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Summary of Tax Proposals in Leaked Document Detailing Policy Proposals
I. Introduction
On January 17, 2025, news sources reported that Republican members of Congress circulated a detailed list of legislative policy options, including tax proposals. This blog post summarizes some of the tax proposals and corresponding revenue estimates mentioned in the list.
II. Individuals
(a) SALT Reform Options
The $10,000 cap on the deductibility of state and local tax (“SALT”) from federal taxable income for most non-corporate taxpayers is set to expire at the end of the year. The list includes several alternative proposals for SALT deductibility going forward.
Repeal SALT Deduction: The SALT deduction would be repealed for individual and business tax filers. This would raise $1 trillion over ten years, as compared to extending the current TCJA deduction cap.
Make $10,000 SALT Cap Permanent but Double for Married Couples: The current TCJA deduction cap for individual and business tax filers would remain, but the cap would be raised for married couples to $20,000 at an estimated cost of $100-200 billion over 10 years, as compared to extending the current TCJA deduction cap.
$15,000/$30,000 SALT Cap: The current SALT deduction cap would be increased to $15,000 for individual taxpayers and $30,000 for married couples, with an estimated cost of $500 billion over 10 years, as compared to extending the current TCJA deduction cap.
Eliminate Income/Sales Tax Deduction Portion of SALT: Only property taxes would be eligible for the SALT deduction, and the deduction would not be capped. This proposal would cost $300 billion over 10 years, as compared to extending the current TCJA deduction cap.
Eliminate Business SALT Deduction: This policy option would eliminate the SALT deduction for business filers only, while maintaining the TCJA deduction cap for individuals. It would raise $310 billion over 10 years.
(b) Repeal or Reduce Mortgage Interest Deduction
The TCJA lowered the amount on which homeowners may deduct home mortgage interest to the first $750,000 ($375,000 if married filing separately) of indebtedness. One proposal would repeal the deduction on primary residences, which would raise $1.0 trillion over 10 years dollars, as compared to extending current TCJA deduction caps.A second proposal would lower the cap on the deduction to the first $500,000 of indebtedness. This proposal would raise $50 billion over 10 years, as compared to extending current TCJA deduction caps. Both savings estimates are Tax Foundation scores.
(c) Repeal Exclusion of Interest on State and Local Bonds
Under current law, interest earned on bonds issued by states and municipalities is excluded from federal taxable income.One proposal would repeal this exclusion, which would raise $250 billion over 10 years. Interest on certain “private activity bonds” is also exempt from federal income tax. A second proposal would repeal the exemption for private activity bonds, Build America bonds, and other non-municipal bonds. It would raise $114 billion over 10 years.
(d) Repeal the Estate Tax
Estates are generally subject to federal tax. The TCJA raised the estate tax exclusion to $13,990,000 in 2025. The list includes a complete repeal of the estate tax. The proposal would cost $370 billion over 10 years.
(e) Exempt Americans Abroad from Income Tax
The foreign earned income exclusion allows U.S. citizens who are residents of a foreign country or countries for an uninterrupted tax year to exclude up to $130,000 in foreign earnings from U.S. taxable income in 2025. The list suggests the limit could be raised, or that all foreign earned income could be exempted from U.S. tax. The Tax Foundation has estimated that the cost is $100 billion over 10 years, though it is not clear which proposal the estimate is related to. This is a Tax Foundation Score.
III. Businesses
(a) Corporate Income Tax
The current corporate income tax rate is 21%. The list posits reductions in the rate to either 15% (at a cost of $522 billion over 10 years) or 20% (at a cost of $73 billion over 10 years).
(b) Repeal the Corporate Alternative Minimum Tax
The Inflation Reduction Act of 2022 (“IRA”) imposed a 15% corporate alternative minimum tax (“CAMT”) on the adjusted financial statement of certain very large corporations. One proposal would repeal the CAMT, at a cost of $222 billion over 10 years.
(c) Repeal Green Energy Tax Credits
The IRA enacted various “green” tax credits, including for clean vehicles, clean energy, efficient building and home energy, carbon sequestration, sustainable aviation fuels, environmental justice and biofuel. These tax credits are proposed to be repealed. The repeal would save up to $796 billion over 10 years.
(d) End Employee Retention Tax Credit
The Employee Retention Tax Credit (“ERTC”) was established under the Coronavirus Aid, Relief, and Economic Security Act in 2020. The ERTC provided “Eligible Employers” with a refundable tax credit for wages paid between March 12, 2020 and January 1, 2021 for keeping employees on payroll despite economic hardship related to COVID-19.The proposal would extend the current moratorium on processing claims for credits, eliminate the credit for claims submitted after January 31, 2024 and impose stricter penalties for fraud related to the credit at an estimated savings of $70-75 billion over 10 years.
