4.31.7  TEFRA Bankruptcy (Cont. 1)

4.31.7.5 
Definitions

4.31.7.5.27  (03-04-2008)
No-Asset Case

  1. A Chapter 7 case in which the trustee has determined that no assets will be administered, as where the debtor has no equity in non-exempt assets. The trustee notifies creditors that no proof of claim need be filed and that they will be notified if assets are discovered. Generally, the Service and other creditors do not file claims in no-asset cases, unless or until the bankruptcy trustee provides further notice that assets have been found. Bankruptcy Rules 2002(e) and 3002(c)(5).

4.31.7.5.28  (03-04-2008)
PACER

  1. Public Access to Court Electronic Records (PACER). An electronic court information system allowing the public ready access to information on federal court cases. PACER maintains case records, including electronic copies of documents filed in a case, and provides a current status on the majority of bankruptcy cases.

4.31.7.5.29  (03-04-2008)
Petition Date

  1. The date the bankruptcy petition is filed with the Bankruptcy Court is the petition date. The petition date is also the date of the order for relief except in involuntary cases (where creditors, rather than the debtor, filed the bankruptcy petition).

4.31.7.5.30  (03-04-2008)
Postpetition Taxes

  1. Tax liabilities incurred, whether or not assessed, after the filing of the bankruptcy petition for tax periods ending after the petition date. An income tax is incurred on the last day of the tax year.

  2. Certain post-petition taxes are treated as administrative expenses of the bankruptcy estate (See IRM 4.31.7.5.1.for the definition of administrative expenses). The Service can file an administrative expense claim for such taxes using the appropriate form. In a liquidation case, administrative expenses will be paid by the trustee from the assets of the estate. In a reorganization case, administrative expenses will be paid pursuant to a confirmed bankruptcy plan.

  3. When the debtor is an individual in a Chapter 7 or 11 case, the bankruptcy estate is a separate taxable entity under IRC 1398. Post-petition income taxes incurred by the Chapter 7 or 11 individual debtor are therefore tax liabilities of the debtor, not the estate, and cannot be claimed against the estate. IRC 1398 gives the individual debtor in a Chapter 7 or 11 case the option of splitting the tax year in which the bankruptcy petition was filed into two tax years, the first ending on the day before the bankruptcy petition was filed. The prepetition portion should therefore be included on the Service’s proof of claim as a prepetition tax if the election is made.

  4. In cases where IRC 1398 does not apply, the bankruptcy estate is not a separate taxable entity. IRC 1399. When the debtor is a corporation in Chapter 7, 11, or 12, the debtor is not considered to have a separate taxable existence from the bankruptcy estate. post-petition taxes incurred by the corporate debtor during a Chapter 7 case or incurred prior to plan confirmation in a Chapter 11 or 12 case are, therefore, claimable as administrative expenses of the estate.

  5. Although there is no separate taxable estate in Chapter 13 cases or in individual Chapter 12 cases, the Service does not file administrative expense claims for post-petition income taxes in those cases. However, the Service has the option under 11 USC 1305 to file a claim for post-petition taxes due from the debtor in Chapter 13 cases. The 1305 claim is treated as though it arose before the bankruptcy petition was filed. The Bankruptcy Code does not contain a similar provision for Chapter 12 cases. As a result, the Service does not have an option under the Bankruptcy Code for filing claims for post-petition taxes due from an individual debtor in a Chapter 12 case.

    Note:

    The Bankruptcy Abuse and Prevention Act of 2005, effective October 17, 2005, made changes to Chapter 11 to make Chapter 11 cases of individuals more like Chapter 13 cases; post-petition earnings of the debtor are now included in the bankruptcy estate. Unlike Chapter 13 cases, however, the Chapter 11 estate of an individual is a separate taxable entity. Post-petition earnings of the individual Chapter 11 debtor should therefore be included on the estate’s return, rather than on the debtor’s return for cases filed after October 17, 2005. See Notice 2006-83

4.31.7.5.31  (03-04-2008)
Prepetition Taxes

  1. Pre-petition taxes are tax liabilities (tax, penalty and interest to the petition date) incurred, whether or not assessed, prior to the filing of the bankruptcy. An income tax is incurred on the last day of the tax year.

4.31.7.5.32  (03-04-2008)
Proof of Claim

  1. A form filed by a creditor with the Bankruptcy Court which specifies the nature and extent of the debtor's liability and asserts a right of payment from the estate for pre-petition debts. The Service’s proof of claim is typically filed through the Automated Proof of Claim system. Sometimes, the Service’s proof of claim is based on an estimate, as when the debtor has not yet filed returns. When the correct and complete amount due can be determined, the claim will be superseded by an amended claim. However, some bankruptcy courts will not permit claims to be amended to list larger liabilities after the bar date has passed and/or plan confirmation has occurred. See IRM 5.9.6.8 through IRM 5.9.6.8.1 .

  2. There are three types of claims: secured, priority, and unsecured general.

  3. Secured Claim: A claim secured by a lien on property of the estate or a right of setoff. A creditor is considered secured to the extent of the value of the collateral or to the extent of the creditor’s right to offset a mutual pre-petition debt owed to the debtor against the creditor’s pre-petition claim against the debtor. A properly filed Notice of Federal Tax Lien secures the tax liability up to the value of equity in the assets. A federal tax liability is secured by virtue of a setoff when the Service has the right to credit the liability against the debtor’s right to a tax refund. See 11 USC 506(a).

