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4.27.1  Petitions Filed After 9/30/79

4.27.1.1  (05-25-1999)
Overview

  1. This section provides an introduction to bankruptcy and how the cases are handled.

4.27.1.2  (05-25-1999)
Introduction

  1. Bankruptcy is a condition existing as the result of the actual filing of a petition under the Bankruptcy Code which provides procedures for individuals, partnerships, and corporations to satisfy their creditors when they are insolvent. It is a matter of federal statutory law found in Title 11 of U.S. Code, commonly known as the Bankruptcy Code (BC). Title 11 contains the substantive and procedural provisions for bankruptcy liquidation and reorganization cases filed after September 30, 1979. The law has three primary objectives:

    1. To relieve debtors from pre-bankruptcy financial burdens (where there are insufficient assets to satisfy debts owed to creditors);

    2. To rehabilitate debtors and to give them a "fresh start " by allowing them to retain assets necessary for subsistence which are exempt from creditors reach; and

    3. To protect creditors by establishing an orderly and equitable system of satisfying their claims out of existing assets and/or future income and earnings.

  2. Bankruptcy cases filed before October 1, 1979, are governed by the Bankruptcy Act. It will not be covered in this section because there are very few, if any, of those cases which are still active.

  3. The Bankruptcy Code provides the law under which bankruptcy proceedings are commenced, administered, and closed. There are five types of bankruptcies which can be filed under various chapters of Bankruptcy Codes and are defined below. However, for purposes of determining federal tax liabilities, the important chapters are 7, 11, 12, and 13.

    1. Chapter 7 — Liquidation: A bankruptcy case in which all of the debtors (individual, corporation, or partnership) non-exempt assets are liquidated (sold) by the trustee in order to pay creditors’ claims or are abandoned. The petition may be voluntarily or involuntarily filed. Typically, the debtor has no hope of continuing business operations and/or paying debts.

    2. Chapter 9 — Adjustment of Debts of Municipality: A bankruptcy case in which the debtor is a municipality which voluntarily files bankruptcy.

    3. Chapter 11 — Reorganization: A bankruptcy case in which debtors (individuals, corporations, or partnerships) are allowed to restructure (reorganize) their debts, either by reducing the amount of debt and/or by extending the time for payment rather than liquidate. To be confirmed by the Bankruptcy Court, the reorganization plan must be proposed in good faith and the creditors must be paid at minimum an amount equal to what they would have received had the case been filed as a Chapter 7 liquidation bankruptcy. The debtor usually remains in possession of the assets (called a debtor-in-possession or DIP) and has all the fiduciary duties and responsibilities of a trustee owed to general creditors. A trustee can be appointed by the Bankruptcy Court if the creditor can show cause. A debtor may also choose to liquidate its assets in a Chapter 11 case.

    4. Chapter 12 — Adjustment of Debts of a Family Farmer with Regular Annual Income: A chapter designed to enable a debtor who is a family farmer to reorganize rather than liquidate its farming operation. A Chapter 12 trustee is appointed by the U.S. Trustee to act in each case. The debtor proposes a plan of reorganization to repay creditors. This type of case has some similarities to both Chapter 11 and Chapter 13 cases. The Bankruptcy Code places certain limitations on debtors in the amount of debt allowed and on the percentage of debt and income derived from farming operations. Family farms can include sole proprietorships, partnerships, and closely held corporations.

    5. Chapter 13 — Adjustment of Debts of an Individual with Regular Income: Only individuals, including self-employed individuals, with regular income may file for bankruptcy under this chapter. There are specific limits as to the kind and amount of debt that an individual may have in order to qualify. The debtor makes regular payments to creditors through the trustee under a plan. The debtor has 3 to 5 years in which to execute the plan and pay off creditors upon which he/she will be discharged of their debts. Chapter 13 petitions must be voluntary.

  4. Examiners should immediately notify the Insolvency Support section upon learning that a taxpayer under examination is involved in a bankruptcy proceeding for which there is no bankruptcy freeze on the master file (transaction code 520, closing code 81, 83, or 84 through 89, freezing accounts from assessments, refunds, and offsets) and for which Examination has received no prior notification from Insolvency Support (or from Examination, PSP Support). Examiners should also immediately notify Insolvency Support of the amounts of any potential deficiencies, penalties, and interest, so that proofs of claim can be filed before the bar date. A proof of claim for an unassessed tax liability should be based upon as factual an estimate as possible. When the correct and complete amount due can be determined, the claim will be superseded by an amended claim. However, some bankruptcy courts will not permit claims to be amended to list larger liabilities after a bar date and/or confirmation has passed. See IRM 5.9.6.7 through 5.9.6.8.2.

  5. Procedures outlined herein (IRM 4.27) apply to all bankruptcy cases commenced after September 30, 1979, the effective date of the Bankruptcy Reform Act of 1978 (P.L. 95–598). The impact of revisions to the Code made by the Bankruptcy Tax Act of 1980 (P.L. 96–589) and by the Bankruptcy Reform Act of 1994, commonly referred to as BRA ‘94 (P.L. 103–394), is also included.

