Straddle Year Federal Income Taxes Entitled to Administrative Priority in Bankruptcy

Faegre Drinker co-chair Andrew Kassner and senior attorney Joseph Argentina coauthored the article “Straddle Year Federal Income Taxes Entitled to Administrative Priority in Bankruptcy,” which originally appeared in the October 15, 2020 edition of The Legal Intelligencer.

In their article, Kassner and Argentina highlighted a recent case addressed by the U.S. District Court for the District of Delaware in which it ruled that federal income taxes for the year in which a debtor files for bankruptcy are entitled to priority treatment as administrative expenses when the end of the taxable year occurred after the bankruptcy petition date. The court noted that the issue of how to treat a “straddle year” for federal income tax under the Bankruptcy Code has not been decided by any appellate court.

Although the decision has been appealed to the Third Circuit, Kassner and Argentina write that the decision demonstrates that courts can interpret the underlying policies of bankruptcy and other federal laws differently, as well as the “plain meaning” of federal statutes. They add that practitioners are well advised to carefully consider the priority of a debtor’s potential tax obligations in advance of a bankruptcy filing, and the timing of the filing accordingly.