Caution.
This publication is not revisedannually. Future changes to the
forms and theirinstructions may not be reflected in this
example.
On December 15, 1994, Thomas Smith filed abankruptcy petition under
chapter 7. Joan Blackwas appointed trustee to administer the estateand
to distribute the assets.
The estate received the following assets fromMr. Smith:
- A $100,000 certificate of deposit,
- Commercial rental real estate with a fairmarket value of $280,000,
and
- His personal residence with a fair marketvalue of $200,000.
Also, the estate received a $251,500 capital losscarryover.
Mr. Smith's bankruptcy case was closed onDecember 31, 1995. During
1995, Mr. Smith wasrelieved of $70,000 of debt by the court. Theestate
chose a calendar year as its tax year.Joan, the trustee, reviews the
estate'stransactions and reports thetaxable events on the estate's
final return.
Schedule B (Form 1040).
The certificate of deposit earned $5,500 ofinterest during 1995.
Joan reports thisinterest on Schedule B. She completes thisschedule
and enters the result on Form 1040.
Form 4562.
Joan enters the depreciation allowedon Form 4562. She completes the
form andenters the result on Schedule E.
Schedule E (Form 1040).
The commercial real estate was rented throughthe date of sale. Joan
reports the income andexpenses on Schedule E.She enters the net income
on Form 1040.
Form 4797.
The commercial real estate was sold onJuly 1, 1995, for $280,000.
The property waspurchased in 1983 at a cost of $250,000. It
wasdepreciated using straight line depreciation andthe total
depreciation allowed or allowable as ofthe date of sale was $120,000.
Additionally,$25,000 of selling expenses were incurred. Shereports the
gain or loss from the sale onForm 4797. She completes the formand
enters the gain on Schedule D (Form 1040).
Form 2119.
Mr. Smith's former residence was sold onSeptember 30, 1995. The
sale price was $200,000,the selling expenses were $20,000 and
hisadjusted basis was $130,000. Joan enters thisinformation on Form
2119. Joancompletes Form 2119 and enters the gain onSchedule D (Form
1040).
Schedule D (Form 1040).
Joan completes Schedule D, taking intoaccount the $250,000 capital
loss carryover from1994 ($251,500 transferred to the estate
minus$1,500 used on the estate's 1994 return). Sheenters the results
on Form 1040.
Form 1040, page 1.
Joan completes page 1 of the 1040 andenters the adjusted gross
income on the firstline of Form 1040, page 2.
Schedule A (Form 1040).
During 1995, the estate paid mortgage interestand real property tax
on Mr. Smith's formerresidence. It also paid income tax to the
state.Joan enters the mortgage interest, real estate taxand income tax
on Schedule A.Also, she reports the estate's administrativeexpenses as
a miscellaneous deductionsubject to the 2% floor.She completes
theSchedule A and enters the result on page2 of Form 1040.
Form 1040, page 2.
Joan determines the estate's taxable incomeand figures its tax
using the tax rate schedulefor married filing separately. She then
enters theestate's estimated tax payments and figures theamount the
estate still owes.
Form 982.
Joan completes the Schedule D worksheetfor capital loss carryover.
Because $70,000 ofdebt was canceled, Joan must reduce the
taxattributes of the estate by the amount of thecanceled debt. See
DebtCancellation, later.In 1996, Thomas Smith (the
individual) willassume the estate's tax attributes. Mr. Smithwill
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 taxpayments, and tax due from
Form 1040 onForm 1041. She completes the identificationarea at the top
of Form 1041, then signs anddates the return.
Form 1041, page 1
for Thomas Smith Bankruptcy Estate
Form 1040, page 1
for Thomas Smith Bankruptcy Estate
Form 1040, page 2
for Thomas Smith Bankruptcy Estate
Schedule A (Form
1040) for Thomas SmithBankruptcy Estate
Schedule B (Form
1040) for Thomas SmithBankruptcy Estate
Schedule D (Form
1040) for Thomas SmithBankruptcy Estate
Schedule E (Form
1040), page 1 for Thomas SmithBankruptcy Estate
Form 2119 for
Thomas Smith Bankruptcy Estate
Form 4797, page 1
for Thomas Smith Bankruptcy Estate
Form 4797, page 2
for Thomas Smith Bankruptcy Estate
Form 4562 for
Thomas Smith Bankruptcy Estate
Form 982 for
Thomas Smith Bankruptcy Estate
Capital Loss
Carryover Worksheet
Partnerships and Corporations
A separate taxable estate is not created whena partnership or
corporation files a bankruptcypetition. The court appointed trustee
is, however,responsible for filing the regular income taxreturns on
Form 1065 or Form 1120.
