- 5.9.9 Processing Chapter 12 Bankruptcy Cases
- 22.214.171.124 Introduction to Chapter 12 Bankruptcy
- 126.96.36.199 Chapter 12 Eligibility
- 188.8.131.52 Processing Duties
- 184.108.40.206 Initial Case Processing
- 220.127.116.11 Adequate Protection in the Chapter 12 Case
- 18.104.22.168 Chapter 12 Plans
- 22.214.171.124.1 Determinations of Tax Implications of Chapter 12 Plans
- 126.96.36.199.2 Plan Modification
- 188.8.131.52 Reasons to Object to the Plan
- 184.108.40.206 Chapter 12 "Pay-out" Arrangements
- 220.127.116.11 Confirmation
- 18.104.22.168 Chapter 12 Plans and Restitution Assessments.
- 22.214.171.124 Monitoring Compliance
- 126.96.36.199.1 Referral to Counsel
- 188.8.131.52.2 After-Acquired Property
- 184.108.40.206.3 Post-petition Liabilities in Chapter 12 Individual Cases
- 220.127.116.11.4 Post-Petition Liabilities in Chapter 12 Non-Individual Cases
- 18.104.22.168 Conversions
Part 5. Collecting Process
Chapter 9. Bankruptcy and Other Insolvencies
Section 9. Processing Chapter 12 Bankruptcy Cases
September 29, 2015
(1) This transmits a revised IRM 5.9.9, Bankruptcy and Other Insolvencies, Processing Chapter 12 Bankruptcy Cases.
(1) IRM 5.9.9, Processing Chapter 12 Bankruptcy Cases, has been updated and expanded to provide clarification of existing material. The table below shows substantive changes within this IRM revision.
|22.214.171.124(2)||Cases may be referred to Associate Area Counsel or the U.S. Attorney's Office (AUSO). The term "Counsel" is used to refer to whichever office is appropriate in this IRM.|
|126.96.36.199(2)||Debt limits for the Chapter 12 case will be adjusted April 1, 2016.|
|188.8.131.52.2||Employees no longer refer cases to the Withholding Compliance Function for a lock-in letter. The requirement to determine if a referral is needed has been removed from the aspects of the initial case review.|
|184.108.40.206.2(10)||Chapter 12 individual debtors are eligible to receive a discharge in the current case even when they received a discharge in a prior case.|
|220.127.116.11.1(3)||Contacts for prompt determination requests are clarified.|
|18.104.22.168(6)||The rate of interest on secured claims locks in at the rate provided for in the plan during the life of the plan.|
|22.214.171.124||A new subsection has been added which discusses Chapter 12 plans and restitution assessments.|
|126.96.36.199.3(5)||In most instances, requests for installment agreements on post-petition liabilities are not processable when a taxpayer is in bankruptcy.|
|188.8.131.52.4(4)||A list of additional citations has been added for IRM content on Limited Liability Companies (LLCs).|
(2) Editorial changes were made throughout this section to add clarity and to update or correct citations.
Kristen Bailey, Acting Director
Audience of this IRM. This IRM provides information and guidance for processing Chapter 12 bankruptcy cases. It is primarily intended for caseworkers in Field Insolvency (FI). However, employees in SBSE and other functions, such as the Centralized Insolvency Operation (CIO), may also refer to this IRM.
Counsel. Certain issues in a Chapter 12 case may be referred to Associate Area Counsel or directly to the U.S. Attorney's Office (USAO). Within this IRM, the term "Counsel" refers to Associate Area Counsel or the USAO, whichever is appropriate. For more information on referrals, see the following subsections in IRM 5.9.4, Common Bankruptcy Issues:
IRM 184.108.40.206, Referrals — Representing IRS in Bankruptcy Court
IRM 220.127.116.11.1, Direct Referrals
IRM 18.104.22.168.2, Referrals to Counsel (Non-Direct Referrals)
IRM 22.214.171.124.3, Significant Bankruptcy Case Referrals
IRM 126.96.36.199.4, Referral Tolerances
Permanent Reenactment of Chapter 12. Since its enactment in 1986, Chapter 12 has been subject to reenactments for periods of limited duration. The passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made Chapter 12 a permanent part of the Bankruptcy Code effective July 1, 2005.
Chapter 12 Debtors. Chapter 12 is the bankruptcy chapter used for the adjustment of debts of a family farmer or family fisherman with regular annual income. A Chapter 12 case closely resembles a Chapter 13 case. However, Chapter 12 incorporates some aspects of the Chapter 11 case.
Voluntary Filing Only. Relief under this chapter is "voluntary." Only the debtor may file a petition for Chapter 12 bankruptcy relief (11 USC § 303). There are no provisions for an "involuntary" Chapter 12.
Debt Reorganization. Chapter 12 allows the family farmer/fisherman to reorganize debts by paying debts through a payment plan. Secured debts may be reduced to the present value of the assets securing the debt and by extending the repayment periods.
Debtor Operates Business. A debtor may continue to operate the farming or commercial fishing operation as a debtor-in-possession (DIP). The DIP has the duties and rights of a trustee. The court may, for cause, appoint a trustee (11 USC §§ 1203 and 1204).
Income Requirements. The Bankruptcy Code provides that only a family farmer or family fisherman, whose annual income is sufficiently stable and regular to enable the debtor to make payments under a Chapter 12 plan, is eligible to file this type of bankruptcy (11 USC § 101(19) and (19B)).
Eligibility. The following table contrasts the eligibility requirements between the family farmer and the family fisherman. Debt limits are adjusted at three year intervals to reflect changes in the Consumer Price Index (11 USC§ 104(b)). The limits below are based on the April 1, 2013 adjustment. The next scheduled adjustment will be on April 1, 2016.
