- Publication 908 - Introductory Material
- Publication 908 - Main Content
- Bankruptcy Code Tax Compliance Requirements
- Tax Returns Due for Periods Ending Before the Bankruptcy Filing in Chapter 13 Cases
- Tax Returns Due After the Bankruptcy Filing
- Individuals in Chapter 12 or 13
- Individuals in Chapter 7 or 11
- Debtor's Election To End Tax Year Form 1040
- Taxes and the Bankruptcy Estate
- Bankruptcy Estate Income, Deductions, and Credits
- Bankruptcy Estate Income
- Bankruptcy Estate Deductions and Credits
- Tax Reporting Chapter 11 Cases
- Allocation of income and credits on information returns and required statement for returns for individual chapter 11 cases.
- Self-employment taxes in individual chapter 11 cases.
- Employment taxes and employer's obligation to file Form W-2 in individual chapter 11 cases.
- Notice to persons required to file information returns (other than Form W-2, Wage and Tax Statement) in individual chapter 11 cases.
- Notice required in converted and dismissed cases.
- Employment taxes.
- Notice 200683
- Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due
- Tax Return Example Form 1041
- Partnerships and Corporations
- Determination of Tax
- Court Jurisdiction Over Tax Matters
- Federal Tax Claims
- Proof of claim.
- Secured tax claims.
- Unsecured Tax Claims
- Discharge of Unpaid Tax
- Debt Cancellation
- Reduction of Tax Attributes
- Order of reduction.
- Net operating loss.
- General business credit carryovers.
- Minimum tax credit.
- Capital losses.
- Passive activity loss and credit carryovers.
- Foreign tax credit.
- Amount of reduction.
- Making the reduction.
- Individuals under chapter 7 or 11.
- Basis Reduction
- Tax Attribute Reduction Example
- How To Get Tax Help
- Tax reform.
- Preparing and filing your tax return.
- Getting tax forms and publications.
- Access your online account (Individual taxpayers only).
- Using direct deposit.
- Refund timing for returns claiming certain credits.
- Getting a transcript or copy of a return.
- Using online tools to help prepare your return.
- Resolving tax-related identity theft issues.
- Checking on the status of your refund.
- Making a tax payment.
- What if I cant pay now?
- Checking the status of an amended return.
- Understanding an IRS notice or letter.
- Contacting your local IRS office.
- Watching IRS videos.
- Getting tax information in other languages.
- Bankruptcy Code Tax Compliance Requirements
- Publication 908 - Additional Material
For the latest information about developments related to Publication 908, such as legislation enacted after it was published, go to IRS.gov/Pub908.
Bankruptcy estate filing threshold. For tax year 2018, the requirement to file a return for a bankruptcy estate applies only if gross income is at least $12,000. This amount is equal to the standard deduction for married individuals filing a separate return and is generally adjusted annually. See the Instructions for Form 1041 for updates to the filing threshold amount for future years.
Net operating loss. For tax years ending after 2017, only NOLs generated from certain farming losses can be carried back. See Pub. 536, Net Operating Loss for Individuals, Estates, and Trusts and Pub. 225, Farmer's Tax Guide for more information.
Automatic 6-month extension of time to file a bankruptcy estate return. An automatic 6-month extension of time to file a bankruptcy estate income tax return is available for individuals in Chapter 7 or Chapter 11 bankruptcy proceedings upon filing a required application.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. The changes to the U.S. Bankruptcy Code enacted by BAPCA are incorporated throughout this publication.Debtors filing under chapters 7, 11, 12, and 13 of the Bankruptcy Code must file all applicable federal, state, and local tax returns that become due after a case commences. Failure to file tax returns timely or obtain an extension can cause a bankruptcy case to be converted to another chapter or dismissed. In chapter 13 cases, the debtor must file all required tax returns for tax periods ending within 4 years of the filing of the bankruptcy petition.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children (NCMC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication isn't intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for the more complex corporate bankruptcy reorganizations or other highly technical transactions. Additionally, this publication isn't updated on an annual basis and may not reflect recent developments in bankruptcy or tax law. If you need more guidance on the bankruptcy or tax laws applicable to your case, you should seek professional advice.
This publication explains the basic federal income tax aspects of bankruptcy.
