4.27.5  Miscellaneous Provisions

4.27.5.1  (12-03-2010)
Overview

  1. This section addresses situations requiring special handling for bankruptcy cases.

  2. Examiners should see IRM 4.31.7, Pass-Through Entity Handbook - TEFRA Bankruptcy, and IRM 4.27.4.5, Bankrupt TEFRA Investors, for information regarding TEFRA bankruptcy cases.

4.27.5.2  (08-25-2009)
Prompt Determination Requests

  1. Rev. Proc. 2006-24; 2006-22 I.R.B. 943, provides the procedures to be followed by a trustee (or debtor in possession) representing the bankruptcy estate when requesting a prompt determination by the Service of any unpaid tax liability of the estate.

  2. Prompt determination requests will be received by the Centralized Insolvency Operation (CIO), Philadelphia Campus.

  3. CIO will screen each request to ensure it meets the requirements outlined in Rev. Proc. 2006-24.

    Note:

    A separate penalty of perjury statement is no longer required under Rev. Proc. 2006-24. The signature on the tax return, signed under penalty of perjury, is sufficient.

  4. If the prompt determination request meets the requirements per Rev. Proc. 2006-24, CIO will overnight the package to the appropriate Planning and Special Programs (PSP).

  5. If the prompt determination package is incomplete, CIO will forward the request to the appropriate Field Insolvency Office.

  6. The Field Insolvency Office will then return an incomplete request to the trustee and give them the opportunity to resubmit a perfected request. Once a perfected request is received, Field Insolvency will forward the completed package to PSP.

  7. PSP will classify the tax returns and notify the trustee whether the return(s) have been selected for examination or whether they will be accepted as filed. All valid requests for a 505(b) prompt determination selected by examination should be controlled for each taxable period on AIMS by PSP. When establishing on AIMS, use:

    1. Source Code 73;

    2. Master File Tax Code (MFT) for return filed;

    3. Status Code 06; and

    4. Project Code 668.

    See IRM 4.1.4.3.15, Prompt Determination Requests , for additional information.

  8. The Service has 60 days from the date of receipt of a request to advise the trustee of the decision to examine a tax return or accept it as filed.

  9. The Service must notify the trustee within 180 days (or any additional time permitted by the bankruptcy court) after the request has been received of any tax, interest and penalties due.

  10. For additional information, refer to IRM 5.9.4.8, Prompt Determination Request from Trustee.

4.27.5.2.1  (08-25-2009)
PSP Processing of Prompt Determinations

  1. If the return is accepted as filed, secure an RTVUE or BRTVUE print, and close the case with Disposal Code 20 to indicate that it was accepted as filed by Classification. The closing letter mailed to the trustee or debtor-in-possession should identify the taxpayer, federal tax return form number, and taxable period. Copies of all correspondence with the trustee or debtor-in-possession, computations of tax, interest and penalties, contact records, and other workpapers should be attached to the back of the return at the time the case is closed (and forwarded to the Campus for association with the return).

  2. If the return is selected for examination, the examiner should become familiar with IRC 1398, Rules Relating to Individuals’ Title 11 Cases, and IRC 108, Income From Discharge of Indebtedness, before beginning the examination of the bankrupt entity. There are numerous issues and consequences associated with the returns of these and related entities, including the Form 1040 of the individual debtor. See Notice 2006-83, 2006-40 I.R.B. 596, Individual Chapter 11 Debtors, for detail on Chapter 11 individual cases.

  3. If the return is selected for examination the trustee or debtor-in-possession must be notified of any tax due within 180 days of the request for prompt determination. As soon as the Examination Report is prepared, a copy should be forwarded to Insolvency so that an Administrative Claim can be filed and so that immediate assessment of any resulting tax deficiency may be considered pursuant to IRC 6871(b), Immediate Assessment with Respect to Certain Title 11 Cases.

  4. In the event that a bankruptcy estate return is selected for examination and the 180-day deadline cannot be met for reasons beyond the control of the Service, a Bankruptcy Court order extending the time limit must be requested through Counsel. The examiner should initiate this process in writing through the manager at least 30 days prior to the end of the 180-day period, requesting Counsel to file a motion for an extension with the Bankruptcy Court and specifying the extension period sought. It should allow for sufficient time and contingencies to complete all work on the case. It is at the discretion of the Bankruptcy Court whether to grant a motion to extend the 180-day period.

