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Part 5. Collecting Process

Chapter 9. Bankruptcy and Other Insolvencies

Section 6. Processing Chapter 7 Bankruptcy Cases

5.9.6  Processing Chapter 7 Bankruptcy Cases

5.9.6.1  (05-20-2008)
Introduction

  1. Chapter 7 Liquidation. Liquidation under Chapter 7 of the Bankruptcy Code has traditionally been the most common form of relief sought by debtors. Chapter 7 is used primarily by individuals to free themselves of debt simply and inexpensively. Businesses wanting to liquidate and terminate their enterprises also file Chapter 7.

    1. Chapter 7 provides relief to debtors regardless of the amount of the debts owed or whether a debtor is solvent or insolvent.

    2. Debtors' assets are converted into cash for distribution among creditors. Individual debtors receive a discharge of all prepetition debts other than certain debts which are non-dischargeable under the Bankruptcy Code. (An individual's right to a discharge through the filing of a Chapter 7 petition is not absolute.)

    3. While corporations and partnerships do not receive a discharge under Chapter 7, few, if any, assets remain from which to collect tax liabilities not paid by the bankruptcy estate.

    4. A bankruptcy discharge does not extinguish a tax lien on property.

  2. Parties. A Chapter 7 bankruptcy involves three major parties: the debtor, the trustee, and the creditors.

  3. Voluntary/Involuntary. A case under Chapter 7 begins either by the filing of a voluntary petition by the debtor or by the filing of an involuntary petition by the creditors. (See Exhibit 5.9.1-1, Glossary – Bankruptcy Terms.)

5.9.6.1.1  (04-01-2006)
Notice and Filings

  1. Notice to IRS. Notice of a Chapter 7 bankruptcy filing must be given to the Service when the IRS is listed as a creditor in the debtor's schedules (Bankruptcy Rule 2002(f)).

  2. Documents Filed. Bankruptcy Rule 1007 requires the Chapter 7 debtor to file supporting documents within a fixed time after filing the petition. Such filings include a mailing matrix, schedules, and a statement of financial affairs.

5.9.6.1.2  (04-01-2006)
The Trustee

  1. Trustee's Role. In general, a Chapter 7 liquidation is administered by a trustee who collects all of the debtor's assets, reduces the assets to cash, and distributes the funds to creditors in the priority set forth in 11 USC § 726. The Chapter 7 trustee is a private party who manages the bankruptcy estate on behalf of creditors. The trustee is accountable to the court for all actions taken on the case.

  2. Trustee's Selection. The trustee is appointed by the United States Trustee’s Office, an office of the United States Department of Justice. A Chapter 7 trustee can also be elected by creditors.

  3. Trustee Responsibilities. The responsibility of collecting assets of the estate, which may include converting property to cash, avoiding unperfected liens, and setting aside preferential, fraudulent, and/or unauthorized transfers falls to the trustee. If the business of the debtor is authorized to continue operating under 11 USC § 721, the trustee may, without notice or hearing, sell or lease property of the estate in the ordinary course of business. The trustee:

    1. examines claims of creditors and objects to those claims when appropriate;

    2. is charged with investigating the finances of the debtor;

    3. files tax returns for the estate when required and pays taxes if due;

    4. may object to a debtor's receiving a discharge if the debtor is uncooperative, found hiding assets, or is otherwise interfering with the effective administration of the case; and

    5. must file a final report with the court and the United States Trustee at the conclusion of the case (any creditor, including the IRS, may object to this report).

  4. Trustee Responsibilities under BAPCPA. In addition to the duties listed in paragraph (3) above, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has given trustees the following duties for Chapter 7 cases filed on or after October 17, 2005.

    1. Presumption of Abuse. The US trustee is obligated, in the case of an individual who files Chapter 7 bankruptcy, to review all materials the debtor has filed and, not later than 10 days after the first meeting of creditors, file a statement with the court stating if a debtor's case is presumed to be an abuse of Chapter 7 under the means test described in paragraph (b) below. The court must supply a copy of that statement to all creditors within five days. Within 30 days of the US trustee's filing a statement that the presumption of abuse arises, (s)he must file a motion for conversion or dismissal or file a statement explaining why (s)he does not think filing such a motion is appropriate.

      Note:

      The debtor's attorney's signature on bankruptcy cases filed on or after October 17, 2005, constitutes certification the filing is well founded in fact, is warranted by existing law, and is not an abuse of the bankruptcy process. The court may assess civil penalties against the attorney if it finds the attorney was negligent in his investigation into the circumstances of the bankruptcy. (See Rule 9011, Federal Rules of Bankruptcy Procedure.)

    2. Means Testing. The US trustee (or bankruptcy administrator, if any) must apply a means test to individuals who file Chapter 7 bankruptcies and owe primarily consumer debt to determine whether their cases are presumed to be an abuse of the Chapter 7 process. The standards for this means test are based in part on the IRS national and local expense standards used in resolving delinquent tax accounts. If the debtor fails to meet the means test, the court, the US trustee, or in certain cases any party in interest can move for dismissal or conversion. This IRM will not go into detail on the mechanics of the process. 11 USC § 707(b)(2) provides a comprehensive explanation of means testing.

5.9.6.1.3  (05-20-2008)
Chapter 7 Tax Refunds to Trustees

  1. Property of the Estate. A Chapter 7 debtor's right to a refund (where the refund statute has not expired) is considered property of the bankruptcy estate to the extent the refund is attributable to prepetition events. As such they are subject to turnover to the Chapter 7 trustee even though the debtor may be in full tax compliance.

    Example:

    If a debtor files a Chapter 7 petition on October 12, the amount of his refund attributable to January 1 through October 11 is property of the bankruptcy estate.

  2. Turnover Procedures. The IRS and the Executive Office of the US Trustees (EOUST) have agreed to the following conditions for the Service's turning over taxpayers' income tax refunds which are considered wholly or partially property of the Chapter 7 bankruptcy estate.

    1. The trustee must request the turnover of refunds in writing for specific taxpayers. The trustee may use a form prepared by the IRS or may request the turnover on official letterhead.

