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4.8.2  Case Processing (Cont. 1)

4.8.2.10 
Case Return Procedures

4.8.2.10.4 
Action by the Examiner

4.8.2.10.4.2  (06-27-2013)
Procedures for Settling Controversies

  1. If examination area management disagrees with TS, the case will not be returned until the controversy is resolved.

    1. If the controversy can be resolved, the parties can proceed as agreed.

    2. If agreement cannot be reached, the controversy will be resolved through existing management channels.

    3. If the examiner disagrees with the resolution of the controversy, the examiner will adopt management’s position. However, examiners have the right to submit a dissenting opinion that will be maintained as part of the case file.

4.8.2.11  (06-27-2013)
Suspense Cases

  1. TS will maintain area "suspense" cases while waiting for an event to occur, such as completion of litigation or other administrative action based on national or area directive.

4.8.2.11.1  (06-27-2013)
Form 1254 Suspense

  1. A case in Form 1254 suspense is held pending a court decision or final action by national office or chief counsel. You may contact your local counsel for any updates or questions.

  2. Cases may be held in suspense under the following circumstances:

    1. The facts in the case to be suspended must be the same or similar to an issue pending in a federal court.

    2. The issue is similar to or under consideration in district court in another jurisdiction but only if Form 906, Closing Agreement on Final Determination Covering Specific Matters, was secured, usually by Appeals.

    3. Headquarters or chief counsel has identified the issue as a suspense issue in most cases.

4.8.2.11.1.1  (06-27-2013)
Placing the Case in Suspense

  1. When placing a case in suspense, the reviewer will:

    1. Determine the case meets the requirements for suspense and the case file has been properly completed. A revenue agent report (RAR) or claim disallowance that addresses the unagreed issue(s) being suspended must be in the file. A claim allowance must also be included in the file should the taxpayer’s position prevail.

    2. Determine if the RAR has been shared with the taxpayer for purposes of IRC 6404(g).

    3. Review all issues. Ensure all issues, other than the suspense issue(s), are resolved to the extent possible and any partial assessment is made before the case is placed in suspense. The only issues that may be suspended are unagreed issues meeting the suspense criteria. If a partial agreement cannot be secured and the taxpayer has failed to file a protest, a statutory notice of deficiency needs to be issued.

    4. Ensure Form 1254, Examination Suspense Report, is complete and meets the requirements of the Form 1254 suspense.

    5. Protect and control statutes of limitation for all returns in the case file. When the case is received for suspense there must be at least 24 months remaining on the statute of limitations. If not, the case should be returned to the originating group with a request to secure an adequate extension.
      Reviewers assigned the responsibility for management of the suspense files for the first time should perform a statute check immediately.

    6. Prepare and issue Letter 1014, Letter to Taxpayer Advising Him of the Reasons for Suspended Action on His Tax Return Examination, to the taxpayer, informing him / her the case is being placed into suspense.

    7. Place the case in Status Code 30, Review Type 44, Suspense Type 590.

4.8.2.11.1.2  (06-27-2013)
Monitoring the Case in Suspense

  1. Monitor the statutes of the cases in suspense every month. If six months or less remain on a statute, the suspense coordinator will solicit a statute extension from the taxpayer. If the taxpayer is unwilling to extend the statute, forward the case for issuance of a notice of deficiency. Resolution of the case should be discussed with the manager prior to removal from suspense.

    Note:

    The activity record should indicate that Pub 1035, Extending the Tax Assessment Period, was provided to the taxpayer which advises the taxpayer that they are not required to sign the extension.

  2. Every quarter the cases in suspense will be reviewed to determine if the suspense issue(s) have been resolved.

  3. If the issue is unresolved, document the case activity record as to who was contacted and the status of the issue.

4.8.2.11.1.3  (06-27-2013)
Case Closing

  1. When the suspense issues are resolved, send the case back to the examination group to prepare and issue the final report to the taxpayer to attempt to obtain his / her agreement. In some instances, the reviewer will be able to directly forward the case for closure when a protective claim has been accepted.

  2. A cover memo will be prepared to the field manager explaining the work required to resolve the suspense issue and close the case.

  3. If closing the case, the reviewer will ensure:

    • Proper case file assembly

    • Proper completion of Form 5344

    • Proper statute controls

    • Proper completion of Form 3198 - see Form 3198

4.8.2.11.2  (06-27-2013)
IRC 183(e) Hobby Loss Suspense

  1. A case forwarded for IRC 183(e), Activities Not Engaged in for Profit, suspense is a case open on AIMS/ERCS in which the taxpayer has executed Form 5213, Election to Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit. The Service will generally postpone the determination until after the end of the fourth consecutive tax year (sixth tax year for an activity that consists mainly of breeding, training, showing, or racing horses) after the tax year in which the taxpayer first engaged in the activity (hereinafter referred to as the "initial presumption period" ). For detailed information regarding IRC 183, see IRM 4.10.13.6, Activities Not Engaged in For Profit - Hobby Loss (IRC Section 183).

  2. Under IRC 183(e)(4), the statute of limitations for the IRC 183 issue is extended by the taxpayer executing Form 5213 until two years after the due date (determined without regard to extensions) of the return for the last year of the initial presumption period. The extension also applies to partners or shareholders in the activity.

    Note:

    The automatic extension applies only to those deductions attributable to the activity and to any deductions (such as medical expense or charitable contribution deductions) that are affected by changes made to adjusted gross income.

  3. The examiner will complete the examination of all open years in the initial presumption period and forward the case for suspense, pending receipt of years that have not been filed. All partial assessments or other unagreed issues should be resolved prior to sending the case for suspense. If needed, a statute extension may be secured for any non-hobby loss issues.

4.8.2.11.2.1  (06-27-2013)
Placing the Case Into Suspense

  1. Place the case in Status Code 38, Review Type 47, Suspense Type 595.

  2. Verify that the Form 5213 was timely filed (three years after the due date of the return of the for the first year of the initial presumption period).

4.8.2.11.2.2  (06-27-2013)
Monitoring the Case in Suspense

  1. Each year, after the due date for the current year's return, check IDRS to determine if the subsequent return has been filed. If filed, order a RTVUE or a BRTVU for the additional filed year.

  2. Again, inspect the return for audit potential for IRC 183 related and non-IRC 183 related income and expenses. Determine if examination is warranted, and if not, place it in suspense associated with the other years.

  3. Monitor the statutes of the cases in suspense every month. If 210 days or less remain on a statute, prepare Form 895, Notice of Statute Expiration, to update the statute to "MM" with an explanation that the return is only open for the IRC 183 issue and the statute for this issue expires two years after the due date (determined without regard to extensions) of the return for the last year of the initial presumption period. Refer to IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS, for further details on updating to alpha codes.

4.8.2.11.2.3  (06-27-2013)
Closing the Case

  1. Once the date prescribed by law (determined without extensions) for the filing of the tax return for the last taxable year in the initial presumption period has expired, the case must be removed from expense.

  2. If sufficient information is contained in the file, a determination will be made by TS and the case will be closed.

  3. If additional case development is required, return the case to the originating group. The coordinator will attach a cover memorandum to the case explaining that a determination should be made on the IRC 183(e) issue.

4.8.2.11.2.4  (06-27-2013)
IRC 6404(g) Tolled During IRC 183 Suspense

  1. The 36-month notification period specified in IRC 6404(g) is tolled (ceases to run) during the time the IRC 183(e) election is in effect and for the particular activity to which the election relates. Tolling also applies to the actual suspension of interest and other amounts under IRC 6404(g), if the suspension period has already begun when the taxpayer makes the IRC 183(e) election.