  4. Priority Claim: An unsecured claim entitled to be paid before other unsecured claims are paid. Priority claims are identified and ranked in 11 USC 507. Priority claims include taxes which qualify as administrative expenses, taxes with return due dates of less than three years prior to the petition date, income taxes assessed within 240 days before the petition date, income tax deficiencies that are unassessed but were assessable prior to the petition date, and trust fund taxes. Administrative expense taxes receive the second highest priority among priority claims.

  5. Unsecured General Claim: A claim that is not entitled to either secured or priority status.

4.31.7.5.33  (03-04-2008)
Short Year Election

  1. Pursuant to IRC 1398, an individual debtor in a Chapter 7 or 11 case can elect to split the income tax year in which the bankruptcy petition was filed into two short years; the first ending on the day before the bankruptcy petition was filed. This allows the pre-petition portion to be treated (and paid) as a pre-petition priority claim in the bankruptcy case, reducing the amount the debtor will owe after the bankruptcy case on this (nondischargeable) liability.

4.31.7.6  (03-04-2008)
The Effect of TEFRA Bankruptcy and TEFRA

  1. It has been determined that the treatment of items as partnership items with respect to a partner named as debtor in a bankruptcy proceeding will interfere with the effective and efficient enforcement of the internal revenue laws.

  2. Partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy.

  3. To the extent that a partner’s partnership items convert to nonpartnership items, that partner/debtor will, pursuant to IRC 6226(d)(1)(A) , no longer have an interest in the outcome of the partnership proceeding and will no longer be a party thereto, or be allowed to participate therein. If a partner is the Tax Matters Partner (TMP), their status as such is terminated.

  4. The partner /debtor would also be ineligible to file a petition commencing a partnership proceeding in any court IRC 6226(d)(2) .

  5. The partner/debtor’s partnership items will convert to nonpartnership items on the date of the filing of a petition in bankruptcy, and the period for assessment will be extended for one year after the date of conversion as long as the period under IRC 6229(a) is open on the date of conversion.

  6. Consequently, the TEFRA partnership proceeding will, without the partner/debtor, continue in a normal manner. If the TMP’s bankruptcy leaves the partnership without a TMP, the Service is not required to appoint a new TMP. If the partnership has non-notice partners, it is advisable to appoint a TMP since the non-notice partners get their notice of the proceedings through the TMP.

  7. Once partnership items have been converted to nonpartnership items for a partnership tax year, they cannot regain status as partnership items. If a partner files a petition in bankruptcy, partnership items become nonpartnership items on the date the petition is filed. The nonpartnership items will not revert back to partnership Items even if the bankruptcy case is dismissed or the debtor is denied a discharge.

4.31.7.6.1  (03-04-2008)
Analyze Case and Determine Which Partnership Tax Years Convert

  1. Partnership items of a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy.

  2. There are two overlapping requirements that must be met before partnership items will convert:

    • the government must be able to file in the bankruptcy proceeding a claim (secured, administrative, priority, or general unsecured) for income tax; and

    • the items must arise in a taxable year of the partnership which ended on or before the last day of the latest taxable year of the partner for which a claim could be filed.

  3. This can be further reduced to a three part test:

    If

    1. the partnership taxable year has ended;

    2. the partner’s (or estate’s) taxable year in which the partnership items has ended; and

    3. the bankruptcy proceeding is still open at the time the partner’s or estate’s year ends so that a claim could be filed, then the partnership items for the partnership year will convert.

  4. Exception: When the debtor is an individual in a Chapter 7 or 11 case, partnership items for postpetition years do not convert if the debtor’s partnership interest is held by the bankruptcy estate when the partnership year closes. See Katz v. Commissioner, 335 F.3d 1121 (10th Cir. 2003). This is because the bankruptcy estate is a separate taxable entity from the debtor under IRC 1398 and the partnership items pass through to the bankruptcy estate unless the estate has abandoned the debtor’s interest in the partnership before the close of the partnership year, when the items pass through. Though perhaps unintended, the language of Treas. Reg. 301.6231(c)-7 does not provide for the conversion of items that affect only the estate’s tax year. Thus, even though the partnership items affect the estate’s liability, and the Service could file an administrative expense claim in the bankruptcy case for the estate’s liability, the items do not convert in this situation.

  5. Example: A partner that is a corporation files a Chapter 11 bankruptcy on December 1, 1986. The plan is confirmed on May 15, 1988. The plan provides that all property of the estate revests in the debtor upon confirmation and no provision of the plan allows for the filing of a claim for post confirmation taxes. The partnership’s taxable year ends on December 31, 1988. As of May 15, 1988, the 1987 taxable years and prior years have converted. The partnership items for the 1988 taxable year would not convert, as neither of the two requirements set forth in Treas. Reg. section 301.6231(c)-7(a) have been satisfied:

    1. Confirmation of the Chapter 11 plan binds all creditors and therefore no claim arising from the 1988 tax year partnership items could be filed by the IRS.

    2. The partnership’s taxable year had not ended by the bar date, i.e., there was no tax due and owing for the 1988 tax year for which a claim could have been filed by the bar date.

