Purpose. This IRM section contains guidance for revenue officers (ROs) concerning bankruptcy cases and proceedings. It explains the provisions and concepts of bankruptcy law that generally apply to all bankruptcy cases.

Audience. This IRM section is designed for use by Small Business/Self-Employed (SB/SE) ROs and management. Specialty Collection - Insolvency (SCI) caseworkers and management in the Centralized Insolvency Operation (CIO) and Field Insolvency (FI) may also refer to this section. Caseworkers in functions other than SB/SE may refer to this section when dealing with a taxpayer that has filed bankruptcy.

Policy Owner. The Director of Collection Policy is responsible for issuing Policy for the Insolvency program.

Program Owner. The program owner is Collection Policy, Insolvency, an organization within the SB/SE division.

Primary Stakeholders. The primary stakeholders are Field Collection, Civil Enforcement Advice and Support Operations (CEASO), Chief Counsel, and Specialty Collection Insolvency (SCI).

Program Goals. The goal is to provide fundamental knowledge and procedural guidance for working bankruptcy cases. Following the guidance in this IRM will ensure cases are worked in accordance with bankruptcy laws and regulations.

The Insolvency program maintains records and files concerning the investigation, preparation, and filing of claims in all bankruptcy proceedings and is the point of contact for revenue officers. The case file is maintained by Insolvency. Insolvency has the responsibility of protecting the government’s interests in all bankruptcy cases. However, Insolvency may request assistance from, or refer a case to, the appropriate Associate Area Counsel (SB/SE) or Assistant U.S. Attorney (AUSA) office. For additional information, see IRM 5.9.4.15, Referrals-Representing IRS in Bankruptcy Court, and subsections.

The purpose of federal bankruptcy law is:

Initially, there were state insolvency laws but no federal bankruptcy laws. Bankruptcy law is now contained in a federal statutory scheme called the "Bankruptcy Code." The Bankruptcy Rules contain procedures for implementation of most Bankruptcy Code provisions.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA" ) made major revisions to the Bankruptcy Code. BAPCPA changes generally apply to cases filed on or after October 17, 2005.

The Bankruptcy Code is divided into several chapters. Chapters 1, 3, and 5 contain general provisions applicable to all types of bankruptcies. Important sections include:

Chapter 7 deals with liquidating bankruptcies, which are called "Chapter 7 cases," in which the debtor’s non-exempt assets are used to pay creditors. See IRM 5.17.9, Chapter 7 Bankruptcy (Liquidation).

Chapter 11 deals with reorganizations of individuals and non-individual debtors which are called "Chapter 11 cases." The non-individual debtor may be a corporation, partnership, or Limited Liability Company (LLC). See IRM 5.17.10, Chapter 11 Bankruptcy (Reorganization). In these cases, plans to pay creditors over a period of time are proposed, with the plan to be funded from future earnings or from liquidation of the debtor’s assets.

Chapter 12 deals with family farmers and disposition of farming property and family fisherman reorganizations, which are called "Chapter 12 cases" and are similar to Chapter 11 and 13 cases. See IRM 5.17.11.20, Chapter 12.

Chapter 13 deals with reorganizations of individuals with regular income, which are called "Chapter 13 cases," in which payments are made from the debtor’s future earnings pursuant to a plan. See IRM 5.17.11, Chapter 13 Bankruptcy (Individuals with Regular Income) for additional information on Chapter 13 cases.

Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor’s debts under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy courts are under the district courts and receive their jurisdiction from the district court.

Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged (i.e., the taxes for which the debtor will no longer be personally liable). The bankruptcy court also has jurisdiction over any matters concerning payment of any tax debts claimed against the estate, validity of liens, turnover of property to the estate, exemptions of property from the estate, and confirmation of plans. See 28 USC 157.

When a taxpayer files a bankruptcy petition, the automatic stay (discussed below) begins in most cases. Although audit activity can continue and assessments can be made, the automatic stay generally stops all of the IRS’s normal collection procedures.

Under the Bankruptcy Code, a debtor has the choice of:

A Chapter 7 liquidation case is administered by a trustee who:

In a Chapter 11, the debtor as a debtor-in-possession ("DIP" ) typically continues to operate its business while formulating a plan to pay the claims of creditors. BAPCPA made Chapter 11 for individuals very similar to Chapter 13.

In a Chapter 12, a debtor continues to operate while formulating and paying a bankruptcy plan. The debtor must be a family farmer or family fisherman with regular annual income. Chapter 12 bankruptcy plans are generally paid over a period of three to five years.

In a Chapter 13, the debtor, who must be an individual with regular income, formulates a plan to pay their creditors over a period of three to five years from future earnings.

The debtor must meet the requirements in 11 USC 109 to be a debtor in a particular chapter.

Bankruptcy cases may be voluntary or involuntary. A voluntary proceeding is one in which the debtor files a petition for relief in bankruptcy. The filing of the voluntary petition is the "order for relief" in the case. Along with the petition, the debtor must file certain schedules or statements. See 11 USC 521 and Bankruptcy Rule 1007.

