Testimony of Michael J. Kane, Deputy Secretary for Enforcement
Pennsylvania Department of Revenue
Mr. Chairman, Members of the Committee, my name is Michael Kane and I am the Deputy Secretary for Enforcement in the Pennsylvania Department of Revenue. In that capacity, I oversee all of the Department of Revenue's enforcement programs, including the processing of cases pending in the bankruptcy courts.
I have also practiced in bankruptcy court, representing the Internal Revenue Service and other federal agencies as an Assistant United States Attorney. Of course, none of my comments should be taken as representing the Department of Justice's views on the subject.
The Pennsylvania Department of Revenue welcomes the opportunity to provide the Committee with information regarding state tax issues in bankruptcy proceedings. I hope that my comments on H.R. 3150, the Bankruptcy Reform Act of 1998, will be of value to the Committee.
As Chairman Gekas has often pointed out, we are witnessing a curious paradox when one considers that today's vigorous economy has produced record numbers of bankruptcy filings. The Bankruptcy Courts in the Commonwealth of Pennsylvania have endured their share on this increase. According to the Administrative office of the United Sates Courts, 1997 petitions in the Middle District of Pennsylvania increased 40% over the previous year, while the rate of increase in the Western District was 34% during the same period.
Though I am not qualified to offer any opinion about the root causes of this phenomenon, I can speak first hand about the effect of such a rapid expansion on the Pennsylvania Department of Revenue's ability to protect its substantive rights in bankruptcy proceedings. Like most state agencies, we must apply limited resources to serve the citizens of the Commonwealth. Our core responsibilities must be met, often at the expense of effective administration of important programs. Bankruptcy processing is one of the areas that is continually under stress in that regard. The swelling of caseloads has simply resulted in a lessened ability to properly meet the requirements of the Code with regard to filing of claims, objecting to plans and other administrative tasks. I believe that our experience is typical of that of many other states.
H. R. 3150 contains many substantive and procedural changes to the Bankruptcy Code. I will address my comments to some of these which are of particular significance to the state tax administrator.
It must be borne in mind that government creditors, particularly taxing authorities, face unique problems in protecting legitimate interests in a bankruptcy case. For example, most creditors know or can easily determine the amount of their claim as soon as they receive notice that a petition has been filed. Taxing authorities oftentimes do not have sufficient information readily available to determine the amount of their claim, or for that matter, whether they have a claim at all. This is so because tax determinations are usually the result of self assessment and reporting. Rather than issuing a bill for a series of discrete transactions, tax departments generally must rely on their "customer" to advise them of the amount that is owed. Additionally, tax authorities often administer a myriad of taxes, each of which is maintained in a separate data base. Unlike the department store or the credit card company, or other lenders, we can not simply access the customer's account for consolidated information from which to make a claim. Rather, each database must be accessed to ensure that all obligations are addressed. In a state like Pennsylvania, this may mean that 20 or more taxes must be reviewed for delinquencies, before a claim can be filed or a plan can be approved.
Often, a petition is filed before the debtor has filed required returns and reports. In such cases, particularly in a Chapter 13, the taxing authority must estimate what taxes may be owed to protect its interest. Many times, because of limited resources, short time frames and lack of sufficient information, the taxing authority is not in a position to make a good faith estimate. In those cases, it may be forced to protect its interest by gathering information at the meeting of creditors, by filing a motion to compel the debtor to file tax returns, or (particularly in a Chapter 13 case) by filing an objection to the plan. This results in a waste of resources of both the creditor and the court. It is incongruous that a debtor may take advantage of the protection of the federal courts, which are funded by tax dollars, while it has not complied with its own obligation to simply file required returns.
H.R. 3150 places the burden on the debtor to file required returns, by mandating that they be filed before the meeting of creditors is held, and by authorizing the dismissal of a petition if the debtor does not comply. Likewise, the act would deem a claim to be filed timely if filed within 60 days of the filing of a required return. This latter provision will enable tax claims to be filed without the need to waste resources for court appearances.
Present procedures jeopardize the collection of post-petition trust fund taxes. The Code allows administrative taxes to be paid through a Chapter 13 plan. Administrative taxes in a Chapter 11 must be paid in full on the effective date of a Chapter 11 plan. Because of this, business debtors often use trust fund taxes to fund operations after the filing of the petition with the expectation that the funds will somehow become available at a later time. Commingling of these taxes often results in the inability of the debtor to fund a Chapter 13 plan, or a lack of necessary cash to confirm a Chapter 11 plan.
H. R. 3150 ensures that money collected or withheld post petition is not misused by requiring that the small business debtor timely file required tax returns and maintain trust fund taxes in a segregated account. As a result, we can anticipate that debtors who can not fund current operations without dipping into government funds will be rooted out at an early stage, before the liability grows larger.
Under present law, a proof of claim is not required in a Chapter 11 case, if the debt is scheduled. In such cases, the claim is deemed allowed without further action by the creditor. In a Chapter 13 case, however, a claim must be filed, even if the obligation is acknowledged by the debtor. There is simply no logical reason for the disparate treatment. In Chapter 11 cases that are converted to Chapter 13, this is particularly problematic.
H. R. 3150 treats acknowledged liabilities in Chapter 13 cases the same as Chapter 11. By eliminating the need to file a claim for an undisputed amount, limited resources will be better applied by the tax administrator.
Notice of the filing of petitions and other documents is a matter of great concern to tax authorities. Obviously, the failure of the proper person within the agency to learn of matters in a timely fashion may have severe consequences. Because an agency may have many satellite offices, such notices often are received by employees who are not aware of the importance. H. R. 3150 will eliminate much of this concern, without placing undue burden on debtors, by allowing the agency to designate the official address and representative to whom all such correspondence should be addressed.
In summary, I would like to state that we welcome the changes that have been proposed. They strike a balance that ensures that maximum revenue is available to government to fund important programs and services, while providing a fresh start to those in need. I will be happy to address any questions which the Committee may have.