Bankruptcy
IMPORTANT: A
bankruptcy may not discharge your tax liability.
AN
OFFER IN COMPROMISE WILL DISCHARGE ALL OF THE TAX LIABILITY YOU
CANNOT AFFORD TO PAY!
Call Alvin Brown at
(888) 712-7690 immediately if you are considering bankruptcy.
Publication 908
(7/1996), Bankruptcy
Tax Guide
Revised:
7/1996
Table of Contents
Introduction
This publication covers the federal income tax aspects of bankruptcy.
Bankruptcy proceedings begin with the filing of a petition with the
bankruptcy court. The filing of the petition creates a bankruptcy
estate, which generally consists of all the assets of the person filing
the bankruptcy petition. A separate taxable entity is created if the
bankruptcy petition is filed by an individual under chapter 7 or chapter
11 of the Bankruptcy Code. These chapters are explained later. The tax
obligations of taxable estates are discussed later under The
Bankruptcy Estate.
The tax obligations of the person filing a bankruptcy petition (the debtor)
vary depending on the bankruptcy chapter under which the petition was
filed. For individuals, these are also explained in the first part of
this publication. For other entities, see Partnerships
and Corporations , later.
Generally, when a debt owed to another is canceled the amount canceled or
forgiven is considered income that is taxed to the person owing the
debt. If a debt is canceled under a bankruptcy proceeding, the amount
canceled is not income. However, the canceled debt reduces the amount of
other tax benefits the debtor would otherwise be entitled to. See Debt
Cancellation, later.
This publication is not intended to cover bankruptcy law in general, or to
provide detailed discussions of the tax rules for the more complex
corporate bankruptcy reorganizations or other highly technical
transactions. In these cases, you should seek competent professional
advice.
Useful Items - You may want to see:
Publication
·
536
Net Operating Losses
·
538
Accounting Periods and Methods
·
544
Sales and Other Dispositions of Assets
·
551
Basis of Assets
Form (and Instructions)
·
SS—4
Application for Employer Identification Number
·
982
Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment)
·
1041
U.S.
Income Tax Return for Estates and Trusts
·
1041—ES
Estimated Income Tax for Fiduciaries
See How
To Get More Information, near the end of this publication
for information about getting these publications and forms.
Individuals in Chapter 12 or 13
A separate estate, for tax purposes, is not created for an individual
who files a petition under Chapter 12 or 13 of the Bankruptcy Code. You,
the individual, should continue to file the same federal income tax
return that was filed prior to the bankruptcy petition.
On your return, report all income received during the entire year and
deduct all allowable expenses. Do not include any debt canceled (because
of bankruptcy) in income on your return. However, you must reduce (to
the extent that you have) certain losses, credits or basis in property
by the amount of canceled debt. See Debt
Cancellation, later.
For information about determining the amount of tax due and paying
tax, see Tax Procedures,
later.
Note:
Interest on trust accounts In Chapter 13
proceedings. If you are an individual debtor
in a chapter 13 wage earner's plan, do not include as income on your
return interest earned on amounts held in trust accounts while awaiting
distribution to your creditors. This interest is not available either to
you or to your creditors. it is available only to the trustees, and is
taxable to the trustee as his or her individual income.
Individuals in Chapter 7 or 11
If you are an individual debtor who files for bankruptcy under chapter
7 or 11 of the Bankruptcy Code, a separate “estate”
is created consisting of property that belonged to you before the filing
date. This bankruptcy estate is a new taxable entity, completely
separate from you as an individual taxpayer.
If a husband and wife file a joint bankruptcy petition and their
estates are jointly administered, treat their estates as separate
entities for tax purposes. Two separate tax returns must
be filed (if they separately meet the filing requirements).
The estate, under a chapter 7 proceeding, is represented by a trustee.
The trustee is appointed by the bankruptcy court to administer the
estate and liquidate your nonexempt assets. In chapter 11, the debtor
remains in control of the assets as a “debtor-in-possession.”
However, sometimes the bankruptcy court will appoint a trustee in a
chapter 11 case. In this case, the debtor-in-possession must turn over
to the trustee control of the debtor's assets and operations.
The estate may produce its own income as well as incur its own
expenses. See The Bankruptcy Estate,
later. The creation of a separate bankruptcy estate also gives you a “fresh
start” —with certain exceptions, wages you earn and property
you acquire after the bankruptcy case has begun belong to you and do not
become a part of the bankruptcy estate.