A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest debtor a financial "fresh start". This is accomplished through the bankruptcy discharge, which is a permanent injunction (court ordered prohibition) against the collection of certain debts as a personal liability of the debtor.
Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. This filing creates the bankruptcy estate.
The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed.
The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later.
The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11.
Generally, when a debt owed to another person or entity is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled isn't income. However, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. See Debt Cancellation, later.
225 Farmer's Tax Guide
525 Taxable and Nontaxable Income
536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
538 Accounting Periods and Methods
544 Sales and Other Dispositions of Assets
551 Basis of Assets
4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments
Form (and Instructions)
SS-4 Application for Employer Identification Number, and separate instructions
982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
1040 U.S. Individual Income Tax Return, and separate instructions
Schedule SE (Form 1040) Self-Employment Tax
1040X Amended U.S. Individual Income Tax Return, and separate instructions
1041 U.S. Income Tax Return for Estates and Trusts, and separate instructions
1041-ES Estimated Income Tax for Estates and Trusts
1041-V Payment Voucher
4506 Request for Copy of Tax Return
4506-T Request for Transcript of Tax Return
4852 Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
See How To Get Tax Help, later, for information about getting these publications and forms.
The Bankruptcy Code requires chapter 13 debtors to file all required tax returns for tax periods ending within 4 years of the debtor's bankruptcy filing. All such federal tax returns must be filed with the IRS before the date first set for the first meeting of creditors. The debtor may request the trustee to hold the meeting open for an additional 120 days to enable the debtor to file the returns (or until the day the returns are due under an automatic IRS extension, if later). After notice and hearing, the bankruptcy court may extend the period for another 30 days.
Failure to timely file the returns can prevent confirmation of a chapter 13 plan and result in either dismissal of the chapter 13 case or conversion to a chapter 7 case.
For debtors filing bankruptcy under all chapters (chapters 7, 11, 12, or 13), the Bankruptcy Code provides that if the debtor does not file a tax return that becomes due after the commencement of the bankruptcy case, or obtain an extension for filing the return before the due date, the taxing authority may request that the bankruptcy court either dismiss the case or convert the case to a case under another chapter of the Bankruptcy Code. If the debtor does not file the required return or obtain an extension within 90 days after the request is made, the bankruptcy court must dismiss or convert the case.
Only individuals may file a chapter 13 bankruptcy. Chapter 13 relief isn't available to corporations or partnerships. The bankruptcy estate is not treated as a separate entity for tax purposes when an individual files a petition under chapter 12 (Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income) or 13 (Adjustment of Debts of an Individual with Regular Income) of the Bankruptcy Code. In these cases the individual continues to file the same federal income tax returns that were filed prior to the bankruptcy petition, Form 1040, U.S. Individual Income Tax Return.
On the debtor's individual tax return, Form 1040, report all income received during the entire year and deduct all allowable expenses. Don't include in income the amount from any debt canceled due to the debtor's bankruptcy. To the extent the debtor has any losses, credits, or basis in property that were previously reduced as a result of canceled debt, these reductions must be included on the debtor's return. See Debt Cancellation, later.
When an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer.
The bankruptcy estate in a chapter 7 case is represented by a trustee. The trustee is appointed to administer the estate and liquidate any nonexempt assets. In chapter 11 cases, the debtor often remains in control of the assets as a "debtor-in-possession" and acts as the bankruptcy trustee. However, the bankruptcy court, for cause, may appoint a trustee if such appointment is in the best interests of the creditors and the estate.
During the chapter 7 or 11 bankruptcy, the debtor continues to file an individual tax return on Form 1040. The bankruptcy trustee files a Form 1041 for the bankruptcy estate. However, when a debtor in a chapter 11 bankruptcy case remains a debtor-in-possession, he or she must file both a Form 1040 individual return and a Form 1041 estate return for the bankruptcy estate (if return filing requirements are met).
Although a husband and wife may file a joint bankruptcy petition whose bankruptcy estates are jointly administered, the estates are be treated as two separate entities for tax purposes. Two separate bankruptcy estate income tax returns must be filed (if each spouse separately meets the filing requirements).
For information about determining the tax due and paying tax for a chapter 7 or 11 bankruptcy estate, see Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due, later.
Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition under chapter 7 or 11 on May 8, 2018. If Jane elected to close her tax year at the commencement of her case, Jane's first short year for 2018 runs from January 1 through May 7, 2018. Jane's second short year runs from May 8, 2018, through December 31, 2018. To have a timely filed election for the first short year, Jane must file Form 1040 (or an extension of time to file) for the period January 1 through May 7 by September 15.
To avoid delays in processing the return, write "Section 1398 Election" at the top of the return. The debtor may also make the election by attaching a statement to Form 4868, Automatic Extension of Time to File an U.S. Individual Tax Return. The statement must state that the debtor elects under IRC section 1398(d)(2) to close the debtor's tax year on the day before filing the bankruptcy case. The debtor must file Form 4868 by the due date of the return for the first short tax year. The debtor's spouse may also elect to close his or her tax year, see Election by debtor's spouse, below.
Paul and Mary Harris are calendar-year taxpayers. Paul's voluntary chapter 7 bankruptcy case begins on March 4.
If Paul does not make an election, his tax year does not end on March 3. If he makes an election, Paul's first tax year is January 1–March 3, and his second tax year begins on March 4. Mary could join in Paul's election as long as they file a joint return for the tax year January 1–March 3. They must make the election by July 15, the due date for filing the joint return.
Fred and Ethel Barnes are calendar-year taxpayers. Fred's voluntary chapter 7 bankruptcy case begins on May 6, and Ethel's bankruptcy case begins on November 1 of the same year.
Ethel could elect to end her tax year on October 31. If Fred did not elect to end his tax year on May 5, or if he elected to do so but Ethel had not joined in his election, Ethel would have 2 tax years in the same calendar year if she decided to close her tax year. Her first tax year is January 1–October 31, and her second year is November 1–December 31.
If Fred did not end his tax year as of May 5, he could join in Ethel's election to close her tax year on October 31, but only if they file a joint return for the tax year January 1–October 31.
If Fred elected to end his tax year on May 5, but Ethel did not join in Fred's election, Fred cannot join in Ethel's election to end her tax year on October 31. Fred and Ethel cannot file a joint return for that short tax year because their tax years preceding October 31 were not the same.
Jack and Karen Thomas are calendar-year taxpayers. Karen's voluntary chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter 7 bankruptcy case began on October 3 of the same year. Karen elected to close her tax year on April 9 and Jack joins in Karen's election.
Under these facts, Jack would have 3 tax years for the same calendar year if he makes the election relating to his own bankruptcy case. The first tax year would be January 1–April 9; the second, April 10–October 2; and the third, October 3–December 31.
Karen may join in Jack's election if they file a joint return for the second short tax year (April 10–October 2). If Karen does join in, she would have the same 3 short tax years as Jack. Also, if Karen joins in Jack's election, they may file a joint return for the third tax year (October 3–December 31), but they aren't required to do so.
A bankruptcy estate deducts expenses incurred in a trade, business, or activity, and uses credits in the same way the debtor would have deducted or credited them had he or she continued operations.
|Notice 2006-83 Statement|
|Pending Bankruptcy Case|
|The taxpayer, , filed a bankruptcy petition under chapter 11 of the Bankruptcy Code in the bankruptcy court for the District of . The bankruptcy court case number is . Gross income, and withheld federal income tax, reported on Form W-2, Forms 1099, Schedule K-1, and other information returns received under the taxpayer's name and social security number (or other taxpayer identification number) are allocated between the taxpayer's TIN and the bankruptcy estate's EIN as follows, using [describe allocation method]:.|
|1.||Form W-2, Payor:||$||$|
|Withheld income tax shown on Form W-2||$||$|
|2.||Form 1099-INT Payor:||$||$|
|Withheld income tax (if any) shown on Form 1099-INT||$||$|
|3.||Form 1099-DIV Payor:||$||$|
|Withheld income tax (if any) shown on Form 1099-DIV||$||$|
|4.||Form 1099-MISC Payor:||$||$|
|Withheld income tax (if any) shown on Form 1099-MISC||$||$|
Tax rate schedule.The tax on income for bankruptcy estates is calculated using the tax rate schedule for Married Individuals Filing Separately not the Estates and Trusts tax rate schedule.