  6. In order to better comprehend bankruptcy law and effectively examine bankruptcy cases, familiarity with bankruptcy terminology is essential. See EXHIBIT 4.27.1–1 for common Bankruptcy Definitions and Concepts.

4.27.1.3  (05-25-1999)
Involvement of Area Counsel

  1. The Area Counsel of the Internal Revenue Service represents the interests of the Service’s compliance efforts (Collections and Examination) with the Department of Justice and also serves as Special Assistant to the US Attorney (SAUSA) in the Bankruptcy Court in many cities. Area Counsel works closely with and, when designated as SAUSA, may act as part of the Department of Justice. Area Counsel can best judge when Department of Justice should become involved in any bankruptcy proceeding. However, Insolvency Support now has the authority in routine cases to make certain types of direct referrals to the U.S. Attorney or Justice Department. See IRM 5.9.4.11.1.

  2. In conjunction with Insolvency Support, Examination will promptly inform Area Counsel when:

    1. a case meets referral criteria for significant bankruptcy case processing procedures. See IRM 4.27.5.2.

    2. litigation is brought against the IRS in the bankruptcy proceedings, such as when an objection to proof of claim is filed.

    3. considering a referral of the taxpayer to the Criminal Investigation for suspected violations of the tax laws.

    4. contemplating assertion of taxpayer’s tax liabilities against a transferee of the taxpayer’s assets.

    5. considering an offer in compromise based on doubt as to liability submitted under IRC sec. 7122. (An offer in compromise submitted by a debtor in bankruptcy will not be considered until the bankruptcy proceeding is terminated. Area Counsel should be consulted regarding an offer that is pending when a debtor files bankruptcy. See IRM 5.9.4.7.)

    6. assets transferred for less than fair consideration within 90 days before filing of the bankruptcy petition or within 1 year to an insider.

  3. It is the responsibility of Examination to promptly respond to all requests from both Area Counsel and Insolvency Support with any supporting data, documents, or other examination information from the administrative file. Examination should be aware of and comply with the deadlines and requirements imposed by the Bankruptcy Court that affect the examination process.

4.27.1.4  (05-25-1999)
Bankruptcy Estate & Filing Requirements

  1. The filing of a bankruptcy petition under any chapter creates a bankruptcy estate. However, for purposes of federal tax liability, only an individual Chapter 7 or 11 bankruptcy estate creates a separate taxable entity. The trustee or debtor-in-possession (DIP) of an individual bankruptcy estate is required to file tax returns and to pay any tax which may be due if the estate has gross income that meets or exceeds the amount required for filing (IRC sec. 1398(c)). This amount is the total of the personal exemption amount and the basic standard deduction for a married individual filing separately. The trustee or DIP must obtain a taxpayer identification number for the estate. The filing of a tax return for the bankruptcy estate does not relieve the individual debtor of his or her tax filing requirement.

  2. No separate taxable entity results from commencement of a bankruptcy case involving a partnership or corporation (IRC sec. 1399). However, the bankruptcy trustee of a partnership in bankruptcy is required under BC sec. 346(c)(2) to make and file tax returns of the partnership that the partnership would have been required to make and file under local or state law. The trustee should at the same time make and file all federal tax returns for the partnership. Also, the bankruptcy trustee of a corporation in bankruptcy is required to file annual income tax returns and pay any corporate taxes which are due for the corporation (IRC sec. 6012(b)(3)).

  3. For purposes of IRC sec. 1398(a), a partnership shall not be treated as an individual, but the interest in a partnership of a debtor who is an individual shall be taken into account under IRC sec. 1398 in the same manner as any other interest of the debtor (IRC sec. 1398(b)(2)).

  4. IRC sec. 1398(d) provides the individual debtor with an election to close the taxable year as of the day before the date on which the bankruptcy case commences (the petition filing date). The election may be made only on or before the due date for filing the return for the taxable year which ends on the day before the petition date and, once made, is irrevocable. If the election is made, the debtor’s taxable year, which otherwise would include the commencement date, is divided into two "short" taxable years of less than 12 months. The first such year ends on the day before the commencement date; the second such year begins on the commencement date (IRC sec. 1398(d)(2)(A)). If the election is not made, the commencement of the bankruptcy case does not affect the taxable year of an individual debtor (IRC sec. 1398(d)(1)). As a result of the debtor’s election, his/her income tax liability for the first short taxable year becomes (under the bankruptcy law) an allowable claim against the bankruptcy estate as a claim arising before bankruptcy. Accordingly, any tax liability for that year is collectible from the estate, depending on the availability of estate assets to pay debts of that priority. Inasmuch as any such tax liability for an electing debtor’s first short taxable year is not dischargeable, the individual debtor remains liable for any amount not collected from the bankruptcy estate (BC sec. 523(a)(1)). If the debtor does not make the election, no part of the debtor’s tax liability from the year in which the bankruptcy case commences is collectible from the estate, but is collectible directly from the individual debtor. If the election is made, the debtor is required to annualize his/her taxable income for each short taxable year in the same manner as if a change of annual accounting period had been made (IRC sec. 1398(d)(2)(f)).

