UAL’s proposed plan of reorganization provides for a modicum of distributions on the plan effective date of UAL’s plan to unionized employees, as required by the terms of revised collective bargaining agreements. UAL, relying upon Bankruptcy Code section 505(a) (which allows the bankruptcy court to “determine the amount or legality of any tax”), sought a declaratory ruling from the bankruptcy court that distributions to employees under the plan cannot be taxed by the IRS as “wages.” This issue is quite significant to UAL because a favorable ruling would save UAL tens of millions of dollars in federal withholding taxes and the like that would have to be paid were the distributions to be characterized as “wages” for federal tax purposes.
The UAL bankruptcy court, however, refused to even reach the merits because it concluded (opinion available here) that it lacked jurisdiction to decide the tax effects of a Chapter 11 plan before it has been confirmed.
In so doing, the Court noted the paucity of cases and consensus on “when a tax issue must arise in order to be subject to adjudication” as compared with “whose tax issues may be adjudicated under looked at the language of Code § 505(a).” The Court stated:

Continue Reading UAL Bankruptcy Court Looks to Context of Specific Code Chapter in Refusing to Exercise Jurisdiction Over Question of Whether Plan Distributions on Union Employee Claims are Taxable as “Wages”