Puerto Rican Bankruptcy




I recently skimmed the below article on the Puerto Rican economy and its need for creditor relief in the U.S. bankruptcy court system. http://www.reuters.com/article/2015/07/07/us-puertorico-bankruptcy-idUSKCN0PH0BI20150707


The issue here is really whether or not a U.S. Territory qualifies as a municipality under the terms of the United States Code. According to 11 U.S.C. 101(40), “The term “municipality” means political subdivision or public agency or instrumentality of a State.” How a court could rule that a U.S. Territory does not meet this definition is difficult to comprehend, but you can read the decision here: http://www.meb.uscourts.gov/meb/pdf/Court_of_Appeals_Franklin_CA_TaxFree_Trust_v_Commonwealth_of_Puerto_Rico.pdf


The whole reason for this deboggle? Section 936 of the Internal Revenue Code, which granted U.S. corporations a tax exemption from income originating from U.S. territories (Cue big tax cuts). Puerto Rico is in trouble, not just because of debt it has the inability to pay today, but really because of a law passed by a Republican Congress, signed by a Democrat President in 1996 which phased out section 936 over a ten year period, leaving it to be fully repealed at the beginning of 2006. “Without section 936, Puerto Rican subsidiaries of U.S. businesses were subject to the same worldwide corporate income tax as other foreign subsidiary.” See http://taxfoundation.org/blog/tax-policy-helped-create-puerto-rico-s-fiscal-crisis.


The Tax Foundation said it best when writing, “delaying comprehensive tax reform can cause substantial fiscal problems down the road.” Id. I couldn’t have said it better myself… It is likely the 2016 presidential candidates will focus somewhat around Puerto Rico and how to boost their economy in order to gain the Latino vote, but not for the true issue that surrounds it: the need for Tax Reform (because hey, everybody gets excited about tax reform, you know?) in both domestic and foreign tax policies.


From an asset protection standpoint, to put it mildly and comically, don’t invest in municipalities that are going broke. Even if an appeals court says they don’t qualify as a municipality.


For advice on Business Development, Asset Protection, Bankruptcy, and Estate Planning, please contact Betsy Lynch.


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