    We next look to 1987. It is clear that the bankruptcy estate was in existence throughout 1987 and that a claim for the estate’s 1987 income tax liability (an administrative claim) could be filed. Also, the partnership’s taxable year has ended for 1987. Therefore, 1987 is the latest year for which a claim could be filed by the government in the partner’s bankruptcy proceeding. Accordingly, all partnership items for 1987 and the earlier years convert.

  6. If a bankruptcy is currently ongoing, then it may be possible that the partnership items in the year which the petition was filed will not convert until some time later. For example, if a partner files a bankruptcy petition is filed on September 15, 1990, the partnership items for 1990 will not convert on that date because no claim could be filed in the bankruptcy proceeding for those items, and the partnership’s 1990 taxable year has not ended on or before September 15, 1990. However, if the bankruptcy estate is in existence throughout 1991, then 1991 becomes the latest year for which a claim could be filed, and all prior years will convert, including 1990.

4.31.7.6.1.1  (03-04-2008)
Chapter 12 Bankruptcy Conversion Exception

  1. Unlike a Chapter 13 proceeding, no provision exists for filing claims for post petition income taxes in a Chapter 12 bankruptcy of an individual. For example, if an individual files a Chapter 12 petition on September 15, 1990, the partnership items for 1990 will not convert because no claim could be filed in the bankruptcy proceeding for those items, and the partnership’s 1990 taxable year has not ended on or before September 15, 1990. The 1989 year would be the latest year for which a claim could be filed, and only the 1989 and prior year(s) would convert regardless of how long the bankruptcy is in existence.

4.31.7.6.2  (03-04-2008)
Individual Returns

  1. This section covers the different types of individual bankruptcy filings.

4.31.7.6.2.1  (03-04-2008)
Individual Return/Individual Bankruptcy Filing

  1. A partner filing an individual return (single, head of household, qualifying widow(er) or married filing separately) named as a debtor in an individual bankruptcy proceeding will have all partnership items converted to nonpartnership items as of the date that the bankruptcy petition is filed if the TEFRA tax years fall within the conversion guidelines. See IRM 4.31.7.6.1., Analyze Case and Determine Which Partnership Tax Years Convert, for conversion guidelines. The Service will have one year from the date the taxpayer filed the bankruptcy petition to either make any assessments based on an agreement pertaining to the TEFRA Partnership/S corporation issues or issue a Statutory Notice of Deficiency per IRC 6229(f).

  2. If the TEFRA proceeding is completed and the decision is final when the partner goes into bankruptcy, but the assessment has not yet been made, the debtor’s partnership items will not convert to nonpartnership items. Treas. Reg. section 301.6231(c)-3.

  3. Under these circumstances, the deficiency procedures will not apply and the Service will not have to issue a statutory notice. Since the debtor’s partnership items do not convert to nonpartnership items, the statute of limitations for assessment under IRC 6229(a) pertaining to partnership and affected items controls.

4.31.7.6.2.2  (03-04-2008)
Joint Return/Joint Bankruptcy Filing - Same Taxpayers

  1. Partners filing a joint return that are named as debtors in a joint bankruptcy will have all partnership items converted to nonpartnership items as of the date that the bankruptcy petition is filed provided that the TEFRA tax years fall within the conversion guidelines See IRM 4.31.7.6.1., Analyze Case and Determine Which Partnership Tax Years Convert, for conversion guidelines. The Service will have one year from the date the taxpayer filed the bankruptcy petition to either make any assessments based on an agreement pertaining to the TEFRA Partnership/S Corporation issues or issue a Statutory Notice of Deficiency per IRC 6229(f).

  2. If the TEFRA proceeding is completed and the decision is final when the partner goes into bankruptcy, but the assessment has not yet been made, the debtor’s partnership items will not convert to nonpartnership items. Treas. Reg. section 301.6231(c)-3.

  3. Under these circumstances, the deficiency procedures will not apply and the Service will not have to issue a statutory notice. Since the debtor’s partnership items do not convert to nonpartnership items, the statute of limitations for assessment under IRC 6229(a) pertaining to partnership and affected items controls.

4.31.7.6.2.3  (03-04-2008)
Joint Return/Individual Bankruptcy Filing

  1. When taxpayers file a joint return and only one of them file a bankruptcy petition, it results in variations on the conversion of partnership items to nonpartnership items which causes the Service to ascertain the following information before determining which partnership items convert and for which taxpayer:

    • Does partnership tax year begin before or after the affective date of Special Rules Relating to Spouses. Treas. Reg. 301.6231(a)(12)-1(a)(2)?

    • Which taxpayer owns the partnership interest?

    • Did taxpayers reside in a community property state?

  2. Treasury Regulation section 301-6231(a)(12)-1(a)2 provides that a partnership interest shall be treated as a joint interest in a partnership only if both spouses are identified on the partnership return or are identified as partners entitled to notice as provided in Treas. Reg. section 301-6223(c)-1(b). Treasury Regulation section 301-6231(a)(12)-1(a)2 is applicable to partnership taxable years beginning on or after October 4, 2001.

  3. For partnership tax years beginning before October 4, 2001, Temporary Treas. Reg. section 301.6231(a)(12)-1T(a) provides that spouses identified on the partnership return, or are identified as partners entitled to notice as provided in Treas. Reg. section 301-6223(c)-1(b) or holding joint interests due to community property interests, are treated as separate partners.