  5. If the debtor making the election was married on the date his/her bankruptcy case commenced, the debtor’s spouse can join in the election to close the taxable year only if the debtor and the spouse filed a joint return for the first short taxable year (IRC sec. 1398(d)(2)(B)). However, the filing of a joint return for the first short taxable year does not require the debtor and the spouse to file a joint return for the second short taxable year. If during the same year a bankruptcy case involving the debtor’s spouse is commenced, the spouse can elect to terminate his/her then taxable year as of the day before the commencement date, whether or not the spouse previously had joined in the debtor’s election. If the spouse previously had joined in the debtor’s election or if the debtor had not made an election, the debtor can join in the spouse’s election. But if the debtor had made an election and the spouse had not joined in the debtor’s election, the debtor cannot join in the spouse’s election inasmuch as the debtor and the spouse, having different taxable years, could not file a joint return for a year ending with the spouse’s commencement date (IRC sec. 6013).

  6. The gross income of the bankruptcy estate includes any of the debtor’s gross income to which the estate is entitled under bankruptcy law. It includes any income the estate is entitled to and receives or accrues after the beginning of the bankruptcy case (IRC sec. 1398(e)(1)). Gross income of the bankruptcy estate does not include amounts received or accrued by the debtor before the bankruptcy petition date (IRC sec. 1398(e)(2)).

  7. The determination whether the bankruptcy estate may deduct or take as a credit any amount it pays or incurs is made as if the amount was paid or incurred by the debtor in carrying on the same trade, business, or activity the debtor engaged in before the commencement date. IRC sec. 1398(e)(3).

  8. Bankruptcy law determines which of the debtor’s assets become part of the bankruptcy estate. These assets are treated the same in the estate’s hands as they were in the debtor’s hands. A transfer (other than by sale or exchange) of an asset incident to creation of bankruptcy estate from the debtor to the estate is not treated as a disposition for income tax purposes. This means that the transfer does not result in gain or loss, recapture of deductions or credits, or acceleration of income or deductions (IRC sec. 1398(f)(1)).

  9. When the bankruptcy estate is terminated, any resulting transfer (other than by sale or exchange) of the estate’s assets back to the debtor is not treated as a disposition. This transfer does not result in taxable gain or loss, recapture of deductions or credits, or acceleration of income or deductions to the estate (IRC sec. 1398(f)(2)). Transfer back to the debtor by abandonment receives similar tax free treatment.

  10. On the first day of the debtor’s taxable year in which the bankruptcy case is commenced, the bankruptcy estate succeeds to the tax attributes of the debtor that are included in IRC sec. 1398(g). The character of tax attributes in the estate’s hands is identical as they would have been in the debtor’s hands. These attributes include 1) net operating loss carryovers, 2) carryovers of excess charitable contributions, 3) recovery of tax benefit, 4) credit carryovers, 5) capital loss carryovers, 6) basis, holding period, and character of assets, 7) method of accounting, 8) passive activity loss and credit carryovers, 9) unused at-risk deductions, and 10) other tax attributes as provided in regulations.

  11. Certain tax attributes of the estate must be reduced by any excluded income from cancellation of debt occurring in a bankruptcy proceeding. The amount of debt cancellation (debt discharged) and the amount to be offset against the estate’s tax attributes is shown by filing Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) in the year of discharge. This form should be attached to the tax return of the bankruptcy estate. Tax attributes remaining under IRC Section 1398(i) at the time the case is closed by the Bankruptcy Court revert to the debtor in that year. (It may be several years after the discharge date depending on the complexity of the case). The tax attributes are not available for the taxpayer’s use during this period prior to the close of the case. For additional information concerning passive activity losses, credits, and at risk amounts, see Reg. secs. 1.1398–1 and 1.1398–2.

  12. The bankruptcy estate is allowed deductions for administrative, liquidation, and reorganization expenses which it incurs. Allowable administrative expenses, such as attorney fees and court costs, include any expenses allowed under BC sec. 503 and any fee or charge assessed against the estate under Chapter 123 of Title 28 of the U.S. Code, to the extent not disallowed under any other provision of Title 26 (IRC sec. 1398(h)(1)).

  13. If the administrative expenses of the bankruptcy estate are more than its gross income for the taxable year, the excess amount may be carried back 3 years and forward 7 years. The excess amount can only be carried back or forward to a taxable year of the estate and never to the debtor’s taxable year. The excess amount to be carried back or forward is treated like a net operating loss and must first be carried back to the earliest year possible (IRC sec. 1398(h)(2)(B)).

  14. The amount of the administrative loss to be carried to each taxable year is determined under IRC sec. 172(b)(2), except that the amount of any regular (non-administrative expense) net operating loss is computed before the amount of the administrative expense net operating loss (IRC sec. 1398(h)(2)(C)).

  15. The bankruptcy estate may change its accounting period (tax year) once without getting approval from the Service (IRC sec. 1398(j)(1)). This rule allows the trustee of the estate to close the estate’s tax year early, before the expected termination of the estate, so that the trustee can file a return for the first short taxable year created by the election to get a BC sec. 505(b) prompt determination of the estate’s tax liability. See IRM 4.27.5.

