CREATION OF THE BANKRUPTCY ESTATE
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
2. Charitable contribution carryover determined under
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
6. The debtor's basis, holding period, and
character of any asset acquired from the debtor (unless acquired by sale or
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)].
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.
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.
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).
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
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. §
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).
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.
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.
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.
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.