Will the Bankruptcy Code Protect You From Certain Taxes?

Several judicial decisions in the past year have renewed the debate about when the transfer of property during a Chapter 11 bankruptcy is exempt from state and local taxes. Although the debate focuses on a single provision of the Bankruptcy Code, the answer may determine tax liabilities in the hundreds of thousands if not millions of dollars.

Section 1146(c) of Bankruptcy Code provides that "the issuance, transfer or exchange of a security or the making or delivery of an instrument of transfer under a plan confirmed under Section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax." This exemption applies to any property transfer subject to a stamp tax but typically is of greatest significance when applied to transfers of valuable real estate, where the deed or mortgage stamps may add as much as five percent or more to the cost of the transaction.