    2. The US Trustee's office will encourage trustees not to submit long rosters of their debtor inventories and to refrain from requesting small dollar refunds; however, the Service will not refuse to accept rosters or small dollar requests.

    3. Insolvency will honor trustees' requests for turnover for 180 days from receiving the turnover request or for 180 days after the due date of a return (including extensions), whichever is later. If no return is received within these 180 day periods, the turnover request will not be honored.

      Example:

      If a trustee submits a turnover request on February 12, 2006, for a 2005 tax year refund, Insolvency will turnover any refund available up to and through April 13, 2007, assuming the debtor has an approved extension to file his 2005 return no later than October 15, 2006.

      Example:

      If a trustee submits a turnover request on February 12, 2006, for a 2004 tax year refund, Insolvency will turnover any refund available up to and through August 11, 2006 (180 days after the request is made).

    4. Insolvency will not compute prepetition and postpetition refund allocations, nor amounts due the debtor as opposed to a non-debtor spouse in the case of a jointly filed return. Those calculations will be completed by the trustee. The trustee is responsible for refunding monies for postpetition allocations and to non-debtor spouses if applicable.

    5. As soon as the turnover notice is received, Insolvency will input the appropriate bankruptcy freeze code and closing code on related accounts to hold the refund. If no account is found on IDRS, the Insolvency caseworker will create a dummy module with the appropriate freeze (TC 520 cc81) to hold credits.

      Note:

      When no accounts are on IDRS and the bankruptcy is a joint filing, dummy accounts must be established for both husband and wife in the event the spouses file separately for the refund period.

      IRM 5.9.15.5 provides instructions for establishing dummy modules.

    6. Trustee requests for refund turnover received after the refund has been remitted to the debtor or before a pending refund can be intercepted will not be honored.

    Note:

    The turnover agreement procedures do not limit either the Service's right of setoff or domestic support agencies' rights of setoff.

  3. Turnover Processing Steps. Exhibit 5.9.6-2 provides specific guidance for processing Chapter 7 trustee turnovers.

  4. Refund Turnover Requests for Discharged Cases. If a taxpayer files a return for a prepetition period after a discharge has been granted and a refund credit is generated, the automatic stay is no longer in effect. That credit may be offset against any existing federal tax debt owed by the taxpayer. If a trustee has requested a turnover of that refund credit, Insolvency should first offset the credit against the current tax liabilities, and any remaining credit should be manually refunded to the trustee.

    Note:

    FMS will offset any appropriate amounts from the refund turnover through the Treasury Offset Program before the manual refund goes to the trustee. No bypass indicator (BPI) code should be used on Form 5792. (See IRM 5.9.4.4.3,Offsets to Other Agencies.)

  5. Reopening a Closed Case. A MyEureka report must be run weekly to identify discharged cases that have been closed on AIS for which a trustee turnover request continues to be in effect. The report will select closed cases with a T or a + in the case class field.

    Note:

    When ADS systemically inputs TC 971 ac100 on an account to begin MFT 31 mirroring, a + automatically generates in the case class field overriding any other code (e.g., T or Y) that might be present.


    The caseworker must take the following actions for cases listed on the MyEureka report:

    1. Access the case on AIS and remove the "closed on AIS" date.

    2. Change the + to a T for cases that are being mirrored.

    3. Ensure IDRS has an open TC 520 cc81 on all related SSNs to freeze future refunds.

    4. If necessary, update the 180 day follow-up date on the AIS letter screen to reflect an accurate turnover hold period.

    Reminder:

    A trustee's request for turnover of a prepetition refund does not preclude the requirement that closing actions be initiated within 30 days of receipt of notice of discharge or dismissal or change the timeframe for release of liens in IRM 5.9.17.18.

  6. Actions on Discharged Cases after the Turnover. Caseworkers must take the following actions on cases where discharge actions have been completed, and the trustee turnover request for all periods has been addressed.

    1. Remove the T from the case class field.

    2. Reverse the TC 520 freeze codes manually on all related SSNs. TC 522 must be input on non-debtor spouse accounts.

    3. Document the AIS history: "Removed T from case class field since refund was issued."

    4. Re-input a closed on AIS date using the current date.

5.9.6.2  (05-20-2008)
Eligible Entities

  1. Petitioners. Any person, with the exception of governmental units, railroads, insurance companies, banks and other financial institutions, can file a Chapter 7 petition. Eligible entities include the following:

    • Individuals

    • Corporations

    • Partnerships

    Reminder:

    Only individuals may receive a discharge.

5.9.6.3  (04-01-2006)
Referrals to Insolvency

  1. Referrals to Insolvency. Non-Insolvency IRS employees must send a referral on Chapter 7 cases to the Centralized Insolvency Operation (CIO) as soon as they learn a bankruptcy has been filed (same day notification, if possible). CIO phone numbers for internal referrals can be found on SERP. The referral to Insolvency may be phoned or faxed to a CIO liaison. Or a written inquiry referral can be sent by overnight courier to the CIO at 11601 Roosevelt Blvd, Mail Drop Point N781, Philadelphia, PA 19154. The outside of the envelope containing written referrals must be marked "expedite."

5.9.6.4  (05-20-2008)
Field Insolvency Groups

  1. Assignments. Up-front clerical work on all Chapter 7 cases is performed by CIO clerks. Field Insolvency groups work all Chapter 7 Asset cases by perfecting automated proofs of claim if necessary, preparing manual proofs of claim on cases that cannot be processed through APOC, and taking closing actions except for dismissals and MFT 31 transfers. If a Field caseworker wants a closure delayed on a Chapter 7 No Asset case, (s)he must open an OI screen on AIS. (See IRM 5.9.5.12,Preventing Inadvertent Closure.)

  2. Complex Issues. Cases identified to have complex issues and assigned to the CIO should be transferred to Field Insolvency to resolve the issues. (See IRM 5.9.1.3(3), Complex Issues.) Once the complex issues have been addressed and resolved, generally the cases should be transferred back to the appropriate CIO unit.

