Publication 908
taxmap/pubs/p908-002.htm#en_us_publink1000137310When an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, the bankruptcy estate is treated as a new taxable entity, separate from the individual
taxpayer.
The bankruptcy estate in a chapter 7 case is represented by a trustee. The trustee is appointed to administer the estate and liquidate any nonexempt assets. In chapter 11 cases, the debtor often remains in control of the assets as a "debtor-in-possession" and acts as the bankruptcy trustee. However, the bankruptcy court, for cause, may appoint a trustee if such appointment is in the best interests of the creditors and the
estate.
During the chapter 7 or 11 bankruptcy, the debtor continues to file an individual tax return on Form 1040. The bankruptcy trustee files a Form 1041 for the bankruptcy estate. However, when a debtor in a chapter 11 bankruptcy case remains a debtor-in-possession, he or she must file both a Form 1040 individual return and a Form 1041 estate return for the bankruptcy estate (if return filing requirements are
met).
Although a husband and wife may file a joint bankruptcy petition whose
bankruptcy estates are jointly administered, the estates are be treated as two
separate entities for tax purposes. Two
separate bankruptcy estate income tax returns
must be filed (if each spouse separately meets the filing requirements).
For information about determining the tax due and paying tax for a chapter 7 or 11 bankruptcy estate, see
Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax
Due, later.
taxmap/pubs/p908-002.htm#en_us_publink1000137311taxmap/pubs/p908-002.htm#en_us_publink1000277185An individual debtor in a chapter 7 or 11 case may elect to close the debtor's tax year for the year in which the bankruptcy petition is filed, as of the day before the date on which the bankruptcy case commences. If the debtor makes this election, the debtor's tax year is divided into 2 short tax years of less than 12 months each. The first tax year ends on the day
before
the commencement date and the second tax year begins on the commencement date.
If the election is made, the debtor's federal income tax liability for the first short tax year becomes an allowable claim against the bankruptcy estate arising before the bankruptcy filing. Also, the tax liability for the first short tax year is not subject to discharge under the Bankruptcy
Code.
If the debtor does not make an election to end the tax year, the commencement of
the bankruptcy case does not affect the debtor's tax year. Also, no part of the
debtor's income tax liability for the year in which the bankruptcy case
commences can be collected from the bankruptcy estate.
Note.The debtor cannot make a short tax year election if no assets, other than exempt property, are in the bankruptcy
estate.
taxmap/pubs/p908-002.htm#en_us_publink1000277187taxmap/pubs/p908-002.htm#en_us_publink1000289310The debtor can elect to end the debtor's tax year by filing a return on Form 1040 for the first short tax year. The return must be filed on or before the 15th day of the fourth full month after the end of that first tax
year.
taxmap/pubs/p908-002.htm#en_us_publink1000289311If the debtor elects to end the tax year on the day before filing the bankruptcy case, the debtor must file the return for the first short tax year in the manner discussed
above.
If the debtor makes this election, the debtor must also file a separate Form 1040 for the second short tax year by the regular due date. To avoid delays in processing the return, write "Second Short Year Return After Section 1398 Election" at the top of the
return.
taxmap/pubs/p908-002.htm#en_us_publink1000277190Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition under chapter 7 or 11 on May 8, 2012. If Jane elected to close her tax year at the commencement of her case, Jane's first short year for 2012 runs from January 1 through May 7, 2012. Jane's second short year runs from May 8, 2012, through December 31, 2012. To have a timely filed election for the first short year, Jane must file Form 1040 (or an extension of time to file) for the period January 1 through May 7 by September
15.
To avoid delays in processing the return, write "Section 1398 Election" at the top of the return. The debtor may also make the election by attaching a statement to Form 4868, Automatic Extension of Time to File an U.S. Individual Tax Return. The statement must state that the debtor elects under IRC section 1398(d)(2) to close the debtor's tax year on the day before filing the bankruptcy case. The debtor must file Form 4868 by the due date of the return for the first short tax year. The debtor's spouse may also elect to close his or her tax year, see
Election by debtor's spouse, below.
taxmap/pubs/p908-002.htm#en_us_publink1000277191If the debtor is married, the debtor's spouse may join in the election to end the tax year. If the debtor and spouse make a joint election, the debtor
must
file a joint return for the first short tax year. The debtor must elect by the
due date for filing the return for the first short tax year. Once the election
is made, it cannot be revoked for the first short tax year. However, the
election does not prevent the debtor and the spouse from filing separate returns
for the second short tax year.
taxmap/pubs/p908-002.htm#en_us_publink1000277192
If the debtor's spouse files for bankruptcy later in the same year, he or she
may also choose to end his or her tax year, regardless of whether he or she
joined in the election to end the debtor's tax year.