An estate (other than a bankruptcy estate) and a trust filing Form 1041 are eligible for an automatic 5 ½ month extension of time to file which is due September 30. Bankruptcy estate income tax returns are due October 15 (unless a fiscal year) and are eligible for a 6 month extension. See Form 7004.
The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. Until these employment taxes are deposited as required by the IRC, they should be set aside in a separate bank account to ensure that funds are available to satisfy the liability. If the employment taxes aren't paid as required, the trustee may be held personally liable for payment of the taxes. See Publication 15, (Circular E), Employer's Tax Guide, for details on employer tax responsibilities. Also see IRS Notice 931, Deposit Requirements for Employment Taxes, for details on the deposit rules, including the requirement that federal employment tax deposits be made by electronic funds transfer.
The trustee also has a duty to prepare and file Forms W-2, Wage and Tax Statement, for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. If the debtor fails to prepare and file Forms W-2 for wages paid before bankruptcy, the trustee should instruct the employees to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with their individual income tax returns.
This publication isn't revised annually. Future changes to the forms and their instructions may not be reflected in this example.
The following return was prepared for tax year 2018. In 2018, the threshold filing amount for a bankruptcy estate was $12,000 (this amount is equal to the $12,000 standard deduction for married individuals filing separately).
Use this worksheet to figure your capital loss carryovers from 2017 to 2018 if your 2017 Schedule D, line 21, is a loss and (a) that loss is a smaller loss than the loss on your 2017 Schedule D, line 16, or(b) the amount on your 2017 Form 1040, line 41 (or your 2017 Form 1040NR, line 39, if applicable) is less than zero. Otherwise, you don't have any carryovers.
|1.||Enter the amount from your 2017 Form 1040, line 41, or Form 1040NR, line 39. If a loss, enclose the amount in parentheses||1.||19,880|
|2.||Enter the loss from your 2017 Schedule D, line 21, as a positive amount||2.||1,500|
|3.||Combine lines 1 and 2. If zero or less, enter -0-||3.||21,380|
|4.||Enter the smaller of line 2 or line 3||4.||1,500|
|If line 7 of your 2017 Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.|
|5.||Enter the loss from your 2017 Schedule D, line 7, as a positive amount||5.||0|
|6.||Enter any gain from your 2017 Schedule D, line 15. If a loss, enter -0-||6.|
|7.||Add lines 4 and 6||7.||1,500|
|8.||Short-term capital loss carryover for 2018. Subtract line 7 from line 5. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 6||8.||0|
|If line 15 of your 2017 Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.|
|9.||Enter the loss from your 2017 Schedule D, line 15, as a positive amount||9.||251,500|
|10.||Enter any gain from your 2017 Schedule D, line 7. If a loss, enter -0-||10.||0|
|11.||Subtract line 5 from line 4. If zero or less, enter -0-||11.||1,500|
|12.||Add lines 10 and 11||12.||1,500|
|13.||Long-term capital loss carryover for 2018. Subtract line 12 from line 9. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 14||13.||250,000|
A separate taxable estate isn't created when a partnership or corporation files a bankruptcy petition and their tax return filing requirements don't change. The debtor-in-possession, court appointed trustee, assignee, or receiver must file the entity's income tax returns on Form 1065, Form 1120 or, Form 1120S.
In cases where a trustee or receiver isn't appointed, the debtor-in-possession continues business operations and remains in possession of the business' property during the bankruptcy proceeding. The debtor-in-possession, rather than the general partner of a partnership or corporate officer of a corporation, assumes the fiduciary responsibility to file the business' tax returns.
The filing requirements for a partnership in a bankruptcy proceeding don't change. However, the responsibility to file the required returns becomes that of the court appointed trustee, receiver, or debtor-in-possession.
A partnership's debt that is canceled as a result of the bankruptcy proceeding isn't included in the partnership's income. However, It may or may not be included in the individual partners' income. See Partnerships, below under Debt Cancellation.
The filing requirements for a corporation in a bankruptcy proceeding also don't change. A bankruptcy trustee, receiver, or debtor-in-possession, having possession of or holding title to substantially all of the property or business operations of the debtor corporation, must file the debtor's corporate income tax return for the tax year.