Characteristics Family Farmer Family Fisherman Entity Individual, partnership, Limited Liability Company (LLC), or corporation Individual, partnership, Limited Liability Company ( LLC), or corporation Debt Limit $4,031,575.00, subject to periodic adjustment for inflation pursuant to 11 USC § 104(b) $1,868,200.00, subject to periodic adjustment for inflation pursuant to 11 USC § 104(b) Percent of Debt from Operation of Business 50% of liabilities must be attributable to farming operations (excluding debt for personal residence of the farmer or residence of the farmer partner/shareholder) 80% of liabilities must be attributable to fishing operations (excluding debt for personal residence of the fisherman or residence of the fisherman partner/shareholder) Gross Income (Individuals Only) More than 50% of the debtor's income is received from a farming operation in the tax year prior to the petition or more than 50% of the debtor's income is received from a farming operation in each of the second and third years before the petition More than 50% of the debtor's gross income is received from commercial fishing operations for the tax year preceding the commencement of the case
50 and 80 Percent Rules —Partnerships/Corporations. The family farmer/fisherman partnership or corporation must have more than 50 percent ownership by one family. The family or relatives must conduct the operation. In addition, more than 80 percent of the value of its assets must consist of farm or fishing-related property. The same debt levels for the family farmer or family fisherman apply to the farming or fishing partnership/corporation, respectively. Finally, if the family farming/fishing corporation issues stock, that stock may not be publicly traded (11 USC § 101(18)(B) and (19A)(B)).
Centralized Insolvency Operation (CIO) Responsibilities. The Centralized Insolvency Operation (CIO) clerical units are responsible for loading new Chapter 12 cases on the Automated Insolvency System (AIS). CIO also:
Resolves IIP status reports.
Resolves IIP error reports, including the Potentially Invalid TIN (PIT) report.
Inputs dismissal notices on AIS.
Creates MFT 31 mirrored accounts when required because a non-debtor spouse owes a joint income tax liability with the debtor spouse.
Field Insolvency (FI) Groups. Field Insolvency (FI) bankruptcy caseworkers handle all aspects of Chapter 12 case processing not specifically assigned to the CIO. This includes posting payments and processing discharges.
Initial Actions. Upon notification of a Chapter 12 filing, Insolvency must follow the processing procedures outlined in IRM 5.9.5, Opening a Bankruptcy Case. IRM 188.8.131.52.1, Initial Case Review Time Frames, discusses acceptable time frames for completion of the initial case review. Aspects of the initial case review are discussed in IRM 184.108.40.206.2, Aspects of the Initial Case Review.
General Time Frame. FI caseworkers must conduct an initial case review at least five calendar days prior to the 341 meeting. The initial case review must be completed within thirty calendar days of assignment when the case is not received at least five calendar days prior to the 341. When the bar date or confirmation of the plan is within 30 days of assignment, the review must be completed earlier. Certain aspects of the review must be completed earlier.
Aspects of the Review that Are Required Earlier. Certain elements of the initial case review are required sooner. Some of these elements are:
Resolving stay violations
Responding to pending motions or defensive litigation
Addressing adequate protection when the Service has a pre-petition Notice of Federal Tax Lien (NFTL) on file
Aspects of the Review Requiring Action within Five Calendar Days. The caseworker must work Automated Proof of Claim (APOC) flags within five calendar days of APOC identifying a potential violation of the stay. (IRM 220.127.116.11.7, Electronic Proofs of Claim and Automated Proofs of Claim, APOC Flag Condition Time-Frame Requirements) Flags that identify possible stay violations are the "Credits Posted After Petition Date" and "Lien Recorded Date Blank" flags.
Action Required within Ten Calendar Days. The caseworker must address the potential for adequate protection within ten calendar days of APOC identifying the "Secured Period" flagged condition (IRM 18.104.22.168.7(1)(b)).
Bankruptcy Petition, Schedules, and SOFA. Numerous electronic tools are available to assist the caseworker with an initial case review. At minimum, the caseworker must review the debtor's bankruptcy petition, bankruptcy Schedules A - J, and the Statement of Financial Affairs (SOFA). The debtor's attorney may mail these documents to the Service. The bankruptcy petition, bankruptcy schedules, and SOFA are also available electronically on PACER.
Issues requiring clarification at the 341 meeting of creditors may be identified as the caseworker completes the initial case review. The caseworker may also determine that there are no issues for discussion at the 341. Document the AIS history clearly with any issues requiring a discussion at the 341. If there are no issues, state that there are no issues for discussion at the 341. The caseworker must document whether or not they will attend the 341 meeting. See IRM 22.214.171.124.2(1), Processing Chapter 11 Bankruptcy Cases, Aspects of the Initial Case Review in the Chapter 11, Bankruptcy Petition, Schedules, and SOFA, for a list of issues that may be clarified at the 341 meeting of creditors. The caseworker can gather information regarding the taxpayer's business prior to the 341 by sending the debtor Form 13648, Request for Business Information.
IDRS. A review of IDRS will assist the caseworker in determining if the debtor is compliant with tax laws. The review will also assist the caseworker in determining post-petition monitoring requirements. The caseworker must review IDRS to determine the debtor's:
Filing requirements and return filing history
Current balances due and delinquent returns
The latest period for which a Form 941 or Form 943 was filed, if applicable
Requirements for federal tax deposits (FTDs), if applicable
Currency with making FTDs since the latest Form 941 or Form 943 was filed, if applicable
Failure to make any FTDs, if applicable
Currency in making estimated tax payments, when applicable
Integrated Collection System (ICS). Caseworkers must review any ICS history for prior Field Collection (FC) involvement. Consider contact with the Revenue Officer (RO).