    Example:

    A taxpayer participated in an activity that began in 2009. The taxpayer makes an IRC 183(e) election in February 2013 with two months remaining in the 36-month IRC 6404(g) notification period for the taxable year in question (2009). Because of the election, the IRS will not determine before the close of the 2013 taxable year whether the IRC 183(e) presumption applies. Under Treas. Reg. 301.6404-4(c)(2)(i), tolling of the IRC 6404(g) notification period starts on the date the IRC 183 election is made, and ends on the later of 1) April 15, 2014; or 2) the date the taxpayer's return for the taxable year 2013 is filed. For example, if the taxpayer files the 2013 return on May 1, 2014, the remaining two months in the notification period would resume running on May 2, 2014 for the activity to which the election related.

4.8.2.11.3  (03-29-2017)
Fraud and Grand Jury Suspense

  1. Fraud and Grand Jury Suspense is an important part of the TS Fraud Program responsibilities. The reviewer or "coordinator" assigned to Fraud and Grand Jury Suspense must have a comprehensive knowledge of the entire joint investigation process. The following references may be used to gain an understanding of this process and relevant related issues:

    • IRM 4.8.11 - Technical Services Fraud Program Responsibilities

    • IRM 4.8.6 - Criminal Restitution and Restitution-Based Assessments

    • IRM 25.1 - Fraud Handbook

    • IRM 20.1 - Penalty Handbook

    • IRM 25.6 - Statute of Limitations

    • IRM 25.25.10 - Frivolous Return Program

    • IRM 25.26 - Restitution

    • IRM 4.10.6.2 - Recognizing Noncompliance

    • IRM 4.12.1 - Nonfiled Returns

    • IRM 8.11 - Penalties Worked in Appeals

    • IRM 8.13 - Closing Agreements

    • IRM 9.4 - Investigative Techniques

    • IRM 9.5 - Investigative Process

    • IRM 9.8.1 - Scheme Development Center

    • IRM 9.9 - Criminal Investigation Management Information System (CIMIS)

    • IRM 38 - Chief Counsel Directives Manual - Criminal Tax

  2. Additionally, the following resources are available:

    • Servicewide Fraud Website - http://sbseservicewide.web.irs.gov/Fraud/default.aspx

    • Criminal Investigation Website - http://ci.web.irs.gov/

    • Financial Crimes Enforcement Network - https://www.fincen.gov

    • Public Access to Court Electronic Records - https://pacer.psc.uscourts.gov

    • LB&I Fraud Website - http://lmsb.irs.gov/pa/cent/fraud/fraud_home.asp

    • SB/SE Fraud Website - http://mysbse.web.irs.gov/examination/tip/fraud/default.aspx

    • Technical Services Fraud SharePoint Website - https://organization.ds.irsnet.gov/sites/SBSEfeTS/SME/Fraud/SitePages/Home.aspx

  3. The reviewer assigned to the TS fraud program, is commonly referred to as a "fraud coordinator" . The local TS fraud coordinator (LTSFC) is responsible for the following:

    • Verifying or determining the correct statute and monitoring the statute of limitations for each return / tax period in suspense.

    • Protecting the statute of limitations on assessment for all cases in suspense.

    • Reviewing and determining whether cases that are sent for suspense meet the suspense criteria.

    • Placing the case in suspense, or returning it to the group if it does not meet the suspense requirements.

    • Coordinating with area counsel and Criminal Investigation (CI) on issues that arise on cases that are in suspense.

    • Ensuring that fraud suspense and fugitive checks are performed every six months and that all fraud suspense inventory is properly coded with respect to ERCS status code, review type, suspense type and next action date.

    • Returning cases to the field that have been released from suspense.

    • Ensuring that a statutory notice of deficiency gets issued for cases in suspense when determined appropriate with concurrence from CI, Examination, and area counsel.

    • Review the civil disposition of criminal investigation cases to ensure compliance with procedural requirements, including conditions of probation and restitution, as applicable.

    • Monitoring tax-related conditions of probation (specifically the Examination-related conditions), in coordination with Field Examination, Collection Advisory and CI.

4.8.2.11.3.1  (03-29-2017)
Why Cases Are Placed in Fraud and Grand Jury Suspense

  1. Cases are placed in suspense when the control of the case is no longer under the jurisdiction of any function of the Service. This usually happens when CI recommends prosecution of the taxpayer or when a grand jury investigation is initiated. In both of these scenarios, the case is under the control of the Department of Justice (DOJ). Although CI controls the criminal investigation for the Service, the fraud coordinator has the responsibility of controlling the civil statutes.

  2. Refer to IRM 4.8.11, Technical Services Fraud Program Responsibilities, for the roles and responsibilities of the LTSFC (including, but not necessarily limited to, Fraud and Grand Jury Suspense, civil resolution, probation and restitution).

4.8.2.11.4  (06-27-2013)
Bankruptcy Suspense

  1. A bankruptcy case is commenced by the filing of a petition in U.S. Bankruptcy Court pursuant to the Bankruptcy Code.

  2. The Bankruptcy Code allows individuals, partnerships, corporations, and limited liability companies to file for debt relief by way of filing a bankruptcy petition with the U.S. Bankruptcy Court.

    1. The Bankruptcy Code, with amendments, can be found in Title 11 of the United States Code.

    2. The Bankruptcy Reform Act of 1994 (BRA 94) and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made significant changes to the Bankruptcy Code.

  3. The Bankruptcy Code provides the law under which bankruptcy proceedings are commenced, administered, and closed. Bankruptcy laws are separate from tax laws, and coordination is necessary to comply with both.

  4. Insolvency, a Collection function of the Small Business/Self Employed Operating Division of the Service, is responsible for administering that coordination.

  5. Refer to Exhibit 4.8.2-3 for a summary of assessment and suspension rules under the Bankruptcy Code, as revised over the years.

4.8.2.11.4.1  (06-27-2013)
Overview

  1. A TS bankruptcy coordinator is responsible for coordinating with and fielding questions from many people inside and outside the Service to ensure timely and accurate assessment of taxpayers who have filed for bankruptcy protection. They are responsible for managing examination case inventory and assisting others who manage cases impacted by bankruptcy.

  2. Because bankruptcy is a specialized field it is important that the TS bankruptcy coordinator have a working knowledge of bankruptcy terminology. IRM Exhibit 5.9.1-1, Glossary of Common Insolvency Terms, contains a list of bankruptcy definitions and concepts.

  3. The TS bankruptcy coordinator must complete Form 9984, Examining Officer’s Activity Record, or equivalent, to document time and actions performed. See IRM 4.8.1.6.1(3), Case Review (641).

4.8.2.11.4.1.1  (06-27-2013)
Sources

  1. Cases are received in TS from various parts of the organization. The primary sources of bankruptcy cases are field and office compliance groups. TS may also receive litigation cases from Campus Correspondence Examination, Automated Underreporter Program, TEFRA Suspense, and Appeals.

4.8.2.11.4.1.2  (06-27-2013)
Origination

  1. A bankruptcy case is typically commenced when a debtor files a petition for debt relief with the U.S. Bankruptcy Court. Bankruptcy provides individuals, partnerships, and corporations a way to satisfy their creditors when they are insolvent.

  2. Federal law found in Title 11 of the United States Code is commonly known as the Bankruptcy Code. The law has two primary objectives:

    1. To provide debtors with a fresh start by providing certain debt relief, and

    2. To establish an orderly and equitable system of financial reorganization or liquidation.

4.8.2.11.4.1.3  (06-27-2013)
Bankruptcy Estate

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

    Note:

    The estate may also include a non-debtor spouse’s community property interests.

  2. The bankruptcy estate is only a separate taxable entity in Chapter 7 or 11 cases of an individual.

  3. In Chapter 13 cases, and Chapter 11 cases of individuals filed on or after October 17, 2005, certain assets acquired by the debtor post-petition are included in the estate.

