This section contains information, instructions, and references concerning bankruptcy cases and proceedings. It explains the provisions and concepts of bankruptcy law that generally apply to all bankruptcy cases.

A glossary of common bankruptcy terms used in this section and IRM 5.17.9, Chapter 7 Bankruptcy (Liquidation); IRM 5.17.10, Chapter 11 Bankruptcy (Reorganization); and IRM 5.17.11, Chapter 13 Bankruptcy (Individuals with Regular Income) is found in Exhibit 5.17.8-1.

The Insolvency program maintains records and files concerning the investigation, preparation, and filing of claims in all bankruptcy proceedings and is the point of contact for revenue officers. The case file is maintained by Insolvency, which has the responsibility to protect the government’s interests in all bankruptcy cases. However, Insolvency may request assistance from or refer a case to the appropriate Associate Area Counsel (SB/SE).

The purpose of federal bankruptcy law is to provide a uniform, fair, and equitable method of distribution of the debtor’s assets to his creditors or to formulate a plan by which the debtor pays creditors from future earnings, and at the same time to give the deserving debtor an opportunity to start over with a clean slate.

Initially there were state insolvency laws, but no federal bankruptcy laws. Bankruptcy law is now contained in a federal statutory scheme called the "Bankruptcy Code." Bankruptcy Rules contain procedures for implementation of most Code provisions.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made a major revision to the Bankruptcy Code. BAPCPA changes generally apply to cases filed on or after October 17, 2005. Most bankruptcy courts have adopted interim bankruptcy rules to reflect changes made by BAPCPA. Consult with Associate Area Counsel on issues involving these changes.

The Bankruptcy Code is divided into several chapters. Chapters 1, 3 and 5 contain general provisions applicable to all types of bankruptcies. Important sections include:

Chapter 7 deals with liquidating bankruptcies, which are called "Chapter 7 cases," in which the debtor’s nonexempt assets are used to pay creditors. See IRM 5.17.9, Chapter 7 Bankruptcy.

Chapter 11 deals with reorganizations of individuals and corporations, which are called "Chapter 11 cases." See IRM 5.17.10, Chapter 11 Bankruptcy. In these cases, plans to pay creditors over a period of time are proposed, with the plan to be funded from future earnings or from liquidation of the debtor’s assets.

Chapter 12 deals with family farmer and family fisherman reorganizations, which are called "Chapter 12 cases" and are similar to Chapter 11 and 13 cases. See IRM 5.17.11.19, Chapter 12.

Chapter 13 deals with reorganizations of individuals with regular income, which are called "Chapter 13 cases," in which payments are made from the debtor’s future earnings pursuant to a plan. See IRM 5.17.11, Chapter 13 Bankruptcy.

Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor’s debts under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy courts are under the district courts and receive their jurisdiction from the district court.

Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged (i.e., the taxes for which the debtor will no longer be personally liable). The bankruptcy court also has jurisdiction over any matters concerning payment of any tax debts claimed against the estate, validity of liens, turnover of property to the estate, exemptions of property from the estate, and confirmation of plans. See 28 USC § 157.

When a taxpayer files a bankruptcy petition, the automatic stay (discussed below) begins in most cases. Although audit activity can continue and assessments can be made, the automatic stay generally stops all of the IRS’s normal collection procedures.

It is the policy of the IRS to not process an administrative offer in compromise proposed by a taxpayer while the taxpayer is in bankruptcy.

Under the Bankruptcy Code, a debtor, assuming the qualifications of the desired chapter are met, has the choice of liquidating assets to pay debts (Chapter 7, and liquidating Chapter 11s) or reorganizing the debtor’s financial situation to pay creditors over a period of time (Chapters 11, 12, and 13).

A Chapter 7 liquidation case is administered by a trustee who collects all the debtor’s nonexempt assets, reduces the assets to cash, and distributes the funds to creditors in the priority set forth in 11 USC § 726. In collecting the debtor’s assets, the trustee may use his powers to avoid certain prepetition and post-petition transfers.

In a Chapter 11 the debtor typically continues operating while formulating a plan to pay all creditors’ claims. In a Chapter 12 the debtor, a family farmer or fisherman with regular income, also continues to operate while formulating a plan. BAPCPA made Chapter 11 for individuals very similar to Chapter 13.