Notice of Federal Tax Lien (NFTL) Refile Determination. The caseworker must determine if any Notices of Federal Tax Lien (NFTL) should be refiled and take necessary actions to request the refiling of the NFTL. (IRM 126.96.36.199.2, Opening a Bankruptcy Case, Refiling Notices of Federal Tax Liens (NFTLs)) The caseworker must schedule a follow-up on AIS to refile the NFTL when the "refile window" for the NFTL is expected to occur during the pendency of the bankruptcy case.
Adequate Protection. If the Service is a secured creditor in the Chapter 12 case, the caseworker must determine if adequate protection should be pursued during the initial case review. See IRM 188.8.131.52, below, for information regarding adequate protection in the Chapter 12 case.
TFRP Issues. For corporations and some Limited Liability Companies (LLCs), caseworkers must conduct a review of the Automated Trust Fund Recovery (ATFR) program to determine if a Trust Fund Recovery Penalty (TFRP) has been proposed for specific tax modules. If a TFRP has been proposed, determine which responsible parties the TFRP has been proposed against. The TFRP may be proposed against:
Officers or other responsible parties of a corporation
Members of a LLC taxed as a partnership
Members, managers, or other responsible parties of the LLC taxed as a corporation
The single-member of a LLC with liabilities for withholding periods that began on or after January 1, 2009
Payroll Service Provider (PSP)
Responsible parties within a PSP
Professional Employer Organization (PEO)
Responsible parties within a PEO
Responsible parties within the common law employer (client of the PSP or PEO)
See IRM 184.108.40.206, Manual Proofs of Claim and Common Claim Issues, Limited Liability Companies (LLC), for guidance on LLCs. See IRM 220.127.116.11.1, Trust Fund Compliance, Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty (TFRP), Establishing Responsibility, for additional information regarding parties that may be assessed the TFRP.
This information should be paired with the data on IDRS using command code (cc) UNLCER. The current RO assignment should be annotated in the AIS history.
TFRP Actions for Debtors. If unpaid trust fund taxes are part of the balance owed by the business, a Trust Fund Recovery Penalty (TFRP) investigation must be considered. Based on local procedures, the investigation may be conducted by a RO in FC or by a FI caseworker. If local practice is to refer the investigation to FC, and the case is not currently assigned to a RO, an Other Investigation (OI) must be issued to FC through the Integrated Collection System (ICS). FI caseworkers should request the TFRP investigation during the initial case review. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ IRM 18.104.22.168, Processing Chapter 11 Bankruptcy Cases, Trust Fund Considerations in Chapter 11, and IRM 22.214.171.124, Debtors' Delinquent Accounts, Trust Fund Recovery Penalty, and IRM 126.96.36.199, Manual Proofs of Claim and Common Claim Issues, TFRP Assessments - Priority Status, provide additional TFRP investigation information.
When requesting a TFRP investigation through an OI on ICS, provide the RO with information to assist them in completing the investigation. The information may be provided by updating the ICS history. (See IRM Exhibit 1.4.51-31, Resource Guide for Managers, Insolvency, Guide for Other Investigation (OI) F/U Report (Field Insolvency), and IRM 188.8.131.52, Trust Fund Recovery Penalty.)
A RO will not work an OI to assert the TFRP if the Assessment Statute Expiration Date (ASED) will expire within 6 months.
TFRP issues must be thoroughly documented in the AIS history. (See IRM 184.108.40.206, AIS Documentation.) If the TFRP is not applicable, notate the AIS history accordingly. The TFRP may not be applicable because there are no outstanding trust fund liabilities or the outstanding aggregate trust fund liability is below tolerance for assertion of the TFRP.
Exam Issues.IRM 220.127.116.11, Common Bankruptcy Issues, Examination and Insolvency, provides guidance for addressing examination issues. A review of IDRS cc AMDISA and contact with the Revenue Agent (RA) or examiner may be beneficial.
LLCs. The caseworker must identify the presence of LLCs and determine how the LLC should be treated for tax and proof of claim filing purposes. Consultation with Counsel is advised. IRM 18.104.22.168, Manual Proofs of Claim and Other Claim Issues, Limited Liability Companies (LLC), and IRM 22.214.171.124.8(5)(i), Automated Proofs of Claim (APOC), Case Flags, LLC Flags, provide more information about LLCs.
Prior Bankruptcies. The caseworker must check for evidence of prior bankruptcies. A prior case may affect tolling or the automatic stay. It may indicate possible lack of feasibility of the plan in the case. In some cases, where the debtor has previously filed a bankruptcy case, the automatic stay may not apply. 11 USC § 362(c) and 11 USC § 362(n) contain additional information regarding the automatic stay. In some instances, debtors may contend, in as much as prior plans were supposed to have addressed the tax liabilities, those liabilities are no longer considered to be a tax claim. See the following subsections and exhibits in IRM 5.9.5, Opening a Bankruptcy Case, for additional information:
IRM 126.96.36.199, Serial Filers
IRM 188.8.131.52.1, Systemic Identification in Serial Filer Cases
IRM Exhibit 5.9.5-4, Common Processing Steps in Serial Filer Cases
IRM Exhibit 5.9.5-5, Processing the Serial Filer Case When the Stay Terminates After 30 Days
IRM Exhibit 5.9.5-6, Processing the Serial Filer Case When No Stay Goes into Effect
Chapter 12 individual debtors who file Chapter 12 bankruptcy petitions are eligible to receive a discharge in the current even when they received a discharge in a prior bankruptcy case. The provisions in IRM Exhibit 5.9.5-3, Allowable Elapsed Time Between Bankruptcy Filings and Discharges, are not applicable in Chapter 12 cases.
