Reorganization. Chapter 11 bankruptcy is a rehabilitative proceeding that gives the debtor a "breathing period" from the petition filing to plan confirmation, during which time business affairs can be reorganized and a plan devised for the orderly payment of creditors. Chapter 11 is frequently referred to as the reorganization bankruptcy.

Debtor-in-Possession/Trustee. In a Chapter 11 proceeding, the debtor usually operates as a debtor-in-possession (DIP). However, a trustee or an examiner may be appointed for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case. (See 11 USC § 1104.) For cases filed on or after October 17, 2005, the bankruptcy court may appoint a trustee if grounds exist to convert or dismiss a case under 11 USC § 1112 but the court determines appointment of a trustee is in the best interests of creditors and the estate. The duties of the trustee or DIP include administering the estate and operating the debtor’s business. (See 11 USC §§ 1106 and 1108.) In a timely fashion, the DIP or trustee must either:

Complex/Long Duration. Chapter 11 cases are ordinarily more labor-intensive to monitor and evaluate than other bankruptcies because of complexities of the restructuring efforts in the process. After a plan is confirmed, the creditors must monitor their receipt of payments under the terms of the plan. A Chapter 11 bankruptcy case can last for several years.

Centralized Insolvency Operation (CIO). Centralized Insolvency loads Chapter 11 cases onto AIS, runs IIP, and works the error, Potential Invalid TIN, and status reports for those cases. If an MFT 31 split for a non-petitioning spouse is required for an individual Chapter 11 case, the CIO technical units will perform all required mirroring actions. Chapter 11 mail received at the national mailing address in Philadelphia will be shipped overnight or faxed to the Field group assigned the case depending on the urgency of the correspondence. (See IRM 5.9.11.3.2,Time Sensitive Mail.)

Field Insolvency Responsibility. With the exception of initial clerical processing and MFT 31 mirroring, Chapter 11 case work remains the responsibility of Field Insolvency groups. Chapter 11 caseworkers should ask trustees or DIPs to send plans, schedules, disclosure statements, and payments directly to the local Field office.

Eligibility. Any entity eligible to file a Chapter 7 petition (individual, sole proprietor, partnership, or corporation) can file Chapter 11, except a stockbroker or a commodity broker. A railroad, which cannot file a Chapter 7 petition, may file a Chapter 11 petition.

Main Chapter for Business Debtors. Chapter 11 is the primary reorganization chapter of the Bankruptcy Code for business debtors. Ideally, a reorganizing Chapter 11 plan is acceptable to most of the debtor's creditors because the plan is more likely (over time) to pay a greater amount of the debtor's pre-bankruptcy debts than if the business were liquidated. A Chapter 11 bankruptcy allows the debtor to continue business operations through a plan of reorganization which meets statutory criteria (11 USC §§ 1123, 1129). Cooperation among the various interests is crucial to a successful reorganization. Generally, reorganization, by preserving jobs and assets, is preferable to liquidation.

Individuals and Chapter 11. An individual is eligible to file Chapter 11 even if the individual is not engaged in a business. However, when individuals file for bankruptcy, but want to retain the use of their non-exempt property, they may opt for a Chapter 13 proceeding if they are eligible.

Property of the Estate. Property of the estate in a Chapter 11 case includes the property listed in 11 USC § 541. When the Chapter 11 debtor is an individual in a bankruptcy case filed after October 17, 2005, 11 USC § 1115 provides that property of the estate also includes earnings from services performed by the debtor after the petition date until the case is dismissed, converted, or closed.

Notice. The bankruptcy courts provide the IRS with notice of all Chapter 11 cases whether or not the IRS is listed as a creditor. This notice provides the date, time, and location of the first meeting of creditors, as required by 11 USC § 341. The court may also provide copies of the debtor’s schedules of assets and liabilities and the statement of financial affairs to the creditor.

First Meeting of Creditors and Prepackaged Plans . The first meeting of creditors (also known as the 341 hearing) occurs generally 20-40 days after the filing of the petition. However, for cases filed on or after October 17, 2005, under 11 USC § 341(e), upon request of a party in interest and after notice and hearing, the court can order the US trustee not to convene a meeting of creditors if the debtor files a prepackaged plan (a plan where the debtor solicits acceptance prior to the commencement of the case). Insolvency, with Counsel's concurrence, may consider opposing the 11 USC § 341(e) requests if the lack of a 341 hearing will compromise the Service's position.