If your bankruptcy case began but was later dismissed by the
bankruptcy court, the estate is not treated as a separate entity, and
you are treated as if the bankruptcy petition had never been filed in
the first place. File amended returns on Form 1040X to replace any
returns you previously filed. Include on any amended returns items of
income, deductions, or credits that were or would have been reported by
the bankruptcy estate on its returns and were not reported on returns
you previously filed. However, you may not be able to deduct
administrative expenses the former estate could have claimed. Also, the
bankruptcy exclusion cannot be used to exclude debt that was canceled
while you were under the bankruptcy court's protection. But the other
exclusions (such as insolvency) may apply.
Responsibilities of the Individual
Debtor
You, as the individual debtor, generally must file income tax returns
during the period of the bankruptcy proceedings. Do not include on your
return, the income, deductions, or credits belonging to the separate
bankruptcy estate. Also do not include as income on your return, the
debts canceled because of bankruptcy. However, the bankruptcy estate
must reduce certain losses, credits, and the basis in property (to the
extent of these items) by the amount of canceled debt. See Debt
Cancellation, later.
You have the option of ending your tax year on the day before you
filed your bankruptcy petition. This allows the tax due on that short
period return to be a claim against the bankruptcy estate. See Election
to End Tax Year, later.
See Tax Procedures,
later, for information about determining and paying the amount of tax
due.
Tax attributes.
Certain deduction and credit carryovers and decisions that
you made in earlier years are taken over by the bankruptcy estate when
you file for bankruptcy. These include carryovers of deductions, losses,
and credits, your method of accounting, and the basis and holding period
of assets. These are referred to as tax attributes.
When the estate is terminated, you
assume any remaining tax attributes that were taken over by the estate
and generally assume any attributes arising during the administration of
the estate. See Attribute carryovers,
later under The Bankruptcy Estate, for a list of attributes. Also, see Administrative
expenses under The Bankruptcy
Estate for a limitation.
Disclosure of return
information. The bankruptcy estate's income
tax returns are open, upon written request, to inspection by or
disclosure to you the individual debtor. The disclosure is necessary so
that you can properly figure the amount and nature of the tax
attributes, if any, that you must assume when the bankruptcy estate is
terminated.
In addition, your income tax
returns for the year the bankruptcy case begins and for earlier years
are open to inspection by or disclosure to the bankruptcy estate's
trustee. See Disclosure of return
information, later, under The
Bankruptcy Estate.
Transfer of assets to the
estate. Bankruptcy law determines which of your
assets become part of the bankruptcy estate. Generally, all of your
legal and equitable interests become property of the estate. However,
you may “exempt” certain property from
the estate.
A transfer (other than by sale or
exchange) of an asset from you to the bankruptcy estate is not treated
as a “disposition” for income tax
purposes. This means that the transfer does not result in gain or loss,
recapture of deductions or credits, or acceleration of income or
deductions. For example, the transfer of an installment obligation to
the estate would not accelerate gain under the rules for reporting
installment sales.
If you receive any assets from the
bankruptcy estate when it terminates, do not treat the transfer as a
taxable disposition. You treat these assets the same as the bankruptcy
estate would have treated them. This includes using the same basis,
holding period, and character of the assets as the bankruptcy estate did
before it was terminated.
Abandonments.
If you receive abandoned property from the estate, you
receive the same basis in the property that the estate had.
Carrybacks from your
activities. As the individual debtor, you
cannot carry back any net operating loss or credit carryback from a tax
year ending after the bankruptcy case has begun to any tax year ending
before the case began. The estate, however, can carry the loss back to
offset your pre-bankruptcy income.
Election to End Tax Year
If you are an individual debtor and have assets (other than those you
exempt from the bankruptcy estate), you may choose to end your tax year
on the day before the filing of your bankruptcy case. Then your tax year
is divided into 2 “short” tax years of
fewer than 12 months each. The first year ends on the day before the
filing date, and the second year begins with the filing date and ends on
the date your tax year normally ends. Once you make this choice, you may
not change it. Any income tax liability for the first short tax year
becomes an allowable claim (as a claim arising before bankruptcy)
against the bankruptcy estate. If this tax liability is not paid in the
bankruptcy proceeding, the liability is not canceled because of
bankruptcy and it can be collected from you as an individual.
If you do not choose to end the tax year, then no part of your tax
liability for the year in which bankruptcy proceedings begin can be
collected from the estate.
Making the election.
If you choose to end your tax year, you do so by filing a
return on Form 1040 for the first short tax year on or before the 15th
day of the fourth full month after the end of that first tax year.
Example.
John Doe files a bankruptcy petition on July 10. To have a timely
filed election, he must file Form 1040 (or an extension) for the period
January 1 through July 9 by November 15.
