4.31.7  TEFRA Bankruptcy

4.31.7.1  (03-04-2008)
Introduction

  1. In the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress added IRC 6221 through IRC 6232. This chapter changed the procedures for examining Partnership returns and resolving disputes arising over partnership items.

  2. In enacting the TEFRA partnership audit and litigation procedures, Congress contemplated that the tax consequences of "partnership items " would be determined at the partnership level through a unified administrative or judicial proceeding, even though the tax liability that results from such a determination is imposed on the individual partners. Partnership items include any item that the partnership is required to determine under subtitle A, to the extent the Service has determined by regulation that the item is more appropriately determined at the partnership level than at the partner level.

  3. Pursuant to IRC 6231(c), the Service has the authority to determine, by regulation, that certain items that would otherwise be treated as partnership items may be treated as nonpartnership items to the extent that their treatment as partnership items will interfere with the effective and efficient enforcement of the tax laws. The Internal Revenue Code and the temporary regulations have identified bankruptcy as one of the special enforcement areas that allow the Service to proceed separately against a partner with respect to converted partnership items.

4.31.7.2  (03-04-2008)
Responsibilities of the Campus TEFRA Bankruptcy Specialist

  1. The TEFRA Bankruptcy Specialist will be responsible for the following:

    1. Having a basic knowledge of the Bankruptcy Code, the Internal Revenue Code, state and local laws, court decisions, and the Internal Revenue Manual relative to collection of Federal taxes through bankruptcy proceedings.

    2. Having a basic knowledge of technical, automated systems, business and legal procedures, policies, principles and practices associated with bankruptcy cases.

    3. Working independently and exercising judgement in determining the course of action on cases.

    4. Researching and verifying bankruptcy on routine and moderately difficult cases.

    5. Providing prompt, professional, courteous service and assistance to all internal and external customers.

    6. Analyzing returns for affects of bankruptcy.

    7. Examining legal documents, conferring with taxpayers, their representatives, fiduciaries, judges and government attorneys to resolve routine and moderately difficult issues.

    8. Ensuring appropriate AIMS freeze codes are on the account

    9. Determining one-year date.

    10. Securing current settlement position(s).

    11. Providing a report to Insolvency for proof of claim before the Bar Date of the bankruptcy.

    12. Notifying key case examining office of bankrupt investor

    13. Notifying field Exam of the bankruptcy of any investors they control

    14. Notating the administrative file

    15. Inputting PSC changes

    16. Preparing instructions for report preparation

    17. Providing a report to Insolvency for proof of claim

4.31.7.3  (03-04-2008)
How to Identify a TEFRA Bankruptcy

  1. PCS 4-4, PCS 5-4 and AIMS Weekly Update reports are generated whenever a TC520 with a bankruptcy closing code is input on an account that is controlled for TEFRA. This will automatically generate a –V or –W freeze on TXMOD or IMFOL. The PCS 4-4, PCS 5-4 and AIMS Weekly Update reports are routed to the Bankruptcy Coordinator for research and determination of necessary actions.

  2. The literal word "Bankruptcy" can be found on AMDIS as well as a U freeze for bankruptcies filed before October 22, 1994 or an X freeze for bankruptcies filed on or after October 22, 1994. The literal word "Bankrupt" will be shown on the top line of TSUMYI, "BRPT/RPI=B" will be shown in the investor name area of TSUMYP.

  3. Notification may also be received from other IRS offices or it may be received in correspondence from the taxpayer.

  4. Each time a technician works a case, they should review the case for any indication of bankruptcy.

  5. Once a bankruptcy has been identified, it must be referred to the Bankruptcy Coordinator for determination of needed actions.

4.31.7.3.1  (03-04-2008)
Identification of Bankruptcies Filed Prior to October 22,1994

  1. For bankruptcy petitions filed prior to October 22, 1994, the Service may not make assessments on pre-petition tax years during the Automatic Stay provided by the U.S. Bankruptcy Code. This Stay remains in effect from the time the taxpayer files a bankruptcy petition until a Notice of discharge is either granted or denied, the case is dismissed, or until a Chapter 11 Plan of Reorganization is confirmed by the Bankruptcy Court.

  2. IRC 6503(h) suspends the statute of limitations while the Service is prohibited from making any assessments during the Automatic Stay and for 60 days after. For this reason, proposed assessments (whether agreed or unagreed) in all bankruptcy cases commenced before October 22, 1994, required suspense until the automatic stay was lifted. Although some cases governed by the pre-1994 law are still in bankruptcy suspense, any new cases would be worked under the new rules that follow.

