March 29, 2024
Re: § 58.1 1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the corporate income tax assessment issued to ***** (the “Taxpayer”), for the taxable year ended January 3, 2021. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a corporation operating in Virginia, filed for Chapter 11 bankruptcy in June 2020. A notice of Chapter 11 bankruptcy was sent to the Department, which declined to submit a proof of claim. The Taxpayer submitted ***** (the “Plan”) to the Bankruptcy Court that did not account for any taxes owed to Virginia. The Plan was approved by the Bankruptcy Court and the Taxpayer emerged from bankruptcy in December 2020.
The Department audited the Taxpayer’s 2020 corporate income tax return and adjusted its net operating loss (NOL) carryforwards, resulting in an assessment. The assessment was issued in June 2022. The Taxpayer filed an application for correction, contending that the Department was barred from collecting the tax because it did not file a proof of claim.
DETERMINATION
A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. Usually, the debtor that remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow additional financing. A plan of reorganization is proposed, creditors whose rights are affected may vote on the plan, and the plan may be confirmed by the court if it satisfies certain legal requirements. See Title 11 U.S.C. §§ 1121 through 1129.
The Taxpayer states that the deadline for governmental entities to file proofs of claim with the bankruptcy court, known as the “Governmental Bar Date,” was December 22, 2020, and that it emerged from bankruptcy on December 30, 2020. The Taxpayer claims that “any amounts being assessed at this time [i.e., the Governmental Bar Date] would be barred.”
While the bankruptcy was filed during 2020, the income tax liability was not deemed to have been incurred until the close of the taxable year, which for this Taxpayer was on January 3, 2021. See United States v. Beskrone (In re Affirmative Ins. Holdings), 620 B.R. 73 (D. Del. 2020). Because the Taxpayer had already emerged from bankruptcy prior to incurring its 2020 Virginia corporate income tax liability, the debt could not have been dischargeable in that proceeding.
Because the liability occurred after the date the Taxpayer emerged from bankruptcy, the assessment of corporate income tax for the taxable year ended January 3, 2021 is upheld. A revised bill will be issued which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4236.B