Preventing Violations of Automatic Stay. If Field Insolvency research reveals no liabilities or pending assessments on a case, a TC 520 control should remain on the account until the potential for a violation of the Bankruptcy Code expires. The freeze also allows for monitoring of postpetition tax compliance.

Proof of Claim. If the Automated Proof of Claim (APOC) system is unavailable and the debtor owes taxes above the tolerance specified in Law Enforcement Manual (LEM) 5.5.3, a manual claim should be prepared and timely filed in accordance with IRM 5.9.13, Manual Proof of Claim. Motions and hearings involving the IRS can begin early in Chapter 11 cases, so the IRS claim should be on record as soon as possible. The bar date for filing proofs of claim in Chapter 11 cases is set by the court, but the Service has at least 180 days from the petition date pursuant to 11 USC § 502(b)(9).

LEM Criteria. The IRS should not rely on being listed in the schedules but should file a claim in every case meeting the Bankruptcy Code or LEM requirements for filing a claim. However, the LEM tolerance criteria do not prohibit Insolvency from filing claims. Local practice may specify filing claims on all balance due accounts.

Initial Review. Insolvency caseworkers must conduct an initial case review and take primary case actions within 10 work days of a case's being assigned to a specialist or advisor. Elements of this review may be required sooner, for example, to resolve stay violations or to respond to pending motions or defensive litigation. All actions taken and findings in the review must be documented in the AIS history.

IDRS. The caseworker must review IDRS to determine the debtor's:

Integrated Collection System (ICS). Caseworkers must review any ICS history for prior Field Collection involvement.

TFRP Issues. For corporations caseworkers must conduct an Automated Trust Fund Recovery (AFTR) review to determine what periods are proposed to be assessed against which corporate officers. This information should be paired with the data on IDRS using command code UNLCER. The current RO assignment should be annotated in the AIS history.

TFRP Actions for Corporate Debtors. If unpaid trust fund taxes are part of a corporation's balances due, a Trust Fund Recovery Penalty (TFRP) investigation must be considered. Based on local procedures the investigation may be conducted by Field Collection or by an Insolvency advisor. If local practice is to refer the investigation to Field Collection, the balances due meet the LEM criterion, and the case is not currently assigned to a revenue officer, an OI must be issued to Field Collection through ICS or Form 2209. Or the case may be assigned to an Insolvency advisor to conduct the required investigation. If the TFRP investigation is handled within Insolvency, the LEM criterion need not be met. IRM 5.9.8.3.4, Trust Fund Considerations in Chapter 11;IRM 5.9.3.9,Trust Fund Recovery Penalty; and IRM 5.9.13.14,TFRP Assessments - Priority Status, provide additional TFRP investigation information.

Exam Issues. IRM 5.9.4.3,Examination and Insolvency, provides guidance for addressing examination issues including abusive tax avoidance transactions and employee plans.

Refund Issues. The caseworker must ensure the correct bankruptcy freeze code has been placed on the account and check for the presence of a "quickie" refund request. IRM 5.9.8.8, Quickie Refunds, below provides direction in addressing these refund requests.

Stay Violations. The caseworker must identify potential stay violations, be they liens recorded postpetition, levy proceeds received after the petition date, or notices sent in violation of the stay. IRM 5.9.8.6, Prepetition Levies, below provides guidance in addressing levies. Potential stay violations stemming from enforced collection must be resolved.

Lien Refile and Adequate Protection. The caseworker must determine if any liens should be refiled and take necessary actions to request the lien refiling. (See IRM 5.9.5.8.2, Refiling of Liens.) The potential for adequate protection must be addressed upon the initial case review. (See IRM 5.9.8.5, Adequate Protection.)

Employee Leasing. The caseworker must determine if employee leasing relationships exist. This is when the business purportedly transfers some or all of its employees to another entity that leases them back to the original employer. Coordination with Counsel is required if this situation is suspected.

LLCs. The caseworker must identify the presence of LLCs. Consultation with Counsel is advised. IRM 5.9.13.16,Limited Liability Companies, provides more information about LLCs.