4.31.7.3.2  (03-04-2008)
The Bankruptcy Reform Act of 1994

  1. (1) The Bankruptcy Reform Act of 1994 created an exception to the automatic stay, specifically permitting the assessment of pre-petition taxes when a bankruptcy petition was filed on or after October 22, 1994. For these bankruptcy cases, the statute of limitation on assessment continues to run since the Service is no longer prohibited from making the assessment. In order to protect the assessment statute the Service must make an assessment within the normal statute period, send out a statutory notice of deficiency, or get protection in the form of a waiver.

    Note:

    The bankruptcy stay also prevents the commencement or continuation of a Tax Court case with regard to the debtor. See definition of automatic stay. See IRM 4.31.7.5.5. For this reason, 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.

4.31.7.3.3  (03-04-2008)
Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA)

  1. Under BAPCPA, the bankruptcy stay that prohibits the commencement or continuation of a Tax Court case with regard to a debtor only applies to an individual debtor’s prepetition taxes in a case filed on or after October 17, 2005. The indirect suspension of the statute of limitations that occurs as a result of the stay against Tax Court proceedings will therefore not occur with regard to individuals in cases after October 17, 2005. The stay against Tax Court cases continues to apply to both prepetition and postpetition corporate liabilities, so long as it is a liability the bankruptcy court can determine.

4.31.7.4  (03-04-2008)
Research TEFRA Bankruptcy Case

  1. There are a variety of tools available to use in researching bankrupt taxpayers. These tools are valuable in conducting research necessary to determine how to process the bankrupt taxpayer's return. The systems researched will provide dates, codes and contacts that will be vital in timely processing the case.

  2. IDRS can be used to identify bankruptcy freeze codes on AIMS and TXMOD. The freeze codes are excellent indicators that the taxpayer has filed bankruptcy. Other data bases are also available that list taxpayers that have filed petitions with the courts. These data bases provide specific dates of actions taken by the taxpayer and/or the courts.

    1. AIMS - The bankruptcy freeze for AIMS is the X freeze. The E freeze is also used as a bankruptcy freeze if the X freeze has not been set to AIMS, but the E freeze is not just for bankruptcy. The X freeze is always set to AIMS by the computer when a TC 520 is input on TXMOD by an insolvency clerk or caseworker. The Exam Bankruptcy Coordinator will never be able to set the X freeze but they can release it. The E freeze is set manually by the Bankruptcy Coordinator when required and released when required using CC AMFRZ. When the X or the E freeze has been input to AIMS due to a Bankruptcy this will keep any AMCLS assessment from being made. The freeze will reject any AIMS closure and case should be transmittal the Exam Bankruptcy Coordinator. The bankruptcy freeze for AIMS is the X freeze. The E freeze is also used as a bankruptcy freeze if the X freeze has not been set. The E freeze should only be input or released by the Bankruptcy Coordinator.

      Note:

      Sometimes both the X and E freeze will show on AIMS. When releasing them they need to be released one at a time.

    2. TXMOD - The –V or the –W freeze will show on TXMOD for a bankruptcy. Usually it will be the –V freeze. The -W freeze can be for bankruptcy or litigation. If –W freeze was set for litigation then bankruptcy procedures will not be followed and case worked as normal. To determine if the –W freeze was set for a bankruptcy find the posted TC 520 on TXMOD and look at the closing codes with the TC 520. The closing codes will indicate if the –W freeze is for litigation or for bankruptcy. See TC 520 closing codes in Document 6209, page 11 - 48 or you can refer to IRM 5.9.5.6.1 for closing codes used for bankruptcies.

    3. AIS (Automated Insolvency System) Data Base - This database is for the Insolvency function to input all required information concerning bankruptcy. This data base will show the following information: the chapter of bankruptcy filed, the petition date, if individual or joint filing, the name of the Insolvency specialist, the discharge or dismissal date, bar date and history notes. The TEFRA Bankruptcy Specialist will have read-only access.

      Note:

      Phone numbers for Insolvency offices are located on SERP under the "Who/Where " tab.

    4. PACER (Public Access to Court Electronic Records) - A nationwide interagency agreement provides IRS employees with PACER. Through PACER, users can access case and docket information from Federal Appellate, District and Bankruptcy courts, and from the U.S. Party/Case Index. Access to PACER is provided from the SPDER web site at http://spder.web.irs.gov or from http://pacer.psc.uscourts.gov.