As each spouse has a separate bankruptcy, one or both of them may have 3 short tax years in the same calendar year. If the debtor's spouse joined the debtor's election or if the debtor had not made the election to end the tax year, the debtor can join in the spouse's election. However, if the debtor made an election and the spouse did not join that election, the debtor cannot then join the spouse's later election. The debtor and the spouse are precluded from this election because they have different tax years. This results because the debtor does not have a tax year ending the day before the spouse's filing for bankruptcy, and the debtor cannot file a joint return for a year ending on the day before the spouse's filing of bankruptcy.
taxmap/pubs/p908-002.htm#en_us_publink1000277193Example 1.(p4)
Paul and Mary Harris are calendar-year taxpayers. Paul's voluntary chapter 7 bankruptcy case begins on March
4.
If Paul does not make an election, his tax year does not end on March 3. If he makes an election, Paul's first tax year is January 1–March 3, and his second tax year begins on March 4. Mary could join in Paul's election as long as they file a joint return for the tax year January 1–March 3. They must make the election by July 15, the due date for filing the joint
return.
taxmap/pubs/p908-002.htm#en_us_publink1000277194Example 2.(p4)
Fred and Ethel Barnes are calendar-year taxpayers. Fred's voluntary chapter 7
bankruptcy case begins on May 6, and Ethel's bankruptcy case begins on November
1 of the same year.
Ethel could elect to end her tax year on October 31. If Fred did not elect to end his tax year on May 5, or if he elected to do so but Ethel had not joined in his election, Ethel would have 2 tax years in the same calendar year if she decided to close her tax year. Her first tax year is January 1–October 31, and her second year is November 1–December
31.
If Fred did not end his tax year as of May 5, he could join in Ethel's election to close her tax year on October 31, but only if they file a joint return for the tax year January 1–October 31.
If Fred elected to end his tax year on May 5, but Ethel did not join in Fred's election, Fred cannot join in Ethel's election to end her tax year on October 31. Fred and Ethel cannot file a joint return for that short tax year because their tax years preceding October 31 were not the
same.
taxmap/pubs/p908-002.htm#en_us_publink1000277195Example 3.(p4)
Jack and Karen Thomas are calendar-year taxpayers. Karen's voluntary chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter 7 bankruptcy case began on October 3 of the same year. Karen elected to close her tax year on April 9 and Jack joins in Karen's
election.
Under these facts, Jack would have 3 tax years for the same calendar year if he makes the election relating to his own bankruptcy case. The first tax year would be January 1–April 9; the second, April 10–October 2; and the third, October 3–December 31.
Karen may join in Jack's election if they file a joint return for the second short tax year (April 10–October 2). If Karen does join in, she would have the same 3 short tax years as Jack. Also, if Karen joins in Jack's election, they may file a joint return for the third tax year (October 3–December 31), but they are not required to do
so.
taxmap/pubs/p908-002.htm#en_us_publink1000277196If the debtor elects to close the tax year, the debtor must annualize taxable income for each short tax year in the same manner a change in annual accounting period is calculated. See
Short Tax Year in Publication
538, for information on how to annualize the debtor's income and to figure the tax for the short tax year.
If the bankruptcy court later dismisses an individual chapter 7 or 11 case, the bankruptcy estate is no longer treated as a separate taxable entity. It is as if no bankruptcy estate was created for tax purposes. In this situation, the debtor must file amended tax returns on Form 1040X, to replace all full or short year individual returns (Form 1040) and bankruptcy estate returns (Form 1041) filed as a result of the bankruptcy case. Income, deductions, and credits previously reported by the bankruptcy estate must be reported on the debtor's amended returns. Attach a statement to the amended returns explaining why the debtor is filing an amended
return.
taxmap/pubs/p908-002.htm#en_us_publink1000273676taxmap/pubs/p908-002.htm#en_us_publink1000275763At the commencement of a bankruptcy case a bankruptcy estate is created. Bankruptcy law determines which of the debtor's assets become part of a bankruptcy estate. This estate generally includes all of the debtor's legal and equitable interests in property as of the commencement date. However, there are exceptions and certain property is exempted or excluded from the bankruptcy
estate.
Note.Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. Excluded property is never included in the estate.
taxmap/pubs/p908-002.htm#en_us_publink1000273948The transfer (other than by sale or exchange) of an asset from the debtor to the bankruptcy estate is not treated as a disposition for income tax purposes. The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits. For example, the transfer of an installment obligation to the estate would not accelerate gain under the rules for reporting installment sales. The estate assumes the same basis, holding period, and character of the transferred assets. Also, the estate generally accounts for the transferred assets in the same manner as debtor.