Subsidiaries or Parent Company. The caseworker must determine if the entity is a subsidiary of a parent company or is a parent company with subsidiaries. Subsidiary refunds or liabilities must be noted in the AIS history. Difficult setoff issues arise when refunds are owed to members of consolidated group. If a refund is owed to a group or some of its members, and members of the group also owe liabilities, Insolvency should consult Counsel regarding the Service's setoff rights.

Prepackaged Chapter 11. The caseworker must determine if the case is a prepackaged bankruptcy which is a plan of reorganization in which the debtor solicits the creditors' approval prior to the filing of the bankruptcy petition. If the plan has been prepackaged and the Service was not part of the negotiations, the caseworker must secure a copy of the plan, review it expeditiously, and consult Counsel.

Significant Cases and Referrals to Counsel. As directed in IRM 5.9.4.15.3,Referrals on Significant Bankruptcy Case Issues, cases meeting the Significant Bankruptcy Case Program criteria must be referred to Counsel expeditiously. Upon referral Counsel takes an active role in coordinating the Service’s efforts in these cases, which are usually Chapter 11 cases.

Notice to TEGE. To protect the integrity of employee plans of businesses that have declared bankruptcy, Insolvency must notify the Employee Plan (EP) function of the Tax Exempt/Government Entity (TEGE) division when a Chapter 11 bankruptcy meeting " significant case" criteria is filed or a nationally known company has filed bankruptcy even though that company may not have a tax liability. Upon initial review of the Chapter 11 case, if the Field Insolvency caseworker identifies a "significant case" or nationally known debtor, the caseworker must take the following steps within two business days of the identification:

Prior Bankruptcies. The caseworker must check for evidence of prior bankruptcies and how they may affect tolling and bring into question the feasibility of the present plan of reorganization. In some instances debtors may contend, inasmuch as prior plans were supposed to have addressed the tax liabilities, those liabilities are no longer considered to be a tax claim.

Protection for Secured Creditors. Adequate protection safeguards a secured creditor against a decrease in the value of a creditor’s collateral during the period prior to confirmation of the plan when a creditor is stayed from taking collection action and is not receiving plan payments. Adequate protection may be requested based on LEM 5.9.4 to protect the value of the creditor's interest in the property being used by the DIP and a valid Notice of Federal Tax Lien (NFTL) has been recorded. (See 11 USC § 361.)

Initial Considerations for Adequate Protection. The caseworker must first determine if schedules of assets and liabilities have been filed. If so and the Service does not have copies, the caseworker must contact the debtor in possession or trustee for schedules along with a aged list of the business' accounts receivable. From this information the caseworker can establish a rationale for requesting adequate protection. The IRS may be entitled to adequate protection when a prepetition NFTL attaches to equity in assets which will depreciate during the bankruptcy proceeding or be consumed in the normal course of business, as is the case with cash collateral or inventory. If the debtor arranges for postpetition financing for property subject to the lien, the IRS may also be entitled to adequate protection of its interest.

Turnover/Adequate Protection. A voluntary Chapter 11 filing is sometimes preceded by the IRS's levying upon or seizing assets of the debtor. After filing bankruptcy the debtor may immediately file a motion with the bankruptcy court requesting a "turnover" order for the IRS to surrender the property to the debtor or to release a levy (11 USC § 542.) The Chapter 11 caseworker must ensure the debtor is providing adequate protection to the IRS for turnover of such property. Counsel guidance should be sought when holding levy funds in anticipation of an adequate protection order.

Most Common Types. Adequate protection usually includes periodic cash payments (the most common form) on the secured claim and/or replacement liens on postpetition assets. SBSE Division Counsel has set minimum dollar criteria for pursuit of adequate protection with Area Counsel having leeway to adjust the dollar guidelines if appropriate. (See LEM 5.9.4.) Field Insolvency offices must coordinate all adequate protection agreements with their local Counsel.

Sources of Adequate Protection. Adequate protection can take the form of:

Adequate Protection Agreement. The Adequate Protection Agreement should provide for protection to replace the property being released. This can include:

Default Provisions. Adequate protection agreements should include language outlining actions to be taken in the event of default. Those provisions can include:

Time Constraints. Creditors, including the IRS, are only entitled to adequate protection if it is requested. If adequate protection is applicable, it must be requested before the assets are dissipated. IRM 5.9.8.5 provides additional information on adequate protection.