An involuntary bankruptcy is one instituted by creditors filing a petition for relief against a debtor. See 11 USC 303. In contrast to the voluntary case, the "order for relief" is entered at some point after the petition is filed, when the court determines that the criteria for an involuntary bankruptcy are met. An involuntary case may only be commenced under Chapter 7 or Chapter 11. The debtor must be eligible to be a debtor under the chapter for which the petition was filed.

Instead of joining with other creditors to file an involuntary petition, the IRS should explore other options to collect tax debts. In the event an involuntary petition is filed by other creditors, however, the IRS should file a proof of claim in order to protect its interests.

Under 11 USC 302, a joint case is commenced by the filing of a single petition by an individual qualified to be a debtor under Chapter 7, 11, 12, or 13, and the individual’s spouse. The court may determine that the assets and liabilities of the two debtors will be combined in a single pool to pay creditors. Bankruptcy Rule 1015 provides for joint administration of the estates.

Notice of Chapter 7, 12, and 13 cases must be given to the IRS when it is listed as a creditor in the debtor’s schedules. See Bankruptcy Rule 2002(g).

Bankruptcy Rule 2002(j) provides that, in a Chapter 11 case, notice must be given to the IRS at the address set out in a register maintained under Bankruptcy Rule 5003(e) for the district in which the case is pending. Notice may either be mailed or given through the electronic noticing system. The IRS must be noticed in all Chapter 11 cases. It does not matter if the IRS was listed as a creditor in the debtor's schedules.

The Bankruptcy Rules do not prescribe the place of notice to the IRS in Chapter 7, 12, or 13 cases. 11 USC 342(e) and (f) authorize creditors to designate addresses to receive notices in Chapter 7 and 13 cases. The IRS has designated one national address for the court's mailing matrix for all Chapter 7, 12, or 13 notices. That address is the Centralized Insolvency Operation in Philadelphia. See IRM 5.9.5.2.2, Mailing Matrix, and IRM 5.9.11.2, Insolvency Mail, for additional information.

Various types of "trustees" participate in particular bankruptcy cases:

The United States Trustee (employed by the U.S. Department of Justice) is a supervisory agency that monitors Chapters 7,11,12,13, and 15 trustees (see 28 USC 586(a)(3)).

A trustee is appointed in every Chapter 7 case. A trustee may also be appointed, "for cause" , in a Chapter 11 case.

Prior to confirmation, the Chapter 13 trustee (also called a standing trustee) frequently assists the court in evaluating proposed plans for confirmation. After confirmation, the Chapter 13 trustee functions largely as a disbursing agent. The Chapter 13 trustee receives the debtor’s monthly plan payments and disburses funds to the creditors according to the plan.

The trustee in a Chapter 7 or 11 bankruptcy case is the representative of the estate. The trustee has the capacity to sue and the trustee can be sued.

In some Chapter 11 cases, the plan provides for the creation of a liquidating trust. In these cases, a trustee is designated to oversee the trust. The liquidating trustee is not a trustee under the Bankruptcy Code. The trustee's duties can only be determined by reference to the plan or court orders.

The United States Trustee for the district in which the case is pending may serve as trustee, if necessary. A person who has served as an examiner in the case may not serve as the trustee.

A bankruptcy trustee qualifies by posting an adequate bond (11 USC 322). The amount of the bond and sufficiency of the surety on the bond are determined by the United States Trustee. A proceeding on a trustee’s bond may not be commenced more than two years after the date of the trustee’s discharge. The selection and qualification of an individual as trustee does not prevent a subsequent replacement. The court may remove a trustee, other than the United States Trustee or an examiner, for cause after notice and a hearing.

11 USC 341 provides that within a reasonable time after the order for relief in a case, the United States Trustee shall convene and preside at a meeting of creditors (often referred to as the 341 meeting).

In a Chapter 7 case, another purpose of the 341 meeting is the election of a case trustee and, where appropriate, of a creditors’ committee. A creditors’ committee may:

In Chapter 11 cases, creditors’ committees often play a prominent role. The members are selected by the United States Trustee. The committee functions as the representative of creditors who hold allowable, unsecured, non-priority claims. Governmental entities such as the IRS, are generally excluded from participation on Chapter 11 creditors’ committees. (11 USC 1102 and 11 USC 101(41))

Not later than the day before the 341 meeting, Chapter 13 debtors are required to submit tax returns for the taxable periods ending within the four years before the petition date, although this deadline may be extended under certain circumstances. (11 USC 1308)

Under 11 USC 362(a), an automatic stay arises by operation of law as soon as the bankruptcy petition, whether voluntary or involuntary, is filed. The stay prohibits most collection activity. Specifically, it prohibits:

Some actions the IRS must avoid after bankruptcy has been filed because of the automatic stay are:

The automatic stay does not prohibit the following:

The stay of an act against property of the estate continues until the property is no longer part of the estate. The stay of any other act continues until the earliest of the time:

For cases filed on or after October 17, 2005, the effective date of BAPCPA, the stay may terminate 30 days after the bankruptcy petition is filed, or may not go into effect at all, if the debtor had one or more bankruptcies dismissed within one year before the latest bankruptcy and dismissal was not for failure to pass the means test. Insolvency should contact Associate Area Counsel (SB/SE) if it is believed that the automatic stay has terminated or has not gone into effect on a case. (See IRM 5.9.5.7, Serial Filers, and related subsections and exhibits for additional information.)