IV. Nonprofits
(a) Endowment Tax Expansion for Private Colleges and Universities
The TCJA imposed a 1.4% excise tax on total net investment income of private colleges and universities with endowment assets valued at $500,000 or more per student (other than assets used directly in carrying out the institution’s exempt purpose). One proposal would increase the excise tax to 14%, which would raise $10 billion over 10 years. A related but separate proposal would change the counting mechanism for the per student endowment calculation to include only students who are U.S. citizens, permanent residents or are able to provide evidence of being in the country with the intention of becoming a citizen or permanent resident. This proposal would raise $275 million over 10 years.
(b) Repeal Nonprofit Status for Hospitals
Generally, hospitals are eligible for federal tax-exempt status. The list proposes to eliminate tax-exempt status for hospitals. The Committee for a Responsible Federal Budget has estimated that the proposal would raise $260 billion over 10 years.
V. Enforcement
Repeal IRA’s IRS Enforcement Funding
The IRA resulted in supplemental funding to the IRS, for enforcement purposes. The list states that if this funding is repealed, outlays would be reduced by $20 billion and revenues by $66.6 billion, for a net cost of $46.6 billion over 10 years.
Mary McNicholas and Amanda H. Nussbaum also contributed to this article.
Home Developers Beware: Mass. Appeals Courts Finds Chapter 93A Liability Beyond Contractual Disclosure Requirements
In Tries v. Cricones, home buyers prevailed at trial on their claims against home developers and sellers. Plaintiffs sued because defendants’ failed to disclose that the buyers’ yard was contaminated by Japanese knotweed, large shards of glass, and metal debris. A jury found for the plaintiffs on their private nuisance, breach of the implied covenant of good faith and fair dealing, and Chapter 93A, Section 9 claims. The trial judge denied the defendants’ motion for a directed verdict and awarded the plaintiffs’ their damages, attorneys’ fees, and costs.
On appeal by the defendants, the Appeals Court concluded that the trial judge should have granted the defendants’ motion for a directed verdict on the plaintiffs’ private nuisance and breach of the implied covenant of good faith and fair dealing claims. As to private nuisance, the claim requires a claimant to have an interest in the property and the “invasion” causing the nuisance must “come from beyond, usually from a different parcel.” Accordingly, the plaintiffs did not have a private nuisance claim against the defendants for pre-existing contamination of their own yard. The claim would be more appropriate under an implied warranty of habitability theory.
As to the implied covenant claim, the Appeals Court similarly concluded that defendants were entitled to a directed verdict because the implied covenant cannot be used to create rights and duties not provided in an existing contractual relationship. Here, the parties’ purchase and sale agreement did not expressly require the defendants to disclose soil contaminants, and the existence of the contaminants alone was not sufficient evidence that the defendants had breached their contractual obligations in bad faith. Rather, a purchaser’s protection against latent defects in a home purchased from a builder lies in any warranty and disclosure requirements in the sale contract, and, again, the implied warranty of habitability, and Chapter 93A.
As to Chapter 93A, the Appeals Court rejected the defendants’ argument that their liability under Chapter 93A was limited to the “terms and obligations”of the parties’ contract. That is because Chapter 93A is “not dependent on traditional tort or contract law concepts for its definition” of unfair or deceptive acts or practices. In that regard, a property seller can violate Chapter 93A by not disclosing a material fact even in the absence of a contractual duty to disclose, especially when disclosure of the fact may have influenced a buyer not to enter into the transaction.
To recover under that theory, the plaintiffs had to show that (1) the defendants knew that the property was contaminated with hazardous material; (2) the contamination was a material circumstance which would have led the plaintiffs not to purchase the property; and (3) the defendants failed to disclose the problem. Here, the evidenced adduced at trial support those findings. Also, while a defendant may avoid liability under Chapter 93A for a nondisclosure “if it is shown that the plaintiff knew about the contamination,” the evidence did not demonstrate such knowledge by the plaintiffs. Therefore, despite not having any disclosure requirements in the purchase and sale agreement, the Appeals Court affirmed the trial court’s Chapter 93A judgment against the defendants.
This decision demonstrates the importance of developer-sellers of residential homes looking beyond common law and contractual disclosure requirements and assessing whether they need to disclose any known latent defects in the property before consummating the sale. Otherwise, once discovered, latent defects may expose a developer-seller to Chapter 93A liability.
Bankruptcy Dollar Amounts Set to Rise Significantly on April 1, 2025
Every three years on April 1, the dollar amounts in the Bankruptcy Code are adjusted to account for inflation. The April 1, 2025, increase will be approximately 13.2%, even larger than the nearly 11% increase three years ago.