4.31.7.5  (03-04-2008)
Definitions

  1. This section defines terms typically used in the processing of TEFRA bankruptcy cases.

4.31.7.5.1  (03-04-2008)
Administrative Claims

  1. An entity may file a claim for payment of administrative expenses of the estate under 11 U.S.C. § 503(a). Administrative expenses include the actual and necessary costs of preserving the estate and any tax incurred by the estate. Administrative expenses are nearly at the top of the bankruptcy priority scheme.

4.31.7.5.2  (03-04-2008)
AIS

  1. Automated Insolvency System (AIS) is the bankruptcy database maintained by Insolvency. Its many functions work together to allow Insolvency to manage all the bankruptcy cases in Insolvency's inventory.

4.31.7.5.3  (03-04-2008)
ASED

  1. The Assessment Statute Expiration Date (ASED) marks the date the statutory period of time for assessing tax ends. The time frame for assessing tax is normally three years from the due date, or three years from the date the return is filed, whichever is later. IRC 6501.

4.31.7.5.4  (03-04-2008)
Asset Case

  1. A Chapter 7 bankruptcy case in which the trustee makes a determination that assets will be administered for the benefit of creditors. See Bankruptcy Rule 2002(e).

4.31.7.5.5  (03-04-2008)
Automatic Stay

  1. With certain exceptions, the filing of a bankruptcy petition operates as a stay – an injunction – against acts to collect pre-petition debts from the debtor or the debtor’s property, or the collection of any liability from property of the estate. 11 USC 362. The stay also prohibits the commencement or continuation of a Tax Court proceeding concerning the debtor. For cases filed after October 17, 2005, the Code was amended to provide that the stay only applies to Tax Court cases concerning an individual when the tax liability is for a tax period ending before the order for relief (the petition date except in involuntary bankruptcy cases). The automatic stay also prohibits the setoff (crediting) of a pre-petition debt owing to the debtor against a pre-petition liability, but case law has clarified that the creditor can freeze the debt pending relief from the stay. For cases filed after October 17, 2005, the stay no longer applies to the setoff (crediting) of an income tax refund against an income tax liability when both the refund and liability are for pre-petition periods. For cases filed after October 22, 1994, the stay no longer applies to the making of an assessment. The Service can be liable for damages and attorneys fees for willful violations of the automatic stay, but punitive damages cannot be awarded. The automatic stay against most actions automatically terminates as to all creditors upon the earliest of the time the case is closed, the time the case is dismissed, or the time a discharge is granted or denied. The automatic stay against acts to collect estate property continues, however, until the property is no longer property of the estate. 11 USC 362(c).

4.31.7.5.6  (03-04-2008)
Bankruptcy Petition

  1. The bankruptcy petition is the form filed by the debtor (or against the debtor by creditors in an involuntary bankruptcy) with the bankruptcy court requesting bankruptcy relief. Bankruptcy petitions must be filed under one of a number of specific chapters of the Bankruptcy Code (Chapters 7, 11 and 13 are the most common).

4.31.7.5.7  (03-04-2008)
Bankruptcy Reform Act of 1994

  1. The Bankruptcy Reform Act of 1994 was signed into law and effective for all bankruptcy cases filed on or after October 22, 1994. It made changes to the bankruptcy law such as permitting assessments and issuing notice and demand during the automatic stay and the filing of late proofs of claim in Chapter 7 cases.

4.31.7.5.7.1  (03-04-2008)
Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA)

  1. Most of the provisions of BAPCPA are effective for cases filed on or after October 17, 2005. Many provisions of BAPCPA are intended to keep debtors from abusing the bankruptcy system. Such provisions may limit the imposition of the automatic stay in cases of serial filings, require tax compliance from individual debtors, and establish a means test for Chapter 7 debtors. BAPCPA limited the automatic stay on Tax Court cases of individual debtors. BAPCPA also added a new Chapter 15 to deal with cross-border bankruptcies.

4.31.7.5.8  (03-04-2008)
Bar Date

  1. The bar date is the last date the filing of a proof of claim will be considered timely.

  2. In all cases, the Service is allowed a minimum of 180 days after the date of the order for relief to file a proof of claim. The date of the order for relief is the same as the petition date except in involuntary cases.

  3. For Chapter 13 cases filed on or after October 17, 2005, debtors are required by 11 USC 1308 to file returns for all taxable periods ending during the four-year period prior to bankruptcy, including returns due after the petition date. The Service is allowed 60 days after a return is filed under 11 USC 1308 to file a proof of claim for the tax shown on such returns. 11 USC 502(b)(9).