  4. The bankruptcy of a spouse who owns a partnership interest will cause his partnership items to convert to nonpartnership items for himself and his jointly filing, non-debtor spouse. The non-debtor spouse will cease to be treated as a partner in the partnership upon the conversion of her husband/debtor’s partnership items.

  5. The bankruptcy of a spouse who shares ownership of a partnership interest with his joint filing, non-debtor spouse in accordance with either Treas. Reg. section 301-6231(a)(12)-1(a)2 or Temporary Treas. Reg. section 301.6231(a)(12)-1T(a) will cause his partnership items to convert to nonpartnership items and his jointly filing non-debtor spouse will continue to have the right to participate in the partnership proceedings.

4.31.7.6.2.3.1  (10-01-2010)
Example

  1. Ken Moore files a single Chapter 13 bankruptcy on 6-18-2002. This creates a one-year date of 6-17-2003.

    • The bankruptcy was completed and the case was closed on 10-21-2005.

    • Ken files joint returns with Janet Moore for tax years 1996 and 1997

    • Ken files separate or single returns for tax years 1998 and 1999

    • Ken files joint returns with Stacey Moore for tax years 2000 thru 2003

    TEFRA Partnerships:

    XYZ Partnership, examined for 1996 through 2003 tax years, Ken holds sole interest and neither Janet nor Stacey are identified as a partner on the Schedule K-1 or identified as a partner entitled to notice as provided in Treas. Reg. section 301-6223(c)-1(b)

    ABC Partnership, examined for 1996 thru 1998 tax years, Ken & Janet hold joint interest.

    QRS Partnership, examined for 2000 thru 2002, Stacey holds sole interest and Ken is not identified as a partner on the Schedule K-1 or identified as a partner entitled to notice as provided in Treas. Reg. section 301-6223(c)-1(b)

    Tax Year and scenario Affect of Conversion

    1996
    Ken is married to Janet and they file a joint return. They reside in a non-community property state.

    Conversion
    XYZ Partnership - Ken’s partnership items are converted to nonpartnership items on 6-18-2002. Janet is no longer treated as a partner as of the date Ken’s partnership items converted. ABC Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002. Janet’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    1997
    Ken is married to Janet and they file a joint return. They reside in a community property state.

    Conversion
    XYZ Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002. Janet’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings. ABC Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002. Janet’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    1998
    Ken and Janet reside in a community property state but file separate tax returns

    Conversion
    XYZ Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002. Janet is not considered a partner in the partnership. ABC Partnership - Partnership items for Ken convert to nonpartnership items on 6-18-2002. Janet’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    1999
    Ken files a single return and resides in a community property state.

    Conversion
    XYZ Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002.

    2000
    Ken is married to Stacey and they file a joint return and reside in a non-community property state

    Conversion
    XYZ Partnership – Partnership items for Ken convert to nonpartnership items on 6-18-2002. Stacey is no longer treated as a partner as of the date Ken’s partnership items converted. QRS Partnership – Partnership items for Stacy are not affected by Ken’s bankruptcy petition. Ken is no longer considered a partner in the partnership as of 6-18-2002.

    2001
    Ken and Stacey file a joint return and reside in a community property state

    Conversion
    XYZ Partnership – Ken’s partnership items convert to nonpartnership items on 6-18-2002. Stacey’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings. QRS Partnership – Ken’s partnership items convert to nonpartnership items on 6-18-2002. Stacey’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    2002
    Ken and Stacey file a joint return and reside in a non-community property state

    Conversion
    XYZ Partnership – Ken’s partnership items convert to nonpartnership items on 6-18-2002. Stacey did not own an interest in the partnership and is no longer treated as a partner as of 6-18-2002. QRS Partnership – Ken is no longer treated as a partner in the partnership as of 6-18-2002. Stacey’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    2003
    Ken and Stacey file a joint return and reside in a community property state

    Conversion
    XYZ Partnership – Ken’s partnership items convert to nonpartnership items on 6-18-2002. Stacey did not own an interest in the partnership and is no longer treated as a partner as of 6-18-2002. QRS Partnership – Ken is no longer treated as a partner in the partnership proceedings as of 6-18-2002. Stacey’s partnership items are not affected and she continues to have the right to participate in the partnership proceedings.

    Note:

    The 2002 and 2003 tax years are considered " post-petition" . In the 2002 case above, the Service would have until 6-17-2003 to issue a statutory notice of deficiency for the TEFRA tax liability or make an assessment within one year of the date the income tax liability for 2002 is "legally due and owing" for all partnership items that have converted to nonpartnership items due to the bankruptcy petition filed by Ken Moore on 6-18-2002. In the 2003 case, even though the one-year date under IRC 6229(f) expired before the due date of the 2003 return, the 2003 partnership items are converted to nonpartnership items because the bankruptcy estate was in existence after the due date of the 2003 tax return. The Service must make an assessment within one year of the date the income tax liability for 2003 is "legally due and owing" for any partnership items that have been converted to nonpartnership items due to the bankruptcy petition filed by Ken Moore on 6-18-2002.

  2. If it is determined that both spouses of a jointly filed return hold an interest in the partnership and only one of them has filed bankruptcy, a photocopy of the original case file will be created and the secondary taxpayer will be controlled on AMDIS and PCS using Non-Master File (NMF).

