1.  CREATION OF THE BANKRUPTCY ESTATE

 

1.10   A separate taxable bankruptcy estate is created when an individual debtor files either a Chapter 7 or Chapter 11 Petition.  [IRC 1398(a)].  In all other bankruptcy proceedings, including Chapter 7 or Chapter 11 bankruptcy cases dismissed by the Bankruptcy Court, the debtor continues to file income tax returns as though there were no bankruptcy and there were no separate taxable bankruptcy estate.  When a separate taxable bankruptcy estate is created, the estate inherits and takes into account the following income attributes of the debtor [IRC '1398(g)]:

 

1. Net operating loss carryovers determined under IRC '172.

 

2. Charitable contribution carryover determined under IRC '170(d)(1).

 

3. Recovery of tax benefit items for any amount to which IRC '111 applies.

 

4. Carryovers of any credit, and all other items that, except for the commencement of the bankruptcy case, the debtor would be required to take into account with respect to any credit.

 

5. Capital loss carryovers determined under IRC '1212.

 

6. The debtor's basis, holding period, and character of any asset acquired from the debtor (unless acquired by sale or exchange).

 

7. The debtor's accounting method.

 

8. Other tax attributes of the debtor, to the extent provided by regulation.

 

1.20   The estate comprises essentially all of the debtor's property, unless property is exempt under USC '522.  [11 USC '541].  Individual estates are allowed to opt out of the federal exemption scheme and determine what property is exempt for resident debtors.  Most states have done so.  Upon conclusion or dismissal of the bankruptcy proceedings, the debtor takes over any remaining tax attributes including those that first arose during administration of the bankruptcy estates.  [11 USC '346(i)(2)].

 

§ 1399.  No separate taxable entities for partnerships, corporations, etc.

1.30   Except in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code.

 

2. BACKGROUND AND GENERAL LEGAL PRINCIPLES

2.10   The commencement of a bankruptcy case creates an estate, which generally includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). Specific exclusions apply, however. See 11 U.S.C. § 541(b) (excluded property). See also 11 U.S.C. § 522 (exempt property); 11 U.S.C. § 554 (abandoned property). Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. By contrast, property excluded from the estate is never included in the estate.

 

Chapter 11

2.20   Confirmation of a Chapter 11 plan of reorganization generally vests all the property of the estate in the debtor, except as otherwise provided in the plan or in the court order confirming the plan. 11 U.S.C. § 1141(b). If no plan is confirmed and a bankruptcy case is dismissed, the property of the estate generally revests in the debtor, unless the court orders otherwise. 11 U.S.C. § 349(b)(3). Notice 2006-83

 

Trustee or Debtor in Possession

2.30   When a trustee is appointed pursuant to section 1104 of the Bankruptcy Code, the debtor generally must turn over to the trustee control over the assets of the bankruptcy estate. In most Chapter 11 cases, a trustee is not appointed and the debtor (referred to as the debtor in possession) remains in control of the property of the bankruptcy estate. Under section 1107(a) of the Bankruptcy Code, the debtor in possession must perform all the functions and duties of a trustee, except for the duties specified in Bankruptcy Code section 1106(a)(2), (3) and (4).

 

EIN

2.40   Because the bankruptcy estate is a separate taxable entity, the trustee or debtor in possession must obtain an employer identification number (EIN) for the estate. I.R.C. § 6109. The trustee or debtor in possession uses the EIN on any tax returns filed for the estate.

 

Attribution of Income

2.50   Section 1398(e)(1) of the Code provides that the gross income of the estate includes the gross income of the debtor to which the estate is entitled under the Bankruptcy Code. Section 1398(e)(2) provides that the gross income of the debtor does not include any item to the extent the item is included in the gross income of the bankruptcy estate.

 

Determination of Deduction or Credit

2.60   In general, the determination of whether or not any amount paid or incurred by the estate is allowable as a deduction or credit to the estate shall be made as if the amount were paid or incurred by the debtor and as if the debtor were still engaged in the trades and businesses, and in the activities, the debtor was engaged in before the commencement of the case. I.R.C. § 1398(e)(3)(A). The estate is, however, specifically allowed a deduction for administrative expenses allowed under section 503 of the Bankruptcy Code and for any fee or charge assessed against the estate under chapter 123 of title 28 of the United States Code. I.R.C. § 1398(h)(1).

 

1040”s

2.70   The individual debtor must continue to file his or her own individual tax returns during the bankruptcy proceedings. I.R.C. § 6012(a)(1).

 

Pre BAPCPA

2.80   For bankruptcy cases filed before October 17, 2005, the property of the estate does not generally include any post-petition property acquired by an individual Chapter 11 debtor. Nor in those cases does the property of the estate include the individual Chapter 11 debtor’s earnings from post-petition services, because section 541(a)(6) of the Bankruptcy Code specifically excluded those earnings from the estate. See, e.g., In re Fitzsimmons, 725 F.2d 1208 (9th Cir. 1984); In re Larson, 147 B.R. 39 (Bankr. D.N.D. 1992). Therefore, in these cases income from post-petition property and earnings from post-petition services are not generally includible in the estate’s gross income. Instead, such income and earnings are generally includible in the debtor’s gross income.

 

Post BAPCPA

2.90   Section 321 of BAPCPA made several changes to Chapter 11, effective for bankruptcy cases filed by individuals on or after October 17, 2005. Although many of the provisions that apply to individual Chapter 11 cases now operate in a manner similar to the provisions that apply in Chapter 13 cases, section 1398 of the Internal Revenue Code has not been amended and continues to apply to individual Chapter 11 cases, but not to Chapter 13 cases. Based on section 1115 of the Bankruptcy Code, read in conjunction with section 1398(e)(1) of the Internal Revenue Code, 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. This rule is subject to the exceptions noted below in sections 2.10, 2.11, 2.12, and 2.13.

 

Conversion to Chapter 13

2.100   If a 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. I.R.C. § 1399.

 

Conversion to Chater7

2.110   If the Chapter 11 case is converted to a Chapter 7 case, section 1115 will not apply after conversion and earnings from post-conversion services will be taxed to the debtor, rather than the estate. 11 U.S.C. § 541(a)(6). 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.

 

Dismissal

2.120   If a Chapter 11 case is dismissed, the debtor is treated as if the bankruptcy case had never been filed and as if no bankruptcy estate had been created. I.R.C. § 1398(b)(1).

 

Taxation of Income From Property Excluded From the Estate

2.130   For Chapter 11 cases filed by individuals on or after October 17, 2005, the estate’s gross income includes gross income from property held by the debtor when the case commenced (“pre-petition property”), as was the case under pre-BAPCPA law. There are certain exceptions to this general rule, however. The gross income on pre-petition property is included in the gross income of the debtor, rather than the estate, if the pre-petition property is excluded from the estate and the gross income is subject to taxation. Also, the gross income on pre-petition property is included in the gross income of the debtor, rather than the estate, after the pre-petition property is removed from the estate by exemption or abandonment.