Upon request of a party in interest, such as a creditor, and after notice and a hearing, the bankruptcy court shall grant relief from the stay by terminating, annulling, modifying, or conditioning the stay:

The party requesting relief from the stay has the burden of proof with respect to whether the debtor has equity in the property. The party opposing the motion has the burden of proof with respect to all other issues.

Section 7433(e) of the Internal Revenue Code (IRC) creates a cause of action for taxpayers who suffer damages when the IRS willfully violates the automatic stay or discharge provisions. Treasury Regulations under IRC 7433(e) describe the administrative procedures the taxpayer must follow before filing a judicial action. (Treas. Reg. 301.7433-2(e)) Additionally, 11 USC 362(k) allows for damages to be recovered by an individual who is injured by a willful stay violation.

Actions in violation of the automatic stay must be corrected expeditiously. Corrective actions may include; for example, prompt release of pre-petition continuous wage levies and prompt reversal of post-petition setoffs.

Creditors who have a secured interest in any property of the debtor are entitled to adequate protection under the Bankruptcy Code. "Adequate protection" means preservation of the value of the property or collateral securing a creditor’s claim; thereby, maintaining the status quo. Adequate protection may be required for the continuation of the automatic stay under 11 USC 362(d) for the debtor’s use, sale, or lease of estate property under 11 USC 363(e), and for the granting of a senior lien on collateral to obtain credit under 11 USC 364(d). The IRS is entitled to adequate protection for its secured claim in both real and personal property.

Adequate protection only applies to claims of secured creditors. The IRS is entitled to adequate protection only if its claim is secured by a filed Notice of Federal Tax Lien (NFTL).

11 USC 361 sets forth three examples of adequate protection:

11 USC 363 governs the use, sale, or lease of property of the estate. Under 11 USC 363(b), the trustee or debtor-in-possession may use, sell, or lease the estate property other than in the ordinary course of business only after notice and a hearing. Bankruptcy Rule 6004 governs the procedural requirements for filing a motion for use, sale, or lease of property not in the ordinary course of business. If the business of the debtor is authorized to be operated under Chapter 7 (11 USC 721), Chapter 11 (11 USC 1108), Chapter 12 (11 USC 1203, 1204), or Chapter 13 (11 USC 1304), the trustee, debtor-in-possession, or debtor, as applicable, may, without notice or hearing, use, sell, or lease property of the estate in the ordinary course of business.

Under 11 USC 363(c)(2), cash collateral may not be used, sold, or leased by the trustee or debtor-in-possession without the consent of each entity that has an interest in the cash collateral or the court’s authorization after notice and a hearing. Bankruptcy Rule 4001 sets forth the procedural requirements for cash collateral motions.

Under 11 USC 363(e), on request of an entity that has an interest in property to be used, sold, or leased, the court may provide adequate protection of such interest.

Under 11 USC 363(f), a trustee may sell property free and clear of liens where certain conditions are met. Most often; however, adequate protection requires that the tax lien and all other liens attach to the sale proceeds with the same priority that it had in the property prior to the sale.

11 USC 501 provides that a creditor may file a proof of claim. A properly filed proof of claim is deemed allowed unless objected to by a party in interest (11 USC 502(a)). A proof of claim is filed for claims (taxes) that arose pre-petition. See 11 USC 101(10)(A).

Governmental entities have 180 days from the date of the order for relief, or such later time as the bankruptcy rules may provide, in which to file proofs of claim (11 USC 502(b)(9)). The general bar date for other creditors in Chapter 7 and 13 cases is 70 days after the petition date. A tax claim is timely if filed by the later of either of these two deadlines.

An untimely tax claim can be disallowed solely on the basis that it was filed late (11 USC 502). This may mean no payment in a Chapter 11 or 13 plan. However, in a Chapter 7 case, a late-filed priority claim is entitled to share in a distribution with timely-filed priority claims, so long as it is filed before the trustee takes certain actions relating to the distribution (11 USC 726(a)).

When the IRS does not receive notice in an individual asset case in sufficient time prior to the bar date to file a timely proof of claim, the debt owed to the IRS is not discharged. See IRM 5.9.13.7.1(6), Late Filed Claims, Notice Received with Insufficient Time to File a Timely Proof of Claim. Also, see IRM 5.9.17.8.9, Procedures for Processing Bankruptcy Discharges when the IRS Received No Notice or Late Notice in the Asset Case, for additional information.