4.8.2.11.4.2  (06-27-2013)
Types of Bankruptcy

  1. The following are types of bankruptcy:

    • Chapter 7, Liquidation

    • Chapter 9, Adjustment of Debts of a Municipality

    • Chapter 11, Reorganization

    • Chapter 12, Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income

    • Chapter 13, Adjustment of Debts of an Individual with Regular Income

    • Chapter 15, Ancillary and Other Cross-Border Cases

4.8.2.11.4.2.1  (06-27-2013)
Chapter 7 Liquidation

  1. Liquidation is the act of reducing tangible and intangible assets to cash. All Chapter 7 cases involve the liquidation of the debtor's assets, to the extent there are some available for creditors. A business could be liquidated in Chapter 7 if there is no hope of continuing business operations and / or paying debts. The bankruptcy petition may be filed voluntarily or involuntarily. An involuntary bankruptcy petition is filed by the creditors on behalf of the debtor. In all Chapter 7 cases, a trustee is appointed.

  2. For individuals, the liquidation is limited to non-exempt assets. A discharge in a liquidation case is available only to individuals.

4.8.2.11.4.2.2  (06-27-2013)
Chapter 9 - Adjustment of Debts of a Municipality

  1. Chapter 9 is a bankruptcy proceeding for a governmental unit. In order to qualify as a Chapter 9 debtor, an entity must, among other things: be a municipality, be authorized to be a debtor by state law, be insolvent or unable to meet its debts as they mature, and desire to effect a plan to adjust such debts. Chapter 9 cases are very rare.

4.8.2.11.4.2.3  (06-27-2013)
Chapter 11 - Reorganization

  1. Chapter 11 is a bankruptcy proceeding in which an individual, business, or other entity may be allowed to reorganize or liquidate. A reorganization is accomplished through the confirmation of a Chapter 11 plan by the bankruptcy court. The plan is binding on the debtor and all creditors. Reorganization plans typically provide for payments to creditors over a number of years. A Chapter 11 plan can provide for either the liquidation or the reorganization of the debtor.

  2. In lieu of reorganizing, many businesses opt to liquidate in a Chapter 11. Such liquidations generally are accomplished where the Chapter 11 plan provides for the liquidation of the debtor’s assets. A business could be liquidated if there is no hope of continuing business operations and / or paying debts.

  3. There is a presumption in Chapter 11 cases that the debtor will remain in possession of its assets, but a trustee can be appointed by the bankruptcy court for cause. If a trustee has not been appointed, the debtor is referred to as the "debtor in possession" (DIP). The DIP has the rights and many of the duties of a bankruptcy trustee.

  4. A large percentage of Chapter 11 bankruptcies eventually end in liquidation.

  5. Chapter 11 - Small Business Case. A Small Business Case under Chapter 11 is a proceeding where the debtor’s liabilities do not exceed $2,490,925 and no active creditors’ committee exists. Many, if not most, Chapter 11 cases will fall within this definition.

    1. The debt limitation must be adjusted every three years under 11 USC 104 to reflect the Consumer Price Index.

4.8.2.11.4.2.4  (06-27-2013)
Chapter 12 - Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income

  1. A Chapter 12 bankruptcy is designed to enable a debtor who is a family farmer or family fisherman to reorganize rather than liquidate its operation. Chapter 12 cases resemble in part both Chapter 11 and Chapter 13 cases.

4.8.2.11.4.2.5  (06-27-2013)
Chapter 13 - Adjustment of Debts of an Individual with Regular Income

  1. Only an individual with regular income can be a debtor under Chapter 13. A payment plan is confirmed whereby the debtor makes payments to the Chapter 13 trustee, who makes disbursements to creditors according to the plan. The duration of the plan is generally three to five years.

4.8.2.11.4.2.6  (06-27-2013)
Chapter 15 - Ancillary and Other Cross-Border Cases

  1. A Chapter 15 proceeding may be commenced when a foreign court or foreign representative seeks assistance in the United States in connection with a foreign proceeding.

4.8.2.11.4.3  (06-27-2013)
Automatic Stay

  1. Understanding the operation of the automatic stay is the first step to understanding how bankruptcy impacts a taxpayer's tax debt.

4.8.2.11.4.3.1  (06-27-2013)
Definitions

  1. Automatic-Stay: The "automatic stay" arises by operation of law when a bankruptcy petition is filed. It prohibits certain acts against the debtor, the debtor’s property, and property of the estate. Since the automatic stay provision was amended in 1994 and again in 2005, the scope of the automatic stay depends on when the bankruptcy petition was filed.

  2. Income ax eriods:

    1. The "petition date" is the date the bankruptcy petition was filed with the bankruptcy court.

    2. An income tax period is the calendar or fiscal period covered by a tax return. It does not depend upon when the return was filed or due. The period covered by the income tax return determines whether a liability is a pre-petition or post-petition. The Bankruptcy Code treats pre-petition and post-petition liabilities differently.

    3. Pre-petition income tax debts are income taxes for periods that ended before the bankruptcy petition was filed.

    4. A post-petition income tax debt is for an income tax period that ends on or after the bankruptcy petition date. For determining whether a tax is pre-petition or post-petition, it does not matter whether the return was due, or the tax was assessed, before or after the petition date.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. Taxpayer filed a bankruptcy petition on December 30, 2006. The tax return was filed by and assessed on April 17, 2007. The tax liability for 2006 is considered a post-petition tax liability.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. The bankruptcy petition was filed February 8, 2007. The tax return was filed by and assessed by April 17, 2007. The tax liability for 2006 is considered a pre-petition tax liability.

    Example:

    A 2006 income tax return (balance due) has a year ending December 31, 2006. The bankruptcy petition was filed February 8, 2007. The tax return was filed on and assessed on May 30, 2007. The tax liability for 2006 is considered to be a pre-petition tax liability.

  3. Discharge: A permanent injunction against the collection of a discharged debt as a personal liability of the debtor. Not all debts are subject to a bankruptcy discharge. Generally, a discharge is granted to an:

    1. Individual debtor’s Chapter 7 case, 60 days after the date set for the first meeting of creditors;

    2. Individual Chapter 11 filed before October 17, 2005, or Chapter 11 cases of non-individuals when the case is confirmed;

    3. Individual Chapter 11 filed on or after October 17, 2005, upon completion of the plan; (BAPCPA), or

    4. Individual Chapters 12 and 13 when the plan is completed, typically within three to five years.

      Note:

      For items (c) and (d) above, the court may grant a hardship discharge.

  4. Dismissal: A term used when a bankruptcy proceeding is terminated prematurely by the court. Debts are not forgiven and the debtor does not receive a discharge. While the bankruptcy estates of individuals in Chapter 7 and 11 cases are separate taxable entities, the bankruptcy estate will not be treated as a separate taxable entity if the case is dismissed. Upon dismissal, the debtor is no longer protected by the automatic stay.

  5. Denial of Discharge: A determination by the bankruptcy court that the debtor is not entitled to receive a bankruptcy discharge. The court order is recorded in the docket history.

  6. Closed: Refers to a court order closing the bankruptcy case. It is recorded in the docket history.

4.8.2.11.4.3.2  (06-27-2013)
Automatic Stay - BAPCPA, Petitions Filed on or After October 17, 2005

  1. The filing of a bankruptcy petition under Chapters 7, 11, 12, and 13 gives rise to an automatic stay effective as of the bankruptcy petition date. The stay generally prohibits the commencement or continuation of collection activities against the debtor, the debtor’s property, and property of the estate (subject to certain exceptions). It also prohibits the commencement or continuation of certain Tax Court cases.

  2. For bankruptcy cases filed on or after October 17, 2005, there is no stay against assessments (that was repealed in 1994). Also, for these cases the automatic stay does not apply to the commencement or continuation of a United States Tax Court proceeding to determine an individual’s post-petition income tax period liability. Therefore, an individual who files a bankruptcy petition under BAPCPA is now permitted to file a Tax Court petition for post-petition income tax periods over which the Tax Court may preside, without violating the automatic stay.

    Caution:

    It is important to determine whether the automatic stay will directly or indirectly toll the ASED to make sure that deficiencies are assessed timely.

  3. Even for bankruptcy cases filed on or after October 17, 2005, the stay applies to both pre- and post-petition liabilities of corporations, as long as the liabilities can be determined by the bankruptcy court.