In a Chapter 13 the debtor, who must be an individual with regular income, formulates a plan to pay his creditors over a period of three to five years from future earnings.

The debtor must meet the requirements in 11 USC § 109 to be a debtor in a particular chapter.

Bankruptcy cases may be voluntary or involuntary. A voluntary proceeding is one in which the debtor files a petition for relief in bankruptcy. The filing of the voluntary petition is the "order for relief" in the case. Along with the petition, the debtor must file certain schedules or statements. See 11 USC § 521 and Bankruptcy Rule 1007.

Under 11 USC § 302, a joint case is commenced by the filing of a single petition by an individual qualified to be a debtor under Chapter 7, 11, 12 or 13, and the individual’s spouse. The court must determine the extent to which the assets and liabilities of the two debtors will be combined in a single pool to pay creditors. Bankruptcy Rule 1015 provides for joint administration of the estates.

An involuntary bankruptcy is one instituted by creditors filing a petition for relief against a debtor. See 11 USC § 303. In contrast to the voluntary case, the "order for relief" is entered at some point after the petition is filed, when the court determines that the criteria for an involuntary bankruptcy are met. An involuntary case may only be commenced under Chapter 7 or Chapter 11, and the debtor must be eligible to be a debtor under the chapter for which the petition was filed.

Instead of joining with other creditors to file an involuntary petition, the IRS should explore other options to collect tax debts.

Notice of Chapter 7, 12, and 13 cases must be given to the IRS when it is listed as a creditor in the debtor’s schedules. See Bankruptcy Rule 2002(f).

Bankruptcy Rule 2002(i) provides that, in a Chapter 11 case, notice must be given to the IRS at the address set out in a register maintained under Bankruptcy Rule 5003(e) for the district in which the case is pending. Notice may either be mailed or given through the electronic noticing system.

The Bankruptcy Rules do not prescribe the place of notice to the IRS in Chapter 7, 12, 13 cases. However, the IRS requests that notices be sent to Centralized Insolvency Operation in Philadelphia. (See IRM 5.9.11.1, Insolvency Mail.) Under BAPCPA, 11 USC § 342(e) and (f) authorize creditors to designate addresses to receive notices in Chapter 7 and 13 cases.

Various types of "trustees" participate in particular bankruptcy cases:

The United States Trustee (employed by the U.S. Justice Department) is a supervisory agency that monitors the Chapter 7 trustees and Chapter 13 trustees and certain matters in Chapter 11 cases.

The panel trustee, also called the case trustee, is the trustee assigned to a particular bankruptcy case. This is usually in a Chapter 7 and sometimes in a Chapter 11.

The Chapter 13 trustee frequently assists the court in evaluating proposed plans for confirmation and, after confirmation, functions largely as a disbursing agent, receiving the debtor’s monthly plan payments and disbursing funds to the creditors according to the plan.

The trustee in a Chapter 7 or 11 bankruptcy case is the representative of the estate with the capacity to sue and be sued.

The United States Trustee for the district in which the case is pending may serve as trustee if necessary. A person who has served as an examiner in the case may not serve as the trustee.

The trustee qualifies by posting an adequate bond (see 11 USC § 322). The amount of the bond and sufficiency of the surety on the bond are determined by the United States Trustee. A proceeding on a trustee’s bond may not be commenced more than two years after the date of the trustee’s discharge. The selection and qualification of an individual as trustee does not prevent a subsequent replacement. The court may remove a trustee, other than the United States Trustee, or an examiner, for cause after notice and a hearing.

11 USC § 341 provides that within a reasonable time after the order for relief in a case, the United States trustee shall convene and preside at a meeting of creditors (often referred to as the § 341 meeting).

Another purpose of the § 341 meeting in a Chapter 7 case is the election of a trustee and, where appropriate, of a creditors’ committee. A creditors’ committee may consult with the trustee or the United States Trustee in connection with the administration of the estate, make recommendations to the trustee or United States Trustee respecting the performance of the trustee’s duties, and submit questions to the court or the United States Trustee concerning the administration of the estate.

In Chapter 11 cases creditors’ committees play a prominent role in many cases, and the members are selected by the United States Trustee. The committee functions as the representative of creditors who hold allowable, unsecured, nonpriority claims. Governmental entities such as the IRS are generally excluded from participation on Chapter 11 creditors’ committees. 11 USC §§ 1102; 101(41).