To avoid delays in processing the return, write “Section
1398 Election” at the top of the return. You may also make the
election by attaching a statement to an application for extension of
time to file a tax return (Form 4868 or other). The statement must say
that you choose under section 1398(d)(2) to close your tax year on the
day before the filing of the bankruptcy case. You must file the
application for extension by the due date of the return for the first
short tax year. If your spouse decides to also close his or her tax
year, see Election by debtor's
spouse, next.
Election by debtor's
spouse. If you are married, your spouse may
also join in the choice to end the tax year, but only if you and your
spouse file a joint return for the first short tax year. You must make
these choices by the due date for filing the return for the first short
tax year. Once you make the choice, it cannot be revoked for the first
year; however, the choice does not mean that you and your spouse must
file a joint return for the second short tax year.
Later
bankruptcy of spouse. If your spouse
files for bankruptcy later in the same year, he or she may also choose
to end his or her tax year, regardless of whether he or she joined in
the choice to end your tax year. Because each of you has a separate
bankruptcy, one or both of you may have 3 short tax years in the same
calendar year. If your spouse had joined in your choice, or if you had
not made the choice to end your tax year, you can join in your spouses
choice. But if you had made an election and your spouse did not join in
the election, you cannot join in your spouse's later election. This is
because you and your spouse, having different tax years, could not file
a joint return for a year ending on the day before your spouse's filing
of bankruptcy.
Example 1.
Paul and Mary Harris are calendar-year taxpayers. A voluntary chapter
7 bankruptcy case involving only Paul begins on March 4.
If Paul does not make an election, his tax year does not end on March
3. If he does make an election, Paul's first tax year is January
1—March 3, and his second short tax year begins on March 4. Mary could
join in Paul's election as long as they file a joint return for the tax
year January 1—March 3. They must make the election by July 15, the
due date for filing the joint return.
Example 2.
Fred and Ethel Barnes are calendar-year taxpayers. A voluntary chapter
7 bankruptcy case involving only Fred begins on May 6, and a bankruptcy
case involving only Ethel begins on November 1 of the same year.
Ethel could choose to end her tax year on October 31. If Fred had not
elected to end his tax year on May 5, or if he had elected to do so but
Ethel had not joined in his election, Ethel would have 2 tax years in
the same calendar year if she decided to close her tax year. Her first
tax year is January 1—October 31, and her second year is November
1—December 31.
If Fred had not decided to end his tax year as of May 5, he could join
in Ethel's choice to close her tax year on October 31, but only if they
file a joint return for the tax year January 1—October 31. If Fred had
elected to end his tax year on May 5, but Ethel had not joined in Fred's
choice, Fred could not join in Ethel's choice to end her tax year on
October 31, because they could not file a joint return for that short
year. They could not file a joint return because their tax years
preceding October 31 were not the same.
Example 3.
Jack and Karen Thomas are calendar-year taxpayers. A voluntary chapter
7 bankruptcy case involving only Karen begins on April 10, and a
voluntary chapter 7 bankruptcy case involving only Jack begins on
October 3 of the same year. Karen chooses to close her tax year on April
9 and Jack joins in Karen's choice.
Under these facts, Jack would have 3 tax years for the same calendar
year if he makes the election relating to his own bankruptcy case. The
first tax year would be January 1— April 9; the second April
10—October 2; and the third October 3—December 31.
Karen may (but does not have to) join in Jack's election if they file
a joint return for the second short tax year (April 1 0—October 2). If
Karen does join in, she would have the same 3 short tax years as Jack.
Also, if Karen joins in Jack's election, they may file a joint return
for the third tax year (October 3—December 31), but they are not
required to do so.
Annualizing taxable income. If you choose to close your tax year,
you must annualize your taxable income for each short tax year the same
way it is done for a change in an annual accounting period. See Short
Tax Year in Publication 538, Accounting
Periods and Methods, for information on how to annualize
your income and how to figure your tax for the short tax year.
Filing requirement.
If you elect to end your tax year on the day before filing
the bankruptcy case, you must file the return for the first short tax
year as explained earlier under Making
the election.
If you make this election, you
must also file a separate Form 1040 for the second short tax year by the
regular due date. You should note on the return that it is the “Second
Short Year Return After Section 1398 Election.”
If the bankruptcy case is later
dismissed, you (the debtor) must file an amended return to replace any
full or short year returns that you filed. Attach a statement to any
amended return you file explaining why you are filing an amended return.
In this situation, no bankruptcy estate is created for tax purposes.
Income that was or would be reported by the bankruptcy estate must be
reported on your return.