    Note:

    Under BAPCPA, the ASED on unagreed individual pre-petition income tax period liabilities will be suspended if a statutory notice of deficiency is issued. The ASED on unagreed corporate pre- and post-petition income tax liabilities will be suspended.

  4. The automatic stay commences upon the filing of a bankruptcy petition. The stay continues until the earliest of the following:

    1. The time the bankruptcy case is dismissed (a case may be dismissed voluntarily by the debtor or involuntarily for "cause." )

    2. The time the case is closed by the bankruptcy court (all chapters), or

    3. The time a discharge is granted or denied (except for corporations in Chapter 7 cases, which never receive a discharge).

  5. The time of discharge is as follows:

    Bankruptcy Chapter Discharge Time
    7 Corporations – A corporation does not receive a discharge in Chapter 7, so the discharge is neither granted nor denied.
    Individuals – Ordinarily, a discharge is granted about three months after the petition date. The Chapter 7 discharge is automatic if no objections are filed.
    11 For Chapter 11 cases of individuals filed on or after October 17, 2005, the debtor generally receives a discharge after completion of payments under the plan. In all other Chapter 11 cases, the discharge is generally granted upon confirmation of the plan. However, a corporation that is liquidating in Chapter 11 may not be granted a discharge. Check with Associate Area Counsel to see if the automatic stay terminated upon plan confirmation, and the ASED begins to run.
    Corporations – A business entity that files Chapter 11 typically tries to reorganize, not liquidate. However, it is not uncommon for a Chapter 11 plan to provide for the liquidation of the debtor corporation. A corporation in a liquidating case does not receive a discharge.
    13 For Chapter 13 cases a discharge is granted upon completion of the debtor’s plan, ordinarily three to five years after the petition is filed.

4.8.2.11.4.3.3  (06-27-2013)
Automatic Stay - BAPCPA, Serial Bankruptcy Filings on or After October 17, 2005

  1. For bankruptcy filings on or after October 17, 2005 (Bankruptcy Abuse Prevention Consumer Protection Act of 2005 (BAPCPA)), Bankruptcy Code 362(c)(3) and (c)(4) prevent the automatic stay from remaining in effect, or coming into effect at all, in certain cases where the debtor has recently been a debtor in bankruptcy.

  2. Under Bankruptcy Code 362(c)(3), generally if an individual (or joint individuals) files a Chapter 7, 11, or 13 case, AND if the same individual (or joint individuals) was in a single or joint bankruptcy case within the preceding one-year period (12 month period preceding), AND the first case was dismissed, THEN the subsequent bankruptcy is presumed abusive, and the automatic stay will terminate 30 days after the second petition was filed, UNLESS within that 30-day period:

    1. A motion is made by a "party in interest" (e.g., the debtor or a creditor) to extend the stay, and

    2. The "party in interest" demonstrates by clear and convincing evidence that the filing of the second case is in good faith.

    3. The previous case was a Chapter 7 dismissed under 11 USC 707(b) (which includes the means test and other factors) and the later case is not a Chapter 7 case.

    Caution:

    Court records may not reflect the automatic stay has been extended within 30 days from the filing of the petition. Allow extra time for the court record to be updated. Contact area counsel if there is any question about whether the stay terminated. Also, if the first bankruptcy case was dismissed after the second bankruptcy case was filed, it is not clear whether the stay would terminate after 30 days. Consult counsel for a determination of whether the stay terminated.

    Note:

    The stay only terminates as to actions by any creditor to collect a debt against the debtor personally or against the debtor’s property securing such debt, unless that property is property of the estate. The stay does not terminate as to property of the estate.

  3. Bankruptcy Code 362(c)(4) further limits serial filings. Generally, the stay will not go into effect if the individual debtor had two or more cases pending within the previous one-year period that were dismissed. At the request of a "party in interest," the court shall promptly enter an order confirming that there is no automatic stay. The court may agree to order the automatic stay to take effect at the request of the debtor or "party of interest." If the court grants an automatic stay, it becomes effective on the day of the court order, not the petition date.

    Exception:

    When a Chapter 7 case is dismissed under section 707(b) of the Bankruptcy Code and converted to a Chapter 13 (or Individual’s Chapter 11), the automatic stay in the new Chapter 13 (or Chapter 11) will not terminate in 30 days. An order in the court record is not necessary to indicate the continuation of the automatic stay.

  4. A "party in interest," such as the Service, may request the court issue an order confirming the automatic stay is terminated.

    Important: Direct any inquiry to confirm whether the automatic stay is in effect to Area Counsel.

4.8.2.11.4.3.4  (06-27-2013)
Automatic Stay - Bankruptcy Reform Act, Petitions Filed On or After October 22, 1994 and Before October 17, 2005

  1. The filing of a bankruptcy petition under Chapters 7, 11, 12, or 13 gives rise to an automatic stay effective as of the bankruptcy petition date. The stay generally prohibits any collection action against the debtor, the debtor’s property, and property of the estate (subject to certain exceptions).

  2. For bankruptcy cases filed on or after October 22, 1994, the stay does not prohibit the making of a tax assessment.

    Note:

    While the stay does not directly prohibit the making of an assessment, it may indirectly stay the making of an assessment because the stay prohibits the commencement or continuation of any Tax Court case concerning the debtor (an exception regarding post-petition liabilities of individuals was added in 2005). The ASED on unagreed individual pre- and post-petition income tax period liabilities may be suspended indirectly once a statutory notice of deficiency is issued because the stay against the commencement of the Tax Court case tolls the time to file the Tax Court case, which tolls the ASED.

  3. There are no serial filer exceptions to the stay for bankruptcy cases filed on or after October 22, 1994, and before October 17, 2005.

  4. The automatic stay commences upon the filing of a bankruptcy petition. See IRM 4.8.2.11.4.3.2(4) and (5) above for the time frames of the stay.

4.8.2.11.4.3.5  (06-27-2013)
Automatic Stay - Assessment Statute Expiration Date

  1. The automatic stay does not prohibit assessments for bankruptcy cases that were filed on or after October 22, 1994. The assessment statute could be suspended indirectly if the Service issued a notice of deficiency. That is because the stay against Tax Court proceedings tolls the debtor's time to file a Tax Court petition for the time the debtor was prohibited from doing so, plus 60 days. See IRC 6213(f). The ASED is tolled while the time to file a Tax Court petition is tolled, plus an additional 60 days. See IRC 6503(a).

  2. For cases filed on or after October 22, 1994, the Service must do one of the following in order to protect the assessment statute:

    • Make agreed assessment

    • Survey

    • No-change

    • Issue a statutory notice of deficiency

    • Get protection in the form of a consent to extend the statute

4.8.2.11.4.4  (06-27-2013)
Bankruptcy Examination

  1. When the Insolvency Unit is notified of a bankruptcy filing, they will generally place a freeze code (-V or -W) on all master file accounts of the taxpayer using a Transaction Code (TC) 520 with an appropriate closing code. The date of the TC 520 will be the date the taxpayer filed the bankruptcy petition.

  2. If a taxpayer is not under examination when the Insolvency Unit is notified of the bankruptcy, a freeze code may be put in place due to Service debts or refund offset to another agency (child support or student loans). The criteria for the bankruptcy TC 520 is established by Collection Insolvency not Examination. Absence of the TC 520 is not evidence an automatic stay is not in effect. A check of PACER should be made.

4.8.2.11.4.4.1  (04-14-2015)
Joint Return, One Spouse in Bankruptcy

  1. IRC 6503(a) suspends the running of the statute of limitations under IRC 6501 while the Secretary is prohibited from making an assessment plus 60 days. If two taxpayers file a joint return and only one spouse files for bankruptcy, the statute of limitation for the other spouse (the "non-bankrupt" spouse) is not suspended under IRC 6503(a). In other words, the bankruptcy stay does not protect the non-bankrupt spouse's statute of limitations. Therefore, the non-bankrupt spouse must be assessed on MFT 31 prior to the normal statute date under IRC 6501.