  3. The Service will have one year from the date the debtor/spouse filed the bankruptcy petition to either make any assessments based on an agreement pertaining to the TEFRA Partnership/S Corporation issues or issue a Statutory Notice of Deficiency per IRC 6229(f).

  4. The non-debtor/spouse will be held awaiting closure of the partnership items. Tax will be computed and assessed for both taxpayers for 100% of the deficiency. Tax assessments for both taxpayers must be made under MFT 31. IRM 5.9.17.15.1 - MFT 31 Mirror Modules, provides detailed instructions for processing joint tax modules with non-petitioning spouses.

  5. If the TEFRA proceeding is completed and the decision is final when the partner goes into bankruptcy, but the assessment has not yet been made, the debtor’s partnership items will not convert to nonpartnership items. Treas. Reg. section 301.6231(c)-3.

  6. Under these circumstances, the deficiency procedures will not apply and the Service will not have to issue a statutory notice. Since the debtor’s partnership items do not convert to nonpartnership items, the statute of limitations for assessment under IRC 6229(a) pertaining to partnership and affected items controls.

4.31.7.6.2.4  (03-04-2008)
Joint Return/Joint Bankruptcy Filing - Different Taxpayers

  1. Splitting depends upon which partner has interest in the partnership. Spouses with joint interests are treated as separate partners.

4.31.7.6.3  (03-04-2008)
Key Case Partnerships or Tier Partnerships

  1. The Service has taken the position that the bankruptcy of a partnership has no bearing on a TEFRA partnership proceeding. When a partnership files bankruptcy, the automatic stay does not prevent the Service from issuing a notice of final partnership administrative adjustments (FPAA), since in a deficiency proceeding the Service is permitted to issue a statutory notice of deficiency. 11 U.S.C. section 362(b)(9).

  2. IRC 701 provides that for income tax purposes, partnerships are not taxable entities. Instead, a partnership is a conduit, in which the items of partnership income, deduction, and credit are allocated among the partners for inclusion in their respective income tax returns; therefore, a TEFRA partnership proceeding should not be stayed simply because the partnership is in bankruptcy.

  3. The bankruptcy of a partnership does not stay the commencement or continuation of a TEFRA partnership proceeding nor does it prevent the individual partners of a bankrupt partnership from filing petitions for redetermination of the partnership adjustments determined by the respondent in FPAA.

  4. In many large partnerships, at least one of the partners is a pass-thru partner. The term "pass-thru partner" is defined in IRC 6231(a)(9) as a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership with respect to which unified proceedings are conducted. The pass-thru partner is commonly referred to as a tier and the partnership in which it holds an interest is called the source partnership. A person holding an interest in a partnership through one or more pass-thru partners is an indirect partner as defined in IRC 6231(a)(10).

  5. The bankruptcy of a tier should generally be treated the same as the bankruptcy of a partnership. Since a partnership is separate and distinct from its partners, the indirect partners should not be affected by the bankruptcy of a tier.

  6. In spite of the fact that a tier is a partner and the bankruptcy of a partner will normally convert the partner/debtors partnership items into nonpartnership items, the tier should be disregarded under the circumstances and that the bankruptcy of a tier will not convert the partnership items of the indirect partners into nonpartnership items. Only the occurrence of an event personal to an indirect partner will convert the indirect partner’s partnership items relating to the source partnership into nonpartnership items. The bankruptcy of a tier should not adversely affect the TEFRA partnership proceeding regarding the source partnership.

4.31.7.6.4  (03-04-2008)
Corporations

  1. Corporations are taxable entities. When a corporation that is a partner files a bankruptcy petition, all its partnership items convert to nonpartnership items.

4.31.7.6.4.1  (03-04-2008)
Parent/Subsidiary

  1. If a parent corporation files for bankruptcy, but the subsidiary corporation, which is a partner in a TEFRA partnership does not, the Service does not remove the subsidiary from the TEFRA partnership proceedings. Since the partnership interest is owned by the subsidiary and subsidiary did not file for bankruptcy, there is no conversion event with regard to subsidiary. The subsidiary partner does not convert and remains in the TEFRA partnership proceedings even though the parent files for bankruptcy (See Treas. Reg. section 301.6231(a)(2)-1(a)(4)(iii) Example 2).

    Note:

    The Treas. Reg. section 301.6231(a)(2)-1(a)(4)(iii) Example 2, in conjunction with Dubin v. Commissioner, 99 T.C. 325 (1992), and Callaway v. Commissioner, 231 F.3d at 106, 108 (2d Cir. 2000), were used to issue IRS FSA (2001 WL 587802) which supports the application of this regulation as it applies to the partner and subsidiaries.

4.31.7.6.4.2  (03-04-2008)
Subchapter S Corporations

  1. S Corporations are pass-through entities that are generally nontaxable, but can also be taxable entities for certain purposes. The bankruptcy of a tier or pass-thru partner will have its own partnership items converted to nonpartnership items while any items of income, gain, losses, deductions and credits that flow through the S Corporations will remain partnership items. The bankruptcy of a tier, or pass-thru partner, will only affect its own taxable partnership items. It will not affect the underlying indirect investors.