When the bankruptcy estate is terminated or dissolved, any resulting transfer (other than by sale or exchange) of the estate's assets back to the debtor is also not treated as a disposition for tax purposes. The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits to the
estate.
taxmap/pubs/p908-002.htm#en_us_publink1000274164
The abandonment of property by the estate to the debtor is a nontaxable
disposition of property. If the debtor received abandoned property from the
bankruptcy estate, the debtor assumes the same basis in the property that the
bankruptcy estate had.
taxmap/pubs/p908-002.htm#en_us_publink1000273979When an individual files a bankruptcy petition under chapter 7 or 11, the bankruptcy estate is treated as a separate taxable entity from the debtor. The court appointed trustee or the debtor-in-possession is responsible for preparing and filing all of the bankruptcy estate's tax returns, including its income tax return on Form 1041, U.S. Income Tax Return for Estates and Trusts, and paying its taxes. The debtor remains responsible for filing his or her own returns on Form 1040, U.S. Individual Income Tax Return, and paying taxes on income that does not belong to the
estate.
taxmap/pubs/p908-002.htm#en_us_publink1000275357The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax returns. See
Employer identification number, under Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax
Due, later.
 | The social security number of the individual debtor cannot be used as the EIN for the bankruptcy
estate. |
taxmap/pubs/p908-002.htm#en_us_publink1000275362In an individual chapter 7 or 11 bankruptcy case, do not include the income, deductions, and credits that belong to the bankruptcy estate on the debtor's individual income tax return (Form 1040). Also, do not include as income on the debtor's return the amount of any debt canceled by reason of the bankruptcy discharge. The bankruptcy estate must reduce certain losses, credits, and the basis in property (to the extent of these items) by the amount of canceled debt. See
Debt Cancellation, below.
Note.The debtor may not be able to claim certain deductions available to the bankruptcy estate such as administrative expenses. Additionally, the bankruptcy exclusion cannot be used to exclude income from a cancelled debt if the discharge of indebtedness was not within the bankruptcy case, even though the debtor was under the bankruptcy court's protection at the time. However, other exclusions, such as the insolvency exclusion, may
apply.
taxmap/pubs/p908-002.htm#en_us_publink1000273679taxmap/pubs/p908-002.htm#en_us_publink1000273972taxmap/pubs/p908-002.htm#en_us_publink1000273951
The gross income of the bankruptcy estate includes gross income of the debtor to
which the estate is entitled under the Bankruptcy Code. Gross income also
includes income generated by the bankruptcy estate from property of the estate
after the commencement of the case.
Gross income of the bankruptcy estate does not include amounts received or accrued by the debtor
before
the commencement of the case. Additionally, in chapter 7 cases, gross income of
the bankruptcy estate does not include any income that the debtor earns
after the date of the bankruptcy petition.
taxmap/pubs/p908-002.htm#en_us_publink1000273952
In chapter 11 cases, under IRC section 1398(e)(1), gross income of the
bankruptcy estate includes income that the debtor earns for services performed
after the bankruptcy petition date. Also, earnings from services performed by an
individual debtor after the commencement of the chapter 11 case are property of
the bankruptcy estate under section 1115 of the Bankruptcy Code (11 U.S.C.
section 1115).
Note.A debtor-in-possession may be compensated by the estate for managing or operating a trade or business that the debtor conducted before the commencement of the bankruptcy case. Such payments should be reported by the debtor as miscellaneous income on his or her individual income tax return (Form 1040).
Amounts paid by the estate to the debtor-in-possession for managing or operating the trade or business may qualify as administrative expenses of the estate. See
Administrative expenses, below.
taxmap/pubs/p908-002.htm#en_us_publink1000273986If 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. If the chapter 11 case is converted to a chapter 7 case, 11 U.S.C. section 1115 does not apply after conversion
and:
- Earnings from post-conversion services will be taxed to the debtor, rather than the estate,
and
- 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. 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.
A bankruptcy estate deducts expenses incurred in a trade, business, or activity, and uses credits in the same way the debtor would have deducted or credited them had he or she continued operations.
Note.Expenses may be disallowed under other provisions of the IRC (such as the disallowance of certain capital expenditures or expenses relating to tax-exempt interest).
taxmap/pubs/p908-002.htm#en_us_publink1000273965Allowable expenses include administrative expenses.
| Administrative expenses can only be deducted by the estate, never by the debtor.
|
The bankruptcy estate is allowed deductions for bankruptcy administrative expenses and fees, including accounting fees, attorney fees, and court costs. These expenses are deductible on Form 1040, Schedule A as miscellaneous itemized deductions
not
subject to the 2% floor on miscellaneous itemized deductions, because they would
not have been incurred if property had not been held by the bankruptcy estate.
See IRC section 67(e). Administrative expenses of the bankruptcy estate
attributable to conducting a trade or business for the production of estate
rents or royalties are deductible in arriving at adjusted gross income on Form
1040, Schedules C, E, and F.