    1. The reason for requesting an extension should be included in the memo. The extension is more likely to be granted if the reason for the request is due to circumstances beyond the control of the Service, for example: the taxpayer has not provided the records requested despite several document requests, copies of which are attached to the memo. A copy should be sent to the PSP manager, or designated employee. Reasons generally not acceptable for requesting an extension are heavy workloads, vacations, training, details, etc. In such instances, the case should be reassigned to another examiner as soon as possible.

    2. If Counsel and the Department of Justice concur with the examiner’s memo, then a motion will be filed with the Bankruptcy Court requesting the extension. The Court will set a date for a hearing on the motion and notify the various affected parties. The judge will make a decision on or after the date of the hearing and all parties will be notified.

    3. The examiner should be prepared to immediately close the case in the event that no additional time is granted. In addition, the procedures in paragraph (3) above for filing the Administrative Claim and assessing the tax, penalties, and interest should be followed.

  5. If the 180-day period (or period of extension, if applicable) is not met, all amounts owed the Service in excess of the tax shown on the return that is paid by the debtor may be discharged against the trustee, debtor, or its successor except under specified circumstances such as misrepresentation or fraud. The Service will be prohibited from collecting any amounts owed from the debtor or its successor. However, even if the deadline is missed, it is still possible for the Service to collect a deficiency from undistributed funds held by the estate.

    Exception:

    For cases filed on or after October 17, 2005, the discharge of liability under 505(b) also applies to the estate.

4.27.5.3  (12-03-2010)
Requests for Refund

  1. If the trustee or debtor-in-possession requests a refund, the applicable refund procedures will apply except that, under 11 USC section 505(a)(2)(B) the Bankruptcy Court has the jurisdiction to determine the refund amount 120 days after the trustee’s request. This procedure is applicable to all chapters of bankruptcy except Chapter 9, Municipal Debt Adjustment cases. The expedited audit procedures used for prompt determination requests should be used to monitor and control the requests for refund filed by the trustee or debtor-in-possession, substituting 120-day for the prompt determination’s 180-day time frame for notification of examination results. However, the Service does not lose the authority to deny a tax refund if no determination is made within 120 days. After 120 days, the trustee may seek a merits determination of the estate’s right to the refund in bankruptcy court.

  2. A request for refund will be deemed to have been made if:

    1. The trustee files a claim for refund in response to the Service’s proof of claim; or

    2. The trustee files a tax return or amended return in which there is a claimed overpayment.

  3. Rev. Proc. 2010-27; 2010-31 I.R.B. 183, provides the procedure to be followed by the bankruptcy estate trustee in filing a claim for credit or refund of any overpayment of tax. Claims of this type will be received by Insolvency. Insolvency will date stamp the claim upon receipt and forward it, within three work days of its receipt, to the attention of the Area PSP manager. The PSP manager will be responsible for monitoring the claim to ensure the 120-day time frame is met. Refer to 11 USC section 511.

  4. If the request for refund is selected for examination, the trustee or debtor-in-possession should be notified within 120 days as to whether the request for refund is allowed in whole or in part. If an extension of time is necessary, the Service should discuss an extended time table with the trustee or debtor-in-possession after coordinating with Area Counsel, but no motion to extend the 120-day time period would be appropriate or necessary.

4.27.5.4  (08-25-2009)
Chapter 12 Bankruptcy Plan - 11 USC Section 1231(b) Requests

  1. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amended 11 USC section 1231(b) to allow proponents of Chapter 12 bankruptcy plans to request determinations of the tax effects of proposed plans. Rev. Proc. 2006-52; 2006-48 I.R.B. 995, provides the procedures to be followed when requesting determinations.

  2. Tax Effects of Proposed Plans: BAPCPA amended 11 USC section 1231(b) allowing bankruptcy courts to authorize proponents of Chapter 12 plans to request determinations of the federal income tax effects of proposed plans of reorganization, limited to questions of law. Should a controversy arise between the Service and the debtor, the court may declare the tax effects of a proposed plan after the earlier of the date on which the governmental unit responds to the request or 270 days after the request.

  3. Mailing Address: Requests for determinations of income tax effects must be filed in writing with the Centralized Insolvency Operation, Post Office Box 21126, Philadelphia, PA 19114-0326. The envelope must be marked "Request for Determination of Tax Effects of Chapter 12 Plan" .