Under BAPCPA, not later than the day before the § 341 meeting, Chapter 13 debtors are required to submit tax returns for the four years ending on the petition date, although this deadline may be extended under certain circumstances. See 11 USC § 1308.

Under 11 USC § 362(a), an automatic stay arises by operation of law as soon as the bankruptcy petition, whether voluntary or involuntary, is filed. The stay prohibits most collection activity. Specifically, it prohibits:

Some of the actions the IRS must avoid after bankruptcy has been filed because of the automatic stay are:

The automatic stay does not prohibit the following:

The stay of an act against property of the estate continues until the property is no longer part of the estate. The stay of any other act continues until the earliest of the time:

For cases filed after the effective date of BAPCPA, the stay may terminate within 30 days after the bankruptcy petition is filed or not go into effect at all if the debtor had one or more bankruptcies dismissed within one year before the latest bankruptcy. Contact Associate Area Counsel (SB/SE) if you believe the automatic stay has terminated or not gone into effect in a case.

Upon request of a party in interest, such as a creditor, and after notice and a hearing, the bankruptcy court may grant relief from the stay by terminating, annulling, modifying, or conditioning the stay:

The party requesting relief from the stay has the burden of proof with respect to whether the debtor has equity in the property. The party opposing the motion has the burden of proof with respect to all other issues.

Section 7433(e) of the Internal Revenue Code creates a cause of action for taxpayers who suffer damages when the IRS willfully violates the automatic stay or discharge provisions. Treasury Regulations under IRC § 7433(e) describe the administrative procedures the taxpayer must follow before filing a judicial action. See Treas. Reg. § 301.7433-2. Additionally 11 USC § 362(h) (redesignated as § 362(k) under BAPCPA) allows for damages to be recovered by an individual who is injured by a willful stay violation.

Actions in violation of the automatic stay must be corrected expeditiously. Corrective actions may include, for example, prompt release of prepetition continuous wage levies and prompt reversal of post-petition setoffs.

Creditors who have a secured interest in any collateral of the debtor are entitled to adequate protection under the Bankruptcy Code. "Adequate protection" means preservation of the value of the property or collateral securing a creditor’s claim, thereby maintaining the status quo. Adequate protection may be required for the continuation of the automatic stay under 11 USC § 362(d) for the debtor’s use, sale or lease of estate property under 11 USC § 363(e), and for the granting of a senior lien on collateral to obtain credit under 11 USC § 364(d). The Service is entitled to adequate protection for its secured claim in both real and personal property.

Adequate protection only applies to claims of secured creditors. The IRS is entitled to adequate protection only if its claim is secured by a filed Notice of Federal Tax Lien.

11 USC § 361 sets forth three examples of adequate protection:

11 USC § 363 governs the use, sale, or lease of property of the estate. Under 11 USC § 363(b) the trustee may use, sell, or lease the estate property other than in the ordinary course of business only after notice and a hearing. Bankruptcy Rule 6004 governs the procedural requirements for filing a motion for use, sale or lease of property not in the ordinary course of business. If the business of the debtor is authorized to be operated under Chapter 7 (11 USC § 721), Chapter 11 (11 USC § 1108), Chapter 12 (11 USC §§ 1203, 1204), or Chapter 13 (11 USC § 1304), the trustee (or debtor-in-possession) may, without notice or hearing, use, sell, or lease property of the estate in the ordinary course of business. In bankruptcies filed on or after October 17, 2005, the trustee may be restricted from using, selling, or leasing estate property when doing so would involve the transfer of personally identifiable information.

Under 11 USC § 363(c)(2), cash collateral may not be used, sold, or leased by the trustee (or debtor-in-possession) without the consent of each entity that has an interest in the cash collateral or the court’s authorization after notice and a hearing. Bankruptcy Rule 4001 sets forth the procedural requirements for cash collateral motions.

Under 11 USC § 363(e), on request of an entity that has an interest in property to be used, sold, or leased, the court may provide adequate protection of such interest.

Under 11 USC § 363(f), a trustee may sell property free and clear of liens where certain conditions are met. Most often, however, adequate protection requires that the tax lien and all other liens attach to the sale proceeds with the same priority that they had in the property prior to the sale.