  16. If the bankruptcy estate has a net operating loss, separate from any administrative expense net operating loss and from any losses passing to the estate from the debtor (under the attribute carryover rules), it can carry the loss back not only to its own earlier tax years but also to the debtor’s tax years before the bankruptcy case began (IRC sec. 1398(j)(2)(A)). The estate may also carry back excess credits, such as the general business credit, to the debtor’s pre-petition taxable years.

  17. An individual debtor may not carry back tax attributes arising in post-petition taxable years to pre-petition taxable years. (IRC sec. 1398(j)(2)(B)).

Exhibit 4.27.1-1  (05-25-1999)
Bankruptcy Definitions and Concepts

(1) 180 Day Reports — Chapter 7 trustees must submit to the U.S. Trustee an interim report on each asset case that was open at the beginning of the reporting period. The interim report consists of the Estate Property Record and Report and the Cash Receipts and Disbursements Record.
(2) Abandonment — The process of severing a bankruptcy estate’s interest in property. The Bankruptcy Court may permit the trustee to abandon any property of the estate that is burdensome or of inconsequential value (after considering secured interests) to the estate. BC sec. 554.
  (a) Affirmative Act — The trustee may actively abandon or a party in interest may request abandonment. The trustee may abandon to the debtor or to a party with a possessory interest. "Notice and a hearing" are required for abandonment, but the "notice" may be general (such as notice of a first meeting of creditors) and an actual "hearing" may not always be held. When property is abandoned to the debtor, he/she is then responsible for any tax consequences associated with the property after the date abandonment occurs.
  (b) Administrative Abandonment — If the property is included on the asset and liability schedules required to be filed with the Bankruptcy Court, but it is not administered by the trustee (sold, etc.), it is abandoned to the debtor upon closing of the estate.
(3) Adequate Protection — The protection given to a secured creditor to ensure that pre-petition interest of the creditor in property is not reduced while the debtor is protected by the automatic stay. This arises when the property is depreciating, losing value, or in some cases, when the accrued interest on the defaulted loan is diminishing the equity in the property.
(4) Administrative Expense — A liability incurred by the bankruptcy estate for actual, necessary expenses of preserving the estate. See BC sec. 503 for the definition of allowable administrative expenses and IRC sec. 1398(h) for the proper handling of these expenses on the bankruptcy estate’s tax return. Post-petition taxes incurred by the bankruptcy estate are administrative expenses, whether or not they are necessary to preserve the estate. Quickie tax refunds received by the estate as a result of excessive allowance of a tentative carryback adjustment are also treated as administrative expenses. BC secs. 503(b)(1)(B)(i) & (ii).
(5) Adversary Proceeding — A type of lawsuit within a bankruptcy case in which one party seeks certain types of affirmative relief, including a proceeding to recover money or property, to determine the validity, priority, or extent of a lien in property, and to determine the dischargeability of a debt. BR 7001. A motion to determine the correct amount of a debtor’s unpaid tax liability is most often treated as a "contested matter" , rather than as a "adversary proceeding " . BR 9014.
(6) AIS — Automated Insolvency System. The bankruptcy database which is maintained by the Insolvency Support Section.
(7) Asset case — A Chapter 7 bankruptcy case in which the debtor has assets which are non-exempt, i.e., available for use in satisfying creditors’ claims. In a "no-asset" case, the debtor has only exempt assets, as defined on a state by state basis (BC sec. 522), that are not available to pay claims.
(8) Automatic stay — A prohibition on the commencement or continuation of legal or enforcement activities against the debtor, debtor’s estate, and property of the debtor or the debtor’s estate (subject to certain exceptions). It is automatically triggered by operation of law on the filing of the bankruptcy petition. For bankruptcy cases commenced after September 30, 1979, and before October 22, 1994, the automatic stay prohibits most assessment and collection activities by the Service, although some local jurisdictions have exceptions established by local rules of Bankruptcy Court. For cases commenced on or after October 22, 1994, assessment of agreed tax deficiencies or voluntarily filed tax returns is no longer prohibited by the Bankruptcy Code; however, IRC sec. 6213(a) sets out the period during which the Service is prohibited from assessing a deficiency. That section provides that there should be no assessment of a deficiency until the 90 day period for filing a Tax Court petition expires if no Tax Court petition is filed, or until a Tax Court decision becomes final if a Tax Court petition is filed. The automatic stay continues from the petition date:
  (a) until the property is no longer part of the estate; or,
  (b) until the earliest of (i) the time the case is closed; or (ii) the time the case is dismissed; or (iii) the time a discharge is granted or denied. Property that leaves the estate and is returned to the debtor will continue to be protected by the automatic stay as property of the debtor. The automatic stay is lifted when the debtor is granted/denied a discharge, or the case is dismissed.
  (c) The Bankruptcy Court may lift the stay in certain circumstances when a party to the proceedings files a motion with the court requesting that the stay be lifted.
  (d) During the time that the stay is in effect, the Service may conduct an audit and issue a statutory notice of deficiency for pre-petition taxes to the debtor/taxpayer. BRA ‘94 allows a tax audit, a demand for tax returns, assessment of agreed income tax liabilities including defaulted notices (before the petition date), and assessment of tax liabilities that are not subject to IRC sec. 6212 notice of deficiency procedures (such as the trust fund recovery penalty and most excise taxes). BRA ‘94 also allows the Service to issue a notice and demand for payment (first notice only) for such assessments.