4.8.2.11.4.4.2  (06-27-2013)
Community Property Considerations

  1. For information on community property considerations see IRM 4.8.2.11.4.8.15.1.

4.8.2.11.4.4.3  (06-27-2013)
IRC 1398, IRC 1399, and IRC 108

  1. The TS bankruptcy coordinators will need to have an understanding of IRC 1398, Rules relating to individuals’ Title 11 cases, and IRC 108, Income from Discharge of Indebtedness, as these code sections relate to returns of debtors who are individuals and returns of bankruptcy estates.

  2. Pursuant to IRC 1398 and IRC 1399, the bankruptcy estate is a separate taxable entity only when the debtor is an individual in a Chapter 7 or 11 case. Where a separate taxable entity is created, both the debtor and the estate have an obligation to file returns for income tax periods ending after the bankruptcy case was commenced (assuming they have sufficient income). The estate calculates its income and deductions in the same way as an individual who is married filing separately.

    Note:

    If the debtor is an individual who is a partner, the individual's interest in the partnership is property of the estate. If the estate holds the debtor's partnership interest when items of income or loss pass through, then the estate, not the debtor, should report those items. Even in Chapter 7 and 11 cases of individuals, no separate entity is created if the bankruptcy case is dismissed (even though one may have existed temporarily) and all income and deductions generated during this period should be reported on the debtor's Form 1040.

  3. The bankruptcy estate is not a separate taxable entity if the debtor is not an individual or if the individual is in Chapter 12 or 13. A bankruptcy filing by a corporation or partnership does not create a separate taxable entity. If a trustee is required to file a return, the return will be a Form 1120, U.S. Corporation Income Tax Return, or Form 1065, U.S. Return of Partnership Income, respectively. IRC 1399, No Separate Taxable Entities for Partnerships, Corporations, etc.

  4. A bankruptcy estate of an individual in Chapter 7 or 11 is required to file an income tax return for any tax year in which its gross income equals or exceeds the sum of the personal exemption amount plus the basic standard deduction amount of a married individual filing a separate return. The responsibility of computing and paying the estate’s tax liabilities and filing the return rests with the trustee or the debtor-in-possession. The form used by the estate is Form 1041, U.S. Income Tax Return for Estates & Trusts. See Pub 908, Bankruptcy Tax Guide. The taxable income of the estate is computed in the same manner as for an individual. The estate is entitled to the same Schedule A or Schedule C deductions as an individual. The standard deduction is the same as for a married individual filing a separate return. Likewise, the estate must choose between itemizing its non-business deductions or taking the standard deduction. The tax rate used is the rate for a married individual filing a separate return. When married individuals file a joint bankruptcy petition, each individual must file a Form 1040, which are both attached to the single estate Form 1041. See IRC 1398(c).

  5. Expenses incurred before the commencement date by a cash basis debtor but paid by the estate retain their character as if paid by the debtor. The debtor’s unpaid bills for business or investment expenses can be deducted as business or investments expenses of the estate, when paid. If wages owed by the debtor to employees are paid by the estate, the estate is liable for employment taxes. See IRC 1398(c).

  6. The estate may adopt either a calendar or a fiscal tax year and the return must be filed within four and a half months after the close of its tax year. An estate may request an extension to file. The estate must adopt the same method of accounting (cash, accrual, etc.) for its income and deductions that was used by the debtor. See IRC 1398(g)(7).

  7. A debtor may elect, and the spouse may join the election, to treat the taxable year which includes the bankruptcy commencement date (date of bankruptcy filing) as two taxable years. The first income period ends on the day before the commencement date, and the second begins on the day of the commencement date. More rules of this election are in IRC 1398(d).

  8. The gross income of the estate includes any income generated by the assets of the estate (e.g., interest, dividends, etc.), and gains from the sale of the estate assets. It also includes gross income of the debtor to which the estate is entitled under Bankruptcy Code 541, except for amounts already received or accrued by the debtor as income before the bankruptcy commencement date. See IRC 1398(e).

  9. Pre-BAPCPA (cases filed before October 17, 2005): For Chapter 11 cases of individuals filed before October 17, 2005, gross income of the bankruptcy estate is determined in the same manner as in Chapter 7 cases involving individuals. Notably, gross income of the estate generally does not include any income that the debtor earns after the commencement of the bankruptcy case. If the debtor is operating a business, the income of the business may have to be allocated between the estate and the debtor. In some cases where a business is being operated, the business income could be treated as income of the estate, and amounts the debtor is allowed to live on could be treated as income of the debtor.

  10. Post-BAPCPA cases (cases filed on or after October 17, 2005): For cases filed on or after October 17, 2005, earnings from services performed by the individual debtor after the commencement of the Chapter 11 case are property of the bankruptcy estate under Bankruptcy Code 1115. Pursuant to IRC 1398(e)(1), gross income of the estate therefore includes income that the debtor earns for services performed after the bankruptcy petition date. The income that the debtor earns for services performed after the commencement of the bankruptcy case should generally be included on the estate's return in cases filed after October 17, 2005.

  11. If a post-BAPCPA Chapter 11 case is converted to a Chapter 13 case, the Chapter 13 estate is not a separate taxable entity and earnings from post-conversion services and income from property of the estate realized after the conversion to Chapter 13 are taxed to the debtor.

  12. If a post-BAPCPA Chapter 11 case is converted to a Chapter 7 case, Bankruptcy Code 1115 will not apply after conversion and earnings from post-conversion services will be taxed to the debtor, rather than the estate. In such a case, the property of the Chapter 11 estate will become property of the Chapter 7 estate. Any income on this property will be taxed to the estate even if the income is realized after the conversion to Chapter 7.

  13. A debtor in possession may be compensated by the estate to manage or operate a trade or business that the debtor conducted before the commencement of the bankruptcy case. For cases filed on or after October 17, 2005, such payments should be reportable by the debtor as miscellaneous income on his or her individual income tax return. Amounts paid by the estate to the debtor in possession for managing or operating the trade or business may qualify as administrative expenses of the estate.

  14. For Chapter 11 cases of individuals filed on or after October 17, 2005, within a reasonable time after the commencement of a Chapter 11 bankruptcy case, the trustee (if one is appointed) or the debtor in possession should provide notification of the bankruptcy estate's EIN to persons that are required to file information returns with respect to the bankruptcy estate's gross income, gross proceeds, or other types of reportable payments. See IRB 2006-83 and IRC 6109(a)(2). Since these payments are property of the estate under Bankruptcy Code 1115 for Chapter 11 cases filed after October 17, 2005, such persons should report the gross income, gross proceeds, or other reportable payment on an appropriate information return using the estate's name and EIN in the time and manner required under the Internal Revenue Code and regulations (see IRC 6041 through IRC 6050W).

    Note:

    The trustee or debtor in possession should not, however, provide the EIN to the debtor's employer or other person filing Form W-2 with respect to the debtor's wages or other compensation, since Bankruptcy Code 1115 does not affect the determination of what constitutes wages for purposes of federal income tax withholding or the Federal Insurance Contributions Act. See IRC 3121(a) and IRC 3401(a). An employer should continue to report all wage income and accompanying tax withholdings, whether pre-petition or post-petition, on a Form W-2 issued to the debtor under the debtor's social security number. See IRC 6721 through IRC 6725 for applicable penalties for failure to comply with information reporting requirements, including providing taxpayer identification numbers, and provisions for penalty waivers for reasonable cause.

  15. When a Chapter 11 bankruptcy case is closed, dismissed, or converted to a case under Chapter 12 or 13, the bankruptcy estate ends as a separate taxable entity. The debtor should, within a reasonable time, provide notification of the closing, dismissal, or conversion to the persons that were previously notified of the bankruptcy case to the extent notification is necessary to ensure that gross income, gross proceeds, and other types of reportable payments realized after the closing, dismissal, or conversion are reported to the proper person and with the correct taxpayer identification number. Gross income, gross proceeds, and other reportable payments realized after the closing, dismissal, or conversion to Chapter 12 or 13 should, in general, be reported to the debtor, rather than the estate.