Bankruptcy Code section 104 requires the Judicial Conference of the United States to publish the changes at least a month before they take effect. On February 4, 2025, the Judicial Conference published this year’s increase in the Federal Register.[1] The planned 13.2% increase in statutory dollar limits will affect nearly everything in bankruptcy that has a dollar limit, including
the amount of property that a debtor may exempt from the estate,
the maximum amount of certain “priority” claims, such as for employee wages and for deposits for certain undelivered products and services,
the minimum aggregate claims needed to file an involuntary bankruptcy petition, and
the aggregate debt limits used to determine which debtors qualify to file cases under chapter 13 or subchapter V of chapter 11.
Anyone who relies on specific dollar limits in the Bankruptcy Code should note these changes.
Note, subchapter V of chapter 11 previously had a debt limit of $7,500,000, but as we reported earlier, this debt limit reverted on Friday, June 21, 2024, to $3,024,725. The subchapter V debt limit will rise to $3,424,000 on April 1, 2025, as part of this triennial adjustment.
Michigan has dollar limits for its own set of state-specific bankruptcy exemptions, and its dollar limits increase every three years as well. They increase on a different three-year cycle, though. They were last increased March 1, 2023, and are not set to increase again until 2026.
[1] Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases, 90 FR 8941-01.
Massive Compensation for Home Sellers Due to Inflated Broker Fees
Massive Compensation for Home Sellers Due to Inflated Broker Fees. Homeowners who sold their properties through a multiple listing service (MLS) between October 31, 2017, and July 23, 2024, and paid a real estate broker commission, may be entitled to compensation from a series of class action settlements totaling over $730 million. The settlement stems […]
California AB 3108 Creates Potential Mortgage Fraud Issue for Lenders on Owner-Occupied Mortgage Loans Made for a Business Purpose
California Assembly Bill 3108 became effective on January 1, 2025 and could conceivably make certain business purpose loans secured by owner-occupied property subject to mortgage fraud claims by the borrowers. The primary goal of the new law—passed unanimously by the State Assembly and nearly unanimously by the State Senate (with one apparent absentee)—is to protect borrowers from certain predatory practices by mortgage lenders and brokers. However, unintended consequences may arise.
Assembly Bill 3108 makes it felony mortgage fraud for a “mortgage broker or person who originates a loan” to intentionally:
Instruct or otherwise deliberately cause a borrower to sign documents reflecting the terms of a business, commercial, or agricultural loan, with knowledge that the borrower intends to use the loan proceeds primarily for personal, family, or household use.
Instruct or otherwise deliberately causes a borrower to sign documents reflecting the terms of a bridge loan, with knowledge that the loan proceeds will be not used to acquire or construct a new dwelling. For purposes of this subdivision, a bridge loan is any temporary loan, having a maturity of one year or less, for the purpose of acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.
This law is clearly intended to go after bad actors with respect to both mortgage loans and bridge loans. However, it also opens up the possibility that a delinquent or defaulting borrower with a business purpose loan could claim that the mortgage lender or broker committed a felony by persuading the borrower to claim that the loan was made for business purposes when the lender knew that the loan was actually for personal purposes.
Putting It Into Practice: All mortgage lenders and mortgage brokers should have policies in place for determining and documenting when loans are made for business purposes. This is the time to review those policies and make sure they are as protective as possible. At a minimum, those policies should include the following:
Obtain a handwritten letter signed in the lender’s presence by the borrower detailing the business purpose of the loan.
Gather corroborating evidence of the business purpose, such as financial statements and invoices.
Have the applicant sign a business purpose certificate.
If possible, fund the loan proceeds to a business bank account.
Consider recording a telephone conversation with the applicant discussing the business purpose, but be sure to inform the applicant that the call is being recorded, as required by California law.
Consider obtaining a legal opinion from the borrower’s counsel.
Having these policies in place could significantly reduce the risk that a borrower will later claim that the mortgage lender or broker has committed felony mortgage fraud in violation of AB 3108.
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Mass. Appeals Court Clarifies Chapter 93A Violations in Landlord-Tenant Dispute
The Appeals Court of Massachusetts recently took up another summary process action concerning landlord-tenant rights and Chapter 93A violations in Hayastan Indus., Inc. v. Guz. In a summary decision[1], the court affirmed a liability finding against a landlord for Chapter 93A violations under several distinct theories.
Plaintiff, a corporate entity, purchased a manufactured home and the lot it resided on from the bank after defendants defaulted on their loan. Plaintiff then brought a summary process action in the Housing Court to take possession of the manufactured home, and the tenants counter-claimed for Chapter 93A violations. The Housing Court entered judgment dismissing plaintiff’s claim for possession of the manufactured home and found plaintiff violated Chapter 93A.