Letter to Non-Debtor Spouse. The Letter 4521, Non-Debtor Letter, must be sent to non-debtor spouses who owe joint liabilities with the individual Chapter 12 debtor. The liability may not be fully abated for the non-debtor spouse when included in the debtor's bankruptcy filing.
Additional Aspects. Facts and circumstances in the case may warrant additional research. Additional research that may be necessary include:
A review and analysis of locator services, such as Accurint.
A review of any available online courthouse records.
A review of IDRS cc IRPTRL for possible mortgage interest paid for identification of real property ownership.
A review of Department of Motor Vehicle (DMV) records when expensive or collectible vehicles are listed in the bankruptcy schedules.
Adequate Protection. If the Service is a secured creditor in the Chapter 12 case due to the filing of a NFTL prior to the filing of the bankruptcy case, it is just as important for the Service to obtain adequate protection in the Chapter 12 case as in other cases. The secured creditor is only entitled to the types of adequate protection specifically provided for in Chapter 12 (11 USC § 1205). The provisions for adequate protection available for use in other chapters may not be applicable in the Chapter 12 case.
Situations in which the Secured Creditor is Entitled to Adequate Protection. A secured creditor in a Chapter 12 case is entitled to adequate protection when the value of the creditor's collateral decreases after the petition date. Because the use of cash collateral may result in a decrease in the creditor's collateral, a Chapter 12 debtor may not use cash collateral unless the secured creditor agrees or the court authorizes the debtor's use of the cash collateral.
Proceeds from the sale of a farmer's crops or livestock or the sale of a fisherman's catch will be cash collateral.
A secured creditor may also be entitled to adequate protection because the value of the creditor's collateral has decreased due to other circumstances, such as the debtor's use, sale, or lease of the property. If the value of the collateral remains constant, the secured creditor is not entitled to any adequate protection. There is no adequate protection in Chapter 12 for lost opportunity costs.
Ways that Adequate Protection May be Provided. In a Chapter 12 case, adequate protection may be provided in the following ways, to the extent that either the value of the property or the secured creditor's ownership in the property has decreased:
By the trustee making cash payments to the secured creditor
By giving the secured creditor an additional or replacement lien
When the collateral is farmland, by paying the secured creditor a reasonable rent customary in the community where the property is located
By granting the creditor other relief which will protect the value of the property or the creditor's interest in the property, except by giving the creditor an administrative claim
Referring the Chapter 12 Case to Counsel for Adequate Protection. While an adequate protection agreement in a Chapter 12 case may provide for less than the agreement in other chapters, a failed adequate protection agreement will still provide the Service with the superpriority of Bankruptcy Code § 507(b). Caseworkers must refer the case to Counsel when the debtor fails to provide the Service with adequate protection on its secured claim. The referral is subject to the tolerances in IRM 184.108.40.206.4(6)(a), Common Bankruptcy Issues, Referral Tolerances, Chapters 11 and 12.
Time Frames. Generally, a debtor is required to file a plan within 90 days of the petition date. A confirmation hearing is to be held within 45 days of the plan filing. In practice, the date for filing a plan is often extended. Plans range from three to five years. However, pursuant to 11 USC § 1222(b)(9), payments to secured claims may extend beyond five years.
Notice to Creditors. Creditors must be given at least 21 days prior notice of the confirmation hearing. (Federal Rule of Bankruptcy Procedure 2002(a)(8))
The Chapter 12 Plan. The bankruptcy caseworker must secure a copy of the debtor’s plan and schedules for evaluation, as soon as possible. 11 USC §§ 1222 and 1225 deal with Chapter 12 plans. The debtor's plan must provide for payment of the Service's claim as follows:
Full payment of secured claims with post-confirmation interest at the compound IRC rate in the month of confirmation (11 USC §§ and 1225(a)(4) and 511);
Full payment of priority claims in deferred cash payments, unless the holder of the claim agrees to different treatment; and
For cases filed on or after April 20, 2005, Chapter 12 was amended to create an exception to the full-payment requirement for priority claims. Pre-petition tax claims that arise because of the disposition of farm assets used in the debtor's farming operation are treated as a general unsecured claim in the Chapter 12 case (11 USC § 1222(a)(2)(A)). Any balance remaining on this unsecured general claim is dischargeable. Insolvency should contact Counsel when plans raise this issue. (See IRM 220.127.116.11.3(1), Post-petition Liabilities in Chapter 12 — Individual Cases, No Provision for Post-petition Tax Debts in Individual Cases, for guidance on post-petition tax incurred from the sale of farm assets.)
Payment of general unsecured claims in an amount not less than the IRS would receive in a Chapter 7 liquidation and debtor has committed all of his disposable income to the plan over the life of the plan. (11 USC §§ 1225(a)(4) and 1225(b)(1)(B))
For cases filed on or after October 17, 2005, the plan may provide for post-petition interest on unsecured claims that are non-dischargeable. Interest is provided only when the debtor has disposable income available to pay interest after making provisions for full payment of all allowed claims (11 USC §§ 1222(b)(11) and 1228(a)(1) and (2)). Interest on the unsecured non-dischargeable taxes is collected at the rate provided for in the plan. If there are no interest provisions, no interest is collected under the plan. Any unpaid tax and interest on the non-dischargeable tax survives the bankruptcy.
See IRM 18.104.22.168, Reasons to Object to the Plan, for common reasons for the Service to object to a Chapter 12 plan. Discharge in the Chapter 12 case is discussed in IRM 5.9.17, Closing a Bankruptcy Case. In particular, see IRM 22.214.171.124, Chapter 12 Discharge, IRM 126.96.36.199.1, Chapter 12 Hardship Discharge, and IRM 188.8.131.52.2, Exceptions to Discharge in the Individual Chapter 12 Case.