Intangible Property. Under 11 USC § 542, unless the automatic stay is lifted, the IRS must release prepetition levies on bank accounts and accounts receivable when the debtor retains an interest in the cash or cash equivalent on the date of the petition (i.e., the IRS has not actually received the cash and applied it to the taxpayer’s account). (See IRM 5.9.3.10.1,Third Party Contacts.)

Avoidance. If the IRS receives payment before the petition as a result of a levy and applies the payment to the taxpayer’s account, the funds are no longer subject to turnover under 11 USC § 542, but they may be preferential transfers subject to avoidance under 11 USC § 547, if the requirements of 11 USC § 547 are met. (See IRM 5.9.4.6,Preferences.)

Tangible Property. Absent extenuating circumstances which allow the automatic stay to be lifted, the IRS is required to release prepetition levies on tangible property. If seized prepetition, the property generally must be turned over to the estate as long as the debtor retains an interest in the property on the date of the petition (e.g., the property has not yet been sold at a tax sale).

Right to Adequate Protection. Although the property is generally required to be turned over, the IRS is entitled adequate protection of its secured interest in the property if a prepetition Notice of Federal Tax Lien has been filed. (See IRM 5.9.8.3.1.2(2),Lien Rights.)

Release vs. Referral. Negotiations involving adequate protection are the responsibility of Insolvency employees, and they are generally conducted with the debtor's attorney. Counsel should be consulted for local procedures.

" Ordinary Course of Business. " In a Chapter 11 case, the debtor-in-possession typically wants to continue running the business until it can be reorganized or sold. The debtor may automatically continue its routine ("ordinary course" ) use, sale, or lease of most of its prepetition property pursuant to 11 USC §§ 363(c)(1) and 1107(a).

Lien Rights. If the IRS has a secured claim, the Service may be entitled to adequate protection when an NFTL, properly filed prepetition, is still valid and attaches to equity in property and/or cash collateral.

Cash Collateral. The Bankruptcy Code can significantly limit a debtor's ability to use its cash collateral without the consent of creditors with secured interests in such property. Cash collateral includes cash and cash equivalents, such as negotiable instruments and funds in depository accounts. (See Exhibit 5.9.1-1, Glossary – Bankruptcy Terms.) For cases filed on or after October 17, 2005, the unauthorized use of cash collateral that is substantially harmful to one or more creditors is an express basis for conversion or dismissal of the case per 11 USC § 1112(b)(4)(D).

Superpriority Liens in a Chapter 11 Proceeding. 11 USC § 364 provides debtors may, with court approval, obtain postpetition financing. To induce lenders to grant this financing, superpriority liens can be offered. Such liens become senior to all other liens.

Real Property and Adequate Protection. Adequate protection is seldom sought by the IRS regarding real property due to its unlikely depreciation. However, unusual situations might arise making adequate protection necessary. At a minimum, the debtor should be required to maintain sufficient insurance on buildings and other improvements.

Insolvency Actions. If the IRS is entitled to adequate protection based on lien equity, Insolvency should:

Tentative Carryback Adjustments. Taxpayers who have net losses can sometimes carry back the losses to previous years where they paid taxes to reduce the liability in the prior year and generate a refund. Such taxpayers may also make a special request for such a refund, known as a tentative carryback adjustment also called a "quickie refund." To request a quickie refund, the taxpayer must file an application for the tentative carryback adjustment, and the Service must make a limited review of the application and issue the refund within 90 days.

IRS Offsets. The Service has the right to offset the quickie refund against federal tax liabilities of the taxpayer. This right of offset becomes particularly important when the taxpayer is in bankruptcy, because dollar amounts of quickie refunds can be large, and offset may be the only assured way of collecting liabilities owing from the taxpayer. Difficult mutuality issues are raised, however, when losses from postpetition periods are carried back to prepetition years, or when a refund is owed to a consolidated group and the liabilities are owed by a single member of the group. Insolvency should consult Counsel in such cases.