IRC 1399; IRC 6012(b)(3); Sen Rep 96-10351980-2 CB 620, 633; IRC
6031
Partnerships
The filing requirements for a partnership inbankruptcy proceedings
do not change. However,the filing of required returns becomes
theresponsibility of an appointed trustee, receiver,or a
debtor-in-possession rather than a generalpartner.
Form 1065 instructions; IRC 6031 & 6036;U.S. Dept. of Justice,
Tax Division
A partnership's debt that is canceled becauseof bankruptcy is not
included in the partnership'sincome. It may or may not be included in
theindividual partners' income.See Partnerships, laterunder
Debt Cancellation.
IRC 108 (d)(6); 703(b)(2); 1398(b)(2)
Corporations
The following discussion covers only thehighlights of the
bankruptcy tax rules applying tocorporations. Because the details of
corporatebankruptcy reorganizations are beyond the scope ofthis
publication, you may want to seek the help ofa professional tax
advisor.
SeeCorporations under DebtCancellation, for
information about acorporation's debt canceled because of bankruptcy.
Tax-Free Reorganizations
The tax-free reorganization provisions of theInternal Revenue Code
apply to a transfer by acorporation of all or part of its assets
toanother corporation in a title 11 or similar case,but only if, under
the reorganization plan, stockor securities of the corporation to
which theassets are transferred are distributed ina transaction
qualifying underIRC section 354, 355, or 356.
IRC 368(a)(1)(G);
A title 11 or similar case, for thispurpose, is a bankruptcy
case under title 11 ofthe United States Code, or a
receivership,foreclosure, or similar proceeding in a federalor state
court, but only if the corporation isunder the jurisdiction of the
court in the caseand the transfer of assets is under a plan
ofreorganization approved by the court. In areceivership, foreclosure,
or similar proceedingbefore a federal or state agency involving
certainfinancial institutions, the agency is treatedas a court.
IRC 368(a)(3)(A), (B), and (D)
Generally, section 354provides that no gain or loss isrecognized if
a corporation's stock is exchangedsolely for stock or securities in
the same oranother corporation under a qualifyingreorganization plan.
In this case,shareholders in the bankrupt corporation wouldrecognize
no gain or loss if they exchange theirstock solely for stock or
securities of thecorporation acquiring the bankrupt's assets.
IRC 354
Section 355 generally provides that nogain or loss is recognized by
a shareholder if acorporation distributes solely stock or securitiesof
another corporation that the distributingcorporation controls
immediately before thedistribution. Section 356 provides that in
anexchange that would qualify under section 354or 355 except that
other property or money besidesthe permitted stock or securities is
received bythe shareholder, gain is recognized by theshareholder only
to the extent of the money andthe fair market value of the other
propertyreceived. No loss is recognized in this situation.
IRC 355; 356
Filing Requirements
The filing requirements of a corporationinvolved in bankruptcy
proceedings do not change.However, the filing of required
returnsbecomes the responsibility of an appointedtrustee, receiver, or
adebtor-in-possession, rather thana corporate officer.
IRC 6012, 6036, 6037; Form 1120 andForm 1120S instructions, pg 15;
U.S. Dept. ofJustice, Tax Division
Exemption from tax return filing.
If you are atrustee, receiver, or an assignee of a corporationthat
is in bankruptcy, receivership,dissolution, or in the hands of an
assignee bycourt order, you may apply to your IRS DistrictDirector for
relief from filing federal incometax returns for the corporation. To
qualify, thecorporation must have ceased business operationsand must
have neither assets nor income.
RR 84-123, 1984-2 CB 244
Your request to the District Director mustinclude the name,
address, and employeridentification number of the corporationand a
statement of the facts (withany supporting documents) showing whyyou
need relief from the filing requirements. Youmust also include a
statement that you are makingthe request and furnishing the
information underpenalties of perjury. The District Directorwill act
on your request within 90 days.