Note.The bankruptcy estate uses Form 1041 as a transmittal for the tax return prepared using Form 1040 and its schedules. See
Transmittal for Form 1040 under
Tax Return Filing Requirements and Payment of Tax, later.
taxmap/pubs/p908-002.htm#en_us_publink1000273967If the administrative expenses of the bankruptcy estate are more than its gross income for a tax year, the excess amount may be carried back 3 years and forward 7 years. The amounts can only be carried to a tax year of the estate and never to a debtor's tax year. The excess amount to be carried back or forward is treated like a net operating loss (NOL) and must first be carried back to the earliest year possible. For a discussion of NOLs, see Publication
536.
The bankruptcy estate may use its tax attributes the same way that the debtor would have used them. These items are determined as of the first day of the debtor's tax year in which the bankruptcy case begins. The bankruptcy estate assumes the following tax attributes from the
debtor:
- NOL carryovers,
- Carryovers of excess charitable contributions,
- Recovery of tax benefit items,
- Credit carryovers,
- Capital loss carryovers,
- Basis, holding period, and character of assets,
- Method of accounting,
- Passive activity loss and credit carryovers,
- Unused at-risk deductions, and
- Other tax attributes provided in the regulations.
Certain tax attributes of the bankruptcy estate must be reduced by the amount of income that was previously excluded as a result of cancellation of debt during the bankruptcy proceeding. See
Debt Cancellation, later.
When the bankruptcy estate is terminated (for example, when the case ends), the debtor assumes any remaining tax attributes previously taken over by the bankruptcy estate. The debtor also generally assumes any of the tax attributes, listed above, that arose during the administration of the bankruptcy
estate.
Note.The debtor does not assume the bankruptcy estate's administrative expense losses because they cannot be used by an individual taxpayer filing Form 1040. See
Administrative expense loss, above.
taxmap/pubs/p908-002.htm#en_us_publink1000273969For bankruptcy cases beginning after November 8, 1992, passive activity carryover losses and credits and unused at-risk deductions are treated as tax attributes passing from the debtor to the bankruptcy estate, which the estate then passes back to the debtor when the bankruptcy estate terminates. Additionally, transfers to the debtor (other than by sale or exchange) of interests in passive or at-risk activities are treated as non-taxable exchanges. These transfers include the return of exempt property and abandonment of estate property to the debtor.
taxmap/pubs/p908-002.htm#en_us_publink1000273970The debtor cannot carry back any NOL or credit carryback from a tax year ending after the bankruptcy case has begun to any tax year ending before the case
began.
taxmap/pubs/p908-002.htm#en_us_publink1000273971If the bankruptcy estate has an NOL that did not pass to the estate from the debtor under the attribute carryover rules, the estate can carry the loss back not only to its own earlier tax years but also to the debtor's tax years before the year the bankruptcy case began. The estate may also carry back excess credits, such as the general business credit, to the pre-bankruptcy tax years.
taxmap/pubs/p908-002.htm#en_us_publink1000274026taxmap/pubs/p908-002.htm#en_us_publink1000274028
In chapter 11 cases, when an employer issues a Form W-2 reporting all of the
debtor's wages, salary, or other compensation for a calendar year, and a portion
of the earnings represent post-petition services includible in the estate's
gross income, the Form W-2 amounts
must
be allocated between the estate and the debtor. The debtor-in-possession or
trustee must allocate the income amount reported in box 1 and the income tax
withheld reported in box 2 between the debtor and the estate. These allocations
must reflect that the debtor's gross earnings from post-petition services and
gross income from post-petition property are, generally, includible in the
estate's gross income and not the debtor's gross income. The debtor and trustee
may use a simple percentage method to allocate income and income tax withheld.
The same method must be used to allocate the income and the withheld tax.
taxmap/pubs/p908-002.htm#en_us_publink1000274029If 20% of the wages reported on Form W-2 for a calendar year were earned after the commencement of the case and are included in the estate's gross income, 20% of the withheld income tax reported on Form W-2 must also be claimed as a credit on the estate's income tax return. Likewise, 80% of wages must be reported by the debtor and 80% of the income tax withheld must be claimed as a credit on the debtor's income tax return. See IRC section
31(a).
If information returns are issued to the debtor for gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate, the debtor-in-possession or trustee must allocate the improperly reported income in a reasonable manner between the debtor and the estate. In general, the allocation must ensure that any income and income tax withheld attributable to the post-petition period is reported on the estate's return, and any income and income tax withheld attributable to the pre-petition period is reported on the debtor's
return.
IRS Notice 2006-83 requires the debtor to attach a statement to his or her
individual income tax return (Form 1040) stating that the return is filed
subject to a chapter 11 bankruptcy case. The statement must also:
- Show the allocations of income and income tax withheld,
- Describe the method used to allocate income and income tax withheld,
and
- List the filing date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, and the bankruptcy estate's
EIN.