If a creditor does not timely file a proof of claim, the debtor, a co-obligor, or the trustee may file a proof of such claim (11 USC 501 and Bankruptcy Rule 3004). The court is to mail notice of the filing to the creditor, debtor, and the trustee. The creditor may file a proof of claim which supersedes the proof of claim filed by the debtor. See IRM 5.9.13.3, Manual Proofs of Claim and Common Claim Issue, Filing Entities.

The payment of claims differs depending on how the claim is classified. The three types of pre-petition claims are (a) secured, (b) unsecured priority, and (c) unsecured general. Post-petition claims may also be provided for in bankruptcy as discussed further in IRM 5.17.8.17, Post-petition Claims/Administrative Expenses.

A proof of claim listing an unassessed liability can be filed to protect the Government’s interest before the exact liability of the taxpayer is determined. The claim serves to meet the bar date and notify parties of the claim. The Government should be in a position to show the court that the liability is reasonable. As soon as the correct or complete amount due can be determined, an amended proof of claim should be filed.

11 USC 502 allows any party in interest to object to a claim. Pursuant to Bankruptcy Rules 3002 and 3003, the court may extend the time within which a claim may be timely filed. Section 502(b) lists several grounds for disallowing a claim, including tardiness (11 USC 502(b)(9)). If more time is needed to complete an audit or conduct research, advise Associate Area Counsel as soon as possible. Associate Area Counsel will need the case in sufficient time to permit filing of a timely motion for extension. The court may also establish the limitation period for requesting an extension pursuant to Bankruptcy Rule 3003(c)(3). When the case is referred to Associate Area Counsel, ensure the reasons an extension is needed are included in the referral. The court will only grant an extension for cause. Associate Area Counsel will ensure proper action is taken to secure an extension of the period for filing the claim. Insolvency should be prepared to file a timely proof of claim for an estimated amount if the extension is denied.

Under 11 USC 506(a), the IRS has a secured claim when:

The allowed amount of a secured claim will be determined after a valuation of the property.

Under 11 USC 506(b), a creditor is oversecured when the value of secured collateral exceeds the amount of the debt owed to the creditor. An oversecured creditor is entitled to post-petition interest on the secured claim. The creditor is also allowed any reasonable fees, costs, or charges provided by an agreement or by state statute under which the claim arose. When the IRS is oversecured, the IRS is entitled to receive post-petition interest on an allowed and oversecured claim. (United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989))

It is not necessary to file a claim in bankruptcy to preserve a lien on the debtor’s pre-petition assets that are not sold and distributed during the bankruptcy case. While receiving a discharge will prevent a creditor from enforcing a dischargeable debt against the debtor personally, the IRS may enforce its lien for dischargeable taxes against the debtor’s exempt property if an NFTL was filed before the bankruptcy petition was filed (In re lsom, 901 F.2d 744 (9th Cir. 1990)). However, a lien for dischargeable taxes cannot be enforced against after-acquired property of the debtor. See IRM 5.9.17.5, Bankruptcy and Other Insolvencies, Closing a Bankruptcy Case, Exempt, Abandoned or Excluded Property (EAEP), and subsections, for additional information.

Excluded property never becomes property of the bankruptcy estate. The statutory lien remains a claim against pre-petition property even after the bankruptcy discharge. This allows the IRS to levy on abandoned or excluded property to collect dischargeable liabilities after the discharge. See IRM 5.9.17.5, and subsections, for additional information.

Under 11 USC 544, the trustee has the rights and powers of a judgment lien creditor. Accordingly, if an NFTL has not been filed prior to the institution of the bankruptcy case, the tax claims will be unsecured. The date the NFTL was filed should be clearly shown on the proof of claim. The trustee may not use 11 USC 544 or 11 USC 545(2) to prevail over NFTLs filed pre-petition for the types of property described in IRC 6323(b), since the trustee is not a "purchaser." (11 USC 545(2); In re WaIter, 45 F.3d 1023 (6th Cir. 1995); In re Berg, 121 F.3d 535 (9th Cir. 1997))

Bankruptcy Code 507 sets forth the expenses and unsecured claims that have priority and the order of their priority. This will affect the claim’s treatment in bankruptcy.

Whether the tax was incurred before or after the date of the petition for relief will affect its priority. To determine whether a tax is incurred before or after the petition, a tax on income for a particular period is considered incurred on the last day of the period. Taxes on an event, or measured by an event, are considered as being incurred on the date of the transaction or the event. For example:

The treatment of pre-petition Employer Shared Responsibility Payment (ESRP) MFT 43 liabilities in bankruptcy plans depends on the classification of the liability on the proof of claim - secured, unsecured priority, or unsecured general. For additional information on treatment of liabilities in bankruptcy plans according to classification, see:

In a Chapter 7 case, claimants within a priority category as set forth in the subsections of 11 USC 507 are paid pro-rata when the bankruptcy estate is not sufficient to provide full payment.

