Expenses In Bankruptcy
Expenses In Bankruptc y
Neil Harl 0 1
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Article 1
Agricultural Law Press
Publisher/Editor
Robert P. Achenbach, Jr.
Contributing Editor
Dr. Neil E. Harl, Esq.
Agricultural
Law Digest
Volume 11, No. 11
May 26, 2000
ISSN 1051-2780
EXPENSES IN BANKRUPTCY
— by Neil E. Harl*
A major issue with farm bankruptcies, as with other bankruptcies, is how to handle
the costs of bankruptcy.1 The fact that a farm or small business bankruptcy nearly
always has non-business aspects as well as a business dimension adds to the
complexity of the determination as to what is deductible.
Administrative expenses
In general, the expenses of administering a bankruptcy estate are deductible.2
Income tax generated on sale or disposition of property by the bankruptcy estate is a
liability of the bankruptcy estate and is paid as an administrative expense.3 The
deductible amounts include the trustee’s fee4 as well as expenses allowed as a cost of
bankruptcy estate administration.5
In general, the determination of whether any amount paid or incurred by the
bankruptcy estate is allowable as a deduction or credit is made as if the amount were
paid or incurred by the debtor and as if the debtor were engaged in the same trade,
business or activity as before commencement of the bankruptcy case.6
Business portion of bankruptcy fees
A problem of allocation arises if a bankruptcy has both business and non-business
components to the bankruptcy. In a 2000 case, Catalano v. Comm’r,7 the debtor’s
personal bankruptcy was proximately caused by liabilities arising from the law firm of
which the debtor was the owner.8 The debtor was allowed to deduct an allocable
portion of bankruptcy fees as a business expense.9 In 1988, the debtor had purchased
a residence which was financed in part by a nonrecourse loan secured by a lien on the
residence. In 1994, the debtor was named as a defendant in a number of law suits
arising from the law practice and both the debtor and the debtor’s law firm each filed
for Chapter 11 bankruptcy.10
The debtor incurred $46,462 for legal fees, accounting costs and U.S. Trustee’s fees.
The Tax Court allowed a business deduction for $41,574 of the costs. The court said
that the determination as to whether an expense is a deductible trade or business
expense or a non-deductible personal, living or family expense depends on the origin
of the claims giving rise to the fees.11 In Catalano v. Comm’r,12 93.79 percent of the
debtor’s liabilities in bankruptcy were business liabilities; thus, the court concluded,
the debtor’s bankruptcy was “proximately caused” by the business liabilities.13 The
court invoked a formula which had been applied in an earlier case14 allowing a debtor
to deduct a percentage of the bankruptcy fees paid equal to the ratio that the claims of
the debtor’s business creditors bore to the total claims.15 That formula produced a
deduction of 93.79 percent of the total, substantiated bankruptcy fees as a business
expense. Thus, the debtor was allowed to claim a business deduction for $41,574 of
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* Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, Iowa
State University; member of the Iowa Bar.
Agricultural Law Digest is published by the Agricultural Law Press, P.O. Box 50703, Eugene, OR 97405 (ph/fax 541-302-1958), bimonthly except June and
December. Annual subscription $100 ($90 by e-mail). Copyright 2000 by Robert P. Achenbach, Jr. and Neil E. Harl. No part of this newsletter may be reproduced
or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without
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the bankruptcy costs (93.79 percent times $44,327, the total
amount paid in the year in question, 1995).16
consequences which might result from failure to defeat the
claim.21
In Cox v. Comm’r,17 the husband was a corporate employee.
The wife opened a western wear store which failed the
following year. The spouses each filed Chapter 7
bankruptcy. The combined debts totaled $163,819 of which
$159,822 was attributable to the wife’s western wear store.
The issue before the Tax Court was whether the $1500
attorney’s fee (reduced from $5,000) was deductible as a
business expense.
The court s (...truncated)