11 USC § 501 provides that a creditor may file a proof of claim. A properly filed proof of claim is deemed allowed unless objected to by a party in interest. 11 USC § 502(a).

Governmental entities have 180 days from the date of the order for relief, or such later time as the bankruptcy rules may provide, in which to file proofs of claim. 11 USC § 502(b)(9). The general bar date for other creditors in Chapter 7 and 13 cases is 90 days from the first meeting of creditors. A tax claim is timely if filed by the later of either of these two deadlines. Under BAPCPA for Chapter 13 cases, a claim of a governmental unit for a tax with respect to a return required to be filed under 11 USC § 1308 is also timely if it is filed on or before 60 days after the return is filed.

An untimely tax claim can be disallowed solely on the basis that it was filed late. 11 USC § 502. This may mean no payment in a Chapter 11 or 13 plan. However, under 11 USC § 726, a late filed priority claim is entitled to share in distribution with timely filed priority claims, so long as it is filed before certain acts of final distribution occur. 11 USC § 726(a).

If a creditor does not timely file a proof of claim, the debtor, a co-obligor, or the trustee may file a proof of such claim. 11 USC § 501, Bankruptcy Rule 3004. The court is to mail notice of the filing to the creditor, debtor, and the trustee. The creditor may file a proof of claim which supersedes the proof of claim filed by the debtor.

The payment of claims differs depending on how the claim is classified. The three types of prepetition claims are (a) secured, (b) unsecured priority, and (c) unsecured general. Post-petition claims may also be provided for in bankruptcy as discussed further in IRM 5.17.8.17.

A proof of claim listing an unassessed liability can be filed to protect the Government’s interest before the exact liability of the taxpayer is determined. The claim serves to meet the bar date. The Government should be in a position to show the court that the liability is reasonable. As soon as the correct or complete amount due can be determined, an amended proof of claim should be filed.

11 USC § 502 allows any party in interest to object to a claim. Section 502(b) lists several grounds for disallowing a claim, including tardiness. 11 USC § 502(b)(9). If more time is needed to complete audits and make searches, Associate Area Counsel should be advised as soon as possible so that proper action to secure an extension of the period for filing a claim can be taken. The request should be made in sufficient time to permit filing of a motion for extension prior to the expiration of the limitation period as set by Bankruptcy Rule 3002. Since the extension may be granted only for cause shown, Associate Area Counsel should be furnished the reasons for such a request at the time the request for extension is made. Insolvency should be prepared to file a timely proof of claim in an estimated amount if the extension is denied.

Under 11 USC § 506(a), the IRS has a secured claim when:

The allowed amount of a secured claim will be determined after a valuation of the property.

Under 11 USC § 506(b), to the extent that a creditor is fully secured, that is the value of the collateral exceeds the amount of the debt, there shall be allowed interest on such claim, and any reasonable fees, costs, or charges provided by the agreement or state statute under which the claim arose. Thus, the IRS is entitled to receive post-petition interest on its allowed oversecured tax claims, but is not entitled to any fees, costs or charges. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989).

It is not necessary to file a claim in bankruptcy to preserve a lien on the debtor’s prepetition assets that are not sold and distributed during the bankruptcy case. While receiving a discharge will prevent a creditor from enforcing a dischargeable debt against the debtor personally, the IRS may enforce its lien for dischargeable taxes against the debtor’s exempt property if a notice of federal tax lien was filed before the bankruptcy petition was filed. In re lsom, 901 F.2d 744 (9th Cir. 1990). However, a lien for dischargeable taxes cannot be enforced against after-acquired property of the debtor.

Because excluded property never becomes property of the estate, the IRS may enforce even an unfiled tax lien for dischargeable taxes against such property after the discharge is granted (and the automatic stay terminates).

Under 11 USC § 544, the trustee can avoid unfiled federal tax liens. Accordingly, if an NFTL has not been filed prior to the institution of the bankruptcy case, the tax claims will be unsecured. The date the NFTL was filed should be clearly shown on the proof of claim. The trustee may not use 11 USC § 544 or 11 USC § 545(2) to prevail over NFTLs filed prepetition for the types of property described in IRC § 6323(b), since the trustee is not a "purchaser." 11 USC § 545(2)(2005); In re WaIter, 45 F.3d 1023 (6th Cir. 1995); In re Berg, 121 F.3d 535 (9th Cir. 1997).