The Bankruptcy Estate
The filing of a bankruptcy petition for an individual debtor under
chapter 7 or chapter 11 of the bankruptcy code creates a separate
taxable bankruptcy estate. The trustee (for chapter 7 cases) or the
debtor-in-possession (for chapter 11 cases) is generally responsible for
preparing and filing the estate's tax returns and paying its taxes. The
debtor remains responsible for filing returns and paying taxes on any
income that does not belong to the estate.
If a bankruptcy case begins, but later is dismissed by the bankruptcy
court, the estate is not treated as a separate taxable entity. If tax
returns have been filed for the estate, amended returns must be filed to
move income and deductions from the estate's returns to the debtor's
returns. If no returns have been filed, report all income and deductions
on the debtor's returns.
The following discussions provide tax information for the bankruptcy
estate.
Treatment of income,
deductions, and credits. The gross income of
the bankruptcy estate includes any of the debtor's gross income to which
the estate is entitled under the bankruptcy law. The estate's gross
income also includes any income the estate is entitled to and receives
or accrues after the beginning of the bankruptcy case. Gross income of
the bankruptcy estate does not include amounts received or accrued by
the debtor before the bankruptcy petition date.
The bankruptcy estate may deduct
or take as a credit any expenses it pays or incurs, the same way that
the debtor would have deducted or credited them had he or she continued
in the same trade, business, or activity and actually paid or accrued
the expenses. Allowable expenses include administrative expenses, such
as attorney fees and court costs. These are discussed later under Administrative
expenses.
The bankruptcy estate figures its
taxable income the same way as an individual figures his or her taxable
income. The estate can take one personal exemption and either individual
(itemized) deductions or the basic standard deduction for a married
individual filing a separate return. The estate cannot take the higher
standard deduction allowed for married persons filing separately who are
65 or older or blind. The estate uses the rates for a married individual
filing separately to figure the tax on its taxable income.
Transfer of assets between
debtor and estate. Bankruptcy law
determines which of the debtor's assets become part of the bankruptcy
estate. These assets are treated the same in the estate's hands as they
were in the debtor's hands.
A transfer (other than by sale or
exchange) of an asset from the debtor to the bankruptcy estate is not
treated as a “disposition” for income tax
purposes. This means that the transfer does not result in gain or loss,
recapture of deductions or credits, or acceleration of income or
deductions. For example, the transfer of an installment obligation to
the estate would not accelerate gain under the rules for reporting
installment sales. The estate is treated the same way the debtor would
be regarding the transferred asset.
When the bankruptcy estate is
terminated, that is, dissolved, any resulting transfer (other than by
sale or exchange) of the estate's assets back to the debtor is not
treated as a disposition. This transfer does not result in gain or loss,
recapture of deductions or credits, or acceleration of income or
deductions to the estate.
The abandonment of property by the
estate to the debtor is a nontaxable disposition of property.
Attribute carryovers.
The bankruptcy estate must treat its tax attributes the same
way that the debtor would have treated them. These items must be
determined as of the first day of the debtor's tax year in which the
bankruptcy case begins. The bankruptcy estate gets the following tax
attributes from the debtor:
1.
Net
operating loss carryovers,
2.
Carryovers
of excess charitable contributions,
3.
Recovery
of tax benefit items,
4.
Credit
carryovers,
5.
Capital
loss carryovers,
6.
Basis,
holding period, and character of assets,
7.
Method
of accounting,
8.
Passive
activity loss and credit carryovers,
9.
Unused
at-risk deductions, and
10.
Other
tax attributes as provided in regulations.
Certain tax attributes of the
estate must be reduced by any excluded income from cancellation of debt
occurring in a bankruptcy proceeding. See Debt Cancellation, later.
Termination
of the estate. If the bankruptcy
estate has any tax attributes at the time it is terminated, they are
assumed by the debtor.
Passive
and at-risk activities. For bankruptcy
cases beginning on or after November 9,1992, treat passive activity
carryover losses and credits and unused at-risk deductions as tax
attributes that the debtor passes to the bankruptcy estate and the
estate passes back to the debtor when the estate terminates.
Additionally, transfers to the debtor (other than by sale or exchange)
of interests in passive or at-risk activities are treated as exchanges
that are not taxable. These transfers include the return of exempt
property to the debtor and the abandonment of estate property to the
debtor.
Cases
beginning before
November 9, 1992
.
If a bankruptcy case begins before November 9,1992, and ends
on or after that date, the debtor and the trustee for an individual
chapter 7 case (the debtor-in-possession for an individual chapter 11
case) can elect to have these provisions apply. In a chapter 7 case, the
election is made jointly by the debtor and the trustee of the bankruptcy
estate. In a chapter 11 case, the election is incorporated in the
bankruptcy plan. See
IRS
regulations 1.1398—1 and 1.1398—2 for more information on how to
make this election.