5.9.6.5  (05-20-2008)
Centralized Insolvency Operations

  1. Assignments. The CIO loads all Chapter 7 cases, runs IIP and works the subsequent reports, posts payments received outside of bankruptcy when those payments are received at the CIO address, and closes Chapter 7 No Asset cases, except those assigned to Field Insolvency for excluded, exempt, or abandoned property review. Complex issues as defined in IRM 5.9.1.3(3) may be transferred to Field Insolvency for resolution.

5.9.6.6  (05-20-2008)
Automatic Stay

  1. The Automatic Stay. IRM 5.9.3.5 provides an overall explanation of the issues involved in the imposition of the automatic stay, and IRM 5.9.5.7,Serial Filers,provides a discussion of the BAPCPA provisions affecting the operation of the automatic stay when an individual has filed one or more bankruptcies, which have been dismissed, prior to filing the current bankruptcy. Unless the stay terminates 30 days after the bankruptcy petition was filed or does not go into effect at all because of a debtor's serial bankruptcy filings, the stay arises at the time the petition is filed and remains until the case is closed by the court or dismissed. In the case of an individual who has filed a bankruptcy petition, the stay remains until the time a dismissal is ordered or a discharge is granted or denied. The stay against property of a Chapter 7 estate continues until such property is no longer property of the estate (i.e., the property is being administered by the trustee). (See IRM 5.9.2.9, The Effect of Bankruptcy on Collection.)

  2. Limited Bankruptcy Timeframes. In the majority of Chapter 7 individual cases, the court grants a discharge shortly after the meeting of creditors has been held and the period of time has expired for creditors to file complaints objecting to the debtor’s discharge. The period of time from petition to discharge is usually 90 to 120 days. Thus, the stay period, if allowed, and the period of the statute suspension for collection (plus six months) on any non-discharged tax in Chapter 7 cases are generally short.

  3. Preventing Stay Violations. An account in a bankruptcy commenced before October 17, 2005, or an account in a bankruptcy commenced on or after October 17, 2005, and for which no order is issued to limit or eliminate the automatic stay must remain under freeze codes (TC 520s). The Service must exercise due diligence to conform with the provisions of the Bankruptcy Code to avoid violating the automatic stay. IRM 5.9.5.7,Serial Filers, details actions to take when the court orders variations to the automatic stay.

5.9.6.6.1  (03-01-2007)
Debtor Payments on Dischargeable Taxes

  1. Payments Received for Dischargeable Tax. When a payment is received from a debtor after a bankruptcy petition is filed, and the debtor directs it be applied toward a dischargeable tax liability, the payment generally cannot be retained by the Service. In most circumstances that will mean returning the uncashed check to the debtor. If a payment by check is received prior to the bankruptcy petition's being filed, the check may be cashed after a bankruptcy petition date without violating the automatic stay.

    Note:

    A debtor may voluntarily pay a discharged tax. (See 11 USC § 524(f).) Therefore, if a debtor knowingly and voluntarily pays a discharged tax after the discharge is granted, the Service may retain it.

  2. Payments Applied to Dischargeable Tax. If a voluntary postpetition payment has posted to a dischargeable tax period and no non-dischargeable periods exist, the payment generally must be refunded. But see 11 USC § 524(f). The Service must initiate the refund process within two business days of identification of receipt of the payment. To refund a payment Insolvency must complete and expedite a Form 5792, using established manual refund procedures. (See IRM 5.9.16.4, Manual Refunds.)

    Note:

    Unless evidence exists the debtor knows (s)he is not obligated to pay the discharged liability (such as a letter from the debtor stating as much), Insolvency will assume the payment has been made in error, and a refund will be issued. If an Insolvency caseworker is unsure if the refund should be sent to the trustee or to the debtor, guidance from Counsel should be sought.

  3. Payments to Non-dischargeable Periods. If a voluntary postpetition payment has posted to a dischargeable tax period and a non-dischargeable period exists, the payment should be transferred from the dischargeable module to the non-dischargeable period.

    Note:

    Debtors, aware of penalties and interest that will accrue on non-dischargeable taxes, may make periodic payments outside of a bankruptcy on those periods to lessen their tax burden after the close of bankruptcy.

5.9.6.6.2  (05-20-2008)
Voluntary Payments on Non-Dischargeable Taxes

  1. Prior Installment Agreements. IRM 5.9.4.17,Installment Agreements and Bankruptcy,and IRM 5.9.4.4.2,Postpetition Payments and Credits, explain how to address voluntary payments received during the pendency of a Chapter 7 bankruptcy.

5.9.6.7  (05-20-2008)
Opening a Chapter 7 Case

  1. Asset/No Asset. Upon receipt of a Chapter 7 case by Centralized Insolvency, each case is categorized as either an "asset" or a "no asset" case. Some bankruptcy courts simplify the asset/no asset determination considering all Chapter 7 petitions as "no asset" until the court issues a notice of possible dividend and sets a bar date. Other courts issue separate notices identifying the cases as either "asset" or "no asset."

    Note:

    The CIO must load all new cases on AIS and run IIP processes C and D within five workdays of receipt. (See IRM 5.9.12.5,Insolvency Interface Program.)

  2. No Asset Case. The IRS and other creditors do not receive payments (or dividends) from the bankruptcy estate in a no asset case. For IRS purposes a no asset case is defined as any case:

    • where the trustee determines "no dividend" will be paid

    • in which assets of the debtor are less than allowed exemptions and costs of administration

    • involving a partnership or corporation where the costs of administration exceed the value of the assets

    Note:

    Since tax liabilities on unfiled returns are not dischargeable in Chapter 7 No Asset cases and no proof of claim is filed, the Service will not expend resources on procuring unfiled returns through the bankruptcy process on those cases.

  3. Stay Research Required. No asset cases filed prior to October 17, 2005, require limited or no follow-up. To prevent violations of the automatic stay on those cases, TC 520 with the applicable closing code is input when the IRS is listed as a creditor. Follow-up on specifically identified cases filed on or after October 17, 2005, is required to check for possible stay variations resulting from serial filings. IRM 5.9.5.7,Serial Filers, and Exhibit 5.9.6-1 provide procedures for caseworkers to work stay variation reports on Chapter 7 cases. The Service does not file a proof of claim in a no asset case. If the case converts to an asset case at a later date, a claim may be filed.