The Appeals Court agreed that the Housing Court erred in concluding that the 30-day notice to quit delivered to the tenants without cause violated the M.G.L. c. 140, § 32J requirement, which is designed to protect owners of manufactured homes. At the time of the notice to quit, the tenants no longer owned the manufactured home and were no longer entitled to the statute’s protections. Thus, the Housing Court erred in dismissing the possession claim based on a M.G.L. c. 140, § 32J violation and in finding a Chapter 93A violation based on this statutory violation.
The Appeals Court further determined, however, that the Housing Court did not err when it concluded that an April 27, 2020, letter plaintiff sent to the tenants violated the Massachusetts eviction moratorium during the COVID-19 pandemic. While the letter did violate the eviction moratorium, the Appeals Court disagreed with the Housing Court that this technical violation was a “serious interference” with a tenancy such that it violated Massachusetts’ quiet enjoyment statute. The Housing Court therefore vacated that ruling and the damages awarded on this claim. This issue was remanded to the Housing Court for the limited purpose of determining whether the technical violation of the eviction moratorium caused the tenants a loss as required to recover under G.L. c. 93A.
Finally, the Appeals Court did not believe the judge erred in finding a violation of Chapter 93A due to plaintiff’s inclusion of lot fees in the summary process complaint, when such fees had previously been adjudicated by the Housing Court not to be owed by the tenants. The Housing Court found that plaintiff “commenced eviction proceedings approximately nine days after purchasing the home because it intended to make repairs and put it on the market for sale,” which supported the conclusion that the notice to quit was motivated by business reasons. These “business reasons” amounted to conduct in trade or commerce for the purposes of Chapter 93A. The Housing Court found, and the Appeals Court agreed, that even though the summary process complaint was amended to remove the demand for lot fees, the elements of c. 93A were still met at the time the summary process complaint was served. Thus, the demand for invalidated lot fees amounted to an unfair or deceptive business practice, which caused defendant to suffer an emotional injury in the form of lost sleep and anxiety. The Appeals Court noted that the failure of the company to apprise itself of the legal effect of the pending appeal did not amount to the sort of negligence that precludes liability under G.L. c. 93A.
The Appeals Court decision on the final issue seems to run contrary to established law that petitioning activity is typically immune from Chapter 93A liability.[2] It does not appear that plaintiff’s petitioning activity was frivolous or designed to frustrate competition.[3] Rather, plaintiff sought to take possession of a property it recently purchased through a summary process complaint and amended the complaint to remove the demand for lot fees it was not owed prior to actual litigation on the issue. This case highlights what appears to be a trend at the trial court level to expand the scope of Chapter 93A liability.
[1] A summary decision is a decision primarily directed to the parties and represent only the views of the panel that decide the case. It may be cited for its persuasive value but is not binding precedent.
[2] See Morrison v. Toys “R” Us, Inc., 441 Mass. 451, 457 (2004) (Chapter 93A “has never been read so broadly as to establish an independent remedy for unfair or deceptive dealings in the context of litigation, with the statutory exception as to those ‘engaged in the business of insurance’”).
[3] See Bristol Asphalt Co., Inc. v. Rochester Bituminous Products, Inc., 493 Mass. 539 (2024).
Boston Accelerates Net Zero Carbon
Last week, the Boston Zoning Commission adopted Net Zero Carbon (NZC) zoning. As addressed in our 2021 and 2023 advisories, this completes a three-part decarbonization strategy, along with the Specialized Energy Code and the Boston Emissions Reduction and Disclosure Ordinance (BERDO 2.0).
NZC requires carbon neutrality for new buildings of at least 20,000 square feet or 15 dwelling units, or additions of at least 50,000 square feet, that file for Large Project Review or Small Project Review on or after July 1, 2025. It will not apply to renovations or changes of use. It requires carbon neutrality once new buildings become operational, with exceptions for lab use (until 2035), and hospital and general manufacturing uses (until 2045).
Here is how NZC interrelates to the other prongs:
The Specialized Energy Code, adopted by Boston in 2023, provides stricter energy efficiency requirements than the frequently iterated Stretch Energy Code, which in turn exceeds the Massachusetts Base Energy Code. The Boston Planning Department estimates that the 2023 Specialized Code may have halved greenhouse gas emissions from new buildings compared to the version of the Stretch Code in effect when Boston’s 2019 Climate Action Plan was adopted. NZC is intended to address the remaining half for new construction.
BERDO 2.0 also targets carbon neutrality, but for covered buildings that already exist (i.e., containing at least 20,000 square feet or 15 dwelling units), phased in to 2050. Emissions levels must decrease every 5 years following a prescribed schedule unless the Emissions Review Board approves an alternative compliance pathway. The Planning Department estimates that 70% of covered existing buildings will have to take steps to comply with emissions reduction requirements by the first milestone in 2030.