Tax Effects of Proposed Plans. BAPCPA amended 11 USC § 1231(b). Bankruptcy courts can authorize proponents of Chapter 12 plans to request determinations of the federal income tax effects of reorganization. Determinations are limited to questions of law. Should a controversy arise between the Service and the debtor, the court may declare the tax effects of the plan. The court may not make such a declaration until after the earlier of the date on which the governmental unit responds to the request or 270 days after the request.
Mailing Address. Requests for determinations of income tax effects must be filed in writing with the CIO. The envelope must be marked, "Request for Determination of Tax Effects of Chapter 12 Plan." The correct mailing address for the request for determination depends on whether or not the request contains a remittance.
Requests with remittance must be mailed to:
Internal Revenue Service
Post Office Box 7317
Philadelphia, PA 19101-7317
Requests without remittance must be mailed to:
Internal Revenue Service
Post Office Box 7346
Philadelphia, PA 19101-7346
Required CIO Action. CIO caseworkers must forward the Chapter 12 determination requests via overnight carrier to the appropriate function. Contact information and mailing addresses for the various functional coordinators can be found on the Prompt Determination Contact List on the CIO shared Drive. The requests must be forwarded to the appropriate function within three workdays of receipt of the tax return by Insolvency based on the receipt date stamped on the return. The appropriate function will complete all review and follow-up actions required. If the debtor’s total assets listed on the Form 1120 or Form 1120S are greater than $10 million, the request is sent to the Large Business (LB&I) Division at:
Internal Revenue Service
Arka Monterey Park Building
1973 North Rulon White Blvd.
M/S 4912 Attn: LB&I Bankruptcy Coordinator
Ogden, Utah 84404-5402
Time Frame. Within 270 days from receipt of a processable application, the appropriate function will notify the plan proponent of the determination.
Effects of Determination. Unless the bankruptcy court declares otherwise pursuant to 11 USC § 1231(b), a field office examining the debtor's return must follow the determination when each of the following is met:
A copy of the determination is attached to the tax return to which it relates
The determination is properly reflected in the return
The representation upon which the determination was made reflected an accurate statement of the controlling facts
The transactions proposed in the plan were carried out substantially as proposed
A change has not occurred in the law that applies to the period during which the transactions were consummated
Modified Plans. Upon occasion, changed circumstances necessitate the debtor's modifying or amending a Chapter 12 plan either before or after confirmation. Insolvency should review a modification of a plan as carefully as if it were the original plan. Insolvency may confer with Counsel if plans require clarification. An objection may be needed to protect the government's interests.
Modification after Confirmation. For cases filed on or after October 17, 2005, 11 USC § 1229(d) lists exceptions to post-confirmation plan modifications. These exceptions serve to protect the debtor against any increase in payments beyond their disposable income. This particularly protects the debtor against increases in the last year of the plan. Only the debtor may seek payment increases under these circumstances.
Inadequate Plan Provisions. If the plan does not provide for appropriate payment of the Service's claims, the Insolvency caseworker should contact debtor's counsel to discuss the deficiencies. If the debtor can demonstrate acceptance of a deficient plan is in the best interests of the government, the case should be referred to Counsel. The caseworker should recommend acceptance of the plan in lieu of objection. Include the debtor's TIN(s) in the referral.
Decision Factors for Evaluating Deficient Plans.IRM 184.108.40.206.5(6), Processing Chapter 13 Bankruptcy Cases, Reasons to Object, Factors for Evaluating Deficient Plans, lists factors to consider when determining if the IRS should agree to treatment of its claim. Consider the factors when the plan provides less than required by the Bankruptcy Code.
Acceptance of Deficient Plans. If a debtor can demonstrate that agreeing to treatment different from statutory requirements under the Bankruptcy Code is in the best interest of the government, the specific payment terms:
Must be incorporated in the debtor's plan.
Are subject to the approval of the bankruptcy court.
Provisions protecting the government's rights to collect upon a default in plan payments should be included in the terms of the plan. IRM 220.127.116.11.5(7), Reasons to Object, Acceptance of Deficient Plans, outlines other requirements for deficient plan provisions.
Prompt Objections. Insolvency must refer the case to Counsel to object to the plan when IRM 18.104.22.168.4, Common Bankruptcy Issues, Referral Tolerances, criteria are met and:
Debtor's counsel is unresponsive to Insolvency contacts,
Debtor's counsel is unable to demonstrate that it is in the best interest of the government to agree to a deficient plan, and
Interests of the government are at risk.
Contents of Objection Referral.IRM 22.214.171.124.5(9), Reasons to Object, Contents of Objection Referral, explains information needed on the referral to Counsel objecting to a deficient plan.
Common Problems with Plans. The debtor may add provisions to a plan adversely affecting the Service's position. Insolvency should consult Counsel if the plan does not appear to provide for the IRS' claim. Subject to the tolerances in IRM 126.96.36.199.4, the caseworker must refer the plan to Counsel for an objection to confirmation when the debtor's attorney refuses to amend the unacceptable plan prior to confirmation. Common reasons for the Service to object to a Chapter 12 plan include the following:
The debtor does not meet the requirements for a Chapter 12 bankruptcy.
The debtor is not in compliance.
The plan is not feasible. Payments to creditors provided by the plan are more than the net income of the debtor after necessary living and operating expenses are taken into account.
The plan proposes to discharge taxes not dischargeable under the Bankruptcy Code. For example, a plan containing language discharging post-petition income taxes should be referred to Counsel.
The plan proposes to discharge individual(s) other than the debtor, in the discharge. For example, the plan proposes to discharge a related Trust Fund Recovery Penalty for another responsible party.
The plan allows the debtor to change provisions of the plan affecting the payment of the Service's claim without a court hearing. This deprives the IRS of an opportunity to object.
