Has the Twinkie Finally Expired?

11/28/2012

The history of American business is filled with companies that have seen both unparalleled success and dramatic failure. The news last week that Hostess Brands – the 82 year-old maker of Wonder Bread, Ding Dongs, Ho Ho's, Sno Balls, and the pop-culture icon Twinkies – was shutting down operations rocked not only the economic sector (eliminating over 18,000 jobs), but shocked consumers with the horror of losing their beloved caked goods (stories of mad dashes to the store and pricey eBay auctions abound).  

While the nail isn’t in the coffin quite yet – a judge ordered Hostess and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union back to the table for mediation – all signs point to Hostess going through the complicated and drawn-out process of liquidating its assets and navigating the murky waters of corporate bankruptcy. Besides wondering what will happen to the iconic Twinkie, there’s also the question about the tax implications. When companies go bankrupt, how does the IRS fare? Let’s look at how taxes are involved in corporate bankruptcies.  

When debtors like Hostess go out of business, the bankruptcy court supervises liquidating the debtor's property and distributing the proceeds to creditors. Hostess has plenty to sell, including 40 bakeries, 400 retail locations, and thousands of trucks and trailers. Once those assets are sold, claims will be paid according to specific priority rules, starting with 1st-priority domestic support obligations, 2nd-priority administrative expenses, 4th-priority employee wages, and so forth.  

The IRS rarely loses income taxes in corporate bankruptcies. That makes sense because companies that can't pay their bills are probably not making much income, and therefore aren't likely to owe much income tax to start with. But even unprofitable companies still have other tax obligations. Property taxes on bakeries and retail locations, sales taxes collected on every Ding Dong, and payroll taxes they withhold on those 18,000 employees' wages would all be accounted for during bankruptcy proceedings. The bankruptcy rules acknowledge these debts by treating "pre-petition" taxes a debtor incurs before filing for bankruptcy as an 8th-priority, and "post-petition" taxes a debtor incurs after filing as a 2nd-priority administrative expense.  

The good news for anyone in despair about their favorite treat is that Twinkies will probably not be gone forever, regardless of how the situation unfolds (though the folks on eBay selling “collector’s edition” boxes sure don’t want anyone to know that). Popular consumer brands are worth big money in today's crowded marketplace, and Hostess should be able to sell the Twinkies name and recipe to a rival like Kellogg (owner of Sara Lee) or Mexico's Grupo Bimbo (owner of Entenmann's). So odds are strong that Twinkies will someday appear back on your grocer's shelf. Since rumor has it Twinkies are pumped so full of preservatives that they are likely to survive a nuclear holocaust, it’s not likely they’ll be taken down by a little bit of financial trouble!