NZC compliance will be assessed through Article 80B Large Project Review or Article 80E Small Project Review based on Planning Department review of a project’s already required Leadership in Energy and Environmental Design (LEED) scorecard, together with a new Greenhouse Gas Emissions checklist. Projects with at least 50,000 square feet will also submit a new structural life cycle analysis addressing embodied carbon emissions from fabrication, transportation, demolition disposal, construction materials, and the like. After becoming operational, the new building becomes an existing building subject to, but presumably already compliant with, BERDO 2.0.
Maine is Ready for Energy Storage. Are Energy Storage Developers Ready for Maine?
Maine has statutory goals for energy storage projects – 300 megawatts by the end of this year and 400 megawatts by the end of 2030. To help reach those goals, the state is beginning the process of developing and evaluating an energy storage procurement program for up to 200 megawatts of cost-effective energy storage in Maine. Companies interested in participating in any procurement program that Maine adopts should start the initial development process early to allow sufficient time to address some potential local zoning challenges that they may face.
In 2023, the Maine Legislature passed An Act Relating to Energy Storage and the State’s Energy Goals, which directed the Governor’s Energy Office, in consultation with the Maine Public Utilities Commission (Commission), to evaluate designs for a program to procure commercially available utility-scale energy storage systems connected to the state’s transmission and distribution systems.
The Commission is now reviewing a recommendation from the Energy Office for a program to procure up to 200 megawatts of cost-effective energy storage for Maine that increases grid resilience, lowers electricity costs, maximizes federal incentives, and advances Maine’s clean energy goals and statutory requirements. While it is not yet clear what process the Commission will undertake to design and implement a storage procurement program, it is reasonable to expect that this program will be offered before Governor Mills’ term ends in two years.
One of the major challenges for energy storage projects in other states has been local governments enacting zoning bylaws that preclude construction of battery energy storage facilities. These zoning bylaws are often inconsistent with a state’s renewable energy goals. Some states, such as Massachusetts, allow for state exemption of local zoning bylaws if, among other reasons, the bylaw is not consistent with the public interest to meet renewable energy goals. See Pierce Atwood’s November 2024 alert on this subject.
Maine has a long-standing tradition of home rule, enshrined in the constitution, that allows municipalities to enact laws on any topic that is not prohibited to them by state or federal law.
This means that municipalities can adopt all types of zoning rules and other performance standards to regulate energy storage projects. This could include traditional zoning, by limiting where such projects can be located, as well as various standards related to, among other things, fire safety, noise, visual screening, and buffering.
Maine’s municipalities can also impose moratoria, which temporarily prevent planning boards and code enforcement officers from even processing, let alone approving, certain types of projects while the municipality enacts more stringent regulations to address the perceived impacts of the project.
So, what do energy storage project developers need to do about municipal permitting in Maine?
Because of home rule, the rules potentially vary in every one of Maine’s 488 municipalities. Developers need to analyze the permitting process in each municipality where they are considering siting a project. Some municipalities will naturally favor energy storage projects, while some will not. Key questions include:
How does the municipality classify energy storage as a use and where is it allowed? Many local zoning ordinances may not have contemplated energy storage as a type of use, and thus it is likely prohibited in many cases.
What are the dimensional standards, such as minimum lot size and setbacks, that apply to energy storage?
Are there separate performance standards that apply to energy storage? These might be in a variety of ordinances, such as zoning, site plan, subdivision, or other ordinances.
Is there a specific ordinance applicable to energy storage or renewable energy projects?
Has the municipality adopted a moratorium?
By statute, a municipality can stop project development if it determines that existing ordinances are inadequate to prevent serious public harm from development. Although this sounds like a high standard, in practice it isn’t, and it is often used to pause review of controversial projects, such as solar projects, while municipalities adopt stringent requirements to either prevent or restrict development.
Because of Maine’s unusual deference to municipal regulation, it is critical to understand that a moratorium can be imposed to stop development even after all permits for the project have been issued. This is because of Maine’s deferential view of vested rights, allowing changes in laws to apply retroactively more or less right up until the moment that actual construction begins.
At the same time, there are options for developers to explore, including.
Consider proposing amendments to the applicable ordinance in question to clarify how energy storage projects fit into the ordinances.
Pursue a contract zone agreement, whereby the municipality rezones the specific parcel in question to allow the proposed project. This is done through a contract, approved by the legislative body of the municipality, that often exacts a benefit from the developer in exchange for the favorable zoning treatment.