In lieu of cash payments, the plan proposes to distribute physical property to the IRS in payment of the IRS' claim. (See 11 USC § 1222(b) and IRM 188.8.131.52(3), When Property is Proposed as Payment, below.)
The plan allows for payments to be made outside the plan.
All of the debtor's disposable income is not committed to the plan while the general unsecured tax claim will not be paid in full under the plan.
The plan proposes a balloon payment at the end of the plan instead of consistent regular payments throughout the plan.
The plan discriminates against the general unsecured claims of the IRS. The plan proposes to pay a larger percentage of the general unsecured claims of other creditors.
The plan does not provide for the payment of interest on the secured claim per 11 USC § 511. The Service is entitled to compound interest at the IRC rate for the month of confirmation during the life of the plan. Any interest rate provided for in the plan "locks in" at the rate provided for in the plan during the life of the plan..
Debtor's Disposable Income. All of the debtor’s disposable income (which excludes amounts reasonably necessary for post-petition domestic support obligations) must be committed to the plan if unsecured claims are not paid in full (11 USC § 1225(b)(2)).
Secured Claims and Collateral. The time allowed for payment of secured claims must be evaluated based on the nature and worth of the collateral securing the claim.
When Property Is Proposed as Payment. 11 USC § 1225(b)(1)(C) provides that a plan may be confirmed if the value of property being distributed under the plan is not less than the debtor's projected disposable income for the plan period. An objection to the plan may be in order if the plan proposes distribution of property in lieu of cash payments. Some factors to consider when determining if an objection is warranted are:
Value of the property is less than the allowed amount of the claim
Disposition of the property is burdensome or costly
Costs may be incurred to store/maintain the property (i.e. livestock)
Costs incurred to dispose of the property result in reduction of the value of the property to less than the allowed amount of the claim
Overall not in the best interest of the government
Holders of other claims in the same classification receive different or more favorable repayment options
Proposes property in lieu of deferred cash payments to claims entitled to priority under 11 USC § 507, in violation of 11 USC § 1222(a)(2)
If property, other than cash payments, is received as part of the plan, Insolvency should follow procedures in IRM 184.108.40.206.1, Processing Chapter 11 Bankruptcy Cases, Post-Confirmation Actions, Disposition of Acquired Property.
Confirmed Plan. When no objections are filed, or after objections are resolved, the plan will be confirmed by the court. The trustee or DIP then begins distribution of the funds to the creditors. Once the court confirms the plan, it is incumbent upon the debtor to make it succeed.
Confirmation Actions. The caseworker must add the "Confirmed Plan Monitoring (CPM)" screen to AIS upon confirmation. (See IRM Exhibit 5.9.8-1, Processing Chapter 11 Bankruptcy Cases, Adding the Confirmed Plan to AIS, for instructions on adding the CPM screen.) Terms of the plan must be documented in the AIS history per IRM 220.127.116.11(4), Opening a Bankruptcy Case, AIS Documentation, Chapters 11 and 12 Plan Documentation.
General Information. Chapter 12 cases with restitution assessments are treated in the same manner as Chapter 11 cases with restitution assessments. For general information regarding restitution assessments and Chapter 12 plans, see the following subsections in IRM 5.9.8, Processing Chapter 11 Bankruptcy Cases:
IRM 18.104.22.168.3, Chapter 11 Plans and Restitution Assessments
IRM 22.214.171.124.3.1, Restitution Assessment Paid Outside the Chapter 11 Plan
IRM 126.96.36.199.3.2, Restitution Assessment Paid in the Chapter 11 Plan
Proofs of Claim in Chapter 12 Cases with Restitution Assessments. For information about filing proofs of claim in cases with restitution assessments, see IRM 188.8.131.52.5, Manual Proofs of Claim and Common Claim Issues, Claim Periods, Restitution Assessments.
Discharge and Restitution Assessments in Chapter 12 Cases. For general information regarding restitution assessments and dischargeability, see IRM 184.108.40.206.8, Closing a Bankruptcy Case, Discharge and Restitution Assessments.
Monitoring No Liability Cases. Insolvency must monitor Chapter 12 no liability cases for compliance until plan confirmation. Close the no liability case on AIS upon confirmation.
Monitoring Liability Cases. Insolvency must monitor post-petition compliance of the Chapter 12 debtor owing pre-petition debts. Compliance monitoring can be discontinued at dismissal, discharge, conversion, or closing of the case. See IRM 220.127.116.11, Processing Chapter 11 Bankruptcy Cases, Post-petition/Pre-confirmation BMF Monitoring.
Insolvency should establish a follow-up schedule to monitor plan payments after confirmation or use AIS plan reports.
Systemic monitoring for Forms 941 can be conducted in the same manner as in Chapter 11 proceedings. (See IRM 18.104.22.168, Post-petition/Pre-confirmation BMF Monitoring.)
Manual monitoring for Form 943 will be necessary. However, the Last Return Amount code (LRA-CD) may be input with a TC 136 to cause post-petition Form 943 delinquencies to appear on the Post-petition Monitoring Report.
If the debtor becomes delinquent on plan payments, the Insolvency caseworker must contact the DIP or trustee, if appointed, by phone. The cause of and a cure for the delinquencies/default must be determined. Caseworkers must establish a deadline for the payments to become current. Advise the DIP or trustee that the Service will request dismissal of the case if the payments are not current by the deadline. Confirm the contact in writing.
If the debtor fails to comply with current filing and payment requirements, the Insolvency caseworker must contact the debtor by phone. Advise the debtor of the non-compliance. Give the debtor a deadline to come into full compliance. Advise the debtor of the consequences for failing to come into filing or paying compliance. Confirm the conversation with the debtor in writing.
