Caplin & Drysdale, Chartered
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of tax, tax controversy, and litigation legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.Show more
The Internal Revenue Service recently published the first Operational Compliance List since the elimination of the five-year remedial amendment cycle system for individually designed qualified retirement plans. The list identifies certain mandatory and discretionary plan amendments, as well as other significant guidance that affects plan operations.
The Internal Revenue Service recently issued Notice 2016-66, which identifies certain transactions relating to micro-captive insurers as 'transactions of interest'. This designation brings covered captive insurers into a federal reporting regime that requires participants in such transactions, as well as their advisers, to meet certain one-off and annual filing obligations.
The Internal Revenue Service (IRS) recently launched its first wave of compliance campaigns. They cover a broad range of topics, including Tax Equity and Fiscal Responsibility Act partnerships, micro-captive insurance transactions, transfer pricing and repatriation of foreign earnings. This new issue-focused approach means that businesses dealing with any of the identified issues face increased IRS audit risk and should work with their legal advisers to prepare for IRS challenges to their positions.
The Internal Revenue Service (IRS) recently issued Notice 2017-10, identifying certain transactions involving conservation easements as 'listed transactions'. For several years the IRS has been actively examining conservation easements. The new listed transaction designation puts certain conservation easement transactions into a tax reporting and record-keeping regime that may lead to additional IRS income tax and promoter examinations and potentially significant penalties.
The Internal Revenue Service (IRS) recently issued final regulations requiring foreign-owned, single-member limited liability companies to disclose to the IRS their beneficial owners by obtaining a US tax identification number and filing annual returns. Wealth advisers and their clients should be aware that failure to comply could result in significant civil penalties and, if wilful, potential criminal penalties under US law.
The Internal Revenue Service (IRS) recently announced the elimination of the five-year remedial amendment cycle system for individually designed qualified retirement plans. The IRS further announced that each year it will publish a Required Amendments List and an Operational Compliance List in place of the cumulative list of amendments that previously provided guidance on these plans.
The Bipartisan Budget Act of 2015 fundamentally changed the rules by which partnerships and entities taxed as partnerships interact with the Internal Revenue Service in an audit or litigation. Many practitioners have expressed concern that the Bipartisan Budget Act partnership audit rules are unclear and unworkable, and impose significant administrative burdens on taxpayers. Congress has now proposed technical corrections in an attempt to clarify and introduce practicality to the new rules.
A federal court recently authorised the Internal Revenue Service (IRS) to issue a John Doe summons to Coinbase Inc, which operates a web-based global convertible digital currency platform and the largest platform in the United States for the conversion of bitcoins. Taxpayers using virtual currency transactions involving Coinbase who are not in tax compliance have an extremely short window to avoid potentially serious IRS action.
The Internal Revenue Service recently issued a notice identifying certain transactions relating to small captive insurers as 'transactions of interest'. The new designation throws small captive insurer transactions into a tax reporting regime that could potentially lead to significant penalties and income tax and promoter examinations.
The Treasury Department and the Internal Revenue Service recently issued revised regulations governing how recourse partnership liabilities are allocated among partners. Under the new regulations, certain guarantees, indemnities and similar arrangements classified as 'bottom-dollar payment obligations' will be disregarded for the purpose of characterising partnership liabilities as recourse obligations.
Insolvency & Restructuring
Unlike Chapter 7 liquidations and Chapter 11 reorganisations, cases filed under Chapter 15 of the Bankruptcy Code are ancillary – essentially functioning in aid of recognised foreign insolvency proceedings. This article considers the discovery tools available to foreign representatives under Chapter 15 and two key issues relating to Chapter 15 discovery: seal-and-gag orders and the recent decision in Platinum Partners.
The Supreme Court's decision in Merit Management construes Section 546(e) of the Bankruptcy Code more narrowly than most lower courts have done before. Often referred to as the securities 'safe harbour', this provision prevents a bankruptcy trustee from unwinding settlement payments or other transfers made in connection with securities contracts if the payments or transfers were "made by or to (or for the benefit of)" certain kinds of market participant, including any stockbroker or financial institution.
The Supreme Court recently held that Section 546(e) of the Bankruptcy Code does not apply to transfers in which financial institutions are mere intermediaries. This decision plainly rejects what was, in many judicial circuits, a long-held interpretation of Section 546(e) and leaves certain transactions previously thought to be inviolate vulnerable to later being unwound if one of the parties files for bankruptcy within the relevant statutory period.