4.31.7.6.5  (03-04-2008)
Trusts

  1. The campus will be concerned with the taxable portion of a trust for bankruptcy purposes. Non-taxable trusts are pass-thru entities and will be treated as tier partnerships. The bankruptcy of a tier or pass-thru partner will have its own partnership items converted to nonpartnership items while any items of income, gain, losses, deductions and credits that flow through the trust will remain partnership items. The bankruptcy of a tier or pass thru will only affect its own taxable partnership items.

4.31.7.6.6  (03-04-2008)
Foreign Bankruptcy

  1. Under Treas. Reg. section 301.6231(c)-7(a), partnership items convert to nonpartnership items for a partner if the United States could file a claim for income taxes due in the bankruptcy proceeding. Generally, the filing of a bankruptcy in a foreign jurisdiction by a foreign entity who is a partner in a TEFRA proceeding will not necessarily convert its partnership items to nonpartnership items since the Service may be prohibited from filing a claim for income taxes in the foreign bankruptcy proceeding. Counsel’s opinion should be sought on a case by case basis.

4.31.7.7  (03-04-2008)
Verify Freeze Codes

  1. The TXMOD freeze code of -V is set by transaction code 520 with the appropriate closing code. For a complete explanation of TC 520 closing codes refer to Doc. 6209 or IRM 5.9.5.6.1.

    Closing Codes

    • 60 thru 67 - address treatment of refunds

    • 83, 85, 88 - freezes assessment actions

    • 87 - Freezes refunds

    • 89 - Allows credit elect transfers

    • 86, 87, 89 - Allows assessment actions

    • 86, 89 - Allows refunds


    -ALL-suppress balance due notices and suspend CSED

    Note:

    Beginning in January 2002, IDRS no longer allows input with closing codes 86, 87, 88 or 89. However, open cases with unreversed TC 520s with those closings codes will continue to be processed by Master File in accordance with the specifications previously listed.

  2. To release the freeze, Insolvency will use transaction code 521/522 with closing code of 60-67, 83, 85-89, or any 521 with a statistical indicator.

  3. The AIMS freeze codes are U and X. These freeze codes are automatically set when a transaction code of 520 is set on Master File. The U freeze is used when the taxpayer files for bankruptcy before October 22, 1994. The X freeze is used when the taxpayer files for bankruptcy after October 21, 1994. These freeze codes are automatically released when the transaction code of 520 is reversed.

4.31.7.8  (10-01-2010)
Determine One-year Date and Input PCS Changes

  1. IRC 6229(f) is the period of limitations which controls for partnership items which have converted to nonpartnership items because of a partners filing of a bankruptcy petition. Under IRC 6229(f) the Service has one year from the date the partnership items convert to make the assessment or to issue a notice of deficiency pursuant to IRC 6230(a)(2)(A)(ii). This general rule applies to pre-petition taxable years, but is slightly modified for post-petition taxable years.

  2. The date from which the one-year period under IRC 6229(f) starts to run for post-petition years differs from pre-petition years. Although IRC 6229(f) controls, it would be difficult , if not impossible, to comply with the one-year from the date of converting event rule in post-petition years since often the liability would not be determinable before the one-year period would normally expire. For post-petition periods, the one-year period for assessment is from the date the income tax liability is "legally due and owing" .

  3. The suspension provision under IRC 6503(a)(1) will suspend the one-year period under IRC 6229(f) if a notice of deficiency has been timely issued. The suspension under that section will last as long as the Service is prohibited from assessing and for 60 days thereafter. This suspension provision provides an independent basis for suspension of IRC 6229(f) during bankruptcy proceedings, separate from the general bankruptcy suspension provision under IRC 6503(h).

  4. IRC 6503(a)(1) will not suspend the period of assessment of liabilities against the bankruptcy estate because the Service is not prohibited from assessing. Under IRC 6871(b), the Service can make an immediate assessment on any deficiency imposed on the debtor’s estate. Therefore, assessment of post-petition years must be made within one year of the income tax liability becoming legally due and owing or else the statute of limitations will expire. Similarly, IRC 6503(a)(2) will not suspend the period for assessment of post-petition liabilities against a debtor who is an individual for cases filed after October 17, 2005, even after a notice of deficiency is issued, since the stay against Tax Court proceedings does not apply and does not indirectly toll the assessment statute.

  5. Once the one-year date has been established, Form 8339 must be input for PCS statute control. PCS Database elements needing updates with bankruptcy cases are:

    PCS element Explanation
    05-YYYYMMDD One-Year or Statute of Limitations Date
    07-**BANKRUPTCY** User Special Message
    09-D Removes the TEFRA indicator
    22-B Bankruptcy Report Package Indicator
    26-YYYYMMDD Date Bankruptcy Notification was received
    29-B Bankruptcy indicator

4.31.7.9  (03-04-2008)
Secure a Current Settlement Position

  1. A current settlement position will be required before sending case for preparation of debtor’s audit report to be used for Proof of Claim and/or Statutory Notice of Deficiency. Generally, a current settlement position can be secured from the administrative key case file held at the Campus. Report Writing will need a copy of the Revenue Agents Report (RAR) that was issued with either the 60-day letter (Letter 1827 or Letter 1829) or FPAA (Letter 1830) and a copy of the Form 886-Z that reflects changes in accordance with the RAR.