11 USC 507(a)(2), as amended by BAPCPA, gives second priority to administrative expenses as defined under 11 USC 503(b). Any tax incurred by the estate is an administrative expense under 11 USC 503(b)(1)(B)(i). These taxes include:

Under 11 USC 507(a)(8), as amended by BAPCPA, eighth priority is given to the following taxes:

Certain excise taxes are also entitled to eighth priority under 11 USC 507(a)(8)(E). These are excise taxes on:

Liabilities incurred by individuals under the individual shared responsibility provision (SRP) of the Affordable Care Act (ACA), and assessed on MFT 35 and/or mirrored as a MFT 65 individual shared responsibility payment (SRP) mirror assessment on IDRS, are treated as income tax under 11 USC 507(a)(8)(A) and/or an excise tax under 11 USC 507(a)(8)(E) in a bankruptcy case.

The ESRP MFT 43 liability will be treated as an excise tax under 11 USC 507(a)(8)(E)(ii). See IRM 5.9.13.19.3, Unsecured Priority, for more information.

A claim for an erroneous refund or credit has the same priority as a claim for the tax to which such refund or credit relates.

Any portion of the IRS’s pre-petition claim that cannot be classified as either secured or unsecured priority is a general unsecured claim.

Section 503(b)(1)(A) provides generally that administrative expenses include "the actual, necessary costs and expenses of preserving the estate" . Taxes incurred by the estate are specifically given administrative expense claim status by 11 USC 503(b)(1)(B)(i). Generally, administrative tax claims are claims for tax liabilities (including estate income and employment taxes) incurred post-petition by the bankruptcy estate.

A post-petition liability incurred by an individual debtor (rather than the estate) in a Chapter 7 or 11 case cannot be claimed in the bankruptcy case. This includes any post-petition liability owed by an individual debtor for tax incurred under the Shared Responsibility Provision (SRP) of the Affordable Care Act (ACA), which is assessed on IDRS under MFT 35 and/or mirrored separately as a SRP liability for each spouse on IDRS under MFT 65. Under IRC 1398, the individual debtor and the debtor's bankruptcy estate in a Chapter 7 or 11 case are separate taxable entities. Taxes on the individual debtor’s post-petition wages in a Chapter 7 cases are incurred by the individual debtor, while taxes on income arising from assets which are property of the estate are incurred by the estate.

An ESRP MFT 43 liability is post-petition when the IRS issues Letter 226-J, ESRP Preliminary Contact, to an employer notifying them that one of their employees was allowed the premium tax credit (PTC) and the Letter 226-J date is after the bankruptcy petition date. The date of Letter 226-J is determined by the date of the TC 971 AC 782 on the ESRP MFT 43 module on IDRS. The treatment of post-petition ESRP MFT 43 liabilities depends upon the type of bankruptcy case filed by the debtor. It also depends upon whether the debtor is an individual or a non-individual.

Taxes collectible as expenses of administration shall be assessed against the estate following normal assessment procedures. The notice and payment demand should be sent to the trustee or debtor in possession. If payment is not received, a request for payment of administrative expenses may be filed with the court.

Administrative expenses accrue interest and penalties to the date of payment.

In Chapter 13 cases, the IRS may file a proof of claim for taxes that become payable while the case is pending (11 USC 1305(a)(1)). This includes post-petition 1040 liabilities and post-petition SRP (MFT 35 and/or MFT 65) liabilities. If the Form 1040 is post-petition (see IRM 5.9.10.9(1), Post-Petition Tax Liabilities), the SRP (MFT 35 and/or MFT 65) liability is also post-petition. The debtor may not file such a claim on behalf of the IRS.

Pre-petition interest has the same status as a claim for the underlying tax: secured, priority, or general unsecured. (11 USC 101(5) and 502(b); In re Garcia, 955 F.2d 16 (5th Cir. 1992); In re Larson, 862 F.2d 112 (7th Cir. 1988))

The IRS generally is not entitled to claim post-petition interest on its pre-petition claims since a creditor cannot claim interest which has not matured as of the petition date (11 USC 502(b)(2)). If the underlying tax is non-dischargeable, however, the post-petition interest on such tax is also non-dischargeable. The non-dischargeable tax and interest may be collected from the debtor after the discharge is granted.

11 USC 506(b) provides that post-petition interest will be paid on claims that are "oversecured" (i.e., the value of the collateral securing the claim exceeds the amount of the claim).

Administrative expense tax claims accrue interest to the date of payment.

Pre-petition penalties on a secured claim are treated as secured. They are payable as part of the secured claim except in a Chapter 7 case. In Chapter 7, 11 USC 726(a)(4) provides a low distribution priority for secured tax penalties, unless the penalty is compensation for actual pecuniary loss (as with the trust fund recovery penalty).

Pre-petition penalties on an unsecured tax claim are treated as general unsecured unless the penalty is compensation for actual pecuniary loss. It does not matter if the tax claim itself is entitled to priority or general unsecured status.