The Automatic Stay Against Setoffs. While the automatic stay prevents the Service from making the setoff by crediting the refund against the liability, the Service may freeze the refund until the stay is lifted. Insolvency specialists and advisors must consult Counsel if the debtor is owed a quickie refund and the Service has a claim.

Post-BAPCPA IRS Offsets. USC § 362(b)(26) provides that for cases filed on or after October 17, 2005, the IRS can setoff a prepetition income tax refund against a prepetition income tax liability without a lift of the automatic stay. Insolvency specialists and advisors should consult Counsel if the debtor is owed a quickie refund on a case filed on or after October 17, 2005, both the liability and the quickie refund are prepetition, and the Service has a claim. If the quickie refund comes from a postpetition period or the liability is not for income tax, a lift of stay or local rules/standing orders allowing the offset are required regardless of the petition date.

Inappropriate Refunds. To prevent these special refunds from going out to taxpayers who are in bankruptcy and owe federal taxes, procedures have been set in place to review the quickie refund claims expeditiously so Counsel can file a motion for lift stay for offset if necessary.

Interagency Offset Requests. The federal government is considered one creditor for purposes of offset. Upon becoming aware of a potential tax refund, a federal agency other than the IRS may seek to have the refund offset against its claim. However, the Service does not have the authority to disclose the refund to another federal agency. If Insolvency receives a request to freeze a refund on behalf of another federal agency, the caseworker assigned to the account must consult Counsel before taking any action.

TCB Units. Tentative carrybacks for business returns originate from the filing of either a Form 1139 or Form 1120X. For individuals, the appropriate forms are Form 1045 or Form 1040X. Tentative Carryback (TCB) Units responsible for processing the carryback requests are located at the Ogden and Cincinnati campuses. Generally when the TCB Units determine a tentative carryback claim is processable, they research IDRS to see if the taxpayer owes federal taxes and if a bankruptcy freeze is on the account.

Insolvency Contact. When a bankruptcy freeze is on an account, the TCB Unit must contact the Field Insolvency caseworker assigned the case. If the TCB Unit has difficulty in locating the Insolvency caseworker, it should call the Insolvency liaison at the Centralized Insolvency Operation for the name and phone number of the caseworker working the bankruptcy case. The TCB Unit caseworker will advise the Insolvency caseworker of the amount of the carryback credit and the processing time remaining.

Counsel Contact. Following the LEM criteria for referrals to Counsel when appropriate, the Insolvency caseworker should advise Counsel of the tentative carryback through a referral asking for a motion to lift the stay to setoff the refund against the taxes owed. Also, as mentioned above, Counsel should be consulted before the setoff of a quickie refund arising from the carryback of losses from a postpetition year to a prepetition year, or when the refund is owed to a consolidated group and the liabilities are owed by a single member of the group.

Interest Free Period. Decisions to offset the tentative carryback credit or refund it to the debtor are under strict time constraints. By statute, quickie refunds must be issued within 90-days unless the government has a right of setoff. But the statutory period during which the Service is exempt from paying interest to the taxpayer is only 45 days from the date the quickie refund request is received by the IRS to the date of refund issuance. Therefore, if setoff is not appropriate under 11 USC § 362(b)(26) because of the petition date or the period generating the refund, to minimize the amount of interest the Service may have to pay the debtor, both the TCB Units and Insolvency need to react quickly in determining if a lift of stay should be requested.

Tax Collection Waivers. Pursuant to IRC § 6502(a), as amended by the IRS Restructuring and Reform Act of 1998 (RRA 98), the Service can no longer obtain waivers of the statute of limitations for collection (Form 900) except in conjunction with IRC § 6159 installment agreements or the release of a levy.

Chapter 11 Plans Are Not Installment Agreements. Although Chapter 11 plans make a series of periodic (installment) payments to the Service, typically toward the taxpayer's priority and secured tax debts, with interest, the Chapter 11 plan differs in many respects from an installment agreement under IRC § 6159, and is, therefore, not considered as such.

Collection Statute Expiration Date (CSED) and Confirmed Plans. The limitation period for collecting a tax provided for by a confirmed Chapter 11 plan is generally suspended automatically via IRC § 6503(h)(2)while the taxpayer is current on Chapter 11 plan payments up to the time the taxpayer is in substantial default on the plan payments, plus six months.

