank Debt: A business can pay the arrearage over three to five years. A debtor could attempt a “cram down” of a lien under certain circumstances. 
• Vendor Debt: A business can pay arrearage over three to five years, and possibly reduce the amount due, depending on the business balance sheet. 
• Federal Taxes: A business can pay delinquent taxes over three to five years. 

• Timeline: Subchapter V reorganizations are designed to be efficient. The SBRA mandates that, in Subchapter V proceedings, courts hold the first status conference within sixty days of the petition date. The reorganization plan must be filed within ninety days of the court’s order for relief. Subchapter V plans must complete all payments under the plan between three and five years from the plan’s effective date.
• Debtor-Proposed Plan: One of the most significant features of Subchapter V reorganizations is that only the debtor is allowed to propose a plan. Creditors may not propose alternate plans. The debtor does not need to submit a separate disclosure statement to obtain approval. 
• Confirmation: Unlike traditional Chapter 11 plans, confirmation of Subchapter V reorganization plans does not require the acceptance of an “impaired class of creditors.”
• Trustee Appointment: The SBRA requires the U.S. Trustee to appoint a trustee for every Subchapter V reorganization. The trustee facilitates the reorganization and oversees its implementation. The debtor presumptively remains a debtor-in-possession. The trustee only takes possession of the debtor’s assets if the court determines the debtor committed acts such as fraud or gross mismanagement.
• Creditor Committees: In traditional Chapter 11 proceedings, courts by default appoint unsecured creditor committees to provide oversight of the reorganization. In Subchapter V reorganizations, there is no requirement for unsecured creditor committees. Courts may still appoint these committees at their discretion.
• No “New Value” Rule: Unlike traditional Chapter 11 reorganizations, Subchapter V reorganizations do not require small business debtor equity holders to provide “new value” to the business in order to retain their stake in it.
• Mortgage Modification: If a small business owner used their primary residence as security for a business loan, Subchapter V allows them to modify the loan. This option was previously only available to family farmers and fishermen under Chapter 12.
• Administrative Expenses: The SBRA also provides small business debtors with greater flexibility for paying administrative expenses than traditional Chapter 11 reorganizations. Subchapter V debtors are eligible to pay administrative expense claims throughout the duration of the plan, rather than on the plan’s effective date.

Subchapter V provides small businesses greater flexibility in restructuring their debts than traditional Chapter 11 proceedings. Because these reorganizations are less expensive than a traditional Chapter 11 proceeding, they can be a tremendous tool that a small business may use to restructure its debts and thereby save the business. This new option is particularly timely, as many small businesses are grappling with the effects of the COVID-19 pandemic.  

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.

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Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft) or other areas in tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.