Consider proposing a bill to enact something akin to what Massachusetts did for energy storage projects – provide an exemption for local zoning from the Legislature to ensure localized interests do not unduly prevent the state from accomplishing its energy storage goals. (Maine already provides a local zoning exemption in 30-A M.R.S. § 4352(4) that primarily applies to transmission lines, but an entirely new statutory scheme would be needed in Maine to establish a local land use exemption for storage.)
As with any development project, in addition to permitting and regulatory issues, energy storage projects in Maine require expertise, diligence, and planning to address real estate, title, and tax issues.
Valuing Real Estate Assets in Bankruptcy: Ethical Considerations and Practical Insights
Real estate bankruptcies present intricate legal and ethical challenges, particularly concerning asset valuation. Accurate valuations are pivotal as they influence negotiations, creditor recoveries, and court proceedings. Ensuring that all parties—attorneys, lenders, property owners, and appraisers—adhere to ethical standards is crucial for maintaining transparency, fairness, and compliance within the bankruptcy process.
The Importance of Valuation in Real Estate Bankruptcy
David Levy, Managing Director for Keen-Summit Capital Partners and Summit Investment Management, notes that valuations play a pivotal role in bankruptcy cases, influencing everything from cash collateral motions to asset sales and plan confirmation. Whether dealing with declining or appreciating property values, parties must navigate competing interests and ethical obligations. Ethics in real estate bankruptcy encompasses adherence to professional obligations, legal requirements, and moral principles to ensure integrity in all dealings. Ethical lapses can lead to significant legal consequences, reputational damage, and financial losses.
Key Ethical Rules Relevant To Real Estate Bankruptcy
Robert Richards, chair of Dentons’ Global Restructuring, Insolvency and Bankruptcy practice group, emphasizes that attorneys and valuation professionals must adhere to the American Bar Association (ABA) Model Rules throughout the valuation process. Several ABA Model Rules are pertinent when navigating real estate bankruptcy cases, including:
Rule 1.3 (Diligence): Attorneys must act with reasonable diligence and promptness in representing their clients, ensuring that cases progress efficiently and clients’ interests are adequately pursued. This includes the proper investigation and verification of valuation reports.
Rule 3.3 (Candor Toward the Tribunal): Lawyers are required to ensure that all statements to the court are truthful and complete, avoiding material omissions that could mislead the tribunal. In bankruptcy valuations, attorneys are obligated to provide truthful information and avoid misrepresenting asset values.
Rule 3.4 (Fairness to Opposing Parties and Counsel): Attorneys must not unlawfully obstruct another party’s access to evidence or alter, destroy, or conceal material with potential evidentiary value. This requirement includes ensuring transparency and fairness when presenting valuation data in negotiations.
Rule 4.1 (Truthfulness in Statements to Others): In the course of representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person.
Valuation Challenges in Bankruptcy Proceedings
Valuation plays a critical role in real estate bankruptcy cases, affecting negotiations, creditor recoveries, and court proceedings. A proper valuation framework helps determine whether secured creditors are adequately protected, ensures that distressed assets are sold at fair market value, and establishes creditor claims appropriately.
Common Valuation Methods
Several methods are used to determine real estate asset values in bankruptcy. Mark Silverman, a partner at Troutman Pepper Locke, highlights the two most common valuation approaches used in bankruptcy cases:
Appraisals: A professional opinion of value based on market trends, property conditions, and comparable sales.
Broker Opinion of Value (BOV): A more market-driven estimate from real estate brokers who understand local conditions.
Valuations should be supported by thorough documentation and clear methodologies to avoid challenges and ensure credibility.
Ethical Considerations in Valuation Practices
Real estate bankruptcies can present various ethical dilemmas related to valuation. Withholding material facts or misrepresenting valuations can lead to legal and reputational consequences. Overstating or understating property values to influence negotiations or court decisions can violate ethical guidelines and legal regulations. Professionals must also be cautious when representing multiple parties with potentially conflicting interests, ensuring that their duties remain aligned with ethical standards.
Transparency in Asset Valuation
Transparency is a fundamental principle in real estate bankruptcy proceedings. All stakeholders, including creditors, courts, and potential buyers, rely on accurate and complete information to make informed decisions. Ethical obligations require full disclosure of all material facts, including pending offers, financial conditions, and market trends. A lack of transparency can lead to mistrust, legal complications, and potential accusations of fraud.
Attorneys and financial advisors must ensure that their clients provide truthful and comprehensive disclosures. This includes being candid about property conditions, occupancy rates, and market comparables. Ethical rules such as ABA Model Rule 3.3 require attorneys to disclose any material information that may impact the court’s decision-making process. Failure to do so can result in sanctions and reputational damage.
Managing Conflicts of Interest
Avoiding conflicts of interest is a prevalent concern in real estate bankruptcy cases, particularly when professionals have relationships with multiple stakeholders. For example, an attorney representing a property owner may have financial ties to other business interests of the client, which could compromise their ability to provide objective advice.