The following discussion only highlights bankruptcy tax rules applying to corporations. The complex details of corporate bankruptcy reorganizations are beyond the scope of this publication. Therefore, you may wish to seek the help of a professional tax advisor. See Corporations under Debt Cancellation for information about a corporation's debt canceled in a bankruptcy proceeding.
The tax-free reorganization provisions of the Internal Revenue Code allow a corporation to transfer all or part of its assets to another corporation in a bankruptcy under title 11 of the United States Code or in a similar case. However, under the reorganization plan, the stock or securities of the corporation to which the assets are transferred must be distributed in a transaction that qualifies under IRC section 354, 355, or 356.
A "similar case" includes a receivership, foreclosure, or other similar proceeding in a federal or state court. In these cases, any party to the reorganization must be under the jurisdiction of the court and the transfer of assets under the plan of reorganization must be approved by the court. In a receivership, foreclosure, or similar proceeding before a federal or state agency involving certain financial institutions, the agency is treated as a court.
Generally, IRC section 354 provides that no gain or loss is recognized if a corporation's stock is exchanged solely for stock or securities in a corporation that is a party to the reorganization under a qualifying reorganization plan. In this case, shareholders in the bankrupt corporation would recognize no gain or loss if they exchange their stock solely for stock or securities of the corporation acquiring the bankrupt corporation's assets.
IRC section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution.
IRC section 356 allows tax-free exchanges in situations that would qualify under IRC section 354 or 355, except that other property or money, in addition to the permitted stock or securities, is received by the shareholder. In this situation, gain is recognized by the shareholder, but only to the extent of the money and the FMV of the other property received. No loss is recognized in this situation.
A trustee, receiver, or assignee of a corporation in bankruptcy, receivership, or in the process of dissolving, may apply to the IRS for relief from filing federal income tax returns for the corporation. To qualify, the corporation must have ceased business operations and have no assets nor income for the tax year. The exemption request must be submitted to the local IRS Insolvency Office handling the case.
The request to the IRS must include the name, address, and EIN of the corporation and a statement of the facts (with any supporting documents) showing why the debtor needs relief from the filing requirements. The request must also include the following statement:
"I hereby request relief from filing federal income tax returns for tax years ending _____ for the above-named corporation and declare under penalties of perjury that to the best of my knowledge and belief the information contained herein is correct."
The statement must be signed by the trustee, receiver or assignee. The statement must also include notice of appointment to act on behalf of the corporation (this isn't required for bankruptcy trustees or debtors-in-possession). The IRS will act on your request within 90 days.
Court-established receiverships sometimes arise in connection with bankruptcies. Certain court-established receiverships should be treated as qualified settlement funds ("QSFs") for purposes of IRC section 468B and the underlying Treasury Regulations. QSFs are required to file an annual income tax return, Form 1120-SF, U.S. Income Tax Return for Settlement Funds. More information about QSFs may be found in Treasury Regulation sections 1.468B-1 through -5.
The determination of the proper amount of tax due for a tax year begins with the bankruptcy estate's filing of Form 1041, and the individual debtor's filing of Form 1040, or for bankrupt entities filing Forms 1065, 1120, or 1120S. After a return is filed, the IRS will either accept the return as filed or select the return for examination. Under examination the IRS may redetermine the tax liability shown on the return. If the bankruptcy estate or debtor disagrees with the redetermined tax due, the tax as redetermined by the IRS may be contested in the bankruptcy court, or Tax Court, as applicable. See Court Jurisdiction over Tax Matters, later.
Pursuant to Rev. Proc. 2006-24, 2006-22 I.R.B. 943, IRS.gov/irb/2006-22_IRB/ar12, as modified by Announcement 2011-77, IRS.gov/irb/2011-51_IRB/ar13, the bankruptcy trustee may request a determination of any unpaid tax liability incurred by the bankruptcy estate during the administration of the case, by filing a tax return and a request for such determination with the IRS. Unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability upon payment of the tax:
As determined by the IRS,
As determined by the bankruptcy court, after completion of the IRS examination, or
As shown on the return, if the IRS does not:
Notify the trustee within 60 days after the request for determination that the return has been selected for examination, or
Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court).