  4. Required Information: The exact information required when requesting a determination are provided in section 7.01, paragraphs (1) through (10) of Rev. Proc. 2006-1; 2006-1 I.R.B. 1. Briefly they are:

    1. A complete statement of facts and other information including names, addresses, phone numbers, and TINS of all interested parties, the annual accounting period, the overall method of accounting, and a description of the business operation;

    2. Copies of all contracts, wills, deeds, agreements, instruments, or other documents;

    3. Analysis of material facts;

    4. A statement regarding whether the same issue occurs in an earlier return;

    5. A statement regarding whether the same or similar issue was previously ruled upon, requested, or is currently pending;

    6. A statement regarding interpretation of a substantive provision of an income or estate tax treaty;

    7. A letter from the Bureau of Indian Affairs relating to a letter ruling request for recognition of Indian tribal government status or status as a political subdivision of an Indian tribal government;

    8. A statement of supporting authorities if the taxpayer advocates a particular conclusion;

    9. A statement of contrary authorities; and

    10. A statement identifying pending legislation.

  5. Copy of Proposed Chapter 12 Plan: In addition to the information above, and requesting party must include a copy of the proposed Chapter 12 Plan along with a copy of the bankruptcy court order allowing the proponent to make the request.

  6. Under Penalty of Perjury: The request for determination must be signed by the proponent with the following declaration, "Under penalties of perjury I declare I have examined this request including the accompanying documents, and, to the best of my knowledge and belief, this request contains all relevant facts relating to the request, and such facts are true, accurate, and complete."

  7. Pursuant to Rev. Proc. 2006-52; 2006-48 I.R.B. 995, the following steps will be taken:

    1. Screening: CIO will determine if the request is processable based on the criteria above.

    2. Incomplete Packages: CIO will return incomplete request packages to the originator with an explanation of the additional needed information.

    3. Acknowledgement: CIO will mail a letter to the requestor advising a processable application has been received.

    4. Processable Applications: If CIO determines the package is processable, they should forward the package to PSP. See IRM 5.9.9.5.1, Determinations of Tax Implications of Chapter 12 Plans, for CIO processing guidelines.

    5. Timeframe: Within 270 days from receipt of a processable application, PSP will notify the plan proponent of the determination. The 270 day timeframe will not begin until a processable application is received.

  8. Unless the bankruptcy court declares otherwise pursuant to 11 USC section 1231(b), a field office examining the debtor's return must follow the determination if:

    1. A copy of the determination is attached to the tax return to which it relates;

    2. The determination is properly reflected in the return;

    3. The representations upon which the determination was made reflected an accurate statement of the controlling facts;

    4. The transactions proposed in the plan were carried out substantially as proposed; and

    5. No change has occurred in the law that applies to the period during which the transactions were consummated.

4.27.5.5  (08-25-2009)
Individual Chapter 11 Debtors Required Filings per IRC Section 1398 Post BAPCPA

  1. There are certain income tax returns and information returns that must be filed. Notice 2006-83, Individual Chapter 11 Debtors, provides guidance to individual Chapter 11 debtors and their bankruptcy estates regarding the tax treatment of post-petition income as the result of the enactment of section 1115 of BAPCPA.