Bankruptcy Code § 507 sets forth the expenses and unsecured claims that have priority and the order of their priority. This will affect the claim’s treatment in bankruptcy.

Whether the tax was incurred before or after the date of the petition for relief will affect its priority. To determine whether a tax is incurred before or after the petition, a tax on income for a particular period is considered incurred on the last day of the period. A tax on or measured by some event, such as the payment of wages or a transfer by reason of death or gift, or any excise tax on a sale or other transaction, is considered as being incurred on the date of the transaction or event.

Claimants within a priority category as set forth in the subsections of 11 USC § 507 are paid pro-rata when the bankruptcy estate is not sufficient to provide full payment.

11 USC § 507(a)(2), as amended by BAPCPA, gives second priority to administrative expenses as defined under 11 USC § 503(b). Any tax incurred by the estate is an administrative expense under 11 USC § 503(b)(1)(B)(i). These taxes include:

Under 11 USC § 507(a)(8), as amended by BAPCPA, eighth priority is given to the following taxes:

Certain excise taxes are also entitled to eighth priority under 11 USC § 507(a)(8)(E). They are excise taxes on:

A claim for an erroneous refund or credit has the same priority as a claim for the tax to which such refund or credit relates.

Any portion of the IRS’s prepetition claim that cannot be classified as either secured or unsecured priority is a general unsecured claim.

Section 503(b)(1)(A) provides generally that administrative expenses include "the actual, necessary costs and expenses of preserving the estate." Taxes incurred by the estate are separately given administrative expense claim status by 11 USC § 503(b)(1)(B)(i). Generally, administrative tax claims are claims for tax liabilities (including income and employment taxes) incurred post-petition by the bankruptcy estate.

A post-petition liability incurred by an individual debtor (rather than the estate) in a Chapter 7 or 11 case cannot be claimed in the bankruptcy case. This is because the individual debtor is a separate taxable entity from the estate in a Chapter 7 or 11 case. Taxes on the individual debtor’s post-petition 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.

Taxes collectible as expenses of administration shall be assessed against the estate and payment demanded by mailing a notice and demand to the trustee or debtor-in-possession in the usual manner. If payment is not received in response to the notice and demand, a request for payment may be filed with the court in order to have the taxes formally allowed as an administrative expense. Some courts may also require that a motion be filed to allow the expense.

Administrative expenses accrue interest and penalties to the date of payment.

In Chapter 13 cases the IRS may file a proof of claim for taxes that become payable while the case is pending. 11 USC § 1305(a)(1). The debtor may not file such a claim on behalf of the IRS.

Prepetition interest has the same status as a claim for the underlying tax: secured, priority or general unsecured. 11 USC §§ 101(5) and 502(b); In re Garcia, 955 F.2d 16 (5th Cir. 1992); In re Larson, 862 F.2d 112 (7th Cir. 1988).

The IRS generally is not entitled to claim post-petition interest on prepetition claims because 11 USC § 502(b)(2) provides that claims for unmatured interest shall be disallowed. If the underlying tax is nondischargeable; however, the post-petition interest on such tax is also nondischargeable and may be collected from the debtor after the discharge is granted.

Section 506(b) provides that interest will be paid on claims that are "oversecured" (i.e., the value of the collateral securing the claim exceeds the amount of the claim).

Administrative expense tax claims accrue interest and penalties to the date of payment. IRC § 6658prohibits the accrual of certain penalties incurred by the estate if the court finds that the estate is unable to pay administrative expenses.

Prepetition penalties on a secured claim are treated as secured and are payable as part of the secured claim except in a Chapter 7 case. In Chapter 7, 11 USC § 726(a)(4) provides a low distribution priority for secured tax penalties, unless the penalty is compensation for actual pecuniary loss (as with the trust fund recovery penalty).

Prepetition penalties on an unsecured tax claim are treated as general unsecured whether the tax claim itself is entitled to priority or general unsecured status.

Post-petition penalties are not allowable on prepetition tax claims, but may sometimes be collectible from the debtor after the discharge. Nonpecuniary loss penalties are nondischargeable if they relate to a nondischargeable tax and the transaction or event giving rise to the penalty occurred within three years of the petition date. Also, IRC § 6658prohibits the accrual of certain penalties during the pendency of the bankruptcy case – from the date the petition is filed until the date the case is closed or dismissed.