If the debtor has already claimed a refund or credit for an overpayment of tax on a properly filed return or claim for refund, the trustee may rely on that claim. However, if the credit or refund was not claimed by the debtor, the trustee may make the request on behalf of the bankruptcy estate by filing the original or amended return or form with the Internal Revenue Service, Centralized Insolvency Operation, P.O. Box 7346, Philadelphia, PA 19101-7346 (marked “Request for Prompt Refund” and accompanied by a written statement explaining that the request is being submitted pursuant to section 505(a) of the Bankruptcy Code. See Rev. Proc. 2010-27, as modified by Announcement 2011-77.
The appropriate form for the trustee to use in making the claim for refund is as follows:
For income taxes for which an individual debtor filed a Form 1040, the trustee should use a Form 1040X, Amended U.S. Individual Income Tax Return.
For income taxes for which a corporate debtor filed a Form 1120, the trustee should use a Form 1120X, Amended U.S. Corporation Income Tax Return.
For income taxes for which a debtor filed a form other than Form 1040, or Form 1120, the trustee should use the same type of form that the debtor had originally filed, and write "Amended Return" at the top of the form.
For taxes other than certain excise taxes or income taxes for which the debtor filed a return, the trustee should use a Form 843, Claim for Refund and Request for Abatement, and attach an exact copy of any return that is the subject of the claim along with a statement of the name and location of the office where the return was filed.
For excise taxes reported on Forms 720, 730, or 2290, the trustee should use Form 8849, Claim for Refund of Excise Taxes, or Form 720X, Amended Quarterly Federal Excise Tax Return, as appropriate.
For overpayment of taxes of the bankruptcy estate incurred during the administration of the case, the trustee may use a properly executed tax return (for income taxes, a Form 1041) as a claim for refund or credit.
Once the IRS receives the trustee's claim for refund, it will examine the refund claim on an expedited basis and notify the trustee of its decision within 120 days from the date of the filing of the claim. If the trustee disagrees with the IRS's decision or does not receive a decision from the IRS within 120 days of filing the claim, the trustee may seek a determination from the bankruptcy court to determine the estate's right to the refund.
The bankruptcy court may enter an order discharging the debtor from personal liability for certain debts, including taxes. The order for discharge is a permanent order of the court prohibiting the creditors from taking action against the debtor personally to collect the debt. However, secured creditors with valid pre-bankruptcy liens may enforce them to recover property secured by the lien.
Not all debts are dischargeable. Many tax debts are excepted from the bankruptcy discharge. The scope of the bankruptcy discharge depends on the chapter under which the case was filed and the nature of the debt. Chapter 7 debtors don't have an absolute right to a discharge; objections may be filed by creditors. Chapters 12 and 13 debtors are generally entitled to discharge upon completion of all payments under the bankruptcy plan.
If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes. A debt includes any indebtedness for which the debtor is liable or that attaches to property the debtor holds. In the event that the amount forgiven is $600 or more, the debtor should receive a Form 1099-C, Cancellation of Debt, from the lender. See Form 1099-C and the separate instructions. The debtor may not have to report the entire amount of canceled debt as income as certain exclusions may apply.
Don't include a canceled debt in gross income if:
The cancellation takes place in a bankruptcy case under the Bankruptcy Code,
The cancellation takes place when the debtor is insolvent, and the amount excluded isn't more than the amount by which the debtor is insolvent,
The canceled debt is qualified farm debt (debt incurred in operating a farm). See Cancellation of Debt in chapter 3 of Publication 225, or
The canceled debt is qualified real property business indebtedness (certain debt connected with business real property). See Publication 525.
$4,000 of the Simpson Corporation's liabilities are canceled outside bankruptcy. Immediately before the cancellation, the Simpson Corporation's liabilities totaled $21,000 and the FMV of its assets was $17,500. Because its liabilities were more than its assets, it was insolvent. The amount of the insolvency was $3,500 ($21,000 − $17,500). The corporation may exclude only $3,500 of the $4,000 debt cancellation from income because that is the amount by which it was insolvent. It must also reduce certain tax attributes by the $3,500 of excluded income. The remaining $500 of canceled debt must be included in income.