Ethical guidelines emphasize the need for attorneys to avoid representing conflicting interests without full disclosure and informed consent. When conflicts arise, attorneys and financial advisors must take steps to address them appropriately. This may involve withdrawing from representation, seeking independent valuations, or ensuring that their recommendations align with the best interests of creditors and other stakeholders.
Manipulation of Valuation Data
Manipulating property valuation data is an ethical pitfall that can have severe legal and financial consequences. Stakeholders may be tempted to overstate property values to secure more favorable loan terms or misrepresent financial conditions to minimize creditor recoveries. Such practices violate ethical obligations and can lead to litigation or regulatory scrutiny.
Common tactics of valuation manipulation include using inappropriate comparables, omitting key expenses, and inflating projected income. Ethical compliance requires professionals to use reliable valuation methodologies, such as third-party appraisals, BOVs, and comparable sales analysis. ABA Model Rule 4.1 prohibits the making of false or misleading statements, emphasizing the need for honesty in all financial representations.
Regulatory Developments Impacting Valuation Practices
Recent regulatory developments have introduced additional considerations for ethical valuation practices:
Automated Valuation Models (AVMs): On June 24, 2024, six federal agencies finalized a rule to create safeguards for automated valuation models in the real estate industry. The rule requires companies that utilize AVMs to implement quality control standards to ensure data accuracy, protect against data manipulation, and prevent discriminatory impacts.
Addressing Discrimination in Appraisals: The Federal Financial Institutions Examination Council (FFIEC) has emphasized the importance of mitigating risks arising from potential discrimination or bias in real estate appraisals. Examiners are encouraged to evaluate appraisal practices to ensure compliance with consumer protection laws and promote credible valuations.
Best Practices for Ethical Compliance in Bankruptcy Valuation
Matt Christensen of Johnson May notes that adhering to best practices can ensure ethical and effective valuation processes. To navigate valuation challenges effectively, professionals involved in real estate bankruptcies should adhere to the following best practices:
Maintain Transparency: Ensure all stakeholders, including creditors and the court, have access to accurate and complete information.
Engage Independent Valuations: Avoid conflicts of interest by using reputable third-party appraisers or brokers.
Document Communications: Keep records of all discussions and disclosures to prevent disputes over what was shared.
Adhere to Fiduciary Responsibilities: Focus on acting in the best interests of creditors when insolvency is a factor.
Understand the Legal Implications: Legal counsel should stay updated on ethical obligations and ensure compliance with jurisdiction-specific rules.
Conclusion
Ethical considerations in real estate bankruptcy, particularly regarding asset valuation, are critical to fair and effective resolution processes. Whether representing borrowers, lenders, or stakeholders, professionals must ensure they act with integrity, transparency, and adherence to established legal and ethical guidelines.
To learn more about this topic view Valuing Real Estate Assets. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about real estate-focused bankruptcy cases.
This article was originally published on DailyDAC.
©2025. DailyDAC TM. This article is subject to the disclaimers found here.
Tax Information for Those Impacted by the Los Angeles County Wildfires
As a Los Angeles-based firm, we are deeply saddened by the devastation caused by the recent wildfires. We remain committed to supporting our clients and friends during this time and are hopeful that the general tax information outlined below may be helpful as those affected by the wildfires begin to consider plans to recover and rebuild.
On January 10, the IRS announced tax relief for individuals and businesses affected by the Los Angeles County wildfires, following the disaster declaration issued by FEMA. The governor announced relief related to California state taxes on January 11, and on January 14, 2025, it was announced that eligible property owners may qualify for property tax relief in Los Angeles County.
Extensions
The IRS and the California Franchise Tax Board (FTB) extended certain filing and payment deadlines falling on or after January 7, 2025 and before October 15, 2025, to October 15, 2025. For individuals and businesses with an IRS address of record located in Los Angeles County, the IRS will automatically provide relief. If a taxpayer resides outside of Los Angeles County but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area (for example, non-resident partners of Los Angeles partnerships), that taxpayer will need to contact the IRS disaster hotline at 866-562-5227 to request the extension.
The October 15, 2025 deadline applies to:
Individual income tax returns and payments normally due on April 15, 2025 (federal and state).
2024 contributions to IRAs and HSAs (and note, additional relief might be available in the form of special disaster distributions or hardship withdrawals; each plan or IRA has specific rules).
Quarterly payroll and excise tax returns normally due on Jan. 31, April 30, and July 31, 2025.
Calendar-year partnership and S corporation returns normally due on March 17, 2025 (federal) and PTE tax returns and elective tax payments normally due on March 15 and June 15, 2025 (state).
Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2025 (federal and state).