Post-petition penalties are not allowable on pre-petition tax claims, but may sometimes be collectible from the debtor after the discharge. Non-pecuniary loss penalties are non-dischargeable if they relate to a non-dischargeable tax and the transaction or event giving rise to the penalty occurred within three years of the petition date. Also, IRC 6658 prohibits the accrual of certain penalties during the pendency of the bankruptcy case – from the date the petition is filed until the date the case is closed or dismissed.

The Trust Fund Recovery Penalty is a pecuniary loss penalty. If not secured, it is an unsecured priority claim (11 USC 507(a)(8)(C) and (G)). It is not dischargeable except in Chapter 13 cases filed prior to October 17, 2005, where it has been provided for in the plan. Under BAPCPA, it is no longer dischargeable in Chapter 13 cases (11 USC 1328(a)(2)).

IRC 1398 contains special tax provisions for an individual filing under Chapter 7 or 11. Individual debtors in those chapters have the right to terminate their tax year when the petition is filed.

The bankruptcy estate in an individual Chapter 7 or 11 case is an entity separately taxable from the individual and must file its own tax returns. The Chapter 7 trustee has the duty to file the estate’s tax returns, as does the Chapter 11 trustee or Debtor-in-Possession (DIP).

In corporate and partnership Chapter 7 and 11 cases, no separate taxable entity is created (IRC 1399). The trustee, the officers, or managers of the DIP are responsible for filing any required returns.

Trustees can apply to be relieved of the filing requirements in corporate cases when the corporation has neither assets nor income. The procedures are contained in Revenue Procedure 84-59.

In Chapters 12 and 13, the debtor’s bankruptcy estate is not a separate taxable entity for federal income tax purposes. The individual debtor is responsible for filing the returns for all income earned while in bankruptcy.

Under BAPCPA, a Chapter 13 debtor must file all required tax returns for all periods ending within four years of the bankruptcy petition date (11 USC 1308). Failure to do so by the first scheduled 341 meeting date, or by the date to which the meeting is held open by the trustee, is a basis for conversion or dismissal of the case (11 USC 1307(e)). See In re Perry, 389 B.R. 62 (Bankr. N.D. Ohio 2008). Pub 5082, What You Should Know About Chapter 13 Bankruptcy and Delinquent Tax Returns, also provides information about tax filing requirements for Chapter 13 debtors.

Ordinarily, disregarded limited liability companies (LLCs), partnerships, and Subchapter S corporations are not themselves liable for a federal income tax. The bankruptcy estates of these pass-through entities are not separate taxable entities pursuant to IRC 1399.

The bankruptcy court may determine the liability of the debtor or the bankruptcy estate. It does not matter if the liability was previously assessed or paid and whether or not a proof of claim is filed. This includes:

The bankruptcy court may not re-determine a tax liability that was adjudicated before a court of competent jurisdiction before the bankruptcy petition was filed (11 USC 505(a)).

Bankruptcy courts do not have authority to determine the tax liabilities of parties other than the debtor or the debtor’s bankruptcy estate. See the following cases for additional information:

A bankruptcy court should not determine tax liabilities of debtors or of bankruptcy estates that may not be claimed or paid through the bankruptcy case. For instance, in a no-asset Chapter 7 case, a bankruptcy court should abstain from deciding the debtor’s pre-petition tax liabilities. Similarly, a bankruptcy court should refrain from determining taxes:

The trustee must file an administrative claim for refund for the bankruptcy court to determine the right of a bankruptcy estate to a tax refund. The claim must either be denied or not acted upon for 120 days (rather than the six months provided in IRC 6532). 11 USC 505(a)(2)(B); see also Rev. Proc. 2010-27 and Rev. Proc. 2010-31.

A trustee may request a prompt determination for administrative period taxes by filing the appropriate tax return (11 USC 505(b)(2)). See IRM 5.9.4.9, Prompt Determination Request from Trustee, and subsections, for additional information.

Trustees and Debtors-in-Possession (DIPs) sometimes file requests with Insolvency for prompt audit determinations under 11 USC 505(b) in bankruptcy cases filed by partnership debtors. Trustees and DIPs may also file requests for prompt audit determinations in bankruptcy cases filed by Subchapter S corporations. The prompt audit determination request may be filed with the partnership's post-petition Form 1065. The prompt audit determination request may also be filed with the Subchapter S corporation's Form 1120-S.

From a debtor’s viewpoint, the primary purpose of bankruptcy is to obtain relief from indebtedness. Creditors are barred from collecting discharged debts from the debtor personally (11 USC 524). However, tax liens may be enforceable against property owned by the debtor before bankruptcy even though the tax debt was discharged. See IRM 5.9.17.5, Bankruptcy and Other Insolvencies, Closing a Bankruptcy Case, Exempt, Abandoned or Excluded Property (EAEP), and subsections for additional information about collection of tax debts discharged in bankruptcy after the discharge.

