Government Trustee Opposes Proposed Attorney Reporting Regs

[1] I appreciate the opportunity you have provided to the United States Trustee Program to comment on the revised proposed regulations on Reporting Gross Proceeds Payments to Attorneys (REG- 126024-01). The proposed regulations, which are intended to implement reporting requirements under 26 U.S.C. § 6045(f), would impose new information reporting requirements on payments to bankruptcy trustees.¹ Thus, any business sending a check payable to a bankruptcy trustee who happens to be an attorney would be required to file an information return.² See § 1.6045-5(f), Example 10.³ I write to convey our very grave concerns with this proposal.

[2] Businesses send over 1.2 million checks each month to chapter 7 and 13 trustees and make the checks payable to the trustees as a matter of common practice, by regulation (for chapter 13 cases), and for security reasons (to reduce the risk of misappropriation of checks made payable in the debtors' names). Many business payors would be obligated to comply with § 1.6045(f) under the current version of the regulations. In 2002, the gross proceeds payments received by chapter 7 and 13 trustees were in excess of $5,374,000,000 with over 76 percent of the gross proceeds payments attributable to chapter 13 cases (over 817,000 pending chapter 13 cases). Thus, the impact of the proposed regulation would be significant.

[3] Proposed § 1.6045-5(a) states that reportable gross proceeds payments are payments made: (1) to an attorney, (2) in connection with legal services; (3) by a payor engaged in a business or trade in the course of that business or trade. The proposed regulation would further define an "attorney" as a person engaged in the practice of law and "legal services" as all services related to, or supportive of, the practice of law performed by, or under the supervision of an attorney. See § 1.6045-5(d)(1) and (2).

[4] We submit that the new reporting requirements should not apply to payments made to bankruptcy trustees because trustee work is not the practice of law, payments to trustees are not made in connection with legal services, their receipts are not related to their personal income, and requiring different treatment of payments to attorney and nonattorney trustees would be confusing, burdensome, and illogical. Accordingly, we urge the modification of proposed § 1.6045-5(c) to exclude payments to bankruptcy trustees from the reporting requirements and recommend that proposed § 1.6045-5(f), Example 10, be changed to state that the reporting requirements do not apply to payments to bankruptcy trustees.

1. Trustees' Services Are Not Legal Services

[5] Many trustees are not attorneys. To be eligible for appointment as a bankruptcy trustee, an individual must have the qualifications set forth in 11 U.S.C. § 321 and 28 C.F.R. §§ 58.3⁴ and 58.4.⁵ Neither membership in the bar nor legal education is required. Of 187 standing chapter 13 trustees, 33 are non-attorneys. One-fourth of chapter 12 trustees are non-attorneys.⁶ A substantial proportion of chapter 7 trustees and chapter 11 trustees are non-attorneys.

[6] Trustee work is not the practice of law. "The use of professional judgment in advising an acting on behalf of others with respect to their legal rights and obligations is generally acknowledged as a key element constituting the practice of law." [Emphasis added.] American Bar Association/Bureau of National Affairs, Lawyers Manual on Professional Conduct 21:8005 (1999). "Generally, the relation of attorney and client exists, and one is deemed to be practicing law whenever he furnishes to another advice or service under circumstances which imply his possession and use of legal knowledge or skill." [Emphasis added.] VA Sup. Ct. Unauthorized Practice Rules, Section B, Definition of the Practice of Law. The practice of law includes the use of legal education, training and experience in applying legal analysis to a client's problem. Somuah v. Flachs, 721 A.2d 680, 690 (Md. 1998).

[7] Congress in enacting the provisions concerning trustees' duties in title 11 made clear that trustees are not practicing law. None of the duties of standing chapter 13 trustees (11 U.S.C. § 1302)⁷ involve the trustee advocating for a client or providing legal advice. Instead, any advice given must be other than on legal matters. 11 U.S.C. § 1302(b)(4). Congress further recognized that trustee work is not the practice of law when it authorized trustees in 11 U.S.C. § 327 to retain attorneys as professionals of the estate. Congress further signaled its intent when it prohibited the Attorney General from requiring a chapter 13 trustee to be an attorney. 28 U.S.C. § 586(d).

[8] Unlike the practice of law where services are performed for others, the trustee performs his duties as a fiduciary (not in representation of another). This distinction has been recognized by state bars, as well as the courts.

2. Trustee Income Is Unrelated to Monies Received on Trustee Accounts

[9] Under the trustee compensation scheme established by Congress, there is no relation between gross proceeds and trustee income. For standing chapters 12 and 13 trustees, the maximum allowable compensation is set by the Attorney General. 28 U.S.C. § 586(e). Such compensation and the expenses of the trusteeship are set in budgets which must be approved in advance by the United States Trustee Program. The chapter 12 or 13 trustee cannot increase his compensation or expenses because his gross receipts increase. For chapters 7 and 11 trustees, the compensation scheme set by Congress in 11 U.S.C. §§ 326 (a) and 330 is limited to a fixed percentage of moneys disbursed, not moneys received. Gross receipts have no relation to the compensation and expenses that are ultimately paid to the trustee which must be approved by the courts.⁹

[10] The Bankruptcy Code requires a trustee to "collect and reduce to money the property of the estate." 11 U.S.C. §§ 704(a), 1106(a), 1302(b). The proposed regulation would reach payments to a trustee made in connection with his or her collection and liquidation of the bankruptcy estate. In contrast to the receipt of gross proceeds by an attorney -- a portion of which may represent income to the client and a portion may represent income to the attorney -- payments to a trustee are to be held and distributed on account of the parties with claims against the bankruptcy estate.

