Partnerships and Corporations(p21)

A separate taxable estate is not created when a partnership or corporation files a bankruptcy petition. The court appointed trustee is, however, responsible for filing the regular income tax returns on Form 1065 or Form 1120.

The filing requirements for a partnership in bankruptcy proceedings do not change. However, the filing of required returns becomes the responsibility of an appointed trustee, a receiver, or a debtor-in-possession rather than a general partner.

A partnership's debt that is canceled because of bankruptcy is not included in the partnership's income. It may or may not be included in the individual partners' income. See Partnerships, later under Debt Cancellation.

The following discussion covers only the highlights of the bankruptcy tax rules applying to corporations. Because the details of corporate bankruptcy reorganizations are beyond the scope of this publication, you may want to seek the help of a professional tax advisor.

See Corporations under Debt Cancellation for information about a corporation's debt canceled because of bankruptcy.

The tax-free reorganization provisions of the Internal Revenue Code apply to a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case, but only if, under the reorganization plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction qualifying under IRC section 354, 355, or 356.

A "title 11 or similar case," for this purpose, is a bankruptcy case under title 11 of the United States Code, or a receivership, foreclosure, or similar proceeding in a federal or state court, but only if the corporation is under the jurisdiction of the court in the case and the transfer of assets is under a plan of reorganization approved by the court. In a receivership, foreclosure, or similar proceeding before a federal or state agency involving certain financial institutions, the agency is treated as a court.

Generally, IRC section 354 provides that no gain or loss is recognized if a corporation's stock is exchanged solely for stock or securities in the same or another corporation under a qualifying reorganization plan. In this case, shareholders in the bankrupt corporation would recognize no gain or loss if they exchange their stock solely for stock or securities of the corporation acquiring the bankrupt corporation's assets.

IRC section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution. IRC section 356 provides that in an exchange that would qualify under IRC section 354 or 355 except that other property or money besides the permitted stock or securities is received by the shareholder, gain is recognized by the shareholder only to the extent of the money and the FMV of the other property received. No loss is recognized in this situation.

The filing requirements of a corporation involved in bankruptcy proceedings do not change. However, the filing of required returns becomes the responsibility of an appointed trustee, a receiver, or a debtor-in-possession, rather than a corporate officer. A bankruptcy trustee, receiver, or debtor-in-possession, having possession of or holding title to substantially all of the property or business of the debtor corporation, must file the debtor's corporate income tax return for the tax year.

If you are a trustee, a receiver, or an assignee of a corporation that is in bankruptcy, receivership, or dissolution, or in the hands of an assignee by court order, you may apply to the IRS for relief from filing federal income tax returns for the corporation. To qualify, the corporation must have ceased business operations and must have neither assets nor income for the tax year. The exemption request must be submitted to the local IRS Insolvency office handling the case.

Your request to the IRS must include the name, address, and EIN of the corporation and a statement of the facts (with any supporting documents) showing why you need relief from the filing requirements. You must also include the following statement: "I hereby request relief from filing federal income tax returns for tax years ending _____ for the above-named corporation and declare under penalties of perjury that to the best of my knowledge and belief the information contained herein is correct." The statement must be signed by you, and you must include your notice of appointment to act on behalf of the corporation (unless you are a bankruptcy trustee or debtor-in-possession). The IRS will act on your request within 90 days.