If a debtor excludes canceled debt from income because it is canceled in a bankruptcy case or during insolvency, he or she must use the excluded amount to reduce certain "tax attributes." Tax attributes include the basis of certain assets and the losses and credits listed later. By reducing the tax attributes, the tax on the canceled debt is partially postponed instead of being entirely forgiven. This prevents an excessive tax benefit from the debt cancellation.
If a separate bankruptcy estate was created, the trustee or debtor-in-possession must reduce the estate's attributes (but not below zero) by the canceled debt. See Attribute carryovers under Bankruptcy Estate Deductions and Credits earlier.
If a partnership's debt is canceled because of bankruptcy or insolvency, the rules for the exclusion of the canceled amount from gross income and for tax attribute reduction are applied at the individual partner level. Thus, each partner's share of debt cancellation income must be reported on the partner's return unless the partner meets the bankruptcy or insolvency exclusions explained earlier. Then all choices, such as the choices to reduce the basis of depreciable property before reducing other tax attributes, to treat real property inventory as depreciable property, and to end the tax year on the day before filing the bankruptcy case, must be made by the individual partners, not the partnership.
Corporations in a bankruptcy proceeding or insolvency generally follow the same rules for debt cancellation and reduction of tax attributes as an individual or individual bankruptcy estate would follow.
If a corporation transfers its stock (or if a partnership transfers an interest in the partnership) in satisfaction of indebtedness and the FMV of the stock or interest is less than the indebtedness owed, the corporation or partnership has income to the extent of the difference from the cancellation of indebtedness. The corporation or partnership can exclude all or a portion of the income created by the stock or interest debt transfer if it is in a bankruptcy proceeding or, if not in a bankruptcy proceeding, it can exclude the income to the extent it is insolvent. However, the corporation or partnership must reduce its tax attributes to the extent it has any by the amount of the excluded income.
The earnings and profits of a corporation don't include income from the discharge of indebtedness to the extent of the amount applied to reduce the basis of the corporation's property as explained earlier. Otherwise, discharge of indebtedness income, including amounts excluded from gross income, increases the earnings and profits of the corporation (or reduces a deficit in earnings and profits).
If there is a deficit in the corporation's earnings and profits and the interest of any shareholder of the corporation is terminated or extinguished in a title 11 or similar case (defined earlier), the deficit must be reduced by an amount equal to the paid-in capital allocable to the shareholder's terminated or extinguished interest.
The sample filled-in Form 982 shown on the next page is based on the following situation.
Tom Smith is in financial difficulty, but he has been able to avoid declaring bankruptcy. In 2018, he reached an agreement with his creditors whereby they agreed to forgive $10,000 of the total that he owed them in return for his setting up a schedule for repayment of the rest of his debts.
Immediately before the debt cancellation, Tom's liabilities totaled $120,000 and the FMV of his assets was $100,000 (his total basis in all these assets was $90,000). At the time of the debt cancellation, he was considered insolvent by $20,000. He can exclude from income the entire $10,000 debt cancellation because it was not more than the amount by which he was insolvent.
Among Tom's assets, the only depreciable asset is a rental condominium with an adjusted basis of $50,000. Of this, $10,000 is allocable to the land, leaving a depreciable basis of $40,000. He has a long-term capital loss carryover to 2018 of $5,000. He also has an NOL of $2,000 and a $3,000 NOL carryover from 2015. He has no other tax attributes arising from the current tax year or carried to this year.
Ordinarily, in applying the $10,000 debt cancellation amount to reduce tax attributes, Tom would first reduce his $2,000 NOL, next, his $3,000 NOL carryover from 2015, and then his $5,000 net capital loss carryover. However, he figures that it is better for him to preserve his loss carryovers for the next tax year.
Tom elects to reduce basis first. He can reduce the depreciable basis of his rental condominium (his only depreciable asset) by $10,000. The tax effect of doing this will be to reduce his depreciation deductions for years following the year of the debt cancellation. However, if he later sells the condominium at a gain, the part of the gain from the basis reduction will be taxable as ordinary income.
Tom must file Form 982, as shown here, with his individual return (Form 1040) for the tax year of the debt discharge. In addition, he must attach a statement describing the debt cancellation transaction and identifying the property to which the basis reduction applies. This statement isn't illustrated.
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