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.

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.

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

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.

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

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

Income ax eriods:

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:

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.

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.

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

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.

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.

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.

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

The time of discharge is as follows:

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.

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:

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.

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

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).

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

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

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.

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).

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

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.

For information on community property considerations see IRM 4.8.2.11.4.8.15.1.

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.

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.

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.

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).

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).

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).

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).

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).

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.

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.

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.

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.

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.

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).

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.

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.

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).

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).

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.

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.

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).

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.

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:

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).

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).

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

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).

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).

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).

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).

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).

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

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.

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.

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.

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.

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

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

Examiners who, during an examination, identify a bankruptcy case by any of the notification processes identified previously will confirm the following with the bankruptcy coordinator:

The examiner will also update AIMS bankruptcy project codes when applicable. See the AIMS web site for bankruptcy project codes at http://mysbse.web.irs.gov/exam/mis/default.aspx

Proceed with the examination applying all established bankruptcy procedures.

Continue the examination as usual if bankruptcy has been discharged or dismissed.

Protect the normal three-year statute of limitations provided by IRC 6501. A consent to extend the statutory period may be solicited.

Requests from insolvency are as unique as the individual bankruptcy districts served and the skill of the particular insolvency group.

Insolvency may request assistance for the following:

Proof of claim referrals may be forwarded directly to PSP who processes bankruptcy proofs of claim in PSP Status Code 06 or Status Code 08, as well as group Status Code 10 or Status Code 12. Procedures for classification and assignment of any returns requiring immediate statutory procedures can be found in IRM 4.27.3.2, Examination Coordination With Insolvency.

Requests of income tax law assistance require development and explanation by the TS bankruptcy coordinator.

Some returns submitted to insolvency by debtors are questionable.

Counsel may request assistance with a bankruptcy court litigation matter.

Such requests may relate to the following:

A request for a cooperating agent to assist the bankruptcy court, DOJ, and / or Counsel for factual development or to prepare tax computations is a litigation request. Upon receipt of the request, the TS bankruptcy coordinator will review the appropriateness, prepare Form 3449, notate the bar date or other bankruptcy court directive, and forward to PSP. See IRM 4.27.1.3.2, Inquiries From Department of Justice.

Many miscellaneous challenged proofs of claim may be forwarded to the appropriate Service unit such as the audit reconsideration and adjustments unit of campuses. Others must be developed and concluded by the TS bankruptcy coordinator.

For Chapter 11 bankruptcy cases of individuals filed before October 17, 2005, the automatic stay is usually operative the day the petition is filed until the day the plan is confirmed.

For Chapter 11 cases of individuals filed on or after October 17, 2005, the stay is usually operative from the day the petition is filed until the plan is completed.

A Letter 531, Notice of Deficiency, and Notice 1421, How Bankruptcy Affects Your Rights to File a Petition in Tax Court in Response to a Notice of Deficiency, are issued to an individual Chapter 11 debtor during the operation of the stay.

The notice of deficiency reviewer must determine the pre-bankruptcy and post-bankruptcy petition income tax periods for those bankruptcy filings on or after October 17, 2005 (BAPCPA 2005) in order to determine operation of the automatic stay and the statutory procedures applicable.

An income tax is a pre-petition debt if the last day of the tax year ended before the bankruptcy petition was filed because an income tax is incurred on the last day of the tax year. (Penalties and excise taxes are incurred when the act that gave rise to the penalty occurred.) Whether an income tax is a pre-petition liability or a post-petition liability does not depend on when the return was due or filed, or when it was assessed.

Post-petition income tax periods are the periods ending on or after the date the bankruptcy petition is filed.

For cases filed on or after October 22, 1994, the automatic stay does not prohibit the making of an assessment. However, the stay still prohibits the commencement or continuation of a Tax Court case, so the assessment statute will be tolled indirectly if the Service has issued a statutory notice of deficiency since the stay will toll the debtor's time to file a Tax Court petition.

The notice of deficiency for a bankrupt taxpayer must be issued within the assessment statute period as defined or extended by law.

Letter 531 and Notice 1421 are issued to a taxpayer in a bankruptcy case when the bankruptcy stay will affect a U.S. Tax court petition.

Letter 531 is issued to a taxpayer in a bankruptcy case when the bankruptcy stay will not affect a Tax Court petition.

For cases begun on or after October 22, 1994, if the notice of deficiency was issued and the 90 day period expired prior to the bankruptcy petition date, the tax must be assessed. The bankruptcy stay does not prohibit the Service from assessing tax. It prohibits a petition to Tax Court.

Bankruptcy examinations not subject to deficiency procedures of IRC 6211, Definition of a Deficiency, et. al., including certain employment tax and excise tax cases, should be immediately assessed, whether agreed or unagreed.