  4. CC 84 and Corporate Chapter 7 Cases. IIP is programmed to input closing code 84 on all Chapter 7 cases with an 1120 filing requirement. This closing code cannot be changed. Closing code 84:

    1. allows an assigned revenue officer to complete TFRP investigations and assessment determinations;

    2. permits an assigned revenue officer to close the case as currently not collectible;

    3. alerts ACS or field Collection not to take collection actions without first contacting Insolvency;

    4. does not suspend the CSED;

    5. does not move the account to Status 72; and

    6. does not prevent collection actions.

  5. ACS and CC 84. An account assigned to ACS may display a TC 520 cc84. The CIO must access ACS when the case is identified on the IIP "stat 22 notice" and ensure any outstanding levies are released and any liens filed after the TC 520 date are withdrawn. After necessary actions are taken by the CIO, including determining if an OI is appropriate for a TFRP investigation, the case should be moved to the queue to delete it from ACS inventory. If ACS identifies a bankruptcy closing code 84 before Insolvency makes contact, ACS should put a 45 day hold on the account to allow sufficient time for the CIO to take necessary actions.

  6. Consolidated Filings. Under consolidated group regulations, each member of the group is severally liable for the income taxes of the group for each year it was a member. However, the Service makes only one assessment which is in the name of the parent of the group. The procedures in IRM 5.9.17.13,Consolidated Chapter 11 Filings, should be followed before a parent's Chapter 7 account is closed as currently not collectable so the group's liability can be collected from other members if possible.

  7. Conversion of Corporate Chapter 11 to Chapter 7. When corporate Chapter 11 cases convert to Chapter 7 proceedings, TFRP determinations may already be underway or completed. If a TFRP investigation has not been requested on the case, the actions in the IF/THEN chart in IRM 5.9.6.14(4) should be followed. Barring local practice to the contrary, the TC 520 freeze code used for the Chapter 11 bankruptcy may remain on the account when it is converted to Chapter 7.

  8. Conversion of Individual Chapter 11, 12, and 13 Cases to Chapter 7. Two types of postpetition, pre-conversion taxes must be considered in a converted case of an individual. (See 11 USC § 348(d).)

    1. Taxes that were entitled to be paid as administrative expenses of the pre-conversion case remain administrative expenses in the Chapter 7 case. (Typically only Chapter 11 estates owe administrative expense taxes.)

    2. Taxes owed by the debtor for postpetition, pre-conversion periods are considered for all purposes as claims that arose on the day before the bankruptcy petition was filed; that is, they are considered prepetition, priority tax claims that are nondischargeable. Usually a debtor who is an individual incurs income tax liability for earnings for tax years ending during the time (s)he is in Chapter 11, 12, or 13 bankruptcy. Under BAPCPA § 1115 and the separate taxable entity rule of IRC 1398, income taxes on earnings during a Chapter 11 case may be taxable to the estate and considered administrative expenses of the pre-conversion case.

  9. Initial Review of Individual 7 Asset Cases. When an individual debtor who files Chapter 7 bankruptcy has non-exempt assets, those assets can be available for satisfying the claims of creditors. Asset cases require complete processing, and appropriate research must be conducted by Insolvency caseworkers.

    1. Stay Review. Cases filed on or after October 17, 2005, should be reviewed for dismissals of previous bankruptcies within one year of the current bankruptcy. For cases filed on or after October 17, 2005, the caseworker assigned to the 7 Asset case must check for possible stay variations resulting from serial filings. IRM 5.9.5.7, Serial Filers, and Exhibit 5.9.6-1 provide procedures for working stay variations.

    2. Discharge Limitations. IRM 5.9.5.7(9), Discharge Limitations, and Exhibit 5.9.5-3 provide instructions for reviewing accounts for allowable elapsed time between discharge and subsequent bankruptcy filings.

    3. Unfiled Returns. BAPCPA provides for conversion or dismissal in the case of unfiled returns. IRM 5.9.4.14,Unfiled Prepetition Returns, explains how the Service advises trustees of unfiled returns for Chapter 7 Asset cases and all other cases for which a proof of claim is prepared.

    4. Lien Refile Determinations. A lien refile review must be conducted during initial case review if a secured claim will be filed by the Service or the Service has identified excluded property that may be used to satisfy the taxpayer’s liabilities after the discharge has been granted. IRM 5.9.17.4.2 and IRM 5.9.17.9provide more information on lien refiling.

    5. Documentation. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation.

  10. Initial Review of Business Chapter 7 Asset Cases. With the exception of reviewing for adequate protection, the initial review for Chapter 11 BMF cases outlined in IRM 5.9.8.4,Initial Case Review for Chapter 11, should be followed for BMF Chapter 7 Asset cases. Insolvency specialists or advisor must conduct an initial case review within 10 work days of the case's being assigned to them. Elements of this review may be required sooner, for example, to resolve stay violations or to respond to pending motions or defensive litigation. All actions taken and findings in the review must be documented in the AIS history.

5.9.6.8  (05-20-2008)
Proof of Claim - Asset Cases

  1. Notice Given if Dividends Likely. The court may initially conclude no assets exist in a case but later determine a dividend payment is possible. At that time the court will issue a notice for the filing of claims. A creditor, including the IRS, must file a proof of claim in a Chapter 7 Asset case to share in the distribution of the estate. The procedures for filing claims in Chapter 7 are set forth in Bankruptcy Rules 3001 and 3002.

  2. Unassessed Claim. To protect the government's interests, the IRS can file an unassessed (estimated) claim when the exact amount of a debtor's liability is unknown (e.g., unfiled returns, TFRP under investigation, pending audit). However, the claim must have a factual basis. The government should be in a position to show the court the liability is reasonable. (See IRM 5.9.13.18.1,Unassessed Claims.)

  3. Monitoring. If Insolvency files an unassessed claim based on a pending assessment, it must monitor the case for the receipt of more information from either the debtor or the IRS function proposing the assessment. After all pending actions are completed, Insolvency may amend or withdraw the claim, or file a $0 claim if appropriate. (See IRM 5.9.13.18.1(11), Liability Not Pursued.)