Waiver Expiration Date. Collection statute limitation waivers (Form 900) obtained from taxpayers before December 31, 1999, outside of the context of an installment agreement, expired automatically on or before December 31, 2002.

CSED and Corporate Cases in Chapter 11. In corporate cases and other cases where the debtor is not an individual, the Service may generally rely on the suspension of the limitation period provided for in IRC § 6503(h)(2) to collect tax payments after confirmation of Chapter 11 plans. The Service should, nevertheless, insist Chapter 11 plans be paid in full within the timeframes required by the Bankruptcy Code.

CSED and Individuals in Chapter 11. As stated in paragraph (3) above, when the debtor is an individual, and the plan provides for the full payment of a particular tax, the Service may also generally rely on IRC § 6503(h)(2) for the suspension of the collection period if the debtor is current on plan payments. However, the Service cannot rely on the IRC § 6503(h)(2) suspension in cases where the debtor is an individual with respect to taxes that are both (1) non-dischargeable, and (2) for which full payment is not provided in the plan.

CSED and Non-dischargeable Taxes in Individual Chapter 11. In bankruptcy cases of individuals where a confirmed Chapter 11 plan does not provide for full payment of non-dischargeable tax liabilities such as priority tax claims, gap interest on those claims, penalties claimed as general unsecured for a return late filed within two years of the petition date, or others; or where surviving federal tax liens are not provided for fully by the confirmed plan, the Service must consider the following:

CSED - Individuals and Secured Claims. Similarly, in cases where the debtor is an individual, the Service cannot rely on the suspension of the collection statute regarding secured claims if the plan does not provide for full payment of the secured claim. The following situations apply these principles:

Policy Statement P-5-60. Absent statute of limitations considerations, the general policy of the Service is to refrain from asserting the TFRP against non-debtor responsible persons in cases where the corporate debtor's Chapter 11 plan provides for full payment of trust fund taxes, as long as the plan is not in default(IRS Policy Statement P-5-60).

RO Assigned Accounts. When the trust fund balance due accounts (e.g., corporate Forms 941) are assigned to field Collection at the time of the bankruptcy petition, the revenue officer (RO) manager is responsible for issuing an ICS Other Investigation to an RO to conduct the investigation as soon as possible. The RO should periodically update Insolvency on the progress of the investigation.

Non-RO Assigned Balance Due Accounts. Insolvency is responsible for initiating the TFRP investigation in bankruptcies, not involving balance due accounts already assigned to field Collection as of the bankruptcy petition filing date. Insolvency may either issue an ICS Other Investigation or Form 2209 to the field or assign the TFRP investigation to an Insolvency advisor. Also, see IRM 5.9.3.9, Trust Fund Recovery Penalty.

LEM-TFRP Criteria. Generally, Insolvency should initiate a TFRP investigation based on the TFRP criteria in the Law Enforcement Manual (LEM), considering tolerance and collectibility factors.

Withholding of TFRP Investigation. If a TFRP investigation is withheld based on LEM criteria, expiration of the assessment statute may be allowed without Insolvency intervention. In that circumstance, established procedures must be followed and clearly documented on AIS explaining the reason the TFRP investigation was withheld.

In Chapter 11 – Withholding Assessment Against Responsible Persons. If the debtor is a corporation responsible for unpaid trust fund taxes, assertion of the TFRP against responsible persons will normally be withheld while the proceeding is pending prior to confirmation of a plan of reorganization. However, note paragraph (7) below. If the corporate debtor has a confirmed reorganization plan providing for full payment of the trust fund taxes, assertion and collection of the TFRP is normally deferred as long as the corporate debtor is current with plan payments.

Indicators to Consider – Doubtful Collection. For any case meeting the LEM criteria, the trust fund investigation should be conducted as soon as possible to identify potential responsible officers and to secure waivers when possible. Forbearance from asserting and collecting the TFRP will remain, unless factors indicate ultimate collection is doubtful from the corporate debtor. Indicators of doubtful ultimate collection follow.

Designation of Payments in Chapter 11 Plans. In Chapter 11 cases, when a corporate debtor owes the IRS significant prepetition trust fund taxes, the debtor-in-possession may seek in its plan to designate IRS application of the earliest payments required under the plan to satisfy the corporation's outstanding trust fund taxes first.