The reviewer must first determine the assessment statute expiration date (ASED). Do not rely on ERCS or AIMS printouts. Use a combination of sources to determine the correct ASED, such as the original tax return, IDRS transcripts, date-received stamps, postmarks on envelopes, Form 872 and Form 895. If any changes are made to the ASED, a completed and approved Form 895 should be attached to the outside of the case file.

The examination report should be reviewed for accuracy. Reconcile the report to the transcript to ensure all previous adjustments have been considered, including unpostable assessments that have not been deleted. Ensure agreements are properly executed with the correct forms and signatures (e.g., reports, waivers, and statute extensions). Cases requiring further development should be returned to the group with a Form 3990, Reviewers Report, explaining necessary corrective action.

The reviewer will review the examination files for bankruptcy issues and take appropriate action:

When a bankruptcy case subject to deficiency procedures is identified, a case file cover sheet should be added to the file to alert the notice suspense unit (90 / 150 day unit) of the bankruptcy status.

The cover sheet should clearly indicate the case should not be assessed upon default, but should be returned to the bankruptcy coordinator. Additionally, the following information may also be included on the cover sheet:

Exhibit 4.8.2-4 is a sample cover sheet that may be used for this purpose.

Letter 531 and Notice 1421 will be issued for pre-petition tax years of individual taxpayers where their Chapter 7 or 13 bankruptcy falls under BAPCPA (bankruptcy petitions filed on or after October 17, 2005).

Letter 531 will be issued for post-petition tax years.

If the case includes both pre-petition and post-petition years, the case will need to be separated into two files, one for pre-petition years and the other for post-petition years. Do not include both pre-petition and post-petition years on one notice of deficiency letter. Only pre-petition tax years require a bankruptcy notice of deficiency case file cover sheet. Post-petition tax years falling under BAPCPA are not affected by the automatic stay and should not be placed into bankruptcy suspense.

For bankruptcy cases filed on or after October 22, 1994, the automatic stay does not prohibit the making of an assessment. But the assessment period will be tolled indirectly if a statutory notice of deficiency is issued and the 90 day period is tolled by the bankruptcy stay against the commencement of a Tax Court case. So, for cases filed on or after October 22, 1994, the notice of deficiency must be prepared and issued on or before the ASED. For bankruptcy cases of individuals filed before October 17, 2005, the stay against the commencement of a Tax Court case applies to both pre-petition and post-petition income tax periods. For bankruptcy cases of individuals filed on or after October 17, 2005, the stay applies only to pre-petition income tax periods.

TS will issue Letter 1005 to the trustee. Letter 1005 offers appeal rights allowable only when adequate time is available on the assessment statute. Letter 1005 does not extend the statute under IRC 6213(a). An unprotested Letter 1005 should be assessed within 60 days of issuance.

A bankruptcy notice of deficiency case file cover sheet is not required.

A corporate Chapter 11 bankruptcy filed on or after October 22, 1994, requires issuance of a notice of deficiency on or before the ASED.

If the Chapter 11 plan has not been confirmed, Letter 531 and Notice 1421 are issued for pre-petition and post-petition income tax years. A bankruptcy notice of deficiency case file cover sheet is required.

If the Chapter 11 plan has been confirmed, the stay is no longer operative. Letter 531 is issued for pre-petition and post-petition income tax periods. A bankruptcy notice of deficiency case file cover sheet is not required.

If a Chapter 7 corporation bankruptcy was filed on or after October 22, 1994, a Letter 531 is issued to the trustee for pre-petition and post-petition tax periods. A bankruptcy notice of deficiency case file cover sheet is required.

A tax determined by the bankruptcy court may be assessed notwithstanding deficiency procedures once the bankruptcy court's determination has become final. See IRC 6871(b) and Bankruptcy Code 505(c). To make this assessment, a bankruptcy notice of deficiency case file cover sheet is not required.

A bankrupt taxpayer may request the Bankruptcy Court lift the automatic stay so that they may petition the Tax Court.

If the bankrupt taxpayer files a petition to the Tax Court during the notice of deficiency suspense period, without authorization from the Bankruptcy Court, Area Counsel will request the Tax Court to dismiss the petition for lack of jurisdiction. The case will then be placed into bankruptcy suspense.

With regard to a jointly filed tax return where only one spouse is in bankruptcy, issue a Letter 531 to both spouses and include Notice 1421 with the copy to the bankrupt spouse.

An assessment against the non-bankrupt spouse should be made timely using MFT 31. The bankruptcy automatic stay has no effect on the non-bankrupt spouse's assessment statute. The assessment should be made before forwarding the case to the bankruptcy coordinator for suspense when six months or less remain on the assessment statute.

Upon default of the notice of deficiency, the 90 day suspense unit forwards the case to the bankruptcy suspense coordinator as indicated on the bankruptcy notice of deficiency case file cover sheet.

A case must be held in suspense during the bankruptcy stay only after issuance of a statutory notice of deficiency that has not defaulted prior to the filing of a bankruptcy petition for tax periods for which the taxpayer cannot commence or continue a Tax Court proceeding.