  2. If the TEFRA exam has recently been initiated and the 60-day letter has not been issued, it will be necessary to contact the Revenue Agent examining the partnership return in the Field to secure a copy of proposed audit changes.

  3. If a partnership examination is not complete, the Bankruptcy Specialist must ensure that Form 4549-A reflecting estimated deficiencies, plus penalties and interest, is based upon as factual an estimate as possible.

  4. If the debtor’s PCS linkage is a tier or flow-through, coordination between the Field and Campus Revenue Agents will be needed in order to obtain a flow-through report.

4.31.7.10  (03-04-2008)
Prepare Instruction for Report Preparation

  1. Pink folders will be used for all bankruptcy cases. Form 13959, TEFRA Bankruptcy Check Sheet, will be used to communicate the necessary actions to be taken. A Form 3210 will be used when transferring the bankruptcy return between functions.

4.31.7.10.1  (03-04-2008)
Report Preparation and Issuance of Statutory Notice

  1. The Bankruptcy Specialist will send the case file to the field for preparation of the report and the issuance of the statutory notice. A Form 4549-A will be prepared using the current settlement position closing document supplied by the Bankruptcy Specialist. A statutory notice will be prepared and mailed to the taxpayer. The case will then be returned to the field Bankruptcy Coordinator to be suspended and monitored until assessments can be made based on either an agreement to the Statutory Notice or the finalization of the bankruptcy as applicable.

4.31.7.10.2  (03-04-2008)
Report must be Prepared in Time Frame Established by Bankruptcy Specialist

  1. The Bankruptcy Specialist will give specific instructions of when the report and statutory notice must be completed by. The dates given by the Bankruptcy Specialist must be strictly adhered to due to the statute date of each case. There will not be more than 30 days to work each case.

4.31.7.10.3  (03-04-2008)
Review Bankruptcy Check Sheet for Special Instructions

  1. Each bankruptcy case will have a Form 13959, TEFRA Bankruptcy Check Sheet attached. The check sheet will have instructions from the Bankruptcy Specialist. The Bankruptcy Check Sheet will also include instructions for completing Form 4549-A, issuing the statutory notice, and the due date for a proof of claim report.

4.31.7.10.3.1  (03-04-2008)
Request for Proof of Claim Report

  1. The TEFRA Bankruptcy Check Sheet, Form 13959, will provide the date that a Form 4549 is needed for the proof of claim. The proof of claim must be given to the Bankruptcy Specialist by this date. The Bankruptcy Specialist will then forward the proof of claim to the Insolvency Technician assigned to that taxpayer before the bar date. If an amended proof of claim is required, coordination between the Bankruptcy Specialist and the Insolvency Technician will be necessary.

4.31.7.11  (03-04-2008)
Return Case File to TEFRA Bankruptcy Specialist

  1. After the report is completed and the statutory notice is mailed, review TEFRA Bankruptcy Check Sheet, Form 13959, to ensure all other instructions have been completed. Once all instructions are completed, update AIMS to EGC 5804 which reflects that a statutory notice on the bankrupt TEFRA investor has been issued. Also update to alpha statute KK. The case file is then ready to be sent back to the TEFRA Bankruptcy Specialist.

4.31.7.12  (03-04-2008)
Monitor TEFRA Bankruptcy Suspense Cases

  1. The following is a general guideline for placing a case into bankruptcy suspense: Verify the bankruptcy status through AIS and PACER. AIS and PACER should be monitored monthly for finalization of the bankruptcy. If there are any discrepancies between the two systems, call Insolvency for clarification. Verify that the statutory notice was issued, defaulted, and that the case requires suspension. Update the statute, EGC and status

    • Update status code to 34, if not already in that status.

    • Update ASED to "KK" (e.g., 04-KK-2000)

    • Update EGC to 5804

    Complete Form 895 to reflect revised ASED, but ensure bankruptcy chapter filing has not changed. Monitor for dismissal, discharge or confirmation. Monitor inventory with PACER every 30 days.

4.31.7.12.1  (03-04-2008)
Dismissal

  1. Applicable to all Chapters. The term used when a bankruptcy proceeding is terminated. Debts are not forgiven and the debtor does not receive a discharge. A dismissed case is closed for cause, e.g., it did not meet bankruptcy guidelines. If a bankruptcy case involving an individual is dismissed by the Court, the estate is not treated as a separate entity (IRC 1398(b)(1) ). It is appropriate to treat the debtor’s tax status as if no proceeding has been brought (except for calculating the suspension of the statutes of limitations on assessments and collection). The debtor should include on his/her tax returns any gross income, deductions, or credits belonging to the bankruptcy estate. The debtor is treated as if a bankruptcy petition had never been filed for IRC 1398 purposes. However, the dismissed bankruptcy case may still have suspended a statute of limitations period or tolled a bankruptcy priority period.

4.31.7.12.2  (03-04-2008)
Discharge

  1. Court order which enjoins the collection of discharged liabilities from the debtor personally. It is generally the event that triggers forgiveness of debt in a bankruptcy case. Generally, a discharge is granted

    1. to an individual debtor in a Chapter 7 case, 60 days after the date set for the first meeting of creditors (11 U.S.C. 341 meeting);

    2. in a non-individual, non-liquidating Chapter 11 reorganization case, when the plan is confirmed;

    3. in an individual Chapter 11 case filed before October 17, 2005, when the plan is confirmed;

    4. in an individual Chapter 11 case filed before October 17, 2005, when the plan payments are completed; and

    5. in Chapter 12 and 13 cases, when the plan is completed (3–5 years).