  (e) Deficiencies for post-petition taxes incurred by the estate (a separate taxable entity) of a debtor which is an individual in a chapter 7 or chapter 11 case may be immediately assessed under IRC sec. 6871(b). A 30-day letter or Statutory Notice of Deficiency should not be issued in these cases because the estate’s own tax liability is determined by the Bankruptcy Court and cannot be litigated in Tax Court.
  (f) For pre-BRA ‘94 and post-BRA ‘94 cases, an immediate assessment of tax imposed on a debtor may be made if the liability for such tax has become res judicata against the debtor pursuant to a Bankruptcy Court determination. This exception and the one in (8)(e) reflect situations in which the Service is not required to follow the normal deficiency notice procedure. In the case of an individual debtor whose liability for nondischargeable tax claims has been litigated in the Bankruptcy Court and, under the doctrine of res judicata, the debtor would be precluded from relitigating the issue, no purpose would be served by requiring issuance of a deficiency notice prior to assessment. For the same reason, immediate assessment of a corporate debtor’s tax liabilities may be made once the bankruptcy court has made a determination which is res judicata.
  (g) Pre-BRA ‘94 cases — Pre-petition taxes for which a notice of deficiency is not required (e.g. employment taxes) may be assessed under IRC sec. 6201, but not until the stay is lifted.
  (h) BRA ‘94 cases — Pre and post-petition taxes for which a notice of deficiency is not required may be assessed under IRC sec. 6201 regardless of the stay.
  (i) For statute of limitations, issues affected by the automatic stay see IRM 4.27.4. However, examiners should not recompute the statute of limitations at the group level. The recomputation is a review function.
  (j) For willful violations of the stay by a creditor, the debtor may receive actual damages, attorney’s fees, and sometimes punitive damages. However, punitive damages should not be allowable against the Service, pursuant to BC sec. 106(a)(3).
(9) Bankruptcy Court — A unit of the federal judiciary system.
(10) Bankruptcy Estate — The entity created when the bankruptcy petition is filed. It generally consists of all the debtor’s interest in any property at the time the case is filed. It is sometimes administered by a court appointed trustee, but is always within the control and oversight of Bankruptcy Court. If the debtor is an individual in a Chapter 7 or Chapter 11 proceeding, the bankruptcy estate is a separate taxable entity; otherwise, it is the same as the debtor. In a Chapter 7 case, unencumbered property of the estate is distributed to creditors in the priority set forth under BC sec. 726, but secured creditors are generally paid first from the proceeds of encumbered property.
(11) Bankruptcy Petition — The form filed by the debtor (or against the debtor by creditors in an involuntary bankruptcy) with the bankruptcy court requesting relief from creditors.
(12) Bankruptcy Reform Act of 1994 (BRA ‘94) — Signed into law and effective for all bankruptcy cases filed on or after October 22, 1994. It made sweeping changes to the bankruptcy law and affected the Service’s statute of limitations on assessments, filing of proof of claims, reduced the priority of federal tax (from seventh to eighth priority) among others. It also waived sovereign immunity more broadly to allow suits for damages against the Federal Government for violating the automatic stay provisions and other provisions of the Bankruptcy Code.
(13) Bar Date — The last date a timely proof of claim may be filed for consideration of payment in the bankruptcy case. In cases filed under Chapter 7, 12, or 13, the bar date is determined by adding 90 days to the date set for the first meeting of creditors. In a case filed under Chapter 11, the bar date is fixed by the court. The Court may grant extensions of the bar date if there is sufficient reason. To request an extension, Area Counsel should file a motion with the Bankruptcy Court at least 30 days prior to the bar date. Note: The Service is now allowed a minimum of 180 days after the order of relief in which to file a proof of claim for cases commenced on or after October 22, 1994. BC sec. 502(b)(9).
(14) BRA ‘94 — Bankruptcy Reform Act of 1994
(15) Case Docket — The official record of the bankruptcy case. It shows every event and every document filed in the case. The docket is maintained by the bankruptcy clerk’s office.
(16) Cash Collateral — Cash, negotiable instruments, documents of title, securities, deposit accounts, and other cash equivalents.
(17) Claim — A right to payment even if unliquidated, contingent, or disputed. Proofs of claim may include liabilities which have not been assessed.
(18) Commencement Date — The day on which the bankruptcy petition is filed.
(19) Complaint — A pleading filed by a party to the bankruptcy to initiate a lawsuit or adversary proceeding.
(20) Confirmation — The approval by the court of a plan of reorganization; Applicable for bankruptcy chapters other than Chapter 7.
(21) Consumer Debt — A debt incurred by an individual primarily for personal, family, or household purpose. Tax debts should not be considered consumer debts for purposes of the co-debtor stay of BC sec. 1301.
(22) Conversion — When a debtor voluntarily or involuntarily changes from one chapter of bankruptcy to another chapter with the approval of the Bankruptcy Court.
(23) Cram Down — In the event any class of claims or interests is impaired under a plan of reorganization in Chapter 11 and the plan does not garner the minimum percentage of votes to accept the plan from such impaired class, the plan’s proponent may request the court to confirm the plan by the alternative "cram down" method. As long as at least one class of impaired creditors approved the plan and the plan does not discriminate unfairly and meets the fair and equitable treatment of creditors as required by the Bankruptcy Code, the court may confirm the plan.