Section 523 provides that certain debts of an individual debtor are excepted from discharge. The following taxes are non-dischargeable under 11 USC 523(a)(1) for individuals who receive a discharge in Chapter 7, 11, or 12. They are also non-dischargeable for an individual who receives a hardship discharge in Chapter 13:

Pursuant to 11 USC 523(a)(7), a non-pecuniary loss penalty is non-dischargeable if it relates to a tax that is non-dischargeable under 11 USC 523(a)(1). The transaction or event that gave rise to the penalty must have occurred within three years before the petition date. Thus, a penalty relating to a non-dischargeable income tax is only non-dischargeable if the tax accrued within three years before the bankruptcy petition. In re Roberts, 906 F.2d 1440 (10th Cir. 1990); In re Burns, 887 F.2d 1541 (11th Cir. 1989); McKay v. United States, 957 F.2d 689 (9th Cir. 1992); In re Miller, 300 B.R. 422 (Bankr. N.D. Ohio 2003). For additional information on non-pecuniary loss penalties, see IRM 5.9.17-9, Processing TC 604 Reversals and Determining Dischargeability when an Individual Received a Discharge Upon Completion of the Plan in a Chapter 13 Case, and IRM 5.9.17-11, Determining Dischargeability of Non-Pecuniary Loss Penalties when the Underlying Tax is Non-dischargeable (Except in the Chapter 13 Case with a Discharge Upon Completion of the Plan).

Liabilities excepted from discharge by section 523 survive the bankruptcy and may be collected from any property of the debtor after the discharge. After discharge, dischargeable liabilities may be collected from exempt property secured by a pre-petition Notice of Federal Tax Lien (NFTL). Dischargeable liabilities may also be collected from abandoned or excluded property due to the IRS's statutory lien. An NFTL is not required to collect discharged taxes from abandoned or excluded property.

Pre-petition and post-petition interest on non-dischargeable taxes is also non-dischargeable, as are any post-petition penalties on these taxes. Bruning v. United States, 376 U.S. 358 (1964); Hanna v. United States, 872 F.2d 829 (8th Cir. 1989).

Under BAPCPA, the following taxes claimed in a Chapter 13 are now non-dischargeable when the debtor receives a discharge upon completion of the Chapter 13 plan (11 USC 1328(a)(2)) :

The bankruptcy estate is created by operation of law as soon as a voluntary or an involuntary petition is filed commencing a case (11 USC 541). In general, only property of the estate is administered in the bankruptcy case. See IRM 5.9.8.14(5), Internal Revenue Code 1398 Issues, Determining if Income is Property of the Estate or Property of the Debtor, for additional information on estate or individual property in Chapter 11 bankruptcy cases.

Generally, the estate is comprised of all the debtor’s legal and equitable property interests as of the commencement of the case.

Proceeds, rents, or profits of estate property are also estate property.

Property that an individual debtor acquires by inheritance or through a divorce settlement within 180 days after the petition date is treated as estate property.

In Chapters 12 and 13, the estate of an individual debtor may include after-acquired property such as wages and income (11 USC 1207, 1306). In general, wages earned by an individual debtor in a Chapter 7 case are not property of the estate( 11 USC 541(a)(6)). In cases filed on or after October 17, 2005, post-petition wages and after-acquired property of an individual Chapter 11 debtor are property of the estate (11 USC 1115(a)).

Community property is included in the estate to the extent it is under the sole or joint management and control of the debtor or to the extent it is liable for an allowable claim.

Property held by nominees or alter egos, or which the debtor transferred as a fraudulent conveyance, is property of the estate. The trustee may avoid certain pre-petition and post-petition transfers of property and bring such property into the estate for distribution.

Generally, property cannot be excluded from the estate by agreement between parties that the debtor’s interest will terminate upon financial insolvency or bankruptcy. However, under 11 USC 541(c)(2), the debtor’s interest in a trust that is subject to a restriction on transferability enforceable under non-bankruptcy law is excluded. Under this provision interests in ERISA-qualified pension plans are excluded from the estate. Under 11 USC 541(b), as amended by BAPCPA, interests in other types of pension plans may also be excluded.

11 USC 542(a) requires an entity in possession, custody, or control of property of the estate (including exempt property) to deliver that property to the trustee, unless the property is of inconsequential value to the estate.

Under 11 USC 542(b), with certain limited exceptions, an entity that owes a debt (e.g., a tax refund) to the debtor that is property of the estate and that is matured, payable on demand, or payable on order must pay such debt to or on the order of the trustee, subject to any setoff rights under 11 USC 553.

Pursuant to United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), property, whether tangible or intangible, levied upon pre-petition but not transferred before the bankruptcy is filed, is property of the bankruptcy estate subject to turnover. See IRM 5.9.5.8, Levies and Bankruptcy, for additional information.

The courts generally recognize the IRS rights to adequate protection where a levy is served pre-petition because the levy provides the IRS with an interest in the levied-upon property. In any case where the IRS is entitled to adequate protection, the IRS should immediately contact the debtor-in-possession or trustee to reach an adequate protection agreement, notify the court, and request relief from the automatic stay. Adequate protection arguments are usually made in Chapter 11 cases, but may occasionally be made in Chapter 7 and 13 cases. A referral should be made to the Associate Area Counsel (SB/SE) for the necessary legal action to be taken. Referrals are subject to the tolerances in IRM 5.9.4.15.4, Referral Tolerances. For additional information about adequate protection and cash collateral in Chapter 11 cases, see IRM 5.9.8.6, Adequate Protection, and IRM 5.9.8.8, Cash Collateral/Property Depreciation of the Estate.

