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Chapter 11 Transfer Tax Exemption Expanded by the Eleventh Circuit - page 1 / 8





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Chapter 11 Transfer Tax Exemption Expanded by the Eleventh Circuit

January/February 2005

Paul D. Leake

The ability to sell assets during the course of a chapter 11 case without incurring transfer taxes

customarily levied on such transactions outside of bankruptcy often figures prominently in a

potential debtor's strategic bankruptcy planning. However, the circumstances under which a sale

or related transaction qualifies for the tax exemption has been a focal point of dispute for many

courts, including no less than four circuit courts of appeal. A ruling recently handed down by the

Court of Appeals for the Eleventh Circuit fuels this growing controversy in a way that may

encourage chapter 11 debtors to rethink the way that they structure plans of reorganization. In

State of Florida v. T.H. Orlando Ltd., (In re T.H. Orlando Ltd.), the Court ruled that because a

mortgage refinancing was "necessary to the consummation" of a plan of reorganization, the

refinancing was exempt from Florida's stamp tax, notwithstanding that both parties to the

transaction were non-debtors and the transaction did not involve estate property.

Tax-Free Transfers under the Bankruptcy Code

Bankruptcy Code section 1146(c) 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 [the

Bankruptcy Code], may not be taxed under any law imposing a stamp tax or similar tax.” The

Bankruptcy Code does not define "stamp" or "similar" taxes. Stamp taxes are commonly

imposed under state or local law in connection with the transfer of real or personal property. In

most cases, the tax rate is a relatively small percentage of the value of the assets, and the tax is

imposed irrespective of whether the seller realizes any gain or loss from the sale. Included are


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