(24) Creditor — Person or entity with a claim against the debtor and/or property of the debtor at the time the bankruptcy case is filed.
(25) Debtor — The person or entity (corporation, partnership, or municipality) that: (i) files a voluntary petition, or (ii) has an order of relief entered against it when an involuntary petition is filed, with the Bankruptcy Court.
(26) Debtor-in-Possession (DIP) — The debtor in a Chapter 11 reorganization when the debtor remains in full control of all the assets and is charged with the duties and responsibilities of a trustee to maximize the assets of the estate for the benefit of all creditors.
(27) Denial of Discharge — The situation in which a debtor goes through the bankruptcy proceeding and is still held responsible (usually for cause) for all of the pre-petition liabilities. There is no income from the forgiveness of debt because none was forgiven. This is not the same as a dismissal.
(28) Disbursement — The process by which money is paid out in a bankruptcy proceeding, whether to creditors or for administrative expenses of the bankruptcy estate.
(29) Discharge — Court order which extinguishes the debtor’s personal liability on many of its pre-petition debts. It is the event that triggers forgiveness of debt in a bankruptcy case. Generally, a discharge is granted (a) to an individual debtor in a Chapter 7 case, 60 days after the date set for the first meeting of creditors (BC sec. 341 meeting); (b) in a Chapter 11 case, when the plan is confirmed and has become effective; and (c) in Chapter 12 and 13 cases, when the plan is completed (3–5 years).
(30) Dischargeability — This concept relates to whether a creditor’s claims will be satisfied only out of the bankruptcy estate or from the post-petition assets of the debtor as well. The debtor will continue to be responsible for nondischargeable debts. BC sec. 523.
(31) Discharge Date — The date the debtor receives a discharge. (See definition above.)
(32) Disclosure Statement — The statement filed with the Bankruptcy Court that contains "adequate information" about the affairs of the debtor to allow the creditors to make an informed judgment about the plan of reorganization in a Chapter 11 case. An approved disclosure statement must accompany the plan of reorganization. However, for post-BRA ‘94 cases, electing small businesses may be subject to less stringent disclosure statement requirements. (See BC sec. 1125(f)).
(33) Dismissal — The term used when a bankruptcy proceeding is terminated. Debts are not forgiven and the debtor does not receive a discharge. A dismissed case is closed for cause, e.g., it did not meet bankruptcy guidelines. If a bankruptcy case involving an individual is dismissed by the Court, the estate is not treated as a separate entity (IRC sec. 1398(b)(1)). It is appropriate to treat the debtor’s tax status as if no proceeding has been brought. The debtor should include on his/her tax returns any gross income, deductions, or credits belonging to the bankruptcy estate. The debtor is treated as if a bankruptcy petition had never been filed for IRC sec. 1398 purposes. However, the dismissed bankruptcy case may still have suspended a statute of limitations period or tolled a bankruptcy priority period.
(34) Estate — Created upon the filing of the petition, it generally consists of all the debtor’s interests in any property at the time the case is filed (BC sec. 541). The estate may also include a non-debtor spouse’s community property interests. Certain assets acquired post-petition may also be included in the estate in Chapter 13 cases (BC sec. 1306). See Bankruptcy Estate.
(35) Examiner — The person who may be appointed in a Chapter 11 case to investigate the financial affairs of the debtor. An examiner does not replace the debtor-in-possession as does a Chapter 11 trustee.
(36) Exempt Assets — Property that is excluded by federal bankruptcy laws from the bankruptcy estate and therefore cannot be liquidated by the trustee. The law also allows for States to opt out of the federal exemptions and provide for same or more exempt assets and in equal or greater amounts. Only individuals may have exempt property which may include a homestead, vehicles, personal furnishings, certain retirement accounts, life insurance policies, etc. Entities are not entitled to exemptions.
(37) Final Account (Post Distribution Report) — The final account shows that the trustee has completed distribution according to the court approved distribution order and no longer holds any estate funds. An original bank statement which shows a zero balance and all canceled checks must be filed with the account.
(38) Final Report (Pre Distribution Report) — The final report is filed after the case has liquidated all assets. It summarizes the trustee’s administration of the case, describes the disposition of each estate asset, accounts for all financial transactions, and sets forth the proposed distribution to creditors. The filing of this report is a prerequisite to paying creditors and closing the case.
(39) First Meeting of Creditors (FMC) — The meeting at which the debtor is required to testify under oath about its financial affairs and to respond to questions from creditors and the trustee. It is also referred to as the "Section 341" meeting (BC sec. 341).
(40) Fraudulent Conveyance — A transfer of any property by the debtor within one year (or such longer periods as may be defined by applicable state law) with the intent to hinder, defraud, or delay a creditor (BC sec. 548). Each State has its own version of Uniform Fraudulent Conveyance Act or Uniform Fraudulent Transfer Act (BC 544). When brought to light, the trustee can successfully challenge the transfer and request turnover of the property to the estate (BC sec. 548).