Administrative expenses.
The bankruptcy estate is allowed a deduction for
administrative expenses and any fees or charges assessed it. These
expenses are generally deductible as itemized deductions subject to the
2% floor on miscellaneous itemized deductions. However, administrative
expenses attributable to the conduct of a trade or business by the
bankruptcy estate or the production of the estate's rents or royalties
are deductible in arriving at adjusted gross income.
The expenses are subject to
disallowance under other provisions of the lnternal Revenue Code, such
as disallowing certain capital expenditures, taxes, or expenses relating
to tax exempt interest. These expenses can only be deducted by the
estate, and never by the debtor.
If the administrative expenses of
the bankruptcy estate are more than its gross income for the tax year,
the excess amount may be carried back 3 years and forward 7 years. The
amounts can only be carried back or forward to a tax year of the estate
and never to the debtor's tax year. The excess amount to be carried back
or forward is treated like a net operating loss and must first be
carried back to the earliest year possible. For a discussion of the net
operating loss, see Publication 536, Net
Operating Losses.
Change of accounting
period. The bankruptcy estate may change its
accounting period (tax year) once without getting approval from the
internal Revenue Service. This rule allows the trustee of the estate to
close the estate's tax year early, before the expected termination of
the estate. The trustee can then file a return for the first short tax
year to get a quick determination of the estate's tax liability.
Carrybacks from the estate. If the bankruptcy estate itself has a
net operating loss, separate from any losses passing to the estate from
the debtor under the attribute carryover rules, the bankruptcy estate
can carry the loss back not only to its own earlier tax years but also
to the debtor's tax years before the year the bankruptcy case began. The
estate may also carry back excess credits, such as the general business
credit, to the pro-bankruptcy years.
Return Requirements and Payment of
Tax
The trustee (or debtor-in-possession) must file an income tax return
on Form 1041, U.S. Income Tax Return
for Estates and Trusts if the estate has gross income that
meets or exceeds the amount required for filing. This amount is the
total of the personal exemption amount and the basic standard deduction
for a married individual filing separately. See the Form 1041
instructions for the current year's amount.
If a return is required, the trustee (or debtor-in-possession)
completes the identification area at the top of the Form 1041 and lines
23—29 and signs and dates it. Form 1041 is a transmittal for Form
1040, U.S. individual Income Tax
Return. Complete Form 1040 and figure the tax using the tax
rate schedule for a married person filing separately. In the top margin
of Form 1040, write “Attachment to Form 1041. DO
NOT DETACH.” Attach Form 1040 to the Form 1041.
Note:
The filing of a tax return for the bankruptcy estate does not relieve
the individual debtor of his or her tax filing requirement.
Estimated tax.
The trustee or debtor-in-possession must pay estimated tax
(if any is due) for the bankruptcy estate. See the Instructions to Form
1041—ES, Estimated income Tax for
Fiduciaries, for information regarding the dollar limits and
exceptions to filing Form 1041— ES and paying estimated tax.
Employer identification
number. The trustee (or debtor-in-possession)
must obtain an employer identification number (EIN) for a bankruptcy
estate if the estate must file any form, statement, or document with the
IRS
. The trustee uses this EIN on any tax return filed for the bankruptcy
estate including estimated tax returns. The trustee can obtain an EIN
for a bankruptcy estate by filing Form SS— 4, Application
for Employer Identification Number. Form SS—4 is available
at
IRS
or Social Security Offices. Trustees representing ten or more bankruptcy
estates (other than estates that will be filing employment or excise tax
returns) may file a consolidated application to obtain blocks often or
more EINs by following the procedures set out in Revenue
Procedure89—37, 1989—1 C.B. 919.
Note:
The social security number of the individual debtor cannot
be used as the EIN for the bankruptcy estate.
Employment taxes.
The trustee (or debtor in-possession) must withhold income
and social security taxes and tile employment tax returns for any wages
paid by the trustee (or debtor), including wage claims paid as
administrative expenses. Until these employment taxes are deposited as
required by the Internal Revenue Code, they should be set apart in a
separate bank account to ensure that funds are available to satisfy the
liability. If the employment taxes are not paid as required, the trustee
may be held personally liable for payment of the taxes. See Publication
15, Circular E, Employer's Tax Guide,
for details on employer tax responsibilities.