  16. If the post-BAPCPA Chapter 11 case is converted to a Chapter 7 case, the bankruptcy estate will continue to exist as a separate taxable entity and gross income (other than post-conversion income from the debtor's services), gross proceeds, or other reportable payments should continue to be reported to the estate if the gross income, gross proceeds, or other reportable payment represents property of the Chapter 7 estate. Because income from services performed by the debtor after conversion to Chapter 7 is not property of the Chapter 7 bankruptcy estate, the debtor should, within a reasonable time after the conversion to Chapter 7, notify payors required to report the debtor's non-employee compensation on Form 1099-MISC that such compensation earned after the conversion to Chapter 7 should be reported using the debtor's names and taxpayer identification number, rather than the estate's name and EIN.

  17. A debtor who is an individual in the post-BAPCPA Chapter 11 case (a case filed on or after October 17, 2005) is not required to file a new Form W-4 with his or her employer to adjust withholding allowances solely because the debtor filed a Chapter 11 case and the post-petition wages are includible in the gross income of the estate. This is true even though the estate may be taxed at a higher tax rate than the debtor and is entitled to only one personal exemption. A new Form W-4 may be necessary; however, under the applicable regulations when, for instance, the debtor is no longer entitled to claim the same number of allowances claimed on the Form W-4 previously provided to the employer, such as for certain deductions or credits that now belong to the estate. See Treas. Reg. 31.3402(f)(2)-1. Furthermore, even where not required, in some circumstances the debtor may wish to file a new Form W-4 to increase the amount of income taxes withheld from the post-petition wages that will be allocated to the estate. Otherwise, estimated tax payments on behalf of the estate may be required in order to avoid a penalty for underpayment of estimated tax. See IRC 6654(a).

  18. IRC 1401 imposes a tax upon the self-employment income of every individual. The term "self-employment income" means the net earnings from self-employment derived by an individual. See IRC 1402(b).

  19. The term "net earnings from self-employment" means, in relevant part, the gross income derived by an individual from any trade or business carried on by such individual less deductions allowed attributable to such trade or business. See IRC 1402(a). With regard to post-BAPCPA Chapter 11 cases, neither Bankruptcy Code 1115 nor IRC 1398 addresses the application of the self-employment tax to the earnings from the individual debtor's continuing services. Because the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report on Schedule SE of the debtor's individual income tax return the self-employment income earned post-petition, which includes the attributable deductions, and must pay the resulting self-employment tax imposed by IRC 1401.

  20. Even though, as a result of the enactment of 11 USC 1115 for Chapter 11 cases of individuals filed after October 17, 2005, post-petition wages earned by a debtor are generally treated for income tax purposes as gross income of the estate, rather than the debtor, the reporting and withholding obligations of a debtor's employer have not changed. 11 USC 1115 has no effect on the determination of wages under the Federal Insurance Contributions Act (FICA), including application of the contribution and benefit base (as determined under section 230 of the Social Security Act). See IRC 3121(a). Similarly the enactment of 11 USC 1115 has no effect on the determination of wages for Federal Unemployment Tax Act (FUTA) tax or federal income tax withholding purposes. See IRC 3306(b) and IRC 3401(a). Since 11 USC 1115 does not affect the application of FICA tax, FUTA tax, or federal income tax withholding with respect to the wages of a Chapter 11 debtor, an employer should continue to reflect such wages and accompanying tax withholdings on a Form W-2 issued to the debtor under the debtor's name and social security number.

  21. For Chapter 11 cases of individuals filed on or after October 17, 2005, when an employer issues a Form W-2 to a Chapter 11 debtor reporting all of the debtor's wages, salary or other compensation to the debtor for a calendar year, and a portion of the wages, salary, or other compensation represents earnings from post-petition services includible in the estate's gross income, an allocation of the amounts reported on the Form W-2 must be made. The debtor in possession, or the trustee, if one is appointed, must allocate in a reasonable manner wages, salary, or other compensation reported in Box 1 and the withheld income tax reported in Box 2 of Form W-2 between the debtor and the estate. The allocations must reflect that the debtor's gross earnings from post-petition services and gross income from post-petition property are, in general, includible in the bankruptcy estate's gross income, rather than in the debtor's gross income. If reasonable, the debtor and trustee may use a simple percentage method for allocating income and withheld income tax between the debtor and the estate. The same method used to allocate income must be used to allocate withheld income tax. For example, if one-sixth of the wages reported on Form W-2 for the calendar year ending December 31 2005, was earned after the commencement of the case and must therefore be included in the estate's gross income, one-sixth of the withheld income tax reported on Form W-2 must be claimed as a credit on the estate's income tax return and five-sixths of the withheld income tax must be claimed as a credit on the debtor's income tax return. See IRC 3121(a).

  22. In some post-BAPCPA cases (cases filed after October 17, 2005), persons filing information returns may report to the debtor gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate using Form 1099-INT, Form 1099-DIV, Form 1099-MISC, Schedule K-1 or other information returns. This may occur, for instance, if the debtor in possession fails to notify the payor of the bankruptcy estate's EIN as explained above. In these cases, the debtor in possession, or the trustee, must allocate the improperly reported income in a reasonable manner between the debtor and the estate. In general, the allocation must ensure that any income (and any income tax withheld) attributable to the post-petition period is reported on the estate's return and any income (and income tax withheld) attributable to the pre-petition period is reported on the debtor's return. The debtor must attach a statement to his or her income tax return stating that he or she filed a Chapter 11 bankruptcy case.

  23. The statement must reflect the foregoing allocations of income and withheld income tax and must describe the method used to allocate income and withheld tax between the debtor and the estate. The statement should list the following:

    • Filing date of the bankruptcy case

    • The bankruptcy court in which the case is pending

    • The bankruptcy court case number

    • The bankruptcy estate's EIN

      Note:

      The debtor in possession or trustee must attach a similar statement to the income tax return of the estate.

  24. Transfers of assets from the debtor to the estate or from the estate to the debtor are not taxable events unless they constitute a sale or exchange. See IRC 1398(f).

  25. The estate may deduct any administrative expenses allowed under Bankruptcy Code 503. This includes the debtor’s accounting, legal, and other professional service expenses necessary to preserve the estate and paid by the estate. See IRC 1398(h).

  26. Certain expenses may be nondeductible under other provisions of the IRC.

    1. Federal income tax: Federal income tax cannot be deducted (IRC 275, Certain Taxes).

    2. Capital expenditures: Capital expenditures must be carried on the books, depreciated, or amortized (IRC 263, Capital Expenditures.)

    3. Administrative expense: If the estate’s administrative expense deduction would hypothetically increase or create a net operating loss (NOL) for the current year, it can be carried back and / or carried forward to income tax years per the NOL deduction rules in IRC 172, Net Operating Loss Deduction Rules. This deduction cannot be carried to any tax returns of the debtor. This deduction is "stacked" after the deduction for the NOL. See IRC 1398(h)(2).

  27. Upon commencement of the bankruptcy, the estate succeeds to the debtor’s tax attributes. Any net operating loss (NOL) that the debtor generated before the commencement date but did not fully utilize becomes a tax attribute of the estate. Applicable IRC 172 rules apply. See IRC 1398(g).

  28. A new NOL generated by the estate during its administration also may be carried back and / or forward for the number of tax years allowable per IRC 172. If the estate did not exist for the allowable number of carryback years, the corresponding returns of the debtor can be substituted. Any unused NOL at the end of a tax year is subject to reduction for debts discharged during the year. IRC 108(b), Income From Discharge of Indebtedness. They are first used to reduce the current years’ taxable income and then become subject to reduction. See IRC 108(b)(4) and IRC 108(d)(8).