  4. Claim Filed on Behalf of Creditor. If a creditor (IRS) does not file a proof of claim, the debtor or the trustee may file a claim on behalf of the creditor. The Service generally then files a corrected claim or an amendment with the court showing accurate tax figures based on the IRS tax database.

  5. Objections to Claims. The duty to object to any duplicative, overstated, previously paid, or otherwise questionable proof of claim falls to the trustee. Objections to a claim may also be made by other parties, including the debtor.

  6. Bar Date. Information on Chapter 7 bar dates and late filed claims can be found in IRM 5.9.13.7 and IRM 5.9.13.7.1.

5.9.6.9  (05-20-2008)
Chapter 7 No Asset Process

  1. Chapter 7 No Asset Process under BAPCPA. Following are the steps typically involved in a Chapter 7 No Asset bankruptcy filed on or after October 17, 2005. Their order of occurrence may vary from court to court.

    1. The debtor attends credit counseling briefing within 180 days prior to filing a petition.

    2. The petition is filed.

    3. The debtor files Form 22A, Statement of Current Monthly Income and Means-Test Calculation, with the petition or within 15 days thereafter.

    4. The debtor's attorney certifies the client's filing is not abusive (Bankruptcy Rule 9011).

    5. The court provides written notice to creditors not later than ten days after the petition date if a presumption of abuse arises in an individual's case.

    6. The United States trustee files a statement with the court determining if the current case is presumed to be an abuse of the bankruptcy system.

    7. A hearing is held on the motion to convert or dismiss based on abuse if applicable.

    8. The debtor provides the most recent return to the trustee no later than seven days before the 341 meeting.

    9. The § 341 meeting of creditors is held.

    10. The trustee checks for assets.

    11. The trustee approves and files a report of no distribution.

    12. The court enters discharge (normally 90 to 120 days after the filing of the petition) or enters denial of the discharge (for individuals).

    13. The court approves the no asset report and excuses the trustee.

    14. The case is closed.

5.9.6.10  (05-20-2008)
Chapter 7 Asset Process

  1. Chapter 7 Asset Process under BAPCPA. The steps in a Chapter 7 Asset bankruptcy typically are:

    1. The debtor attends credit counseling briefing within 180 days prior to filing a petition.

    2. The petition is filed.

    3. The debtor files Form 22A, Statement of Current Monthly Income and Means-Test Calculation, with the petition or within 15 days thereafter.

    4. The debtor's attorney certifies the client's filing is not abusive (Bankruptcy Rule 9011).

    5. The court provides written notice to creditors not later than ten days after the petition date if a presumption of abuse arises in an individual's case.

    6. The trustee files a statement with the court determining if the current case is presumed to be an abuse of the bankruptcy system.

    7. A hearing is held on the motion to convert or dismiss based on abuse if applicable.

    8. The debtor provides most recent return to the trustee no later than seven days before the 341 meeting.

    9. The § 341 meeting of creditors is held.

    10. The trustee files an interim report of assets.

    11. The trustee checks for any additional assets.

    12. A proof of claim is filed.

    13. The court enters discharge (for individuals).

    14. The trustee administers the case, including 1) liquidating all assets that create a benefit for the estate; 2) objecting to questionable proofs of claim; 3) determining the distribution of proceeds; and 4) filing a final report.

5.9.6.11  (05-20-2008)
Commodity Broker Bankruptcies

  1. Overview. Commodity brokers are not eligible to file Chapter 11 or Chapter 13 bankruptcies, leaving Chapter 7 as their only option. A commodity broker is a licensed agent involved in the trading of commodities also known as commodity "futures " trading. (See Exhibit 5.9.1-1, Glossary.) A broker may be an individual or a company. 11 USC §§ 761 through 767 provide requirements and procedures for commodity broker bankruptcies.

  2. Commodity Futures Trading Commission (CTFC). The CTFC is an independent agency of the US government that oversees futures markets to:

    • encourage competition and efficiency

    • ensure their integrity

    • protect against manipulation, abusive trading practices, and fraud

    • ensure the financial integrity of the clearing process

  3. CTFC and Bankruptcy. A commodity broker must advise the CTFC within one business day of filing a bankruptcy. Its role is to regulate liquidating commodity brokers. The CTFC may:

    • exempt the trustee from time limits imposed by the Commission

    • extend time limits imposed on the trustee

    • inspect trustee records

    • become involved in account transfers

    Note:

    Although the CFTC has regulatory authority over an insolvent commodity broker, the Bankruptcy Code still applies.

  4. AIS Processing. The Centralized Insolvency Operation (CIO) will do initial clerical processing of commodity broker bankruptcies as they would for any other Chapter 7 bankruptcy.

  5. Normal Chapter 7 Procedures. Commodity broker bankruptcies are handled by the Field Insolvency office that handles that court's jurisdiction.

    1. TFRP investigations will be conducted and assertions will be made as in any other Chapter 7 bankruptcy.

    2. Unfiled tax returns must be addressed.

    3. Claims are filed with the bankruptcy court.

    4. Payments will be posted through AIS according to Chapter 7 priorities.

    5. Collection from exempt, abandoned, or excluded property should be addressed in the case of individual filers.

    6. Discharges will be processed following Chapter 7 guidance provided in IRM 5.9.17.

  6. Payment Preference. The allowed claims of customer creditors (see Exhibit 5.9.1-1, Glossary of Common Insolvency Terms) generally receive priority preference with respect to all other claims, except administrative expense claims under 11 USC § 502(a)(2) that are attributable to the administration of customer property. The IRS will never be a customer creditor. After distribution is made to customer creditors, distribution on other claims are treated as in a usual Chapter 7 Asset case (11 USC § 507).

  7. Counsel Guidance. Issues surrounding commodity broker bankruptcies not covered by this IRM should be discussed with Counsel.