The trustee has the duty to
prepare and file Forms W—2, Wage and Tax Statement, in connection with
wage claims paid by the trustee, regardless of whether the claims
accrued before or during bankruptcy. If the debtor fails to prepare and
file Forms W—2 for wages paid before bankruptcy, the trustee should
instruct the employees to file an
IRS
Form 4852, SUBSTITUTE FOR
FORM
W-2, WAGE
AND
TAX STATEMENT OR
FORM
1099R, DISTRIBUTIONS FROM PENSIONS, ANNUITIES, RETIREMENT OR
PROFIT-SHARING PLANS, IRA'S, INSURANCE CONTRACTS,
ETC
., with their individual income tax returns.
Disclosure of return
Information. The debtor's income tax returns
for the year the bankruptcy case begins and for earlier years are, upon
written request, open to inspection by or disclosure to the trustee. If
the bankruptcy case was not voluntary, disclosure cannot be made before
the bankruptcy court has entered an order for relief, unless the court
rules that the disclosure is needed for determining whether relief
should be ordered.
For information concerning the
disclosure of the bankruptcy estate's tax return see Disclosure
of return in formation, earlier, under Responsibilities
of the Individual Debtor.
Example.
Cautlon.
This publication is not revised annually. Future changes to
the forms and their instructions may not be reflected in this example.
On
December 15, 1994
, Thomas Smith filed a bankruptcy petition under chapter 7. Joan Black
was appointed trustee to administer the estate and to distribute the
assets.
The estate received the following
assets from Mr. Smith:
1.
A
$100,000 certificate of deposit,
2.
Commercial
rental real estate with a fair market value of $280,000, and
3.
His
personal residence with a fair market value of $200,000.
Also, the estate received a
$251,500 capital loss carryover.
Mr. Smith's bankruptcy case was
closed on
December 31, 1995
. During 1995, Mr. Smith was relieved of $70,000 of debt by the court.
The estate chose a calendar year as its tax year. Joan, the trustee,
reviews the estate's transactions and reports the taxable events on the
estate's final return.
Schedule B (Form 1040).
The certificate of deposit earned $5,500 of interest during
1995. Joan reports this interest on Schedule B. She completes this
schedule and enters the result on Form 1040.
Form 4562.
Joan enters the depreciation allowed on Form 4562. She
completes the form and enters the result on Schedule E.
Schedule E (Form 1040).
The commercial real estate was rented through the date of
sale. Joan reports the income and expenses on Schedule E. She enters the
net income on Form 1040.
Form 4797.
The commercial real estate was sold on
July 1, 1995
, for $280,000. The property was purchased in 1983 at a cost of
$250,000. It was depreciated using straight line depreciation and the
total depreciation allowed or allowable as of the date of sale was
$120,000. Additionally, $25,000 of selling expenses were incurred. She
reports the gain or loss from the sale on Form 4797. She completes the
form and enters the gain on Schedule D (Form 1040).
Form 2119. Mr.
Smith's former residence was sold on
September 30, 1995
. The sale price was $200,000, the selling expenses were $20,000 and his
adjusted basis was $130,000. Joan enters this information on Form 2119.
Joan completes Form 2119 and enters the gain on Schedule D (Form 1040).
Schedule D (Form 1040).
Joan completes Schedule D, taking into account the $250,000
capital loss carryover from 1994 ($251,500 transferred to the estate
minus $1,500 used on the estate's 1994 return). She enters the results
on Form 1040.
Form 1040, page 1.
Joan completes page 1 of the 1040 and enters the adjusted
gross income on the first line of Form 1040, page 2.
Schedule A (Form 1040).
During 1995, the estate paid mortgage interest and real
property tax on Mr. Smith's former residence. It also paid income tax to
the state. Joan enters the mortgage interest, real estate tax and income
tax on Schedule A. Also, she reports the estate's administrative
expenses as a miscellaneous deduction subject to the 2% floor. She
completes the Schedule A and enters the result on page 2 of Form 1040.
Form 1040, page 2.
Joan determines the estate's taxable income and figures its
tax using the tax rate schedule for married filing separately. She then
enters the estate's estimated tax payments and figures the amount the
estate still owes.
Form 982.
Joan completes the Schedule D worksheet for capital loss
carryover. Because $70,000 of debt was canceled, Joan must reduce the
tax attributes of the estate by the amount of the canceled debt. See Debt
Cancellation, later. In 1996, Thomas Smith (the individual)
will assume the estate's tax attributes. Mr. Smith will assume a capital
loss carryover of $3,500 ($73,500 carryover minus the $70,000 attribute
reduction).
Form 1041.
Joan enters the total tax, estimated tax payments, and tax
due from Form 1040 on Form 1041. She completes the identification area
at the top of Form 1041, then signs and dates the return.