RP 84-59, 1984-2 CB 504; TD 8172
Personal Holding
Company Tax
A corporation that is subject to thejurisdiction of the court in a
title 11 orsimilar case is exempt from the personal holdingcompany
tax, unless the main reason for beginningor continuing this case is to
avoid paying thistax. A title 11 orsimilar case is defined
earlierunder Tax-FreeReorganizations.
IRC 542(c)(9)
Tax Procedures
The following section discusses the proceduresfor determining the
amount of tax due from thedebtor or the bankruptcy estate, paying the
taxclaim, and obtaining a discharge of the taxliability.
P.L. 96 -589, sec. 7(e)
Determination of Tax
The first step in the determination of thetax due is filing a
return. As an individualbankrupt debtor, you file a Form 1040 for
thetax year involved, and the trustee of yourbankruptcy estate files a
Form 1041,as explained earlierunder Individuals in Chapter 7
or11. A bankrupt corporation, or areceiver, bankruptcy trustee,
or assignee havingpossession of, or holding title to, substantiallyall
the property or business of the corporation,files a Form 1120 for the
tax year.
IRC 6012(b)(3)&(4)
After the return is filed, the Internal RevenueService may
redetermine the tax liability shown onthe return. When the
administrative remedieswithin the Service have been exhausted, the
taxissue may be litigated either in the bankruptcycourt or in the U.S.
Tax Court, as explainedin the following discussion.
Request for prompt determination of taxliability by the trustee.
The trustee of the bankruptcy estate mayrequest a determination of
any unpaid liabilityof the estate for tax incurred during
theadministration of the case by the filing of a taxreturn and a
request for such a determination withthe Internal Revenue Service.
Unless the return isfraudulent or contains a
materialmisrepresentation, the trustee, the debtor, andany successor
to the debtor are discharged fromliability for the tax upon payment of
the tax:
- As determined by the Internal RevenueService,
- As determined by the bankruptcy court, afterthe completion of the
IRS examination, or
- As shown on the return, if the IRSdoes not:
- Notify the trustee within 60 daysafter the request for the
determinationthat the return has been selected forexamination, or
- Complete the examination and notifythe trustee of any tax due
within 180days after the request (or anyadditional time permitted by
thebankruptcy court).
11 USC 505(b)
Making the request for determination.
To request a prompt determination of any unpaidtax liability of the
estate, the trustee must filea written application for the
determination withthe IRS District Director for the district inwhich
the bankruptcy case is pending. Theapplication must be submitted in
duplicate andexecuted under the penalties of perjury. Thetrustee must
submit with the application anexact copy of the return (or returns)
filed bythe trustee with the IRS for acompleted tax period, and a
statement of thename and location of the office where the returnwas
filed. On the envelope writePersonal Attention of the Special
ProceduresFunction. DO NOT OPEN IN MAILROOM.
The IRS examination function will notify thetrustee within 60 days
from receipt of theapplication whether the return filed by thetrustee
has been selected for examination or hasbeen accepted as filed. If the
return isselected for examination, it will be examined assoon as
possible. The examination function willnotify the trustee of any tax
due within 180 daysfrom receipt of the application or within
anyadditional time permitted by the bankruptcy court.
Rev. Proc. 81-17
Bankruptcy court jurisdiction.
Generally, thebankruptcy court has authority to determine theamount
or legality of any tax imposed on thedebtor or the estate, including
any fine, penalty,or addition to tax, whether or not the tax
waspreviously assessed or paid.
11 USC 505(a)(1)
The bankruptcy court does not haveauthority
to determine the amount or legality of a tax,fine, penalty, or
addition to tax that wascontested before and finally decided by a
court oradministrative tribunal of competent jurisdiction(that became
res judicata) before thedate of filing the bankruptcy
petition.
11 USC 505(a)(2) (A)
Also, the bankruptcy court does not haveauthority to decide the
right of the bankruptcyestate to a tax refund until the trustee of
theestate properly requests the refund from theInternal Revenue
Service and either the Servicedetermines the refund or 120 days pass
after thedate of the request.
11 USC 505(a)(2)(B)
If you (the debtor) have already claimed arefund or credit for an
overpayment of tax on aproperly filed return or claim for refund,
thetrustee may rely on that claim. Otherwise, if thecredit or refund
was not claimed by you, thetrustee may make the request by filing
theappropriate original or amended return or formwith the District
Director for the district inwhich the bankruptcy case is pending. On
thereturn or claim for refund writePersonal Attention of the
SpecialProcedures Function. DO NOT OPEN INMAILROOM.