Note.
The debtor-in-possession or trustee must attach a similar statement to the bankruptcy estate's income tax return (Form
1041).
The model Notice 2006-83 Statement, shown above, may be used by debtors, debtors-in-possession, and trustees to satisfy the reporting
requirement.
taxmap/pubs/p908-002.htm#en_us_publink1000274032IRC section 1401 imposes a tax upon the self-employment income, that is, the net earnings from self-employment of an individual. Net earnings from self-employment are equal to the gross income derived by an individual from any trade or business carried on by such individual, less deductions attributable to the
business.
Neither section 1115 of the Bankruptcy Code nor IRC section 1398 addresses the application of self-employment tax to the post-petition earnings of the individual debtor. Therefore, if the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report the debtor's self-employment income on Schedule SE (Form 1040) of the debtor's income tax return. This schedule includes self-employment income earned post-petition and the attributable deductions. The debtor must pay any self-employment tax imposed by IRC section
1401.
taxmap/pubs/p908-002.htm#en_us_publink1000274183In chapter 11 cases, post-petition wages earned by a debtor are generally treated as gross income of the estate. However, section 1115 of the Bankruptcy Code (11 U.S.C. section 1115) does not affect the determination of what are deemed wages for Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, or Federal Income Tax Withholding purposes. See Notice 2006-83.
The reporting and withholding obligations of a debtor's employer also do not change. An employer should continue to report the wages and tax withholding on a Form W-2 issued under the debtor's name and social security
number.
taxmap/pubs/p908-002.htm#en_us_publink1000274033Within a reasonable time after the commencement of a chapter 11 bankruptcy case, the trustee or debtor-in-possession should provide notification of the bankruptcy estate's EIN to all persons (or entities) that are required to file information returns for the bankruptcy estate's gross income, gross proceeds, or other types of reportable payments. See IRC section 6109(a)(2). As these payments are the property of the estate under section 1115 of the Bankruptcy Code, the payors should report the gross income, gross proceeds, or other reportable payments on the appropriate information return using the estate's name and EIN as required under the IRC and regulations (see IRC sections 6041 through
6049).
The trustee or debtor-in-possession should not, however, provide the EIN to a person (or entity) filing Form W-2 reporting the debtor's wages or other compensation, as section 1115 of the Bankruptcy Code does not affect the determination of what constitutes wages for purposes of federal income tax withholding or FICA. See Notice 2006-83. An employer should continue to report all wage income and tax withholding, both pre-petition and post-petition, on a Form W-2 to the debtor under the debtor's social security
number.
The debtor in a chapter 11 case is not required to file a new Form W-4 with an employer solely because the debtor filed a chapter 11 case and the post-petition wages are includible in the estate's income and not the debtor's income. However, a new Form W-4 may be necessary if the debtor is no longer entitled to claim the same number of allowances previously claimed because certain deductions or credits now belong to the estate. See Employment Tax Regulations section 31.3402(f)(2)-1. Additionally, the debtor may wish to file a new Form W-4 to increase the income tax withheld from post-petition wages allocated to the estate to avoid having to make estimated tax payments for the estate. See IRC section 6654(a).
taxmap/pubs/p908-002.htm#en_us_publink1000274034When a chapter 11 bankruptcy case is closed, dismissed, or converted to a chapter 12 or 13 case, the bankruptcy estate ends as a separate taxable entity. The debtor should, within a reasonable time, send notice of such event to the persons (or entities) previously notified of the bankruptcy case. This helps to ensure that gross income, proceeds, and other reportable payments realized after the event are reported to the debtor under the correct TIN rather than to the
estate.
When a chapter 11 case is converted to a chapter 7 case, the bankruptcy estate will continue to exist as a separate taxable entity. Gross income (other than post-conversion income from the debtor's services), gross proceeds, or other reportable payments should continue to be reported to the estate if they are property of the chapter 7 estate. However, income from services performed by the debtor after conversion of the case to chapter 7 is not property of the chapter 7 estate. After the conversion, the debtor should notify payors required to report the debtor's nonemployee compensation that compensation earned after the conversion should be reported using the debtor's name and TIN, not the estate's name and
EIN.
taxmap/pubs/p908-002.htm#en_us_publink1000277198The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. See Publication
15, Circular E, Employer's Tax Guide, for details on employer tax
responsibilities.