First Circuit finds creditors' committees have unconditional right to intervene in adversary proceedingsUSA | 09 February 2018
The First Circuit Court of Appeals recently held that Section 1109(b) of the Bankruptcy Code provides a creditors' committee with an "unconditional right to intervene" in an adversary proceeding. This decision further bolsters the right of creditors' committees to intervene in and be heard on all matters within a bankruptcy case and positions the First Circuit in line with the Second and Third Circuits, which both have similarly concluded that the code affords an unconditional right to intervene.
In an upcoming case, the Supreme Court will address the question of whether the Bankruptcy Code bars a bankruptcy trustee from avoiding a debtor's constructively fraudulent pre-petition securities transactions merely because the deal was executed through a financial intermediary with no stake of its own in the transaction. The issue turns on the meaning of Section 546(e) of the Bankruptcy Code.
Recognition of a foreign proceeding opens the door to mandatory or discretionary relief from the bankruptcy court, depending on whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding. Two threshold requirements for obtaining recognition under Chapter 15 of the Bankruptcy Code, which took effect 11 years ago, are the existence of a duly designated foreign representative and a foreign proceeding.
Following a Chapter 15 petition to recognise Korean insolvency proceedings as foreign main proceedings, the Bankruptcy Court for the District of New Jersey recently granted an order of provisional relief that includes application of the automatic stay to block the enforcement of maritime liens and the seizure of shipping company Hanjin's vessels. The case demonstrates how essential provisional relief can be for foreign debtors to preserve the status quo and maintain business operations before a recognition ruling.
Chapter 15 of the Bankruptcy Code, which deals with cross-border insolvency cases, took effect nearly 11 years ago. Congress enacted Chapter 15 in 2005 to replace Section 304 of the code, which previously addressed transnational insolvencies. Chapter 15 largely incorporates the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency.
The Supreme Court will soon consider whether a Chapter 11 debtor in dire straits can settle claims of the bankruptcy estate, receive court approval to distribute the settlement proceeds to junior creditors without paying priority claims and then obtain dismissal of the bankruptcy case on terms that leave the priority-skipping settlement intact, or whether such a resolution violates essential aspects of the Bankruptcy Code.
The Supreme Court has ruled that the US Bankruptcy Code pre-empts the Recovery Act, which Puerto Rico enacted in 2014 to address its mounting debt crisis. The question before the Supreme Court was whether the pre-emption provision contained in Chapter 9 applied to bar Puerto Rico from enacting its own bankruptcy scheme for restructuring the debts of its municipalities and public utilities.
In a world of free-ranging capital and cross-border transactions, the question of whether US courts will apply US law to transactions taking place in other countries is important. It is therefore a matter of both interest and concern that judges in the Southern District of New York have reached opposite conclusions when asked to give extraterritorial effect to the avoidance or 'clawback' provisions of the Bankruptcy Code.
The US Court of Appeals recently decided in In re Tribune Co Fraudulent Conveyance Litigation that Section 546(e) of the Bankruptcy Code impliedly pre-empts state fraudulent conveyance laws that creditors might otherwise use to unwind payments made by a corporate debtor to public shareholders in a pre-bankruptcy leveraged buy-out. The court so held even though Section 546(e) in terms applies to claims only by a bankruptcy 'trustee'.
The US Court of Appeals for the Seventh Circuit recently reviewed a bankruptcy court's denial of a trustee's motion for a temporary injunction staying litigation between non-debtors. The court accepted the premise that the bankruptcy proceeding and the lenders' suits did not involve "the same claims". However, it held that the lower courts had construed too narrowly the equitable powers conferred by Section 105(a) of the Bankruptcy Code.
The recent decision in Banco Centrale makes clear that the Second Circuit will strictly interpret and apply any waivers of sovereign immunity. The Second Circuit established a high bar for creditors seeking to prove that state-owned instrumentalities are the alter egos of their states, and sets clear limits on the types of activity that will permit application of the commercial activity exception.
The US Court of Appeals for the First Circuit has held that Chapter 9 of the US Bankruptcy Code pre-empts an insolvency law enacted by Puerto Rico designed to provide a path for the restructuring of financially distressed municipalities and public utilities in Puerto Rico. The action was initiated by two groups of investors which collectively hold nearly $2 billion worth of bonds issued by one of Puerto Rico's distressed public utilities.