  2. The notice alerts information return preparers regarding their reporting responsibilities.

    1. Form W-2,

    2. Form 1099-INT, Form 1099-DIV, Form 1099-MISC and

    3. Other information returns (including Schedule K-1) that report payments to these individuals.

  3. This notice also provides guidance for:

    1. Employers of these individuals,

    2. Chapter 11 trustees in bankruptcy cases filed by these individuals, and

    3. Correct reporting of SE tax on Form 1040 and Form 1041.

Exhibit 4.27.5-1 
Prompt Determination Requests - Research Requirements

Research on Forms 1041 - Individual Bankruptcy Chapters 7 and 11
For the bankruptcy estate of an individual (TIN XX-XXXXXXX), order the following:
__ INOLES  to make sure you have correct TP
__ AMDIS  to see if AIMS controls are in place
__ TSUMY  for PCS linkage(s)
__ BMFOLI  for tax return filing history
__ MFTRA or BMFOLT and BMFOLR (MFT 05) for all years of estate’s existence
For the individual taxpayer, the debtor (SSN XXX-XX-XXXX), who filed bankruptcy, order the following:
__ Identify the debtor's SSN from any of the following sources:
  (a) bankruptcy estate return
  (b) insolvency database - Automated Insolvency System (AIS)
  (c) Bankruptcy Court database
  (d) SSNAD
__ INOLES  to make sure you have correct TP
__ AMDIS  to see if AIMS controls are in place
__ TSUMY  for PCS linkage(s)
__ IMFOLI  for tax return filing history and freezes to account
__ MFTRA or IMFOLT and IMFOLR (MFT 30) for all years beginning the year prior to bankruptcy filing through the present
Research on Forms 1120
For a bankrupt corporation (Form 1120) order the following:
__ INOLES  to make sure you have correct TP
__ AMDIS  to see if AIMS controls are in place
__ TSUMY  for PCS linkage(s)
__ BMFOLI  for tax return filing history and freezes to account
__ MFTRA or BMFOLT and BMFOLR (MFT 05) for all years
__ PMFOL  for information return filing (Form 1099)
__ ENMOD or BMFOLE to ensure that corporation is not an S Corporation
For shareholders related to the corporation, order the following after identifying the SSN's:
__ Identify the SSN’s from the appropriate tax return schedules
__ INOLES  to make sure you have correct TP
__ AMDIS  to see if AIMS controls are in place
__ TSUMY  for PCS linkage(s)
__ IMFOLI  for tax return filing history and freezes to account
__ MFTRA or IMFOLT and IMFOLR (MFT 30) for all years beginning the year prior to bankruptcy filing through the present

Exhibit 4.27.5-2 
Pattern Letter—Prompt Determination Request for Partnership Return

Address:
Person to Contact:
ID Badge Number:
Telephone Number:
Refer Reply to:
Date:
 
[Salutation]
 
 On (date), you requested a prompt determination of tax liability as shown on Form 1065 under Bankruptcy Code section 505(b) for the bankruptcy estate of (partnership name), for the period ending (YYMM). Your request is being denied for the following reason.
 Upon request, a prompt determination of a bankruptcy estate's tax liabilities is granted as required by law where there are tax liabilities incurred during the administration of the estate. As partnerships do not incur federal income tax liabilities, your request for prompt determination is denied.
 A trustee of a partnership in bankruptcy is not exposed to potential personal liability with respect to federal income taxes as partnerships do not incur any income tax liabilities. If there is an audit of the Form 1065 submitted, any tax consequences will apply to the partners only.
 If you have any questions, please write or call the person named above.
 
Sincerely,
 
[Signature]
Manager

Exhibit 4.27.5-3 
Pattern Letter-Prompt Determination Request for 1120S Return (Not Examined)

Address:
Person to Contact:
ID Badge Number:
Telephone Number:
Refer Reply to:
Date:
 
[Salutation]
 
 On (date), you requested a prompt determination of tax liability as shown on Form 1120S under Bankruptcy Code section 505(b) for the bankruptcy estate of (S corporation name), for the period ending (YYMM).
 Under section 505(b) of the Bankruptcy Code, the trustee, the debtor, and any successor to the debtor are discharged from any liability for such tax upon payment of the tax shown on such return if the trustee is not notified within 60 days after such request that such return has been selected for examination. The return you submitted is not being selected for examination under this provision. However, the trustee, the debtor, and any successor to the debtor is not discharged under section 505(b) if the return is fraudulent or contains a material misrepresentation.
 With limited exceptions, S corporations filing Form 1120S returns do not incur any income tax liabilities. The exceptions apply to S corporations with prior C corporation history. Further, the income tax liability in such instances is limited to recapture of tax credits, tax on built in gains, and tax on excessive passive investment income under IRC sections 1371(d), 1374, and 1375, respectively. Under IRC section 1363(d), the S corporation may also be liable for the last three of four payments related to LIFO recapture included on the final C corporation tax year return. Since there is no indication from the material submitted that there is a prior C corporation history, it appears that the bankruptcy estate did not incur any income tax liability.
 The Form 1120S return you submitted has not been selected for examination under the prompt audit procedures of section 505(b). Accordingly, unless the return is fraudulent or contains a material misrepresentation, the trustee, the debtor, and any successor to the debtor will be discharged from any tax liability for such return under section 505(b). Please note that the decision not to select this return for examination under the prompt audit procedures does not preclude future audit of the return. However, if there is an audit of the Form 1120S submitted with the request, any income tax consequences will apply to the shareholders only.
 If you have any questions, please write or call the person named above.
 
Sincerely,
 
[Signature]
Manager

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