The trustee also has the duty to prepare and file Forms W-2 for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. For a further discussion of employment taxes, see
Employment Taxes, later.
taxmap/pubs/p908-002.htm#en_us_publink1000276086
| Notice 2006-83 Statement | | Pending Bankruptcy Case | | The taxpayer,
, filed a bankruptcy petition under chapter 11 of the Bankruptcy Code in the bankruptcy court for the District
of . The bankruptcy court case number is
. Gross income, and withheld federal income tax, reported on Form W-2, Forms 1099, Schedule K-1, and other information returns received under the taxpayer's name and social security number (or other taxpayer identification number) are allocated between the taxpayer's TIN and the bankruptcy estate's EIN as follows, using [describe allocation
method]: .
| | |
Year
| Taxpayer | | Estate | | 1. | Form W-2, Payor:
| $ | | $ | | | | Withheld income tax shown on Form W-2 | $ | | $ | | | 2. | Form 1099-INT Payor:
| $ | | $ | | | | Withheld income tax (if any) shown on Form 1099-INT | $ | | $ | | | 3. | Form 1099-DIV Payor:
| $ | | $ | | | | Withheld income tax (if any) shown on Form 1099-DIV | $ | | $ | | | 4. | Form 1099-MISC Payor: | $ | | $ | | | | Withheld income tax (if any) shown on Form 1099-MISC | $ | | $ | |
|
taxmap/pubs/p908-002.htm#en_us_publink1000273267taxmap/pubs/p908-002.htm#en_us_publink1000275157taxmap/pubs/p908-002.htm#en_us_publink1000275368If the bankruptcy estate has gross income that meets or exceeds the minimum amount required for filing, the trustee or debtor-in-possession must file an income tax return on Form 1041. This amount is equal to the sum of the personal exemption amount plus the basic standard deduction for a
married individual filing separately.
For 2012, the threshold filing amount for a bankruptcy estate is $9,750 (the sum of the $3,800 personal exemption plus the $5,950 standard deduction for married individuals filing separately).
These amounts are generally adjusted annually. See the present year Form 1041 Instructions at
www.irs.gov/form1041 for the current dollar amounts.
A bankruptcy estate may have a fiscal year. However, this period cannot be longer than 12
months.
taxmap/pubs/p908-002.htm#en_us_publink1000275774The bankruptcy estate may change its accounting period (tax year) once without IRS approval. This rule allows the bankruptcy trustee to close the estate's tax year early, before the expected termination of the bankruptcy estate. The trustee can then file a return for the first short tax year to get a quick determination of the estate's tax liability.
taxmap/pubs/p908-002.htm#en_us_publink1000277200The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax
returns.
| The social security number of the individual debtor cannot be used as the EIN for the bankruptcy
estate. |
Obtain an EIN for a bankruptcy estate by applying:
- Online by clicking on the EIN link at
www.irs.gov/businesses/small. The EIN is issued immediately once the application information is
validated.
- By telephone at 1-800-829-4933 from 7:00 a.m. to 7:00 p.m. in the trustee's or debtor-in-possession's local time zone. Assistance provided to callers from Alaska and Hawaii will be based on the hours of operation in the Pacific time zone, or
- By mailing or faxing Form SS-4, Application for Employer Identification
Number.
If the trustee or debtor-in-possession has not received the bankruptcy estate's EIN by the time the return is due, write "Applied for" and the date you applied in the space for the EIN. For more details, see Pub.
583, Starting a Business and Keeping Records.
Trustees representing ten or more bankruptcy estates (other than estates that will be filing employment or excise tax returns) may request a series or block of
EINs.
taxmap/pubs/p908-002.htm#en_us_publink1000275374The bankruptcy estate figures its taxable income the same way an individual figures taxable income. However, the estate uses the tax rates for a
married individual filing separately
to calculate the tax on its taxable income. The estate is entitled to one
personal exemption and may either itemize deductions or take the basic standard
deduction for a married individual filing a separate return. The estate cannot
take the higher standard deduction allowed for married persons filing separately
who are 65 or older or blind.
| Tax rate schedule.The tax on income for bankruptcy estates is calculated using the tax rate schedule for Married Individuals Filing Separately
not the Estates and Trusts tax rate schedule. |
taxmap/pubs/p908-002.htm#en_us_publink1000275772Calendar year bankruptcy estates must file Form 1041 by April 15th. Fiscal year bankruptcy estates must file on or before the 15th day of the 4th month following the close of its tax year. For example, an estate that has a tax year that ends on June 30th must file Form 1041 by October 15th of the tax year. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business
day.
Note.The bankruptcy estate is allowed an automatic 6-month extension of time to file the bankruptcy estate tax return upon filing the required application, Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other
Returns.
taxmap/pubs/p908-002.htm#en_us_publink1000275376Form 1041 is used as a
transmittal
for Form 1040. If a return is required, the trustee or debtor-in-possession must
complete the identification area at the top of Form 1041 and indicate the
chapter under which the bankruptcy estate filed, either chapter 7 or chapter 11.