The appropriate form for the trustee to use inmaking the claim for
refund is as follows:
- For income taxes for which anindividual debtor had filed a Form
1040,Form 1040A, or Form 1040EZ, the trusteeshould use a Form 1040X,
AmendedU.S. Individual Income Tax Return.
- For income taxes for which a corporate debtorhad filed a Form
1120, the trusteeshould use a Form 1120X, AmendedU.S. Corporation
Income Tax Return.
- For income taxes for which a debtor had fileda form other than
Form 1040, Form1040A, Form 1040EZ, or Form 1120, thetrustee should use
the same type of form thatthe debtor had originally filed, and
writeAmended Return at the top of the form.
- For taxes other than certain excise taxesor income taxes for
whichthe debtor had filed a return, the trusteeshould usea Form 843,
Claim for Refund andRequest for Abatement, attaching
anexact copy of any return that is thesubject of the claim along with
a statementof the name and location of the officewhere the return was
filed.
- For excise taxes you reported on Forms720, 730, or 2290, the
trustee should useForm 8849, Claim for Refund of ExciseTaxes
or Schedule C of Form 720, whicheveris appropriate.
- For overpayment of taxes of the bankruptcyestate incurred during
the administration ofthe case, the trustee may choose to use aproperly
executed tax return (for incometaxes, a Form 1041) as a claim
forrefund or credit.
The IRS examination function,if requested by the trustee
ordebtor-in-possessionas discussed later, will examine theappropriate
amended return, claim, or originalreturn filed by the trustee on an
expedite basis,and will complete the examination and notify thetrustee
of its decision within 120 days from thedate of filing of the claim.
Rev. Proc. 81-18
Tax Court jurisdiction.
The filing of abankruptcy petition automatically results in astay
(suspension) of any U.S. Tax Court proceedingto determine your tax
liability as the debtor.This stay continues until one of the acts
removingit occurs. The stay may be lifted by thebankruptcy court upon
your request, the request ofthe IRS, or the request of any other party
ininterest. Because the bankruptcy court has powerto lift the stay and
allow you to begin orcontinue a Tax Court case involving your
taxliability, the bankruptcy court has, in effect,during the pendency
of the stay, the soleauthority to determine whether the tax issueis
decided in the bankruptcy court itself or inthe Tax Court.
11 USC 362(a)(8), (c), and (d);Sen. Rep. 96-1035
Suspension of time for filing.
In anybankruptcy case, the 90-day period for filing aTax Court
petition, after the issuance of thestatutory notice of deficiency, is
suspended forthe time you are prevented from filing thepetition
because of the bankruptcy case, and for60 days thereafter. However,
even if the statutorynotice was issued before the bankruptcy
petitionwas filed, the suspension exists if any part ofthe 90-day
period remained at the date thebankruptcy petition was filed.
IRC 6213(f)(1)
Trustee may intervene.
The trustee of yourbankruptcy estate in any title 11 bankruptcy
casemay intervene, on behalf of the estate, in anyproceeding in the
U.S. Tax Court to which you area party.
IRC 7464
Tax assessment.
Generally, the automatic stay rules preventa creditor from taking
actions to collect prepetitiondebts. However, the automatic stay does
not apply to:
- An audit to determine tax liability,
- A demand for tax returns,
- The issuance of a notice of deficiency to thedebtor, or
- The making of an assessment for any tax and thesending of a notice
and demand for payment of thetax assessed (for bankruptcy cases filed
afterOctober 22, 1994).
IRC 6213(f); 11 USC 362
Any tax lien that attaches to the estate's propertybecause of an
assessment describedabove can only take effect when the property (or
itsproceeds) are transferred back to the debtor.Also, the tax must be
the debtor's debtthat will not be discharged in the case.
Disclosure of return information.
In bankruptcy cases other than those ofindividuals filing under
chapter 7 or 11, and inreceivership proceedings where substantially
allthe debtor's property is in the hands of thereceiver, current and
earlier returns of thedebtor are, upon written request, open
toinspection by or disclosure to the trustee orreceiver, but only if
the Internal RevenueService finds that the trustee or receiver has
amaterial interest which will be affected byinformation on the return.
IRC 6103(c)(4)
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