  29. Other tax attributes to which the estate succeeds are charitable contribution carryovers, credit carryovers, capital loss carryovers, bases, holding periods, character of assets, method of accounting, and suspended passive activity losses and credits. See IRC 1398(g).

  30. On termination of the bankruptcy estate, the debtor succeeds to the same attributes as succeeded to by the estate except for the estate’s method of accounting. See IRC 1398(i).

  31. A reduction of the tax attributes by the amount of the debtor's discharge of indebtedness in the bankruptcy case may be required. Generally, under IRC 108, the debts discharged are excluded from gross income but the estate’s tax attributes must be reduced by the discharged amount. The tax attributes are generally reduced while in the hands of the estate. See IRC 108(d)(8).

  32. Under IRC 108(b)(2), tax attributes are reduced in the following order:

    1. Any NOL for the year of discharge, and any NOL carryover to this taxable year,

    2. Any general business credit carryover to or from the taxable year of discharge,

    3. Any minimum tax credit at the beginning of the taxable year immediately after discharge,

    4. Any net capital loss for the taxable year of the discharge, and any capital loss carryover to such taxable year,

    5. Basis of all depreciable and non-depreciable property, except property that is exempt under the bankruptcy code,

    6. Any passive activity loss and credit carryover of the taxpayer from the taxable year of the discharge, and

    7. Any foreign tax credit carryover to or from the taxable year of discharge.

  33. Alternatively, under IRC 108(b)(5) the debtor may elect to first reduce the basis of depreciable property (not non-depreciable property) and then reduce tax attributes in the order shown above. However, the amount of the basis reduction cannot exceed the aggregate adjusted bases of the depreciable property held at the beginning of the taxable year after the year of the discharge. See IRC 108(b)(5)(B). If the debtor does not make the IRC 108 election, then when calculating the attribute reduction required under IRC 108(b)(2)(E) the bases of property (not limited to depreciable property) cannot be reduced below the excess of the aggregate bases of the property over the aggregate amount of the individual debtor’s remaining liabilities. IRC 1017(b)(2). For reductions made under IRC 108(b)(2)(E) or (b)(5), no reduction is made to any property exempt under the Bankruptcy Code. IRC 1017(c)(1). Note that under IRC 108(b)(3) all reductions in tax attributes are one dollar for each dollar excluded except to tax credits (including passive activity credit carryovers) which are 33 1/3 cents for each dollar.

  34. In general, the effective date of the reduction to tax attributes is the beginning of the first taxable year after the year of the discharge of indebtedness. See IRC 108(b)(4)(A) and IRC 1017(a). Thus, for calendar year taxpayers, if the discharge order is entered in 2008, the reduction of tax attributes occurs as of January 1, 2009.

  35. The reduction of tax attributes is reported on a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). In an individual Chapter 7 or 11 case, the trustee or debtor-in-possession reports any reduction of tax attributes other than basis on Form 982 and attaches it to the bankruptcy estate’s Form 1041. The individual debtor may inspect the bankruptcy estate’s Form 1041. The debtor’s reduction of basis is reported on Form 982 and attached to the individual Form 1040. Pub 908, Bankruptcy Tax Guide.

  36. In all other bankruptcy cases, the debtor reports any reduction of tax attributes, including basis, on Form 982 and attaches it to the entity’s regular tax return. A separate taxable entity is not created and no Form 1041 is required. Pub 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

4.8.2.11.4.4.3.1  (04-14-2015)
Tax Equity Fiscal Responsibility Act (TEFRA) Partnership Control System (PCS)

  1. Upon confirmation that a bankrupt partner is also a TEFRA investor, or a Partnership Investor Control Code (PICF-CD) is present on AMDISA, the Technical Service bankruptcy coordinator will contact the TEFRA coordinator to determine the proper handling of the case. Refer to IRM 4.31.7, Pass Through Entity Handbook–TEFRA Bankruptcy.

  2. If the linked taxpayer is still in bankruptcy and non-TEFRA issues are resolved, note instructions on Form 3198, "Forward to Technical Services," check the box "TEFRA Investor" and check the box "Other" and write "Agreed case with unresolved TEFRA issues-Bankruptcy" or similar instructions as appropriate. The TEFRA coordinator will determine if the one-year assessment date has been input in the PCS system, advise the Campus TEFRA Function and coordinate with the TS bankruptcy coordinator for disposition of the case.

  3. A partnership may file bankruptcy. The automatic stay of Bankruptcy Code 362 does not prevent the Service from issuing a Final Partnership Administrative Adjustment, FPAA.

  4. If the bankrupt investor is also the tax matters partner (TMP), the TMP status is terminated. See Treas. Reg. 301.6231(a)(7)-1(I)(1)(iv) and Treas. Reg. 301.6231(c)-7(a).

  5. Conversion of TEFRA debtor partner partnership items to non-partnership items: The Service has administratively 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. See IRC 6231(c) and Treas. Reg. 301.6231(c)-7(a). The partner may no longer remain a part of the TEFRA proceedings. IRC 6226(d)(1)(A). The Service will proceed separately against a partner that has been removed from the TEFRA proceeding with respect to partnership items.

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

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

    2. 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. IRM 4.31.7.6.1, Analyze Case and Determine Which Partnership Tax Years Convert. After determination of the partnership items converted, the examination must be completed and closed, agreed or no-change, or a notice of deficiency issued within one year from the bankruptcy petition date under IRC 6229(f) or within the partner's IRC 6501 limitations period if longer. The statute may be extended using Form 872–F, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership That Have Converted Under Section 6231(b) of the Internal Revenue Code or Form 872 (October 2009 version or later), Consent to Extend the Time to Assess Tax.

    Note:

    If the case is unagreed, the normal statutory notice of deficiency instead of an FPAA must be issued prior to the expiration of the 1-year date (or unextended IRC 6501 period) in order to trigger the suspension of the statute under IRC 6503(a)(1). The period of limitations pursuant to IRC 6501 will be suspended under IRC 6503(a)(1) for the period debtor is prohibited from filing a petition in U.S. Tax Court. The one year is computed by using the date of the bankruptcy filing plus one year, less one day.

  7. If a spouse files a joint return with a partner, the spouse becomes a "partner" to the TEFRA procedures. See IRC 6231(a)(2)(B). If the partnership items of the spouse that holds an interest in the partnership convert to nonpartnership items (e.g., because of a bankruptcy), then the spouse who does not hold an interest in the partnership will no longer be treated as a partner. Treas. Reg 301.6231(a)(2)-1(a)(4)(ii). However, if the non-bankrupt spouse holds a separate interest in the partnership, then the non-bankrupt spouse’s partnership items will not convert to nonpartnership items. Treas. Reg. 301.6231(a)(2)-1(a)(4)(i).

  8. If the TEFRA partnership proceeding is completed (i.e., the FPAA has been issued and the decision is final) but the assessment has not been made, there is no conversion of partnership items. Deficiency procedures do not apply. Accordingly, the suspension of the statute of limitations of IRC 6503(h) generally is not applicable. The period for assessment will expire one year from the date of the FPAA default or the decision of the court becomes final. See IRC 6229(d).

  9. Issue Letter 1005, Deficiency Letter in Bankruptcy & Receivership Cases.

4.8.2.11.4.5  (06-27-2013)
Prompt Determinations

  1. The trustee may request a prompt determination of any unpaid tax liability of the bankruptcy estate under Bankruptcy Code 505(b)(2). See Rev. Proc. 2006-24. Prompt determinations are handled by PSP. The bankruptcy coordinator in TS may receive inquiries from various partners. See IRM 4.27.5.2, Prompt Determination Requests.

  2. Requests are initially sent to centralized insolvency operation (CIO) in the Philadelphia Campus by the trustee.

  3. CIO forwards the prompt determination requests to PSP. PSP has 60 days from the date of receipt of a request to advise the trustee by letter of the decision to examine an estate tax return or accept it as filed.