Exempt property is property that an individual debtor may elect to place outside of the estate. The exempt property cannot be liquidated by the trustee. Section 522 of the Bankruptcy Code governs the types and amounts of property that the debtor can exempt from the bankruptcy estate. 11 USC 522(b) provides that the debtor may choose to utilize the Bankruptcy Code exemptions listed in 11 USC 522(d) or elect the exemptions provided by other Federal or applicable state law. States may legislatively opt out of the Bankruptcy Code exemption scheme and allow the debtors in their state only those exemptions provided by state law. Joint debtors must make the same exemption election.

Exempt property is not liable for any debts of the debtor except alimony, security interests, non-dischargeable tax debts, and tax debts secured by a Notice of Federal Tax Lien (NFTL).

Only individuals can claim exempt property.

Taxes that are discharged with an NFTL properly filed pre-petition may still be collectible from exempt property (11 USC 522(c)(2)(B)). See IRM 5.9.17.5, Exempt, Abandoned, or Excluded Property (EAEP), and subsections for additional information.

Pursuant to 11 USC 547(b), the trustee may avoid certain pre-petition transfers of the debtor’s interests in property to bring that property back into the bankruptcy estate. Such transfers benefit one creditor at the expense of others and are known as preferences.

To qualify as a preference, a tax payment must:

Pursuant to 11 USC 547(b), a trustee may avoid a transfer of an "interest of the debtor in property." An interest of the debtor in property does not include property that the debtor holds in trust for another (11 USC 541(d)). In Begier v. IRS, 496 U.S. 53 (1990), the Supreme Court held that a voluntary pre-petition payment of trust fund taxes (withheld employment taxes and excise taxes collected from purchasers) cannot be avoided under 11 USC 547(b) because the funds paid were not property of the debtor. The funds were held in trust for the United States under IRC 7501(a).

Although "antecedent debt" is not defined by the Bankruptcy Code, it is clear that the term "antecedent debt" refers to a debt incurred before the date of the transfer. As long as the payment is made by the due date of the return (or by the due date of an extension) without a penalty, there is no antecedent debt. Timely payments of tax cannot be avoided under 11 USC 547.

A tax payment must be made on or within 90 days before the filing of the bankruptcy petition to be avoidable (11 USC 547(b)(4)). For payments by check, the relevant date is the date the check is honored by the drawee bank.

Outside of bankruptcy, the IRS has the right to set off tax overpayments against tax debts (IRC 6402). 11 USC 553 preserves the IRS’s right to offset pre-petition claims against pre-petition refunds except as prohibited by the automatic stay. Under BAPCPA, the automatic stay no longer prohibits offsets of pre-petition income tax claims against pre-petition income tax refunds. BAPCPA also allows offsets of income tax refunds to domestic support obligations. (See IRM 5.9.4.5, Credits, Refunds and Offsets, and subsections, for additional information.)

Pre-petition tax refunds are property of the estate under 11 USC 541(a). The IRS may be required to turn over the refund to the trustee unless the refund is protected under 11 USC 553.

If the automatic stay prohibits the IRS from setting off, but the IRS’s right of setoff is protected under 11 USC 553, the IRS is not required to turn over the refund. The IRS may temporarily freeze the refund until it has the authority to exercise its setoff rights (Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995)).

In many jurisdictions, bankruptcy courts have issued standing court orders that modify the automatic stay to permit setoff in some or all circumstances and dispense with the requirement to turn over pre-petition refunds to the bankruptcy trustee.

Generally, in Chapter 7, 11, and 13 cases, post-petition overpayments can be offset directly to post-petition tax periods.

IRC 6503(h) suspends the running of the period of limitation on collection (IRC 6502) in a case under the Bankruptcy Code during the period in which the IRS is prohibited by reason of such case from collecting, plus six months thereafter. The collection period is suspended while the automatic stay is in effect, and in a Chapter 11 case, while the plan is in effect and not in default. Under BAPCPA, an individual in a Chapter 11 case does not receive a discharge until all payments under the plan have been completed. Thus, the automatic stay remains in effect until the earliest of the date the case is dismissed or closed by the court or until a discharge is granted or denied (11 USC 362) . When the taxpayer is a "serial filer" the automatic stay and collection period suspension may be impacted. For additional information on the automatic stay, collection statute suspension, and assessment statute in a bankruptcy case, see:

The limitation period for assessments is not suspended by IRC 6503(h) because assessments are not prohibited by the automatic stay.

However, where a notice of deficiency has been issued, the debtor may be prohibited from commencing a Tax Court case by the automatic stay, which indirectly tolls the assessment statute. See Rev. Rul. 2003-80, IRB 2003-29 (July 21, 2003).