If the Service has an unpaid secured claim, Insolvency must make a NFTL refile determination. The NFTL must be refiled during the NFTL "refile window" when that window occurs during the pendency of the bankruptcy. (IRM 22.214.171.124.2, Opening a Bankruptcy Case, Liens and Insolvency, Refiling Notices of Federal Tax Liens (NFTLs))
Serious Delinquencies. The debtor may continue to incur significant post-petition tax liabilities. Problems with unfiled tax returns may continue. The Insolvency caseworker must take appropriate actions to protect the interest of the government when:
The debtor is not addressing compliance concerns
The debtor cannot resolve the concerns given present circumstances
Referral. The debtor may have continuing non-compliance problems with plan provisions. If the debtor's explanation for the delinquencies is unsatisfactory, and the delinquencies are not cured, Insolvency should consider a referral to Counsel. The options generally available to the Service are to have the debtor's case dismissed or to have the stay lifted so administrative collection can be pursued.
Property of the Estate. Much of the property the debtor acquires after the bankruptcy petition is filed becomes property of the bankruptcy estate. Therefore, such property is not subject to administrative collection (11 USC § 1207(a)).
No Provision for Post-petition Tax Debts in Individual Cases. Unlike a Chapter 13 case, no provision exists for filing claims for post-petition taxes owed by a debtor who is an individual in a Chapter 12 bankruptcy. In the case of Hall v. United States, 132 S. Ct. 1882 (2012), the debtors attempted to argue that the post-petition tax arising from the post-petition sale of their farm qualified as an administrative expense priority tax that could be treated as an unsecured general claim in their Chapter 12 plan under 11 USC § 1222(a)(2)(A). They argued the tax was incurred by the bankruptcy estate and, therefore, entitled to administrative priority status because the tax was incurred post-petition. The Supreme Court agreed with the Government that the IRC makes only certain estates liable for post-petition taxes, and since there is no separately taxable estate in a Chapter 12 or 13 case, the debtors, not their estate, were liable for the tax. The Supreme Court, therefore, ruled that an individual debtor cannot treat post-petition taxes as an administrative expense of the bankruptcy estate and must pay the post-petition taxes as they become due. Because of the Hall decision, 11 USC § 1222(a)(2)(A) applies only to pre-petition taxes. The post-petition income tax liability of an individual Chapter 12 debtor cannot be paid or discharged through a Chapter 12 plan. (See IRM 126.96.36.199(3), Chapter 12 Plans, The Chapter 12 Plan, for guidance on pre-petition taxes incurred from the sale or other disposition of a farm asset used in the debtor's farming operation.)
Refer for Dismissal. If an individual debtor does not pay significant post-petition liabilities timely, Insolvency should consider a referral to have the bankruptcy dismissed. The caseworker should make the decision to refer the case to Counsel for dismissal early in the case. The court is more inclined to grant a dismissal request on a plan in its early stages, rather than in its advanced stage.
Removal of Debtor as DIP. When the debtor incurs post-petition liabilities, Insolvency should consider referring the case to Counsel to request removal of the DIP and appointment of a trustee (11 USC §§ 1202 and 1204). The trustee supervises the administration of the debtor's affairs. The court may remove the debtor as DIP for cause including:
Gross mismanagement of the affairs of the debtor
Notice of Federal Tax Lien (NFTL). The filing of a NFTL is an effective action to protect the interest of the government and to promote compliance. The FI caseworker should make a NFTL filing determination when:
The plan has been confirmed
The post-petition liability has not been made a part of the plan and the plan does not prohibit taking collection actions for the periods included
The aggregate unpaid balance on the post-petition liability is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
There is a sound business reason to file a NFTL
The automatic stay is not in effect for the periods included in the NFTL
A reasonable effort has been made to contact the taxpayer per IRM 188.8.131.52, Federal Tax Liens, Notice of Lien Determinations, Taxpayer Contact. Issuance of the statutory assessment notice and the balance due notices during the collection process will generally constitute a reasonable effort to contact the taxpayer. Caseworkers may still wish to contact the debtor to request full payment and warn of the possible filing of a NFTL in an attempt to resolve the case without the need to file the NFTL.
Caseworkers must document the AIS history with the decision to file, not file, or defer filing of the NFTL. The history must include a description of any NFTL filing actions taken. In addition, caseworkers and their managers must follow the approval for do not file and deferral found in IRM 184.108.40.206.3, NFTL "Do-Not-File" and Filing Deferral Determination Approvals.
Installment Agreement (IA) Requests on Post-Petition Liabilities. Taxpayers who are in Chapter 12 may incur post-petition liabilities. To prevent any inadvertent collection action against property of the bankruptcy estate, a TC 520 cc 84 should be input to post-petition liabilities. The TC 520 cc 84 will alert Service employees to contact Insolvency before taking any collection actions on the post-petition modules. These taxpayers may submit a request for an installment agreement (IA) for post-petition liabilities. When a taxpayer is in bankruptcy, a request for an IA on post-petition liabilities is non-processable. Administrative appeal rights are not provided for a non-processable IA. A TC 971 ac 043 should not be input on these accounts. For additional information, see IRM 220.127.116.11.1, Common Bankruptcy Issues, IA Requests for Post-Petition Liabilities Submitted During Bankruptcy.
Requests for Payment of Administrative Expense Taxes in Certain Non-Individual Cases. Although the bankruptcy estate of an individual in Chapter 12 does not incur a post-petition tax and there is no provision for filing a claim for post-petition taxes owed by the individual debtor in Chapter 12 cases, the bankruptcy estate of a corporation, partnership, or LLC in Chapter 12 may incur an administrative expense liability for taxes incurred prior to confirmation. The Service may file an "administrative claim" , Form 6338-A, Request for Payment of Administrative Expenses, for these post-petition liabilities in non-individual cases.
