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Chapter 11 Transfer Tax Exemption Expanded by the Eleventh Circuit

By 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.), 2004 WL 2711888 (11th Cir. Nov. 30, 2004), 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

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