Prepare the bankruptcy estate's return by completing Form 1040. In the top margin of Form 1040, write "Attachment to Form 1041
—DO NOT DETACH." Then, attach Form 1040 to the Form 1041 transmittal. Enter the tax and payment amounts on lines 23 through 29 of Form 1041, then sign and date the return. An example of a bankruptcy estate's tax return is prepared below.
Note.The filing of the bankruptcy estate's tax return does not relieve a debtor from the requirement to file his or her individual tax return on Form
1040.
taxmap/pubs/p908-002.htm#en_us_publink1000275366taxmap/pubs/p908-002.htm#en_us_publink1000275363Payment of tax due may be made by check or money order or by credit or debit card. For information on how to make payments electronically by credit or debit card, go to
irs.gov/e-pay.
Payments may also be made electronically using the Electronic Federal Tax
Payment System (EFTPS), a free tax payment system that allows you to make
payments online or by phone. To enroll in EFTPS, go to
eftps.gov or call 1-800-555-4477. For more information see Publication
966, Electronic Federal Tax Payment System: A Guide to Getting
Started.
Form 1041-V accompanies payments made by check or money order for Form 1041. The voucher includes information about the bankruptcy estate, including the name of the bankruptcy estate, trustee, EIN, and amount due. Using Form 1041-V assists the IRS in processing the payment more accurately and efficiently. We recommend the use of Form 1041-V; however, there is no penalty if the voucher is not
used.
taxmap/pubs/p908-002.htm#en_us_publink1000275365In most cases, the trustee or debtor-in-possession
must
pay any required estimated tax due for the bankruptcy estate. See the Form
1041-ES Instructions for information on the minimum threshold amount required
for filing Form 1041-ES, paying the estimated tax, and exceptions to filing.
taxmap/pubs/p908-002.htm#en_us_publink1000275155The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. Until these employment taxes are deposited as required by the IRC, they should be set aside in a separate bank account to ensure that funds are available to satisfy the liability. If the employment taxes are not paid as required, the trustee may be held personally liable for payment of the taxes.
See Publication
15, (Circular E), Employer's Tax Guide, for details on employer tax responsibilities. Also see IRS Notice 931, Deposit Requirements for Employment Taxes, for details on the deposit rules, including the requirement that federal employment tax deposits be made by electronic funds
transfer.
The trustee also has a duty to prepare and file Forms W-2, Wage and Tax Statement, for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. If the debtor fails to prepare and file Forms W-2 for wages paid before bankruptcy, the trustee should instruct the employees to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with their individual income tax
returns.
taxmap/pubs/p908-002.htm#en_us_publink1000137340 | This publication is not revised annually. Future changes to the forms and their instructions may not be reflected in this
example. |
Note.The following return was prepared for tax year 2011. In 2011, the threshold filing amount for a bankruptcy estate was $9,500 (the sum of the $3,700 personal exemption plus the $5,800 standard deduction for married individuals filing separately).
taxmap/pubs/p908-002.htm#en_us_publink1000288377On December 15, 2010, Thomas Smith filed a bankruptcy petition under chapter 7. Joan Black was appointed trustee to administer the bankruptcy estate and to distribute the
assets.
The estate received the following assets from Mr. Smith:
- A $100,000 certificate of deposit,
- Commercial rental real estate with a fair market value (FMV) of $280,000,
and
- His personal residence with an FMV of $200,000.
Also, the estate received a $251,500 capital loss carryover.
Mr. Smith's bankruptcy case was closed on December 31, 2011. During 2011, Mr. Smith was relieved of $70,000 of debt by the bankruptcy court. The estate chose a calendar year as its tax year. Joan, the trustee, reviews the estate's transactions and reports the taxable events on the estate's final
return.
taxmap/pubs/p908-002.htm#en_us_publink1000137342
The certificate of deposit earned $5,500 of interest during 2011. Joan reports
this interest on Schedule B. She completes this schedule and enters the result
on Form 1040.
taxmap/pubs/p908-002.htm#en_us_publink1000137343Joan enters the depreciation allowed on Form 4562. She completes the form and enters the result on Schedule E.
taxmap/pubs/p908-002.htm#en_us_publink1000137344The commercial real estate was rented through the date of sale. Joan reports the income and expenses on Schedule E. She enters the net income on Form
1040.
taxmap/pubs/p908-002.htm#en_us_publink1000137345The commercial real estate was sold on July 1, 2011, for $280,000. The property was purchased in 2001 at a cost of $250,000. The total depreciation allowable as of the date of sale was $120,000. Additionally, $25,000 of selling expenses were incurred. Joan reports the gain or loss from the sale on Form 4797. She completes the form and enters the gain on Schedule D (Form
1040).
Mr. Smith's former residence was sold on September 30, 2011. The sale price was $200,000, the selling expenses were $20,000, and his adjusted basis was $130,000. This sale is excluded from gross income under IRC section
121.