The Trust Fund Recovery Penalty is a pecuniary loss penalty. If it is not secured, it is unsecured priority. 11 USC § 507(a)(8)(G). It is not dischargeable except in Chapter 13 cases filed prior to October 17, 2005, where it has been provided for in the plan. Under BAPCPA it is no longer dischargeable in Chapter 13 cases. 11 USC § 1328(a)(2).

IRC § 1398contains special tax provisions for an individual filing under Chapter 7 or 11. Individual debtors in those chapters have the right to terminate their tax year when the petition is filed.

The bankruptcy estate in an individual Chapter 7 or 11 case is an entity separately taxable from the individual and must file its own tax returns. The Chapter 7 trustee has the duty to file the estate’s tax returns, as does the Chapter 11 trustee or debtor-in-possession.

In corporate and partnership Chapter 7 and 11 cases, no separate taxable entity is created. IRC § 1399. The trustee or the officers or managers of the debtor-in-possession are responsible for filing any required returns.

Trustees can apply to be relieved of the filing requirements in corporate cases when the corporation has neither assets nor income. The procedures are contained in Revenue Procedure 84-59.

In Chapters 12 and 13, the debtor’s bankruptcy estate is not a separate taxable entity for federal income tax purposes, so the individual debtor is responsible for filing the returns for all income earned while in bankruptcy.

Under BAPCPA, a Chapter 13 debtor must be current in return filings for the four-year period preceding the bankruptcy petition date in order to obtain confirmation of a plan. BAPCPA also provides that nonfiling of a required post-petition tax return can often serve as a basis for dismissal or conversion.

Ordinarily, partnerships and Subchapter S corporations are not themselves liable for a federal income tax, and the bankruptcy estates of these passthrough entities are not separate taxable entities pursuant to IRC § 1399.

The bankruptcy court may determine the liability of the debtor or the bankruptcy estate for any tax, including a fine or penalty relating to a tax and any addition to tax, whether or not previously assessed or paid and whether or not a proof of claim is filed. The bankruptcy court may not reexamine a tax liability, however, which was adjudicated before a court of competent jurisdiction prior to the filing of the bankruptcy petition. 11 USC § 505(a).

Bankruptcy courts do not have proper authority to determine the tax liabilities of parties other than the debtor or the debtor’s bankruptcy estate. In re Prescription Home Health Care, Inc., 316 F.3d 542 (5th Cir. 2002); In re Brandt-Airflex Corp., 843 F.2d 90 (2nd Cir. 1988).

A bankruptcy court also should not determine tax liabilities of debtors or of bankruptcy estates that may not be claimed or paid through the bankruptcy case. For instance, in a no-asset Chapter 7 case, a bankruptcy court should abstain from deciding the debtor’s prepetition tax liabilities. When an individual debtor’s own post-petition tax liabilities can not be or have not been claimed in a case, the bankruptcy court should similarly refrain from determining the taxes. The same result should also occur for any post-confirmation taxes to be incurred or incurred by a reorganizing corporate Chapter 11 debtor.

In order for the bankruptcy court to determine the right of a bankruptcy estate to a tax refund, the trustee must file an administrative claim for refund and the claim must either be denied or not acted upon for 120 days (rather than the six months provided in IRC § 6532). See Rev. Proc. 81-18, 1981-1 C.B. 688.

A trustee may request a prompt determination for administrative period taxes by filing the appropriate tax return. 11 USC § 505(b)(2)(2005).

Trustees and Debtors in Possession (DIPs) of debtor partnerships or subchapter S corporations sometimes file requests for prompt audit determinations with Insolvency under 11 USC § 505(b), along with their post-petition Form 1065 or Form 1120S returns.

From a debtor’s viewpoint the primary purpose of bankruptcy is to obtain relief from indebtedness. 11 USC § 524 bars creditors, including the IRS, from seeking to collect discharged debts against the debtor personally. However, tax liens may be enforceable against property owned by the debtor before bankruptcy even though the tax debt was discharged.