Sample Form 1040 - page 1
Sample Form 1040 - page 2
Sample Schedule A
Sample Schedule B
Sample Schedule D
Sample Schedule E
Sample Form 2119
Sample Form 4797 - page 1
Sample Form 4797 - page 2
Sample Form 4562
Sample Form 982 - page 1
Sample Capital Loss Carryover Worksheet
Sample Form 1041
Sample Form 982 - page 2
Partnerships and Corporations
A separate taxable estate is not created when a partnership or
corporation files a bankruptcy petition. The court appointed trustee is,
however, responsible for filing the regular income tax returns on Form
1065 or Form 1120.
Partnerships
The filing requirements for a partnership in bankruptcy proceedings do
not change. However, the filing of required returns becomes the
responsibility of an appointed trustee, receiver, or a
debtor-in-possession rather than a general partner.
A partnership's debt that is canceled because of bankruptcy is not
included in the partnership's income. It may or may not be included in
the individual partners' income. See Partnerships, later under Debt
Cancellation.
Corporations
The following discussion covers only the highlights of the bankruptcy
tax rules applying to corporations. Because the details of corporate
bankruptcy reorganizations are beyond the scope of this publication, you
may want to seek the help of a professional tax advisor.
See Corporations under Debt
Cancellation, for information about a corporation's debt
canceled because of bankruptcy.
Tax-Free Reorganizations
The tax-free reorganization provisions of the Internal Revenue Code
apply to a transfer by a corporation of all or part of its assets to
another corporation in a title 11 or similar case, but only if, under
the reorganization plan, stock or securities of the corporation to which
the assets are transferred are distributed in a transaction qualifying
under IRC section 354, 355, or 356.
A “title 11 or similar case,” for this
purpose, is a bankruptcy case under title 11 of the United States Code,
or a receivership, foreclosure, or similar proceeding in a federal or
state court, but only if the corporation is under the jurisdiction of
the court in the case and the transfer of assets is under a plan of
reorganization approved by the court. In a receivership, foreclosure, or
similar proceeding before a federal or state agency involving certain
financial institutions, the agency is treated as a court.
Generally, section 354 provides that no gain or loss is recognized if
a corporation's stock is exchanged solely for stock or securities in the
same or another corporation under a qualifying reorganization plan. In
this case, shareholders in the bankrupt corporation would recognize no
gain or loss if they exchange their stock solely for stock or securities
of the corporation acquiring the bankrupt's assets.
Section 355 generally provides that no gain or loss is recognized by a
shareholder if a corporation distributes solely stock or securities of
another corporation that the distributing corporation controls
immediately before the distribution. Section 356 provides that in an
exchange that would qualify under section 354 or 355 except that other
property or money besides the permitted stock or securities is received
by the shareholder, gain is recognized by the shareholder only to the
extent of the money and the fair market value of the other property
received. No loss is recognized in this situation.
Filing Requirements
The filing requirements of a corporation involved in bankruptcy
proceedings do not change. However, the filing of required returns
becomes the responsibility of an appointed trustee, receiver, or a
debtor-in-possession, rather than a corporate officer.
Exemption from tax return
filing. If you are a trustee, receiver, or an
assignee of a corporation that is in bankruptcy, receivership,
dissolution, or in the hands of an assignee by court order, you may
apply to your
IRS
District Director for relief from filing federal income tax returns for
the corporation. To qualify, the corporation must have ceased business
operations and must have neither assets nor income.
Your request to the District
Director must include the name, address, and employer identification
number of the corporation and a statement of the facts (with any
supporting documents) showing why you need relief from the filing
requirements. You must also include a statement that you are making the
request and furnishing the information under penalties of perjury. The
District Director will act on your request within 90 days.
Personal Holding Company Tax
A corporation that is subject to the jurisdiction of the cout in a
title 11 or similar case is exempt from the personal holding company
tax, unless the main reason for beginning or continuing this case is to
avoid paying this tax. A“ title 11 or similar case”
is defined earlier under Tax-Free
Reorganizations.
Tax Procedures
The following section discusses the procedures for determining the
amount of tax due from the debtor or the bankruptcy estate, paying the
tax claim, and obtaining a discharge of the tax liability.
Determination of Tax
The first step in the determination of the tax due is filing a return.
As an individual bankrupt debtor, you file a Form 1040 for the tax year
involved, and the trustee of your bankruptcy estate files a Form 1041,
as explained earlier under Individuals
in Chapter 7 or 11. A bankrupt corporation, or a receiver,
bankruptcy trustee, or assignee having possession of, or holding title
to, substantially all the property or business of the corporation, files
a Form 1120 for the tax year.