  4. In Chapter 11 cases, the court sets the bar date. If the bar date set by the court is later than 180 days after the order for relief, the Service will have the benefit of the additional time.

  5. The Court may grant extensions of the bar date if there is sufficient reason. To request an extension for the Service, Area Counsel or the Department of Justice should file a motion with the Bankruptcy Court at least 30 days prior to the bar date.

4.31.7.5.9  (03-04-2008)
Definition of Chapters

  1. There are six types of bankruptcies that can be filed under various chapters of the Bankruptcy Code. However for purpose of determining federal tax liabilities the most common chapters are 7, 11, 12, and 13, which are briefly discussed below.

4.31.7.5.9.1  (03-04-2008)
Chapter 7 – Liquidation

  1. In Chapter 7 cases, a trustee is appointed and the debtor’s assets, if any, are liquidated for the benefit of creditors. The petition may be filed voluntarily or involuntarily. Typically, the debtor has no hope of continuing business operations and/or paying all his debts.

4.31.7.5.9.2  (03-04-2008)
Chapter 11 - Reorganization

  1. The presumption in Chapter 11 cases is that the debtor will continue its business operations post-petition and propose a reorganization plan. The plan, if confirmed, has the effect of a contract between the debtor and its creditors. Debts not provided for in the plan may be discharged. A trustee may be appointed by the court for cause, such as the inability to propose a feasible plan or to pay post-petition taxes. Chapter 11 plans can also provide for the liquidation and distribution of the debtors assets. Individuals, as well as corporations and other entities, may file under Chapter 11. As a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Chapter 11 cases of individuals filed after October 17, 2005 are similar to Chapter 13 cases, without the Chapter 13 debt limits.

4.31.7.5.9.3  (03-04-2008)
Chapter 12 - Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income

  1. This chapter is designed to enable a debtor, who is a family farmer or fisherman, to reorganize rather than liquidate a farming/fishing operation. The debtor proposes a plan of reorganization to repay creditors. This type of case has some similarities to both Chapters 11 and 13 cases. Family farmers or fishermen can include sole proprietorships, partnerships, and closely held corporations.

4.31.7.5.9.4  (03-04-2008)
Chapter 13- Adjustment of Debts of an Individual with Regular Income.

  1. Only individuals, including self employed individuals, with regular income may file for bankruptcy under this chapter. There are specific limits as to the kind and amount of debt that an individual may have in order to qualify. The debtor makes the regular payments to creditors through the trustee under a plan similar to a Chapter 11 reorganization plan. The debtor has three to five years in which to complete the plan, upon which he/she will be discharged of the debts.

4.31.7.5.10  (03-04-2008)
Commencement Date

  1. The commencement date is the date on which a bankruptcy petition is filed.

4.31.7.5.11  (03-04-2008)
Confirmation Date

  1. The confirmation date is the date of the court’s order that confirms a Chapter 11, 12, or 13 plan. Chapter 11 cases need to be followed closely since Insolvency generally makes notations only for dismissed or discharged cases on the bankruptcy status report.

4.31.7.5.12  (03-04-2008)
Conversion

  1. When a debtor voluntarily or involuntarily changes from one chapter of bankruptcy to another chapter with the approval of the bankruptcy court.

4.31.7.5.13  (03-04-2008)
Creditor

  1. Person or entity with a claim against the debtor and/or property of the debtor at the time the bankruptcy petition is filed.

4.31.7.5.14  (03-04-2008)
Debtor

  1. The person or entity (e.g., corporation, partnership, municipality) that:

    1. files a voluntary petition, or

    2. has an order for relief entered against it when an involuntary petition is filed by creditors.

4.31.7.5.15  (03-04-2008)
Debtor in Possession

  1. Unless a trustee is appointed to take control of the bankruptcy estate, the debtor in a Chapter 11 or 12 case is known as a debtor-in-possession (DIP). The debtor remains in control of all of the assets. The DIP has the powers of a bankruptcy trustee.

4.31.7.5.16  (03-04-2008)
Discharge Date

  1. This is the date of the order of the bankruptcy court granting the debtor a discharge. The discharge order enjoins the collection of discharged debts. Many types of debts are excepted from the bankruptcy discharge. 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;

    2. in a Chapter 11 reorganization case, when the plan is confirmed;

    3. in a Chapter 11 case filed by an individual on or after October 17, 2005, when plan payments are completed; and

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

    Note:

    A debtor that is not an individual (e.g., a corporation or partnership), that is liquidated under Chapter 7 or under a Chapter 11 plan of liquidation does not receive a discharge.