5.9.6.12  (04-01-2006)
Subordination of Federal Tax Lien

  1. Subordination. 11 USC § 724(b) provides for the distribution of the proceeds of property encumbered by a valid prepetition tax lien. Specifically it provides that holders of unsecured priority claims under 11 USC § 507(a)(1) through § 507(a)(7) are paid before the holder of the tax lien is paid. This is referred to as a subordination of the tax lien (taking a lower position). ( See IRM 5.9.6.18, Distribution, and IRM 5.9.4.5.1(6),Certificate of Discharge.)

  2. Administrative Expenses. For cases filed before October 17, 2005, the Service's claim for administrative expenses that accrue during the bankruptcy proceeding is entitled to priority classification under 11 USC § 507(a)(1). Accordingly the Service's secured tax claim will be subordinated to the payment of the Service's administrative tax claim, if any.

    Note:

    On cases filed prior to October 17, 2005, in addition to the federal secured tax claim, state and local secured tax claims are also subordinated.

  3. BAPCPA Amendment. BAPCPA has amended 11 USC § 724(b) for Chapter 11 cases filed on or after October 17, 2005, which are converted to Chapter 7 Asset cases. In those cases the tax lien will not be subordinated to administrative claims incurred in the prior Chapter 11 case except for the following:

    • Wages

    • Salaries

    • Commissions

    Further before the trustee can subordinate a tax lien on personal or real property, the trustee must:

    1. exhaust the unencumbered assets of the estate, and

    2. recover from property securing an allowed secured claim the reasonable and necessary expenses of preserving or disposing of the property.

    Note:

    Tax liens arising in connection with ad valorem taxes on property, are no longer subordinated with exceptions being claims for wages, salaries, and commissions, or for contributions to an employee benefit plan.

5.9.6.13  (03-01-2007)
Sale of Property by the Trustee

  1. Lien Interest. When the trustee disposes of the debtor's assets by selling property, and the IRS has a valid prepetition notice of federal tax lien on file, the Service's rights to distribution based on its lien interest in such property is unknown until all priority claims, including administrative expenses, are determined. Thus Insolvency should not interfere with, or object to, any sale of property by the trustee without specific cause.

    Note:

    Chapter 7 trustees have in the past avoided the fixing of the Service's lien on motor vehicles by arguing they assume the status of purchaser under IRC § 6323. Under the provisions of BAPCPA, trustees cannot assume the status of a purchaser.

  2. Certificate of Discharge. A need to issue a Certificate of Discharge may arise, if requested, to clear title concerns after the completion of a sale. If appropriate, a no interest lien discharge may be considered. (See IRM 5.9.4.5.1,Sale of Property Considerations. )

  3. Post-Discharge Liens. Tax liens filed against the individual debtor after a discharge from bankruptcy is granted may interfere with the sale of estate property. Because the bankruptcy estate is a separate entity, such post-discharge liens do not attach to estate property. Therefore, a no interest lien discharge may be provided.

  4. Tax Consequences. The US Trustee encourages trustees to evaluate the tax aspects of any sale and discourages them from administering any property with significant tax consequences.

  5. Objections to Sale. Insolvency caseworkers should review sale motions with tax consequences in mind and object to sales when appropriate, as provided in IRM 5.9.4.5.1(8), Tax Consequences.

    Note:

    In rare instances estate property may be abandoned after the debtor has received a discharge, but before the court has closed the case. If the Service records an NFTL after the debtor receives a discharge but before the abandonment of the property and court closure, the federal tax lien will attach to the property once it is abandoned (11 USC §554(c)).

5.9.6.14  (05-20-2008)
Trust Fund Recovery Penalty

  1. Corporation and Responsible Officers in Bankruptcy. Assessment of the Trust Fund Recovery Penalty (TFRP) under IRC § 6672 becomes an issue when a corporation, having unpaid trust fund liabilities, files a Chapter 7 petition. In addition, the potentially responsible persons of the corporation may have filed their own bankruptcy petitions.

  2. Objections Filed by Responsible Persons. The responsible persons frequently object to the TFRP investigation the IRS conducts against them, claiming trust fund taxes will be paid through the corporate bankruptcy proceeding.

  3. Field Compliance Assignment. If research on corporate asset Chapter 7 cases shows balance due accounts or return delinquency periods assigned to field Collection, Insolvency should contact the revenue officer (RO) group to determine what information is available on the case.

  4. Investigations. If an investigation of the TFRP is warranted, guidance in the IF/THEN chart below should be followed.

    IF... THEN...
    local procedures provide for issuance of an OI to an RO group and the tolerance for a TFRP meets LEM 5.19.7, an OI should be issued to the appropriate ro group to complete a TFRP investigation.
    local procedures provide for handling TFRP investigations within the Insolvency function and locally established tolerances are met, the case should be reassigned to a Field Insolvency employee with properly delegated authority to complete the TFRP investigation.

  5. TFRP Assessments Against Responsible Persons. IRM 5.9.3.10(14) provides the TFRP should generally be assessed against the responsible persons of a corporate Chapter 7 debtor case unless compelling evidence exists the assets of the estate are sufficient to satisfy all of the liabilities of the debtor (which is rare).

    1. Generally, Insolvency will recommend immediate assertion of the TFRP.

    2. If the decision is made not to assess, Insolvency must indicate the reasons for non-assertion in the case history. The decision on withholding the TFRP assessment should be reviewed with the manager in accordance with local procedures.

      Caution:

      Should the circumstances/factors change at a later date that prompted Insolvency to delay the TFRP assessment (e.g., a current review indicates non-compliance, plan deficiencies, etc.), reconsideration should be given to making the TFRP assessment. Also, if the limitations period for assessment will expire before the liability is paid in full, the assessment should be made before the period expires.

  6. Field Assignment of Accounts. If a revenue officer group wants an account to remain open to field Collection, TC 520 with closing code 84 will not suspend a balance due account for the module on which it is input.

    Caution:

    Although CC 84 is available for circumstances that require extensive field work and involve little risk of a violation of the Bankruptcy Code, caution must still be employed. The Service can be liable for damages if a violation of the Bankruptcy Code occurs.