The Service can assess a tax deficiency, notwithstanding normal deficiency procedures, if the tax is determined by the bankruptcy court.

Review the case to ensure the automatic stay is in effect.

The reviewer will research AIMS / ERCS, verifying that a full master file or non-master file record is established on both systems. Ensure the AIMS record properly reflects name of taxpayer, identification number (SSN / EIN), open tax period(s) compared to period(s) contained in the case, regular statute dates, organization code, status code, and project code. The following project codes should be added if they are not shown on AIMS. Tracking codes should be added according to TS guidelines.

Complete a bankruptcy suspense case file cover sheet or other similar document with AIMS / ERCS data. Exhibit 4.8.2-5 must be used for this purpose, using the AIMS / ERCS codes reflected in Exhibit 4.8.2-1, Technical Services Status Codes and Related Review and Suspense Type Codes.

Ensure Form 895 is completed and attached to the case. Indicate the following:

Use of alpha code "KK" is provided in IRM 25.6.23, Examination Process – Assessment Statute of Limitations Controls.

Refer to IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS, for further details on the use of alpha statutes.

The suspense case file must contain:

The bankruptcy suspense coordinator will conduct a limited review of the case file. The limited review will include the following:

Ensure the correct disposal code is reflected on the RGS CEAS record (10, 12, 13, etc.).

Move the RGS CEAS record to Fileserver(Suspend) while in bankruptcy suspense.

There are several tools available to the coordinator that may be utilized in monitoring the status of bankruptcy cases. Access permission and a password may be obtained using the online 5081 system.

PACER is a third-party service that provides detailed up-to-date information on the status of bankruptcy cases. It is a fee-based service and requires a password for access.

AIS is the inventory control system used by the Insolvency unit. This database provides case assignment information, detailed history, etc. Obtain the ORACLE user guide from Insolvency.

On a monthly basis, PACER should be accessed to determine the bankruptcy status for all cases held in bankruptcy suspense. It may be necessary to access more than one system when conflicting or incomplete information is found. A word search in the PACER docket is suggested to review to see if there is any activity of the court that would trigger the lifting of the stay. A search of the following words is recommended: dismiss, discharge, denied, denial, terminate, stay, closed and confirmed.

Record the date of the monthly monitoring on the Bankruptcy Suspense Monthly PACER Check File Coversheet. See Exhibit 4.8.2-5.

Reviewers will need to contact the appropriate campus staff for any questions / issues related to Centralized Insolvency Chapter 7 and confirmed Chapter 13 cases.

If research indicates the automatic stay is still in effect, an entry should be made in the suspense case file cover / case file activity record or similar document to reflect this fact. Though not currently mandatory, an entry may also be made on ERCS as follows:

The TS group manager for the bankruptcy coordinator will monitor the action dates to ensure that all procedures are followed properly to ensure timely actions are being taken. The bankruptcy cases will remain in Review Type 48 through the suspense process.

The bankruptcy suspense coordinator will obtain transcripts for bankruptcy suspense cases in Alpha Code "EE" , twice a year, to check for transactions that may indicate a tax return has been filed (e.g., TC 976 or 977). An ESTAB of the appropriate DLN may need to be requested to determine if a return has been filed and how it compares to the notice of deficiency. A supplemental report will need to be issued. If no agreed closure, continue with the monthly monitoring of the bankruptcy status. Be sure to update the ASED to the live ASED or to Alpha Code "KK" , as appropriate.

Upon expiration of post bankruptcy Tax Court petition period, prepare to assess in Disposal Code 10, unagreed. Obtain an AMDISA and current transcripts to confirm there have been no secondary actions, particularly another bankruptcy filing.

A bankruptcy AIMS "X" freeze present on AMDISA will prevent an unagreed assessment. Due to Insolvency procedures, the TC 520 and AIMS bankruptcy freeze may remain, although the automatic stay is no longer operative.

TS must address all AIMS freeze codes, which includes, but is not limited to, contacting the bankruptcy suspense coordinator before requesting the freeze be lifted.

Forward the case to CCP for closing.

Upon expiration of the period to petition Tax Court, prepare to assess the bankruptcy spouse on MFT 31 and prepare the final closure for the MFT 30 account.

A bankruptcy AIMS "X" freeze present on AMDISA will prevent an unagreed assessment from posting. Due to Insolvency procedures, the TC 520 and AIMS bankruptcy freeze may remain, although the automatic stay is no longer operative.

TS must address all AIMS freeze codes. The bankruptcy coordinator is responsible for addressing the AIMS "X" freeze. The bankruptcy coordinator will determine if the AIMS "X" freeze may be lifted. If the AIMS "X" freeze may be lifted, the bankruptcy coordinator will:

Prepare the Form 5344 for the MFT 31 of the bankrupt spouse’s assessment.

Prepare a second Form 5344 for the MFT 30 closure.

Prepare a Form 3198.