4.31.7.5.17  (03-04-2008)
Discharge, Denial of

  1. The bankruptcy court makes a determination that a discharge will not be granted, i.e., debtor goes through a bankruptcy proceeding and is still held responsible (usually for cause) for all of the pre-petition liabilities.

4.31.7.5.18  (03-04-2008)
Dismissal Date

  1. This is the date the bankruptcy court orders that the case be dismissed. Once the case is dismissed, there is no longer a proceeding before the bankruptcy court. Under I.R.C. §1398, the bankruptcy estate of an individual debtor in a Chapter 7 or 11 cases is treated as a separate taxable entity, but if the case is dismissed, the estate is not treated as a separate entity. The debtor should include on his/her tax returns any income, deductions, or credits belonging to the bankruptcy estate. However, the dismissed bankruptcy case may still have suspended a statute of limitations period or tolled a bankruptcy priority period.

4.31.7.5.19  (03-04-2008)
Estate, Bankruptcy

  1. A bankruptcy estate is created upon the filing of the bankruptcy case. It generally consists of all the debtor’s interests in property at the time the case is filed plus property acquired by the estate after the petition is filed.

    Note:

    The estate may include the debtor’s interest in a partnership. The estate may also include a non-debtor spouse’s community property interests. In a Chapter 7 or 11 case of an individual, the bankruptcy estate is a separate taxable entity. In Chapter 13 cases, the estate is not a separate taxable entity and post-petition taxes are incurred by the debtor. In Chapter 13 cases, and Chapter 11 cases of individuals filed on or after October 17, 2005, property of the estate includes post-petition earnings of the debtor.

4.31.7.5.20  (03-04-2008)
Insolvency

  1. Generally, understood to mean an inability to pay debts as they become due. However, the Bankruptcy Code (BC) refers to an insolvent entity as one whose debts are greater than the fair market value of its assets (BC sec. 101 (32)). A debtor need not be insolvent to file bankruptcy.

4.31.7.5.21  (03-04-2008)
Insolvency Funtion

  1. The Insolvency function within Compliance is comprised of two operations, Field Insolvency and the Centralized Insolvency Operation (CIO). Together they handle the administrative processing of bankruptcy cases for the Service and the collection of delinquent taxes from bankruptcy estates.

4.31.7.5.22  (03-04-2008)
Insolvency Specialist

  1. Insolvency specialists are professional employees located primarily in the Field Insolvency offices. They handle Chapter 7 asset cases and Chapter 9, 11, 12, and 15 cases. They also work Chapter 13 cases through plan confirmation. The CIO has a limited number of specialists who act as team leads. The names of Insolvency specialists appear in the "Insolvency Technician " field on the AIS entity screen. Phone numbers for Field Insolvency offices may be found under the "Who/Where" tab on SERP.

4.31.7.5.23  (03-04-2008)
Insolvency Technician

  1. Insolvency technicians are paraprofessional employees located at the CIO who work Chapter 13 cases with confirmed plans and Chapter 7 no-asset cases. Because technicians are not assigned specific cases, CIO managers’ names appear in the "Insolvency Technician" field on AIS rather than a technician’s name. The phone number for a CIO liaison can be found under the "Who/Where" tab on SERP.

  2. The name of the Insolvency Technician will be found on the AIS database. The technician name and telephone number will be listed. The Insolvency Technician listed is the contact person for that bankruptcy case. The proof of claim for each bankruptcy claim is sent to the Technician list on AIS.

4.31.7.5.24  (03-04-2008)
Joint Return/Separate Bankruptcy Petitions Filed by Each Spouse

  1. The situation in which spouses file a joint income tax return and file separate bankruptcy petitions either on the same date or on different dates. The cases may or may not be "consolidated" into a single case.

4.31.7.5.25  (03-04-2008)
Joint Return/Single Petitioner (Petitioning and Non-Petitioning Spouse

  1. The situation in which spouses file a joint income tax return but only one spouse declares bankruptcy. The person who files for bankruptcy protection is known as the debtor or petitioning spouse, and the other spouse, who does not file bankruptcy, is known as the non-debtor spouse or the non-petitioning spouse.

4.31.7.5.26  (03-04-2008)
Lifting the Automatic Stay

  1. Relief obtained by a specific creditor from the bankruptcy court that lifts the injunction under 11 U.S.C. section 362 against that creditor to permit a certain action, such as exercising a right of setoff.


More Internal Revenue Manual