Deducting Pass-Through Taxes For Corporation’s “Disposable Income” In Subchapter V? (Greenberg v. A Cab)

By: Donald L Swanson

Can a corporation’s pass-through taxes be counted as “reasonably necessary” expenses in computing the corporation’s “projected disposable income” in Subchapter V?

The answer is, “Yes,” according to Leon Greenberg Professional Corp. v. A Cab, Series L.L.C. (In re A Cab, Series L.L.C.), Case No. 25-1205 (9th Cir. BAP, decided August 4, 2026).

Facts

Debtor operates a taxicab service in Las Vegas, Nevada.

Plaintiffs (consisting of 660 class-action creditors) obtain a judgment against Debtor for violations of the Nevada Minimum Wage Act, in the amount of $870,000 plus $744,000 attorney fees.

Debtor files bankruptcy and files a Subchapter V Plan that proposes to pay Plaintiffs’ judgment in full, with interest, over five years.

Plaintiffs object to Plan confirmation, claiming that the Plan improperly deducts pass-through tax liability (for which Debtor has no legal liability) from its projections of disposable income.

Debtor argues: (i) full payment with interest makes the tax deduction issue largely irrelevant, and (ii) nothing in the Bankruptcy Code prevents a Subchapter V debtor from deducting taxes on pass-through income in calculating its projected disposable income.

The Bankruptcy Court overrules Plaintiffs’ objection (reasoning that payment of pass-through income tax is reasonably necessary for the continuation, preservation, and operation of Debtor’s business) and confirms Debtor’s Plan.

Plaintiffs appeal to the Ninth Circuit BAP, which affirms.

What follows is a summary of the BAP opinion.

Two Issues

The BAP addresses two issues:

1. Did the Bankruptcy Court err by confirming a plan that deducts tax liability on pass-through income from Debtor’s calculation of projected disposable income?
2. Should the Bankruptcy Court have limited Debtor’s deduction for taxes to the 21% rate payable by a C corporation, instead of the higher 30.6% rate for an individual?

Pass-Through Issue

Under Subchapter V, a bankruptcy court can confirm a nonconsensual plan that is “fair and equitable” as to each non-consenting and impaired class of claims (§ 1191(b)).

A minimum “fair and equitable” requirement is that all of debtor’s “projected disposable income” be applied to make plan payments for the term of the plan (§ 1191(c)(2)(A)).

“Disposable income” is defined as income “received by the debtor and that is not reasonably necessary to be expended . . . for the payment of expenditures necessary for the continuation, preservation, or operation of the business of the debtor” (§ 1191(d)). This definition:

• is substantially the same as definitions of “disposable income” in standard Chapter 11 (§ 1129(a)(15)), Chapter 12 (§ 1225(b)(2)), and Chapter 13 (§ 1325(b)(2)); and
• does not prohibit a debtor from deducting pass-through income tax amounts.

Plaintiffs argue that Debtor has no legal responsibility to pay income taxes on behalf of its owner and, consequently, cannot deduct such taxes in calculating projected disposable income.

Plaintiffs primarily rely on a 2004 Ninth Circuit BAP opinion for the proposition that a bankruptcy filing cannot alter Debtor’s tax status. But that opinion does not limit a bankruptcy court’s authority to approve reasonable deductions from projected disposable income.

The question here is whether a bankruptcy court has authority to allow payment of such taxes as a reasonably necessary deduction from disposable income. In answering the question, § 1191(d):

• does not limit a debtor’s deductions from disposable income to only those obligations for which it has legal responsibility; and
• allows deductions for any expenditure that is reasonably necessary for the “continuation, preservation, or operation” of the debtor’s business.

A bankruptcy court must decide, on a case-by-case basis, whether projected expenses are reasonably necessary. This requires a factual determination and a fact-intensive inquiry into expenses that are reasonably required for maintenance and continuation of Debtor’s operation.

Nothing in the Bankruptcy Code prohibits a bankruptcy court—as part of its fact-intensive inquiry—from deciding that sufficient distributions to an owner to cover tax liability on pass-through income is reasonably necessary. Otherwise, the owner will owe a tax on the business income but will receive no money to pay it.

Tax Rate Issue

The Ninth Circuit BAP finds:

• since disposable income deductions are not restricted to a debtor’s legal obligations, no basis exists for limiting the deduction to the tax rate that a C corporation would pay; and
• the propriety of such deductions depends on the factual circumstances of each case.

Summary

Here, the Bankruptcy Court did not clearly err by finding the tax deduction reasonably necessary to the continuation, preservation, or operation of Debtor’s business.

The Bankruptcy Court’s ruling is particularly sound because of the Plan’s (i) provision for full payment of Plaintiffs’ claims, with interest, and (ii) commitment to a five years term.

Further, uncontroverted evidence shows that, under a contrary finding, an “incredible hardship” would be created for Debtor and its owner.

The Bankruptcy Court also reasons:

• taxes on income generated from business operations are generally considered business expenses;
• if Congress had intended Subchapter V debtors to devote “gross” or “pre-tax” income to plan payments, it would have clearly required it in the statute; and   
• requiring Debtor’s owner to pay taxes on Debtor’s income, without receiving corresponding distributions, would be “contrary to the intent and spirit of Subchapter V.”

The Bankruptcy Court could have limited the deduction to the corporate tax rate or determined that no deduction is reasonable, but it did not. And the Bankruptcy Court’s factual determination is not clearly erroneous.

Conclusion

It will be interesting to see how this opinion plays out in subsequent Subchapter V cases.

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