Note.Gains from the sale of personal residences are excluded from gross income up to $250,000 under IRC section 121 ($500,000 for married couples filing a joint return). Bankruptcy estates succeed to this exclusion at the commencement of the case. See Regulation section
1.1398-3.
taxmap/pubs/p908-002.htm#en_us_publink1000137346Joan completes Schedule D, taking into account the $250,000 capital loss carryover from 2010 ($251,500 transferred to the estate minus $1,500 used on the estate's 2010 return). She enters the results on Form
1040.
taxmap/pubs/p908-002.htm#en_us_publink1000137347Joan completes page 1 of the Form 1040 and enters the adjusted gross income on the first line of Form 1040, page
2.
taxmap/pubs/p908-002.htm#en_us_publink1000137348During 2011, the estate paid mortgage interest and real property tax on Mr. Smith's former residence. It also paid income tax to the state. Joan enters the mortgage interest, real estate tax, and income tax on Schedule A. Also, she reports the bankruptcy estate's administrative expenses as a miscellaneous deduction
not
subject to the 2% floor on miscellaneous itemized deductions. She completes the
Schedule A and enters the result on page 2 of Form 1040.
taxmap/pubs/p908-002.htm#en_us_publink1000137349Joan determines the estate's taxable income and figures its tax using the tax rate schedule for married filing separately. She then enters the estate's estimated tax payments and figures the amount the estate still owes.
taxmap/pubs/p908-002.htm#en_us_publink1000137350Joan completes the
Schedule D Tax Worksheet
to figure the capital loss carryover. Because $70,000 of debt was canceled, Joan
must reduce the tax attributes of the estate by the amount of the canceled debt.
See
Debt Cancellation,
later. After the bankruptcy case ends, Mr. Smith will assume the estate's tax attributes. Mr. Smith will assume a capital loss carryover of $53,500 ($123,500 carryover minus the $70,000 attribute reduction) for use in preparation of his individual tax return (Form
1040).
Note.If the bankruptcy estate had continued, the capital loss carryover would be available to the bankruptcy estate for the 2012 tax
year.
taxmap/pubs/p908-002.htm#en_us_publink1000137351Joan enters the total tax, estimated tax payments, and tax due from Form 1040 on Form 1041. She completes the identification area at the top of Form 1041, then signs and dates the return as the trustee on behalf of the bankruptcy
estate.
taxmap/pubs/p908-002.htm#en_us_publink1000137352
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taxmap/pubs/p908-002.htm#en_us_publink1000290173
taxmap/pubs/p908-002.htm#id2012_id2012_w24331i01 | Capital Loss Carryover Worksheet—Lines 6 and 14 Use this worksheet to figure your capital loss carryovers from 2010 to 2011 if your 2010 Schedule D, line 21, is a loss and
(a)
that loss is a smaller loss than the loss on your 2010 Schedule D, line 16,
or
(b)
the amount on your 2010 Form 1040, line 41 (or your 2010 Form 1040NR, line 38,
if applicable) is less than zero. Otherwise, you do not have any carryovers.
| 1. | Enter the amount from your 2010 Form 1040, line 41, or Form 1040NR, line 38. If a loss, enclose the amount in
parentheses | 1. | 19,880
| | | 2. | Enter the loss from your 2010 Schedule D, line 21, as a positive
amount | 2. | 1,500 | | | 3. | Combine lines 1 and 2. If zero or less, enter -0- | 3. | 21,380 | | | 4. | Enter the
smaller of line 2 or line 3
| 4. | 1,500 | | | | If line 7 of your 2010 Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line
9. | | | | | 5. | Enter the loss from your 2010 Schedule D, line 7, as a positive
amount | 5. | 0 | | | 6. | Enter any gain from your 2010 Schedule D, line 15. If a loss, enter
-0- | 6. | | | | | | 7. | Add lines 4 and 6 | 7. | 1,500 | | | 8. | Short-term capital loss carryover for 2011.
Subtract line 7 from line 5. If zero or less, enter -0-. If more than zero, also
enter this amount on Schedule D, line 6
| 8. | 0 | | | | If line 15 of your 2010 Schedule D is a loss, go to line 9; otherwise, skip lines 9 through
13. | | | | | 9. | Enter the loss from your 2010 Schedule D, line 15, as a positive
amount | 9. | 251,500 | | | 10. | Enter any gain from your 2010 Schedule D, line 7. If a loss, enter
-0- | 10. | 0 | | | | | 11. | Subtract line 5 from line 4. If zero or less, enter -0- | 11. | 1,500 | | | | | 12. | Add lines 10 and 11 | 12. | 1,500 | | | 13. | Long-term capital loss carryover for 2011.
Subtract line 12 from line 9. If zero or less, enter -0-. If more than zero,
also enter this amount on Schedule D, line 14
| 13. | 250,000 | | | | | | | | | |
|
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