5.9.6.15  (05-20-2008)
Bankruptcy Estate Income Taxes – Separate Taxable Entity

  1. Individual Chapter 7 – IRC § 1398. The bankruptcy estate in an individual Chapter 7 bankruptcy is a separate taxable entity required to file its own Form 1041.

    1. IRC § 1398 contains special provisions for an individual under Chapter 7.

    2. Individual debtors have the right to terminate their tax year when the petition is filed.

    3. The Chapter 7 trustee has a duty to file the estate's tax return.

    4. The return filing requirements are generally the same as for individual Chapter 11 cases, as discussed in IRM 5.9.8.13,Internal Revenue Code § 1398 Issues.

5.9.6.15.1  (05-20-2008)
Bankruptcy Estate Income Taxes – NO Separate Taxable Entity

  1. No Separate Taxable Entity. In non-individual cases, no separate taxable entity is created. The trustee or debtor in possession (DIP) is responsible for filing any required returns.

  2. Relief from Filing Requirement. A trustee or DIP can apply to be relieved of the return filing requirements in corporate cases when the corporation:

    1. has ceased business;

    2. has no assets to be liquidated by the trustee; and

    3. has no income for the taxable year.

    The procedures are found in Revenue Procedure 84–59, which has not been updated since the IRS's reorganization in 2000. These procedures are outlined below in paragraphs (4) and (5) with supplemental guidance.

    Note:

    In addition to a bankruptcy trustee or DIP, these procedures may be used by a receiver or trustee of a corporation that is in receivership, dissolution, or in the hands of an assignee by order of a court, operation of law or otherwise. In particular, a trustee in a Securities Investor Protection Act proceeding may use these procedures to request exemption from return filing.

  3. Content of Exemption Request. The bankruptcy trustee or DIP must submit a written request for exemption from return filing to the Service. The request should contain the following:

    1. The name, address, and employer identification number of the corporation;

    2. The facts, with supporting documents if necessary, explaining why relief from the filing requirements is needed; and

    3. The following statement signed by the bankruptcy trustee or DIP:
      "I hereby request relief from filing federal income tax returns for tax year(s) ending [ date(s) ] 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."

    Note:

    Trustees (other than a bankruptcy trustee or DIP), receivers, and assignees requesting exemption from return filing must also include in their requests the notice of appointment to act, as required under Treas. Reg. § 301.6036-1(a).

  4. Procedures for Exemption Requests. The trustee must make a written request to the Service giving the reasons to support a filing exemption. The request must be signed under penalties of perjury.

    1. Requests must be submitted to the local Insolvency office handling the case.

    2. Requests must be reviewed by an Insolvency advisor or a grade 12 Insolvency specialist with assistance from Counsel if needed.

    3. The preliminary determination (either to approve or deny) made by the advisor or specialist must be approved by an Insolvency group manager.

    4. Upon manager approval the request and Insolvency's recommendation must be forwarded to the appropriate Exam bankruptcy coordinator within 45 days from the received date of the request.

    5. Exam will review the request and Insolvency's recommendation and resolve any issues it may find with the recommendation.

    6. Upon concurrence with Insolvency's recommendation, Exam will prepare and mail the Service's response to the trustee.

      Note:

      The determination to grant or deny the request must be made within 90 days of receipt of the request.

5.9.6.16  (04-01-2006)
Postpetition Liabilities— Individuals

  1. Rule for Individuals – Chapter 7 Postpetition Debts. In a Chapter 7 proceeding, the individual debtor is considered to be a separate taxable entity from the estate. Taxes on the individual debtor's postpetition wages are incurred by the individual debtor, while taxes on income arising from assets which are property of the estate are incurred by the estate. Therefore, a postpetition liability incurred by an individual debtor (rather than the estate) in a Chapter 7 proceeding cannot be claimed in the bankruptcy case.

5.9.6.17  (04-01-2006)
Conversion

  1. Voluntary. Chapter 7 debtors may voluntarily convert their cases to proceedings under Chapters 11, 12, or 13 at any time, as long as the Chapter 7 case was not originally converted from a Chapter 11, 12, or 13 proceeding.

  2. Involuntary. Involuntary conversions to Chapter 11 sought by creditors or the trustee can also occur.

  3. Under BAPCPA. For cases filed on or after October 17, 2005, the IRS may move to dismiss or convert a Chapter 7 bankruptcy filed by an individual to a Chapter 11 or Chapter 13 case where a presumption of abuse of the bankruptcy process arises because of the means test.

    Note:

    Presumption of abuse because of the means test is explained in 11 USC § 707(b)(2).

5.9.6.18  (04-01-2006)
Distribution

  1. Order of Distribution. The order of distribution in a Chapter 7 case for estate property not subject to liens is established in 11 USC § 726 and is as follows:

    1. 11 USC § 507 priority claims (includes administrative expenses, postpetition taxes incurred by the estate, including interest on these taxes, and priority tax claims) which are timely filed, or which are untimely filed but meet the filing timeframes outlined in IRM 5.9.13.7.

    2. General unsecured claims which are timely filed, or filed late due to lack of notice.

    3. Late claims (other than those in items (1) and (2)).

    4. Non-pecuniary loss penalties (punitive in nature, for example, failure to pay) and fines.

    5. Postpetition interest.

    6. The debtor receives the remainder of any distribution.

  2. Rights of a Private Secured Party. The distribution does not affect the rights of a private secured party. If property in which a secured party has a lien is sold by the trustee, that creditor will be paid first from the sale proceeds after the expenses of the sale.

  3. Treatment of IRS Tax Lien. The IRS, as a secured creditor, does not have the same rights as private secured creditors in a Chapter 7 case. This is because the tax lien is subordinated to certain priority claims, pursuant to 11 USC § 724. Other priority claims will be paid before the tax lien is paid. (See IRM 5.9.6.12, Subordination of Federal Tax Lien, and IRM 5.9.6.13, Sale of Property by the Trustee.) However, if the notice of federal tax lien has priority over the interest of a private secured party, the tax lien may be paid before the secured party depending on calculation under § 724.