In a recent unanimous decision the Supreme Court held that a bankruptcy court order denying confirmation of a debtor's repayment plan, but leaving the debtor free to propose another plan, was not a final order that could be appealed immediately as of right. The decision closes off an avenue that would have allowed debtors to obtain immediate appellate review of such a decision, thereby delaying the conclusion of the bankruptcy case.
In Bank of America NA v Caulkett the Supreme Court considered whether debtors in a Chapter 7 bankruptcy liquidation could invoke Section 506(d) of the Bankruptcy Code to void or 'strip off' the junior mortgage liens on their homes when the senior mortgage debt exceeded their homes' current value. In a unanimous opinion the court has reversed the US Court of Appeals for the Eleventh Circuit and held that the debtors could not strip off the junior mortgage liens.
In a recent decision the Supreme Court held that parties may consent to bankruptcy courts entering final judgment on so-called 'Stern claims'. The decision is significant: a decision that litigants could not consent to adjudication in a bankruptcy court would have required already overburdened district courts to take over a large portion of the bankruptcy docket.
The Supreme Court recently heard oral argument in Bank of America v Caulkett, considering whether the US Bankruptcy Code permits a Chapter 7 debtor to 'strip off' a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral (ie, when the property is 'underwater'). The court is expected to issue a decision before the end of June.
In the Fairfield Sentry Limited cross-border insolvency case, the US Court of Appeals for the Second Circuit held that US bankruptcy law governed the sale of intangible property of a foreign debtor in liquidation proceedings in the British Virgin Islands. The decision shows that despite being a governing concept, the doctrine of international comity is not without limit in Chapter 15 cases.
The US Court of Appeals for the Second Circuit recently handed down a remarkable decision concerning Section 546(e) of the Bankruptcy Code in Madoff. Relying on the statute's broad wording, the court extended the safe harbour to shield payments carrying only the veneer of a securities-related transaction from recovery, even though the payments were not related to any actual transactions in securities.
The Uniform Fraudulent Transfer Act has been amended and renamed as the Uniform Voidable Transactions Act. The act, which declares rights and provides remedies for unsecured creditors against transactions that impede them in the collection of their claims, now has of a choice of law rule, and rules allocating the burden of proof and defining the standard of proof with respect to claims and defences.
The Supreme Court has ruled that in the case of a bankruptcy-related matter which has been designated as 'core' in Section 157 of the Bankruptcy Code, but under Article III of the US Constitution cannot be finally adjudicated by a bankruptcy judge, the bankruptcy judge may issue proposed findings of fact and conclusions of law to be reviewed de novo by a district court judge.
When a corporation undergoes multiple corporate restructurings which spin off most of its assets while keeping most of its liabilities, under what circumstances may its creditors pursue those spun-off assets? In a recent ruling a court held that corporate defendants which separated most of their liabilities from most of their assets were liable under a fraudulent transfer theory to tort and environmental claimants.
After a corporation files for bankruptcy, does a creditor have standing to pursue claims against an alleged third-party successor corporation? In In re Emoral the Third Circuit barred a group of tort claimants from pursuing their claims on an alleged successor liability theory against a third-party defendant that had purchased all of the debtor's assets before the bankruptcy filing.
One of the major benefits of reorganisation is the discharge of debts, which allows the reorganised debtor a fresh start, unencumbered by pre-petition liabilities. US courts are wary of providing similar relief to non-debtors by enjoining claims against them as part of a bankruptcy plan. Indeed, it can be argued that a court does not have the authority to do so under the Bankruptcy Code.
International arbitration and US bankruptcy proceedings are in tension. A key goal of bankruptcy is the centralisation of disputes, while arbitration encourages decentralisation. US courts balancing these competing impulses have taken a variety of approaches. A decision questioning the jurisdictional underpinnings of US bankruptcy courts is now causing further changes.
Section 546(e) of the Bankruptcy Code curtails the power of a bankruptcy trustee to avoid, as fraudulent transfers, settlement payments made in securities transactions. Nevertheless, the US Bankruptcy Court for the Southern District of New York recently held that Section 546(e) did not bar or pre-empt state law fraudulent transfer claims asserted by a litigation trustee.
In a case to be decided this term, the Supreme Court will confront questions arising in a bankruptcy trustee's fraudulent conveyance action that go to the scope and meaning of its much-noted decision in Stern v Marshall: may a party to a dispute that the Constitution assigns to Article III courts consent by implication to entry of final judgment by a bankruptcy judge, who by definition sits outside of Article III?