(41) Gap Taxes — Tax liabilities and penalties which accrue during the interim period after an involuntary bankruptcy case is filed and before an order for relief is entered.
(42) General Unsecured Claims — Claims that are neither secured nor entitled to priority status.
(43) Hardship Discharge — When hardship prevents the Chapter 13 debtor from completing the plan, the debtor receives the same type of discharge which would have been received had the debtor been discharged in a Chapter 7 case (BC sec. 1328(b)).
(44) Insider — In the case of an individual, a term which includes relatives, general partners, relatives of general partners, partnerships in which the debtor is a general partner, and corporations of which the debtor is a director, officer, or person in control. BC sec. 101 (31) defines insiders in both individual, corporate, and partnership case.
(45) Insolvency — Generally understood to mean an inability to pay debts as they become due. However, the Bankruptcy Code refers to an insolvent entity as one whose debts are greater than the fair market value of its assets (BC sec. 101 (32)). A debtor need not be insolvent to file bankruptcy.
(46) Involuntary Bankruptcy Petition — The situation in which creditors file a bankruptcy petition, forcing a debtor into bankruptcy involuntarily.
(47) Joint Return/Single Petitioner — The situation in which spouses file a joint income tax return but only one declares bankruptcy.
(48) Joint Return/Two Single Petitioners — The situation in which spouses file a joint income tax return and file separate bankruptcy petitions either on the same date or on different dates. The cases may or may not be consolidated into a single case.
(49) Levy — An enforcement tool used to attach tangible and intangible assets. This is generally not allowed while the automatic stay is in effect, but a levy may sometimes still be used against an individual debtor’s post-petition acquired property to collect the individual debtor’s post-petition tax debts.
(50) Lien — An encumbrance on property or rights to property as security for a debt or obligation.
(51) Liquidation — The act of reducing tangible and intangible assets to cash. This applies in Chapter 7 cases in which the business ceases to exist and its assets are sold. For individuals, the liquidation is limited to non-exempt assets. Many debtors attempt to liquidate through Chapter 11.
(52) Monthly Operating Reports — The reports required to be filed in all Chapter 11 cases by debtors-in-possession or trustees. Generally, the reports include a cash receipts and disbursements journal, income statement, and balance sheet analysis.
(53) No Asset Case — A Chapter 7 case in which there are no assets available to pay unsecured creditors because the assets are exempt, fully encumbered by secured liens, or have little value. Generally, the Service and other creditors do not file claims in "no asset" cases, unless or until the bankruptcy trustee provides further notice that assets have been found (Bankruptcy Rule 2002(e) and 3002(c)(5)).
(54) Non-exempt Assets — Assets which are part of the bankruptcy estate, i.e., the property available to satisfy creditors’ claims.
(55) Objection to Claim — A motion filed with the bankruptcy Court by a debtor, creditor, or trustee to object to all or parts of a claim. A hearing will be held to resolve the dispute. The Service’s position is that the burden of proof should be the same whether the taxpayer is in or out of bankruptcy. However, some courts have placed the burden of proof in bankruptcy cases on the Service when a different rule would have applied outside of bankruptcy.
(56) Order for Relief — The order entered by the court which grants the protection of the court to the debtor. It is automatically granted when a voluntary petition is filed. It may be granted in an involuntary case after notice and a hearing (Bankruptcy Rule 1013).
(57) Order of Discharge — Releases the debtor from personal liability for all debts that either were, or properly could have been, asserted in the bankruptcy proceedings. The discharge is the fundamental mechanism affording debtors a "fresh start" after bankruptcy. An individual debtor in a Chapter 7, 11, 12 and hardship discharge 13 case may still be held liable for certain debts listed under BC sec. 523. A Chapter 11, 12, and 13 debtor also remains liable for paying the debts provided to be paid by a confirmed plan.
(58) Petition — A filing with the Bankruptcy Court seeking an order for relief. It is the formal filing of the bankruptcy proceedings and identifies the debtor, attorney, chapter, etc.
(59) Petition Date — The date the bankruptcy was filed in the Bankruptcy Court.
(60) Plan of Reorganization — A proposed method of payment submitted by the debtor and/or other interested parties in a Chapter 11 case to the Bankruptcy Court and creditors for review and approval. Creditors have the right to vote to accept or reject the plan.
(61) Post-Confirmation — The period after the plan is confirmed.
(62) Post-petition — An event that occurs after the bankruptcy petition was filed.
(63) Post-petition Pre-confirmation — The period from the petition date to the confirmation date.
(64) Post-petition Taxes — Taxes incurred after the filing of the bankruptcy petition for tax periods ending after the petition date.
(65) Preference — A pre-petition transfer made by or for the debtor to a creditor on a pre-existing debt. The trustee may, unless there is an exception, avoid the transfer. The transfer must take place within 90 days of filing, or within one year if it is made to or for the benefit of an insider (BC sec. 547).
(66) Pre-petition — An event that occurs before the bankruptcy petition was filed.
(67) Pre-petition Taxes — Taxes incurred and owing (whether or not determined in amount or assessed) prior to the filing of the bankruptcy petition for tax periods ending before the petition date. Divisible taxes incurred pre-petition, such as employment or excise taxes, will be considered pre-petition taxes even though the taxable period (the quarter, for instance) had not ended when a bankruptcy petition was filed.