Calendar-year tax-exempt organization returns normally due on May 15, 2025 (federal and state).
A 2024 estimated tax payment normally due on Jan. 15, 2025, and estimated tax payments normally due on April 15, June 16, and Sept. 15, 2025 (federal and state).
Certain other time-sensitive actions, including those related to Section 1031 exchanges, as discussed below.
Note that while an extension will prevent penalties as long as taxes are paid before the October 15 deadline, the extension does not prevent interest from accruing.
The IRS and the FTB also have provided affected taxpayers until Oct. 15, 2025, to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2018-58, including specific relief pertaining to like-kind exchanges of property (including for taxpayers who are not otherwise “affected taxpayers” under the general relief rule).
Finally, the California Department of Tax and Fee Administration (CDTFA) has granted a three-month extension on the ability to file and pay taxes or fees for various CDTFA-administered programs, including sales and use tax returns for certain taxpayers, as well as various programs related to natural resources.
Casualty Losses
Affected taxpayers will be able to claim fire-related casualty losses on their federal income tax return on either their current or prior year tax returns (i.e., a taxpayer can elect to treat the loss as offsetting its 2024 income). A casualty loss is typically limited to a tax basis, rather than fair market value, but taxpayers should carefully consider whether a casualty loss deduction makes sense for them, because it cannot be claimed if tax basis is expected to be reimbursed (e.g., through insurance or litigation proceeds). If any portion of a casualty loss deduction is reimbursed, a portion of the reimbursement will be treated as ordinary income (and not eligible for deferral).
For California state tax purposes, taxpayers can only take a casualty loss to the extent it exceeds 10% of adjusted gross income. It is unclear at this time whether a federal law signed at the end of last year will apply to these wildfires, eliminating this 10% adjusted gross income requirement for federal tax purposes.
For property tax purposes, taxpayers may be entitled to both a deferral of payment and monetary relief for property taxes already paid and future property taxes as a result of property being damaged or destroyed. The relevant forms are available on the Los Angeles County website under “Misfortune or Calamity,” linked here for convenience.
Insurance Proceeds and Casualty Gain
Certain insurance proceeds resulting from federally declared disasters (such as certain proceeds for temporary living expenses or personal property, in either case, resulting from a loss of principal residence) can be received tax-free. However, other insurance proceeds may be treated as sales proceeds, resulting first in a reduction in basis of one’s property and beyond that, taxable gain (a “casualty gain”). For the loss of a principal residence, to the extent a taxpayer has casualty gain, up to $250,000 for single taxpayers and $500,000 for married taxpayers can be excluded from income.
Tax-Deferred Exchanges
Taxpayers, including businesses, may be able to defer gain under Section 1031, Section 1033 or possibly both.
Section 1033 allows tax deferral when a taxpayer’s property has been involuntarily converted, including in circumstances involving a federally declared disaster. An election under Section 1033 can allow indefinite deferral on casualty gain. However, the rules relating to involuntary conversions, including the deadlines, can be complex. For example, for a principal residence, the casualty gain must be reinvested within 4 years of the first year in which casualty gain was realized. In many circumstances, a taxpayer can receive insurance proceeds and sell underlying land and use all of the proceeds as part of a Section 1033 exchange.
In certain circumstances, taxpayers may determine utilizing Section 1031 makes more sense, which allows for similar tax deferral. Generally speaking, Section 1031 is more limited as it is only available to taxpayers that hold their real property for use in a trade or business or for investment, and proceeds received as part of a Section 1031 exchange must be reinvested within six months.
Property Tax Relief
For any taxpayer that has had their property destroyed or damaged and decides to rebuild, the rebuilding will not cause an additional “new construction” assessment provided that the property after reconstruction is “substantially equivalent” to the property prior to the damage or destruction. Any reconstruction of real property, or portion thereof, that is not substantially equivalent to the damaged or destroyed property, shall be deemed new construction and only that portion that exceeds substantially equivalent reconstruction shall be newly assessed.
Similarly, any taxpayer that has had their property substantially damaged or destroyed by the fire may transfer their base-year value to a comparable property within the same county, which comparable new property must be acquired or newly constructed within five years after the disaster. Replacement property is comparable to the property damaged or destroyed if it is similar in size, utility, and function to the property which it replaces. As long as the replacement property is not worth more than 120 percent of the value of the damaged or destroyed property (immediately prior to the disaster), the base value will transfer with no adjustments. If the replacement property costs more than 120 percent of the value of the damaged or destroyed property, then the excess will be added to the base-year value.
For taxpayers who had their principal residence damaged or destroyed by the wildfire, they may transfer their base-year value to a replacement dwelling anywhere in California that is purchased or newly constructed by that person as their principal residence within two years of the sale of the original property.