After the return is filed, the Internal Revenue Service may
redetermine the tax liability shown on the return. When the
administrative remedies within the Service have been exhausted, the tax
issue may be litigated either in the bankruptcy court or in the U.S. Tax
Court, as explained in the following discussion.
Request for prompt
determination of tax liability by the trustee.
The trustee of the bankruptcy estate may request a
determination of any unpaid liability of the estate for tax incurred
during the administration of the case by the filing of a tax return and
a request for such a determination with the internal Revenue Service.
Unless the return is fraudulent or contains a material
misrepresentation, the trustee, the debtor, and any successor to the
debtor are discharged from liability for the tax upon payment of the
tax:
1.
As
determined by the Internal Revenue Service,
2.
As
determined by the bankruptcy court, after the completion of the
IRS
examination, or
3.
As
shown on the return, if the
IRS
does not:
a.
Notify
the trustee within 60 days after the request for the determination that
the return has been selected for examination, or
b.
Complete
the examination and notify the trustee of any tax due within 180 days
after the request (or any additional time permitted by the bankruptcy
court).
Making
the request for determination.
To request a prompt determination of any unpaid tax
liability of the estate, the trustee must file a written application for
the determination with the
IRS
District Director for the district in which the bankruptcy case is
pending. The application must be submitted in duplicate and executed
under the penalties of perjury. The trustee must submit with the
application an exact copy of the return (or returns) filed by the
trustee with the
IRS
for a completed tax period, and a statement of the name and location of
the office where the return was filed. On the envelope write “Personal
Attention of the Special Procedures Function.
DO NOT OPEN IN MAILROOM.”
The
IRS
examination function will notify the trustee within 60 days from receipt
of the application whether the return filed by the trustee has been
selected for examination or has been accepted as filed. If the return is
selected for examination, it will be examined as scon as possible. The
examination function will notify the trustee of any tax due within 180
days from receipt of the application or within any additional time
permitted by the bankruptcy court.
Bankruptcy court
jurisdiction. Generally, the bankruptcy court
has authority to determine the amount or legality of any tax imposed on
the debtor or the estate, including any fine, penalty, or addition to
tax, whether or not the tax was previously assessed or paid.
The
bankruptcy court does not have authority to determine the amount
or legality of a tax, fine, penalty, or addition to tax that was
contested before and finally decided by a court or administrative
tribunal of competent jurisdiction (that became res
Judicata) before the date of filing the bankruptcy petition.
Also, the bankruptcy court does
not have authority to decide the right of the bankruptcy estate to a tax
refund until the trustee of the estate properly requests the refund from
the Internal Revenue Service and either the Service determines the
refund or 120 days pass after the date of the request.
If you (the debtor) have already
claimed a refund or credit for an overpayment of tax on a properly filed
return or claim for refund, the trustee may rely on that claim.
Otherwise, if the credit or refund was not claimed by you, the trustee
may make the request by filing the appropriate original or amended
return or form with the District Director for the district in which the
bankruptcy case is pending. On the return or claim for refund write “Personal
Attention of the Special Procedures Function. DO
NOT OPEN IN MAILROOM.”
The appropriate form for the trustee to use in making the claim for
refund is as follows:
1.
For
income taxes for which an individual debtor had filed a Form 1040, Form
1040A, or Form 1 040 EZ, the trustee should use a Form 1 040X, Amended
U.S. Individual Income Tax Return.
2.
For
income taxes for which a corporate debtor had filed a Form 1120, the
trustee should use a Form 1120X, Amended
U.S. Corporation Income Tax Return.
3.
For
income taxes for which a debtor had filed a form other than Form 1040,
Form 1040A, Form 1O4OEZ, or Form 1120, the trustee should use the same
type of form that the debtor had originally filed, and write “Amended
Return” at the top of the form.
4.
For
taxes other than certain excise taxes or income taxes for which the
debtor had filed a return, the trustee should use a Form 843, Claim
for Refund and Request for Abatement, attaching an exact
copy of any return that is the subject of the claim along with a
statement of the name and location of the office where the return was
filed.
5.
For
excise taxes you reported on Forms 720,730, or 2290, the trustee should
use Form 8849, Claim for Refund of
Excise Taxes or Schedule C of Form 720, whichever is
appropriate.
6.
For
overpayment of taxes of the bankruptcy estate incurred during the
administration of the case, the trustee may choose to use a properly
executed tax return (for income taxes, a Form 1041) as a claim for
refund or credit.
The
IRS
examination function, if requested by the trustee or
debtor-in-possession as discussed later, will examine the appropriate
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