John J. Stockdale, Jr.
July, 2021

Complex Problems: Personal Property Taxes under the Bankruptcy Code

            Chapter 11 debtors often have tax problems.  If a debtor has not paid the Internal Revenue Service or State of Michigan, it is unlikely to have paid its local municipality for the personal property taxes.  In order to prepare a debtor’s bankruptcy schedules and a confirmable chapter 11 plan of reorganization, debtor’s counsel must investigate and thoroughly understand the status of the debtor’s personal property taxes.

            The Michigan Tax Code authorizes the imposition of tax on the value of a business’s tangible personal property.[1]  Notwithstanding when the personal property tax is due, liability for the personal property tax is assessed to the property owner[2] on December 31 of the preceding year (e.g., liability for 2020 personal property tax was assessed on December 31, 2019).[3]  Further, the personal property tax automatically becomes a superpriority lien encumbering personal property on December 1 of the tax year (e.g., liability for 2020 personal property tax becomes a lien on the personal property on December 1, 2020).[4]  Significantly, a personal property tax lien is a “secret lien” because it is not recorded and will be not be disclosed by a UCC or title search.[5]

            Under the Bankruptcy Code, prepetition personal property taxes can be treated as either a secured claim or a priority claim. 

            Determining whether prepetition personal property taxes are a secured claim depends upon when the tax was assessed.   If the relevant personal property tax was assessed before December 1 of that tax year then it is a secured claim, and it has superpriority over any other secured creditor claiming an interest in the same personal property under applicable non-bankruptcy law. 

            If the personal property tax claim is not a secured tax claim under Michigan law, then the personal property tax claim is priority tax claim under Bankruptcy law.  Section 507(a)(8)(B) of the Bankruptcy Code allows pre-petition unsecured property taxes to be a priority unsecured claim (i.e., paid ahead of general unsecured creditors) where the taxes are: (i) incurred before the commencement of the case, and (ii) last payable without penalty after one year before the date of the date of filing.[6]  Determining the first prong of the test is a relatively simple matter.  Determining the second prong is more difficult.[7]

            Under Michigan law, personal property taxes are billed at the same time as real estate taxes.[8]   As a result, the summer tax bill is billed on July 1, due on August 31, and penalties begin to accrue on September 1.[9]  By contrast, the winter tax bill is billed on December 1, due on February 14, and penalties begin to accrue February 15.[10]

            Breaking this down and using 2020 as the example tax year, the 2020 personal property taxes are assessed on December 31, 2019, the summer 2020 tax bill is last due without penalty on August 31, 2020, the winter 2020 taxes are last due without penalty on February 15, 2021, and both the summer and winter taxes become a statutory lien on December 1, 2020.

            With that understanding, there is still a wrinkle: prepetition personal property taxes can morph from a priority tax claim under section 507(a)(8)(B) into a secured claim by virtue of 11 U.S.C. 362(b)(18), which provides that the automatic stay does not apply to prevent “the creation or perfection of a statutory lien for an ad valorem property tax … imposed by a governmental unit, if such tax or assessment comes due after the filing of the petition.”  Thus, notwithstanding the automatic stay, unpaid personal property taxes that were priority taxes on the petition date mature into a statutory lien on December 1, becoming a secured claim.[11]

            By way of example, if a debtor filed its chapter 11 case on February 15, 2020 and did not fully paid its 2019 taxes, then the unpaid 2019 personal property taxes would be a secured claim and the unpaid 2020 personal property taxes would be a priority claim unless the bankruptcy case continued through December 1, 2020 when the unpaid 2020 personal property taxes would mature into a secured claim because they came due after the bankruptcy case was filed.  However, if the same debtor filed its chapter 11 case on or after December 1, 2020, then both its 2019 and 2020 property taxes would be secured claims even though the winter 2020 bill is not last due without penalty until February 14, 2021.[12]  These examples illustrate that, under Michigan law, unpaid personal property taxes will never be a general unsecured claim. 

            While a debtor generally cannot push the personal property taxes into the class of general unsecured creditors[13], Chapter 11 does provide a debtor with some benefits.  First, unpaid prepetition personal property taxes may be paid in installments over a period not to exceed five (5) years from the petition date.[14]  Second, penalties and interest on penalties (if any) accruing on the personal property tax may be reclassified as general unsecured claims.[15]

            Lastly, whether in or out of bankruptcy, the debtor may have a small window between December 31 (tax day) and the following December 1 (lien day)[16] when the assets may be sold free of the current year personal property taxes. However, if there are outstanding personal property taxes that remain unpaid and are a lien on the personal property on the sale date, then the lien will follow the personal property and continue to encumber the personal property after the sale to a bona fide purchaser.[17] The personal property encumbered by the tax lien may be subject to seizure and sale by the taxing authority to satisfy the outstanding tax liens even in the hands of a bona fide purchaser.[18]

            Personal property tax issues are complicated.  They are made more complicated inside a bankruptcy. Schafer and Weiner, PLLC has significant experience navigating a troubled company’s personal property tax issues both in and outside of bankruptcy.

[1] MCL § 211.13(1).

[2] MCL § 211.13(1) (subject to caveats).

[3] MCL §§ 211.2(2), 211.13(1), and 211.40.

[4] MCL § 211.40; but see MCL § 211.40a (authorizing the lien date to be modified upon the filing of an appropriate affidavit under certain circumstances) and MCL § 211.44a(4) (authorizing county’s unpaid summer property tax levy to be become a lien against property on July 1 of the tax year).  For the purposes of this article, we are focusing solely on the December 1 lien date.

[5] Thomas R. Morris, In Need of Repair: Secret Personal Property Liens in Michigan, 35 Mich. Bus. L. J. 3, 32 (2015).

[6] 11 U.S.C. § 507(a)(8)(B).

[7] At least one court determined that the section 507(a)(8)(B)’s phrase “‘after one year before the date of filing of the petition’ does not limit itself to a prepetition or post-petition period.”  In re Wang ZI Cashmere Prods., 202 B.R. 228 (Bankr. D. Md. 1996) (applying Maryland law and holding that taxes incurred prepetition but not due until after the petition date are a priority claim under 507(a)(8)(B)).

[8] MCL § 211.40.

[9] MCL §§ 211.44a(4), (6).

[10] MCL § 211.40 and MCL § 211.44(3).

[11] See, supra, fn. 4.  While the automatic stay does not prohibit the creation or perfects of the lien on personal property, it does prohibit the taxing authority from foreclosing on that lien absent lifting the automatic stay. 11 U.S.C. § 362(a)(4)-(6).

[12] 11 U.S.C. § 362(b)(18).

[13] There may be an opportunity to reduce the secured claim under 11 U.S.C. § 506(a) if the secured creditor is undersecured.

[14] 11 U.S.C. § 1129(a)(9)(C)-(D).

[15] See, e.g., In re Southeast Waffles, LLC, 460 B.R. 132, 142-143, aff’d 2012 U.S. App. LEXIS 24991 (6th Cir. 2012).

[16] Subject to application of MCL § 211.44a(4), if applicable.

[17] MCL § 211.40.  See also In re Ever Krisp Food Prods. Co., 307 Mich. 182, 11 N.W.2d 852 (Mich. 1943), followed by In re Ciena Capital, LLC, 2010 Bankr. LEXIS 2573, *15-*17 (Bankr. S.D. N.Y. August 10, 2010).

[18] MCL § 211.47(1).