Section 523 provides that certain debts of an individual debtor are excepted from discharge. The following taxes are nondischargeable under 11 USC § 523(a)(1) for individuals receiving a discharge in Chapter 7, 11, 12, or a hardship discharge in Chapter 13:

Pursuant to 11 USC § 523(a)(7) a nonpecuniary loss penalty is nondischargeable if it relates to a tax that is nondischargeable under 11 USC § 523(a)(1) and if the transaction or event that gave rise to the penalty occurred within three years before the petition date. Thus, a penalty relating to a nondischargeable income tax is only nondischargeable if the tax accrued within three years before the bankruptcy petition. In re Roberts, 906 F.2d 1440 (10th Cir. 1990); In re Burns, 887 F.2d 1541 (11th Cir. 1989); McKay v. United States, 957 F.2d 689 (9th Cir. 1992); In re Miller, 300 B.R. 422 (Bankr. N.D. Ohio 2003).

Those types of taxes that are enumerated in § 523 survive a discharge in bankruptcy and may be collected from the exempt, excluded, abandoned, or after-acquired property of the debtor.

Prepetition and post-petition interest on nondischargeable taxes is also nondischargeable, as are any post-petition penalties on these taxes. Bruning v. United States, 376 U.S. 358 (1964); Hanna v. United States, 872 F.2d 829 (8th Cir. 1989).

Under BAPCPA the following taxes claimed in a Chapter 13 are now nondischargeable: trust fund taxes, taxes with respect to unfiled returns, late returns filed within two years of the petition date, or fraudulent returns, and those taxes that the debtor made a willful attempt to evade or defeat. 11 USC § 1328(a)(2).

The bankruptcy estate is created by operation of law as soon as a voluntary or involuntary petition is filed commencing a case. 11 USC § 541. In general, only property of the estate is administered in the bankruptcy case.

Generally, the estate is comprised of all the debtor’s legal and equitable property interests as of the commencement of the case.

Proceeds, rents, or profits of estate property are also estate property.

Property that an individual debtor acquires by inheritance or through a divorce settlement within 180 days after the petition date is treated as estate property.

In Chapters 12 and 13, the estate of an individual debtor may include after-acquired property such as wages and income. 11 USC §§ 1207, 1306. In general, wages earned by an individual debtor in a Chapter 7 case are not property of the estate. 11 USC § 541(a)(6). Under BAPCPA 11 USC § 1115 provides that post-petition wages and after-acquired property of individual Chapter 11 debtors are property of the estate.

Community property is included in the estate to the extent it is under the sole or joint management and control of the debtor or to the extent it is liable for an allowable claim.

Property held by nominees or alter egos, or which the debtor transferred as a fraudulent conveyance, is property of the estate. The trustee may avoid certain prepetition and post-petition transfers of property and bring such property into the estate for distribution.

Generally, property cannot be excluded from the estate by agreement between parties that the debtor’s interest will terminate upon financial insolvency or bankruptcy. However, under 11 USC § 541(c)(2), the debtor’s interest in a trust that is subject to a restriction on transferability enforceable under nonbankruptcy law is excluded. Under this provision interests in ERISA-qualified pension plans are excluded from the estate. Under 11 USC § 541(b), as amended by BAPCPA, interests in other types of pension plans may also be excluded.

11 USC § 542(a) requires an entity in possession, custody, or control of property of the estate (including exempt property) to deliver that property to the trustee, unless the property is of inconsequential value to the estate.

Under 11 USC § 542(b), with certain limited exceptions, an entity that owes a debt (e.g. a tax refund) to the debtor that is property of the estate and that is matured, payable on demand, or payable on order must pay such debt to or on the order of the trustee, subject to any setoff rights under 11 USC § 553.

Pursuant to United States v. Whiting Pools. Inc., 462 U.S. 198 (1983), property, whether tangible or intangible, levied upon prepetition, but not transferred before the bankruptcy is filed, is property of the bankruptcy estate subject to turnover.

The courts generally recognize IRS rights to adequate protection where a levy is served prepetition because the levy provides the IRS with an interest in the levied-upon property. In any case where the IRS is entitled to adequate protection, the IRS should immediately contact the debtor-in-possession or trustee to reach an adequate protection agreement, notify the court, and request relief from the automatic stay. Adequate protection arguments are usually made in Chapter 11 cases, but may occasionally be made in Chapter 7 and 13 cases. A referral should be made to the Associate Area Counsel (SB/SE) for the necessary legal action to be taken.