4.31.7.12.3  (03-04-2008)
Confirmation

  1. The approval by the court of a bankruptcy plan. Applicable to bankruptcy Chapters 11, 12, and 13, but not Chapter 7. In certain Chapter 11 cases, the debtor receives a discharge on confirmation, see IRM 4.31.7.12.2, which terminates the automatic stay.

4.31.7.13  (03-04-2008)
Compute New Statute Date and Assessment Date

  1. The following is a general guideline for removing a case from bankruptcy suspense:

    1. Verify the bankruptcy status by accessing AIS/PACER/VCIS.

    2. Request current IMFOLTS and AMDISAs. Verify that there is no new information that would alter the closing of the case (e.g., a filed amended return) (

      Note:

      This should be done consistently throughout the suspense of the case.

      )

    3. Update the Suspense Case Index Card. Pull the suspense case index card and update it with the discharge or dismissal date and revised statute date.

    4. Calculate new ASED by completing the worksheet "Computation of Statute Date for Bankruptcy Cases" This worksheet is only a guide and it is not all-inclusive for all possible situations. IRM 4.27.4 and Chief Counsel Notice N (35)(13)(10)-1 should be consulted for examples of assessment statute computations.

  2. This section is applicable to unagreed cases only. The taxpayer is entitled to petition the Tax Court and may do so until the end of the unexpired portion of the 90 or 150 day statutory notice period. Determine how many days of the 90 or 150 days (IRC 6213(a)) the taxpayer was allowed to petition the Tax Court and how many days were unused, plus 60 days under IRC 6213(f)(1). Using a Julian calendar, complete the second section of the worksheet to calculate the Tax Court petition date. Keep in mind that there are two Julian calendars, one for leap year and one for a regular calendar year. The deficiency cannot be assessed until the taxpayer has had the benefit of the full " 90 + 60 days" or "150 + 60 days" . Simply put, the case is removed from the "bankruptcy suspense" cabinet and then held in the Tax Court "petition suspense" cabinet, if applicable, until this date.

  3. The Service is prohibited by law under IRC 6213(a) from assessing a deficiency against a taxpayer during the 90 or 150 period during which the taxpayer has to file a petition with the United States Tax Court. Under IRC 6213(f), when a taxpayer in bankruptcy is issued a statutory notice, the time for filing a petition is suspended for the period taxpayer is prohibited from filing a Tax Court petition by the provisions of the Bankruptcy Code, plus 60 days. In effect, IRC 6213(f) extends the time for filing a Tax Court petition.

  4. The bankruptcy stay also prevents the commencement or continuation of a Tax Court case with regards to the debtor. BC § 362(a)(8). If the stay on Tax Court cases applies, the mailing of a notice of deficiency to a taxpayer in bankruptcy suspends the statute of limitations on assessment until the bankruptcy case has been resolved. For cases filed before October 17, 2005, the stay on Tax Court cases applies to both pre-petition and post-petition tax years of the debtor. For cases filed on or after October 17, 2005, the stay on Tax Court cases applies to an individual debtor’s pre-petition tax years only, and to a corporate debtor’s pre-petition and post-petition tax years, so long as the year involves a tax the bankruptcy court may determine.

4.31.7.14  (03-04-2008)
Review Docket List to Ensure TP has not Petitioned Tax Court

  1. The docket list should be reviewed to ensure that the taxpayer has not filed a petition in Tax Court. To review the docket list the Bankruptcy Specialist would have to access the Disclosure Information Management System (DIMS). This list is of all the newly petitioned Tax Court Cases.

4.31.7.15  (03-04-2008)
Assess Tax and Close Case

  1. Bankruptcy Filed On or After October 22, 1994. Agreed pre-petition and post-petition audit deficiencies must be assessed.

  2. Bankruptcy Filed Before October 22, 1994. Agreed pre-petition audit deficiencies cannot be assessed. The case must be suspended until the bankruptcy stay is lifted. Agreed post-petition audit deficiencies must be assessed.

    Note:

    Generally, all years converted by the bankruptcy can be full closed. However, if that converted year would be needed for a carryback or carry over issue, then the return should be partialed. Years not converted by the bankruptcy may also need to be partialed and held if other links exists, or it is needed for potential carry back or carry over issues.

4.31.7.16  (03-04-2008)
Suspense the Administrative File

  1. The administrative file will be held in suspense for two years. This will allow the Bankruptcy Specialist to answer any questions related to the case. Due to the age of the cases, the returns are often destroyed and are not available if questions come up at a later date. Retaining the administrative file enables the Service to prove actions were made timely.

4.31.7.17  (03-04-2008)
Transferring Cases to the Field

  1. The field will assist the campus in the event the campus needs assistance with TEFRA bankruptcy cases. The cases need to be transferred to Technical Services in status 21.

  2. The bankruptcy cases will be sent to the local TEFRA Coordinator in the area responsible for the partnership examination.

  3. The local TEFRA Coordinator will coordinate with local Bankruptcy Coordinator to ensure adjustments are made timely


More Internal Revenue Manual