(68) Priority — The concept relating to the order in which, and the extent to which, the various creditor’s unsecured claims are satisfied out of the available assets of the bankruptcy estate.
(69) Priority Claim — A claim that meets certain conditions. BC sec. 507 explains the tests for priority claims, including taxes (income employment and excise) with return due dates less than three years prior to the petition date, income tax assessments made within 240 days before the petition date, income tax deficiencies that are unassessed but are assessable prior to the petition date, trust fund taxes, and trust fund recovery penalties.
(70) Proof of Claim — A document filed by a creditor with the Bankruptcy Court which specifies the nature and extent of the debtor’s liability and asserts a right of payment from the estate. IRS Proofs of claim are filed by the Insolvency Support Section in each Area. If an examination is not complete, examiners should ensure that estimated deficiencies, plus penalties and interest, are based upon as factual an estimate as possible. When the correct and complete amount due can be determined, the claim will be superseded by an amended claim. However, some bankruptcy courts will not permit claims to be amended to list larger liabilities after a bar date and/or confirmation has passed. See IRM 5.9.6.7 through 5.9.6.8.2.
(71) Property of the Estate — All legal or equitable interests of the debtor at the time the bankruptcy is filed. This includes potential claims and lawsuits the debtor may yet file against a third party. It is from this estate that the trustee will liquidate assets to pay creditors (BC sec. 541).
(72) Reorganization — The approved Chapter 11 plan through which a debtor promises to resolve or pay creditors’ claims.
(73) Res Judicata — A matter already decided by a judicial authority.
(74) Rule 2004 Examination — Similar to a deposition but much broader in scope. It permits any party in interest to examine any entity about the acts, conduct, or property of the debtor, the liabilities and financial condition of the debtor, or about any matter which may affect the administration of the debtor’s estate, or the debtor’s right to a discharge.
(75) Schedule — All debtors must file schedules of assets and liabilities, current income and expenditures, and financial affairs.
(76) Secured Creditor — A creditor having a lien, security interest, or other encumbrance which has been properly perfected as required by law with respect to property owned by the debtor. The creditor has a secured claim to the extent of the value of the collateral or to the extent of the creditor’s right to offset a mutual debt owed to the debtor against the creditor’s claim against the debtor (BC sec. 506(a)). For tax purposes, a properly filed Notice of Federal Tax Lien may secure the tax liability to the extent of a debtor’s property covered by the lien. A federal tax liability may sometimes be secured (setoff) by a debtor’s right to federal tax refunds or overpayment of tax, or by amounts other federal agencies may owe the debtor.
(77) Short year election — The case in which an individual debtor (and spouse) has the option of filing short year income tax returns for the pre-petition and post-petition portions of the tax year. This election applies to individual taxpayers who have filed a Chapter 7 "asset" or 11 bankruptcy case. For the case to qualify as an "asset" case, the bankruptcy estate must contain assets which are nonexempt (IRC sec. 1398(d)).
(78) Insolvency Support Section — The unit within Compliance in each area which handles the administrative processing of bankruptcy cases for the IRS.
(79) Stay — See Automatic Stay above.
(80) Stay Lift Date — The effective date of the action that lifts the automatic stay, i.e., discharge date, denial of discharge date, or case closing date, whichever is earliest.
(81) Super Discharge — The discharge granted to an individual debtor upon the successful completion of a Chapter 13 plan or to a corporation or a partnership upon the effective date of a confirmed Chapter 11 plan. All pre-petition tax debts (with exceptions inapplicable to the Service’s claims) that were provided for in a Chapter 13 plan may be discharged. In the case of a corporation or partnership in Chapter 11 that is not liquidating, all pre-confirmation debts (including administrative period taxes) are generally discharged as provided for in the plan or confirmation order; a Chapter 11 corporate or partnership debtor remains liable after confirmation for paying the debts provided to be paid by a confirmed plan.
(82) Trustee — In a case under Chapter 7, 12, or 13, the trustee is the officer appointed by the United States Trustee or sometimes elected by creditors to administer the processing of a bankruptcy case. The trustee is the representative of the bankruptcy estate and owes fiduciary duties to unsecured creditors. In a case under Chapter 11, the debtor-in-possession generally serves as the trustee unless the court orders that a trustee be appointed.
(83) Unsecured Creditor — A creditor who (a) has no perfected security interest in property of the estate to secure its claim or no right of setoff or (b) to the extent the value of the creditor’s collateral or right of setoff is less than the amount of the debt (BC sec. 506(a)). Unsecured creditors may be either priority or general unsecured creditor. A general unsecured creditor recovers a very low percentage on their claims.
(84) United States Trustee — A component of the Department of Justice charged with certain administrative duties for all bankruptcy cases, except in North Carolina and Alabama.
(85) Violation of Stay — An improper assessment or collection action made during the period in which the automatic stay is in effect. The solicitation of an installment agreement is a collection action prohibited during the automatic stay.
(86) Voluntary Bankruptcy Petition — The situation in which the debtor makes the decision to file bankruptcy and voluntarily files the petition with the Bankruptcy Court.

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