Exhibit 5.9.6-1  (05-20-2008)
Steps for CIO Investigation of Chapter 7 Stay Variations

  1. CIO runs IIP daily which updates the AIS TIN screen with the codes for serial filers.

  2. The CIO generates a report identifying the Chapter 7 cases with L or B in the Prior Bankruptcy Status field of the AIS TIN screen. The report will cover the cycle period for cases added to AIS seven cycles prior.

    Example:

    A report run the week of December 18, 2005, would cover cases added to AIS the week of October 30, 2005.

  3. The the lists are assigned to caseworkers to complete.

  4. The caseworker researches AIS to determine:

IF... THEN...
the current bankruptcy is for a corporate filer, no action or AIS history on this report is warranted.
the current bankruptcy is for an individual filer, the caseworker locates the previous bankruptcy(ies) on AIS and determines if the case(s) was dismissed or discharged.
the previous case(s) was discharged, the caseworker updates the AIS history stating the debtor has received a previous discharge within the past twelve months and is not eligible for another discharge on this case.
Note: The caseworker must attempt to verify through the court's electronic records the previous case was truly discharged and not dismissed. (S)he must also check the court's electronic records on the current case to see if the docket shows the court is aware of the previous discharge. If the electronic records give no indication of knowledge of a previous discharge, the caseworker should transfer the case to the appropriate Field Insolvency specialists to prepare a referral to Counsel to alert the court of the previous discharge.
only one previous case was found, and it was dismissed for means testing,
Note: It may be necessary to check the court's electronic records to determine the cause of the dismissal. 		the caseworker updates the AIS history with the information the report has been worked, and the previous dismissal was due to means testing. Further action on this report is not warranted.
previous cases were found and were dismissed for abusive filing, the caseworker must check the court's electronic records to determine:
• if the presumption of abuse has been successfully challenged by a party in interest; and

• if the court has determined not to impose a stay.
the presumption of abuse has been successfully challenged by a party in interest, and the stay remains in effect, the caseworker updates the AIS history with the information that the report has been worked and the stay remains in effect. Further action on this report is not warranted.
the presumption of abuse stands, and no stay has been imposed, follow the instructions in IRM 5.9.5.7,Stay Variations.
the caseworker cannot determine if the stay is in effect, refer the case to Counsel to request a court order confirming the status of the stay.
Note: Once the report has been completed, the caseworker must place it in classified waste unless otherwise directed by management.

Exhibit 5.9.6-2  (05-20-2008)
Chapter 7 Trustee Turnover Procedures

The following table outlines procedures to be taken on tax periods subject to a Chapter 7 trustee's request for turnover of a refund where the bankruptcy case has not yet been discharged. (For turnover requests on cases where the bankruptcy has been discharged before the debtor's refund has posted, see IRM 5.9.6.1.3(4), Refund Turnover Requests for Discharged Cases .)

If the case for which a turnover is requested is not on AIS, then secure the filing information from the court's electronic records, and establish the case on AIS. Once the case is on AIS, continue with the instructions below.
IF the turnover request applies to one or more prepetition returns that have been filed and ... THEN...
IMFOLI indicates the refunds for all requested periods have been issued, update the AIS history stating the refund was issued before the turnover request was received.
IMFOLI indicates a refund credit on the requested period(s), and no prepetition liabilities exist, prepare Form 5792 to request a manual refund to the trustee and update the AIS history.
Note: No T is required in the case class field unless the trustee has requested turnover of refunds for returns not yet filed.
IMFOLI indicates a refund credit on the requested period(s) and prepetition income tax liabilities exist, complete a credit transfer to the prepetition income tax liabilities, and if credits remain, prepare Form 5792 to request a manual refund to the trustee and update the AIS history.
Note: No T is required in the case class field unless the trustee has requested turnover of refunds for returns not yet filed.
IMFOLI indicates a refund credit on the requested period(s) and prepetition tax liabilities exist that are not for income (e.g., TFRP assessment), and no local rule or standing order exists allowing IRS offsets, prepare Form 5792 to request a manual refund to the trustee and update the AIS history.
Note: No T is required in the case class field unless the trustee has requested turnover of refunds for returns not yet filed.
IMFOLI indicates a refund credit on the requested period(s) and prepetition tax liabilities exist that are not for income (e.g., TFRP assessment), and a local rule or standing order exists allowing IRS offsets, complete a credit transfer to the outstanding liabilities, and if credits remain, prepare Form 5792 to request a manual refund to the trustee and update the AIS history.
Note: No T is required in the case class field unless the trustee has requested turnover of refunds for returns not yet filed.
IF the trustee turnover request applies to one or more prepetition returns that have not been filed, and... THEN...
the case class field on AIS is blank, input a T for the case class, input TC 520 cc81 on related SSNs, and update the AIS history: "Recvd ttee turnover request for tax yr XXXX date stamped XX/XX/XX. 520 cc81 input on XXX-XX-XXXX and XXX-XX-XXXX" [both SSNs if the debtor is currently married]. Input a 180 day follow-up on the AIS letter screen.
the case class field on AIS has a Y, and the case has not been discharged, do NOT override the Y with a T. Input TC 520 cc81 on related SSNs, and update the AIS history: "Recvd ttee turnover request for tax yr XXXX date stamped XX/XX/XX. 520 cc81 input on XXX-XX-XXXX and XXX-XX-XXXX" [both SSNs if the debtor is currently married]. Input a 180 day follow-up on the AIS letter screen.
the case class field on AIS has a Y, and the case has been discharged but the discharge has not yet been worked,
• work the issue represented by the Y (or take appropriate action);
• once all issues are addressed and actions are taken, replace the Y with a T;
• request ADS closing (RI);
• if a DDR generates that cannot be resolved immediately, follow IRM 5.9.17.11 to address liens;
• input TC 520 cc81 on related SSNs, and update the AIS history: "Recvd ttee turnover request for tax yr XXXX date stamped XX/XX/XX. 520 cc81 input on XXX-XX-XXXX and XXX-XX-XXXX" [both SSNs if the debtor is currently married].
• Input a 180 day follow-up on the AIS letter screen.
Note: It may be necessary to establish dummy modules in some instances. IRM 5.9.15.5 provides instructions for creating dummy modules.

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