Corporations. If a corporation in Chapter 12 fails to timely pay post-petition income, employment, or excise taxes incurred prior to confirmation, Insolvency may file a Form 6338-A, Request for Payment of Administrative Expenses, (an "administrative claim" ), in the Chapter 12 case. (See IRC § 6012(b)(3), which requires the trustee or the DIP of a corporation in bankruptcy to file income tax returns for the corporation.)
Partnerships and S-Corporations. Partnerships and S-Corporations are flow-through entities for income tax purposes and, therefore, do not incur an income tax liability. The income is reported on the partner or shareholder return. However, a partnership or S-Corporation in Chapter 12 can incur a post-petition employment tax liability. If a partnership or S-Corporation in Chapter 12 fails to timely pay post-petition employment taxes incurred prior to confirmation, Insolvency may file a Form 6338-A, Request for Payment of Administrative Expenses, (an "administrative claim" ), in the Chapter 12 case.
Limited Liability Companies (LLCs). A LLC can be treated as a sole proprietorship, partnership, corporation, or S-Corporation. Consequently, not all LLCs will be treated the same in Chapter 12 for tax purposes.
Income Taxes. If a LLC that is treated as a corporation for income tax purposes fails to timely pay post-petition income taxes incurred prior to confirmation, Insolvency may file a Form 6338-A, Request for Payment of Administrative Expenses, ("administrative claim" ), for those taxes in the LLC's Chapter 12 case.
Employment Taxes. In general, a LLC is liable for employment taxes. However, if a single member LLC that is treated as a disregarded entity paid wages before January 1, 2009, the single member owner (SMO) is the taxpayer, not the LLC. (See IRM 18.104.22.168, Bankruptcy Proceedings). If a single member LLC that is treated as a disregarded entity pays wages on or after January 1, 2009, it is treated as a corporation for employment tax purposes and the LLC is the taxpayer. The following explains when a Form 6338-A, Request for Payment of Administrative Expenses, may be filed for unpaid employment taxes in a Chapter 12 case filed by a LLC:
LLC Classified as a Corporation, S-Corporation, or Partnership. Insolvency may file a Form 6338-A for post-petition employment taxes incurred prior to confirmation in the Chapter 12 case of a LLC that is classified as a corporation, S-Corporation, or partnership.
LLC Classified as a Disregarded Entity — Wages Paid Before January 1, 2009. Do not file a Form 6338-A for post-petition/pre-confirmation employment taxes on wages paid by the LLC before January 1, 2009. The SMO, not the LLC, is liable for those taxes.
LLC Classified as a Disregarded Entity — Wages Paid After January 1, 2009. Insolvency may file a Form 6338-A for post-petition/pre-confirmation employment taxes on wages paid by the LLC on or after January 1, 2009. The LLC is treated as a corporation for employment tax purposes with respect to wages paid on or after January 1, 2009. The LLC, not the SMO, is the taxpayer in this instance.
See the following IRM subsections for additional information on LLCs:
IRM 22.214.171.124, Collecting from Limited Liability Companies, Bankruptcy Proceedings
IRM Exhibit 5.1.21-2, Collecting from Limited Liability Companies, Income Taxation for LLCs
IRM Exhibit 5.1.21-3, Collecting from Limited Liability Companies, Employment Taxation for LLCs
IRM 126.96.36.199, Manual Proofs of Claim and Common Claim Issues, Limited Liability Companies (LLC)
IRM 188.8.131.52.8(5)(i), Automated Proofs of Claim (APOC), Case Flags, Case Flag Conditions and Resolutions, LLC Flag
IRM 184.108.40.206, Closing a Bankruptcy Case, Closing Corporate Chapter 7 and Chapter 7 Limited Liability Companies (LLCs)
IRM 220.127.116.11, Closing a Bankruptcy Case, Closing Liquidating Chapter 11 Corporations and Liquidating Chapter 11 LLCs
Post-confirmation Taxes. In general, an "administrative claim" , Form 6338-A, Request for Payment of Administrative Expenses, cannot be filed for post-confirmation taxes incurred in a non-individual Chapter 12 case. Insolvency should follow the procedures in IRM 18.104.22.168.3(2), Post-petition Liabilities in Chapter 12 — Individual Cases, Referral for Dismissal, and IRM 22.214.171.124.3(4), Post-petition Liabilities in Chapter 12 — Individual Cases, Notice of Federal Tax Lien (NFTL), when a non-individual Chapter 12 debtor incurs post-confirmation taxes.
Except as otherwise provided in the plan or order confirming the plan, confirmation vests property of the estate in the debtor (11 USC §1227(b)). This means the property is the debtor's property again. When property vests in the debtor, the estate generally terminates and there is no estate left to incur an administrative expense. However, courts interpreting a similar provision in Chapter 13 (11 USC § 1327(b)) vary on when the estate terminates. In addition, some Chapter 12 plans specifically provide that property of the estate will remain in the estate post-confirmation. In jurisdictions or cases where the estate does not terminate after confirmation, it may be possible to file a Form 6338-A, Request for Payment of Administrative Expenses, in a non-individual case, if such a request could have been filed in the case prior to confirmation. Insolvency should contact Counsel for guidance on filing an administrative claim in a non-individual chapter 12 case if a confirmed plan or confirmation order provides that property of the estate will remain in the estate post-confirmation.
Conversion Only for Fraud. Chapter 12 is not like Chapters 11 and 13. A creditor cannot move for conversion of the Chapter 12 case to Chapter 7 unless the debtor has committed fraud in connection with the case (11 USC § 1208(d)). Referrals to Counsel in a Chapter 12 case will usually be to request a motion for dismissal rather than conversion.