Exempt property is property of the estate that an individual debtor may elect to place outside of the estate and that therefore cannot be liquidated by the trustee. Section 522 of the Bankruptcy Code governs the types and amounts of property that the debtor can exempt from the bankruptcy estate. Section 522(b) provides that the debtor may choose to utilize the Bankruptcy Code exemptions listed in § 522(d), or elect the exemptions provided by other Federal or applicable state law. States may legislatively opt out of the Bankruptcy Code exemption scheme and allow the debtors in their state only those exemptions provided by state law. Joint debtors must make the same exemption election.

Exempt property is not liable for any debts of the debtor except alimony, security interests, nondischargeable tax debts, and tax debts secured by a Notice of Federal Tax Lien.

Only individuals can claim exempt property.

Taxes that are discharged, but on which there is a NFTL properly filed prepetition, may still be collectible from exempt property. 11 USC § 522(c)(2)(B).

Pursuant to 11 USC § 547(b), the trustee may avoid certain prepetition transfers of the debtor’s interests in property to bring that property back into the bankruptcy estate. Such transfers benefit one creditor at the expense of others and are known as preferences.

To qualify as a preference, a tax payment must:

Pursuant to 11 USC § 547(b), a trustee may avoid a transfer of an "interest of the debtor in property." An interest of the debtor in property does not include property that the debtor holds in trust for another. 11 USC § 541(d). In Begier v. IRS, 496 U.S. 53 (1990), the Supreme Court held that a voluntary prepetition payment of trust fund taxes (withheld employment taxes and excise taxes collected from purchasers) cannot be avoided under 11 USC § 547(b) because the funds paid were not property of the debtor but were held in trust for the United States under IRC § 7501(a).

Antecedent debt requirement. Although "antecedent debt" is not defined by the Bankruptcy Code, it is clear that it refers to a debt incurred before the date of the transfer. As long as the payment is made by the due date of the return (or by the due date of an extension), there is no antecedent debt. Timely payments of tax cannot be avoided under 11 USC § 547.

A tax payment must be made on or within 90 days before the filing of the bankruptcy petition to be avoidable. 11 USC § 547(b)(4). For payments by check the relevant date is the date the check is honored by the drawee bank.

Outside of bankruptcy the IRS has the right to set off tax overpayments against tax debts. IRC § 6402. 11 USC§ 553 preserves the IRS’s right to offset mutual prepetition claims against prepetition refunds except as prohibited by the automatic stay. Under BAPCPA the automatic stay no longer prohibits offsets of prepetition income tax claims against prepetition income tax refunds.

Prepetition tax refunds are property of the estate under 11 USC § 541(a). The IRS may be required to turn over the refund to the trustee unless the refund is protected under 11 USC § 553.

If the automatic stay prohibits the IRS from setting off, but the IRS’s right of setoff is protected under 11 USC § 553, the IRS is not required to turn over the refund but may temporarily freeze the refund until it has the authority to exercise its setoff rights. Citizens Bank v. Strumpf, 515 U.S. 16 (1995).

In many jurisdictions, bankruptcy courts have issued standing court orders that modify the automatic stay to permit setoff in some or all circumstances and dispense with the requirement to turn over prepetition refunds to the bankruptcy trustee.

Generally, in Chapter 7, 11, and 13 cases, post-petition overpayments can be offset directly to post-petition tax periods.

IRC § 6503(h)suspends the running of the period of limitation on collection ( IRC § 6502) in a case under the Bankruptcy Code during the period in which the IRS is prohibited by reason of such case from collecting, pIus six months thereafter. The collection period is suspended while the automatic stay is in effect, and in a Chapter 11 case, while the plan is in effect and not in default. Under BAPCPA, an individual in a Chapter 11 case does not receive a discharge until all payments under the plan have been completed. Thus, the automatic stay remains in effect until the court grants a discharge at the end of the plan.

The limitation period for assessments is not suspended by IRC § 6503(h) section because assessments are not prohibited by the automatic stay.

However, where a notice of deficiency has been issued, the IRS may be prohibited from making an assessment, and the assessment period may be suspended while the automatic stay is in effect. See Rev. Rul. 2003-80, 2003-29 I.R.B. 83 (July 21, 2003).