[11] Moreover, the standing trustees' budgets must be approved in advance by the United States Trustee Program. They must file annual reports of their trusteeships' financial operations which are independently audited each year. Chapter 11 and chapter 7 trustees must file periodic and final financial reports with the U.S. Trustee. All distributions must be approved by the courts. With such safeguards there is nothing to be gained by payor reporting of gross proceeds.

3. The Regulation Would Impose a Substantial Burden on the Business Community

[12] Applying the reporting requirement to payments made to bankruptcy trustees would impose a substantial burden on the business community. In a chapter 13 case, the trustee normally receives monthly payments from the debtor or the debtor's employer and may receive other payments as well. The payments are in the form of checks with the trustee as the payee. In a similar vein, chapter 7 trustees are charged with obtaining possession of, and liquidating, a debtor's property, and it is common practice for checks remitting proceeds to be payable to the trustees.

[13] Significant confusion is anticipated to result if the proposed regulation is approved in its current form. Employers are already interpreting Example 10 as meaning that payments to all trustees, not only attorney trustees, are subject to gross proceeds payments reporting. Many trustees are concerned about the risks inherent in providing their federal taxpayer identification numbers to thousands of institutions and persons, many of whom have adverse relationships with the trustees. Where such trustees refuse to provide such taxpayer identification numbers, the employers would be faced with a Hobson's choice of effecting backup withholding, which will result in under funding of the chapter 13 plan and possible contempt of court proceedings, or being held responsible by the IRS for the amount that was to be withheld and other penalties. The trustees, on the other hand, would have to expend time and resources in an effort to obtain compliance by the employers with court ordered payments. While it is difficult to quantify the burden that will be imposed upon the standing trustees' resources at this time, it is clear that the effect of such regulation would strain trustees' staffing and increase the costs of operations, thereby reducing the monies available to pay creditors, including the IRS.

[14] For payments made to trustees operating businesses (such as a chapter 11 trustee of a manufacturer), there are additional concerns including: (1) payors, in order to avoid penalties, will insist upon reporting those payments which would not be reported if there was no trustee operating the company; (2) to avoid the costs of reporting, some payors will issue payments in the names of the debtors (which will increase the risk of misappropriation of funds); (3) the reporting requirement may discourage companies from doing business with trustees; and (4) confusion may result in payors "playing it safe" by recharacterizing the relationship with the trustee as one with an attorney resulting in the reporting of all payments made to operating bankruptcy trustees, regardless of the basis. These concerns would likely translate into higher costs and delays in case administration.

4. Recommended Changes in the Regulation

[15] For the foregoing reasons, the regulation should be modified to state explicitly that information reporting under § 1.6045(f) is not required for payments made to bankruptcy trustees, regardless of whether a particular trustee is an attorney. We recommend that the following be added at the end of § 1.6045-5(c) (relating to exceptions): "(7) Payments made to a trustee serving in a case under title 11, U.S. Code." In addition, § 1.6045-5(f), Example 10, should be amended to state:

[16] If applied to trustees under Title 11, the proposed regulations would not achieve Congress' purpose in requiring information reporting of gross proceeds payments to attorneys. As proposed, the regulation is unnecessarily over broad, will diminish the funds available to pay creditors, and impose substantial burdens upon the trustees, debtors, creditors, the U.S. Trustee Program, and the courts without conferring any commensurate benefit. Exempting bankruptcy trustees from the proposed 26 C.F.R. § 1.6045(f) will substantially reduce the negative effects of this regulation.

²A payor would also be required to obtain the trustee's TIN at or prior to the time of payment, and to institute back up withholding if the trustee does not provide the TIN.

³Example 10 states:

⁷The duties of a chapter 13 trustee are spelled out in 11 U.S.C. § 1302(b) and (c) and include many duties of a chapter 7 trustee. Chapter 13 trustees must account for all property received (704(2)); investigate the financial affairs of the debtor (§ 704(4)); object to the allowance of improper claims (§ 704(5)); when appropriate, oppose the debtor's discharge (§ 704(6)); furnish information to a party in interest upon request (§ 704(7)); make a final report and file a final account of the administration of the estate with the United States Trustee and the court (§ 704(9)); appear at hearings relating to the value of property subject to a lien (§ 1302(b)(2)(A)), confirmation of a plan (§ 1302(b)(2)(B)), or modification of the plan after confirmation (§ 1302(b)(2)(C)); advise, other than on legal matters, and assist the debtor in performance under the plan (§ 1302(b)(4)); ensure that the debtor commences making timely payments (§ 1302(b)(5)); and if the debtor is engaged in business, investigate the business, including the desirability of the continuing the business (§ 1106(a)(3); and file a report detailing the results of the investigation § 1106(a)(4)(A)).

Duties of a panel trustee (chapter 7) under 11 U.S.C. § 704 that are not among the duties of a chapter 13 trustee include collecting and reducing to money the property of the estate (§ 704(1)); when appropriate, opposing the discharge of the debtor (§ 704(6)); if the court authorizes continued operation of the debtor's business, prepare and file periodic reports and summaries of the operation of the business (§ 704(8)); and file a final account of the administration of the estate with the United States Trustee and the court (§ 704(9)).

⁸The Ethics Committee also noted that although the opinion involved a chapter 13 trustee, the analysis and result would be the same for other bankruptcy trustees. The opinion concluded that the state bar rule concerning interest on attorney trust accounts did not apply to bankruptcy trustee accounts.

⁹11 U.S.C. § 326.

¹⁰Note that the Bankruptcy Reform Act of 1978, Pub. L. 95-598, 92 Stat. 2549, repealed Chapter XIII of the Bankruptcy Act of 1898 and replaced it with chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 1301-1330.