  4. A bankruptcy estate selected for examination is controlled and assigned by PSP. The trustee or debtor in possession must be notified by an examination report of any tax due within 180 days from the date of receipt of the prompt determination request.

  5. The examiner must forward a copy of the examination report to Insolvency so that an administrative claim can be filed. See IRM 4.8.2.11.4.7.2.4.

  6. The following sources can provide additional information, if needed:

    1. IRM 4.27.5.2, Prompt Determination Requests.

    2. The Prompt Determination coordinator in PSP may be located at http://mysbse.web.irs.gov/exam/mis/contacts/default.aspx.

4.8.2.11.4.6  (06-27-2013)
Requests for Determinations of the Tax Effects of Proposed Chapter 12 Plans

  1. BAPCPA amended Bankruptcy Code 1231, to provide that a proponent of a Chapter 12 plan may request a determination of the tax effects of a proposed plan. Rev. Proc. 2006-52, 2006-2 C.B 995. Bankruptcy Code 1231 now allows the bankruptcy court to authorize the proponent of a Chapter 12 plan to request a determination, limited to questions of law, of the federal income tax effects of the plan. The bankruptcy court may declare the tax effects of a proposed plan after the earlier of the date the Service responds to the request or 270 days after the request. The revenue procedure directs the request for determination to be sent to CIO, which forwards it to the appropriate area TS bankruptcy coordinator.

  2. The bankruptcy coordinator will work the request for determination along with bankruptcy counsel assigned the case. Counsel will direct the contents of the determination letter issued on SB/SE letterhead from TS. The TS manager is delegated the authority to sign the determination letter. See Delegation Order 25-3 per IRM 1.2.52.4, Delegation Order 25-3 (formerly DO-51, Rev. 9).

  3. Upon examination of the request for determination by TS and Area Counsel, if it is determined that the request is actually a prompt determination request, the request is sent to PSP.

4.8.2.11.4.7  (06-27-2013)
Bankruptcy Coordination

  1. SB/SE Collection Insolvency is responsible for notifying Examination of bankruptcy filings.

  2. The automatic insolvency system (AIS) inputs TC 520 on IDRS with bankruptcy condition codes on those cases that meet insolvency bankruptcy criteria. The condition codes are listed in Document 6209, IRS Processing Codes and Information, Section 11.8(8), TC 520 Closing Code Chart.

  3. Examiners / reviewers, as a rule, examine and analyze a return’s transcript in processing any assigned case. The bankruptcy indicators on IDRS are:

    • IMFOLI will indicate a litigation entity freeze of "-V" or "--W" .

    • TC 520 will be on one or more of the taxpayer pre-petition years.

    • AMDISA print may reflect a bankruptcy freeze "U" or "X" .

  4. Insolvency inquiries via telephone calls and e-mail will be received requesting / notifying of ongoing examinations in area groups, campuses, or under reporter units. These inquiries are received soon after the filing of a bankruptcy petition because Insolvency must file a proof of claim in bankruptcy court.

  5. SB/SE Counsel, Department of Justice, and the U.S. Attorney will also make requests and inquiries concerning bankruptcy court litigation.

  6. When examiners, while developing an examination case and / or interviewing a taxpayer, learn of bankruptcy, they should contact the TS bankruptcy coordinator.

  7. Revenue agents assigned the examination of a prompt determination of a bankruptcy estate, Form 1041 and related taxpayer’s Form 1040, should also contact the TS bankruptcy coordinator.

  8. Taxpayers in bankruptcy may respond to TS after receipt of a statutory notice of deficiency.

4.8.2.11.4.7.1  (06-27-2013)
Tools

  1. IDRS, AIS, and PACER are common electronic tools used in bankruptcy coordination.

  2. To access these systems, complete an Online 5081 request. Once processed, an account ID and password will be issued.

4.8.2.11.4.7.1.1  (04-14-2015)
Tools and Definitions

  1. The Service, as a creditor of a debtor, files a proof of claim with the bankruptcy court asserting a right of payment from the bankruptcy estate for pre-petition debts. This includes unpaid balances on the debtor’s master file, unassessed deficiencies for ongoing examinations, and potential liability for unfiled returns.

  2. Whoever is holding a case at the time of bankruptcy discovery (Examination, PSP, TS, Campus, Appeals) is responsible for advising Insolvency of any pending tax and penalty amounts 30 days prior to the bar date. These amounts may need to be estimated.

  3. The "bar date" (i.e., the date by which a creditor must file a proof of claim) is fixed by the court if it is a Chapter 9 or Chapter 11 case or by Federal Bankruptcy Rule 3002(c) if it is a Chapter 7, Chapter 12, or Chapter 13 case. The Service is generally allowed a minimum of 180 days after the order of relief in which to file a proof of claim. Extensions are granted for cause.

  4. The "first meeting of creditors" (FMC) is the meeting at which the debtor is required to testify under oath about its financial affairs and to respond to questions from creditors and the trustee. It is usually held within 20 to 50 days after the case is commenced depending on the type of case. See Federal Bankruptcy Rule 2003(a) for specifics. It is also referred to as the "341 Hearing."

4.8.2.11.4.7.1.2  (06-27-2013)
Integrated Data Retrieval System (IDRS)

  1. As previously discussed, a TC 520 is input on IDRS by Insolvency after a bankruptcy petition has been filed and a proof of claim (POC) has been submitted. The TC 520 condition codes will assist in identifying bankruptcy. Examination’s role:

    1. Bankruptcy closing codes determine Service restrictions, i.e. restrict closing a debtor case in unagreed Disposal Code 10.

    2. Proceeding codes are numeric indicators that represent the bankruptcy chapter.

    3. Claim indicators represent the type of bankruptcy claim.

  2. A TC 521 on IDRS is input to reverse a TC 520. The TC 521 is input to document the discharge and / or dismissal of bankruptcy proceedings. The TC 521 closing codes operate independently of each other and have different purposes.

    Reminder:

    Insolvency will not necessarily input the TC 521 when litigation ceases. This is not a reliable indicator for examination to determine the bankruptcy is closed. The TC 521 may also be input by Insolvency after collection’s criteria have been met. The bankruptcy litigation may not be closed.

  3. A TC 640 on IDRS indicates a bankruptcy discharge of debt. Sometimes a TC 971 with a bankruptcy closing code indicates bankruptcy discharge of debt.

4.8.2.11.4.7.1.3  (06-27-2013)
Automated Insolvency System (AIS)

  1. The AIS is an ORACLE database maintained by Insolvency. Its many functions work together to allow Insolvency to manage all of the bankruptcy cases in Insolvency inventory. AIS contains information that is used in the processing of bankruptcy and other insolvency proceedings. AIS is used to prepare and file proofs of claim with the court.

  2. AIS is useful for determining the following:

    • Detail of name, address and SSN

    • Date petition filed

    • Where / who is assigned the case - Consolidated Insolvency Unit (CIU) or Field Insolvency Technician

    • Which Bankruptcy district filed and docket number

    • Meeting of creditors

    • Bar date

    • Amount and date of any proof of claim

    • Re-filing of applications for bankruptcy

    • History comments (case history includes taxpayer responses, insolvency actions, and any litigation proceedings)

    • Updates to applicable screens such as plans, confirmation dates

    • Dismissal / discharge date

4.8.2.11.4.7.1.4  (06-27-2013)
Public Access to Court Electronic Records (PACER)

  1. PACER allows electronic access to federal court records. It is public information. AIS is a Service database designed to meet insolvency bankruptcy needs, not examination bankruptcy criteria. Bankruptcy coordinators must access PACER to obtain accurate and current bankruptcy court records. PACER is utilized to query bankruptcy information not reflected on IDRS and / or AIS.

  2. PACER allows the following:

    1. National search of all bankruptcy districts.

    2. Spouse / ex-spouse searches.

    3. Access to docket reports to investigate and audit.

    4. Comprehensive search for multiple filings.

    5. Access to court record dates and transactions necessary to protect the statute.

    6. Access to associated / key case information.


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