4.31.7. TEFRA Bankruptcy

Administrative Claims

An entity may file a claim for payment of administrative expenses of the estate under 11 USC 503(a). Administrative expenses include the actual and necessary costs of preserving the estate and any tax incurred by the estate. Administrative expenses are nearly at the top of the bankruptcy priority scheme.

Affected Item

Any item that requires adjustment as a result of an adjustment made to a partnership item. There are two types of affected items: computational and factual. Factual affected items are those that require a determination at the partner level.

Assessment Statute Expiration Date (ASED)

The ASED marks the date the statutory period of time for assessing tax ends. The time frame for assessing tax is normally three years from the due date, or three years from the date the return is filed, whichever is later. IRC 6501.

Asset Case

A Chapter 7 bankruptcy case in which the trustee makes a determination that assets will be administered for the benefit of creditors. See Bankruptcy Rule 2002(e).

Automated Insolvency System (AIS)

AIS is the bankruptcy database maintained by Insolvency. Its many functions work together to allow Insolvency to manage all the bankruptcy cases in Insolvency's inventory.

Automatic Stay

With certain exceptions, the filing of a bankruptcy petition operates as a stay – an injunction – against acts to collect pre-petition debts from the debtor or the debtor’s property, or the collection of any liability from property of the estate. 11 USC 362. The stay also prohibits the commencement or continuation of a Tax Court proceeding concerning the debtor. For cases filed after October 17, 2005, the Code was amended to provide that the stay only applies to Tax Court cases concerning an individual when the tax liability is for a tax period ending before the order for relief (the petition date except in involuntary bankruptcy cases). The automatic stay also prohibits the setoff (crediting) of a pre-petition debt owing to the debtor against a pre-petition liability, but case law has clarified that the creditor can freeze the debt pending relief from the stay. For cases filed after October 17, 2005, the stay no longer applies to the setoff (crediting) of an income tax refund against an income tax liability when both the refund and liability are for pre-petition periods. For cases filed after October 22, 1994, the stay no longer applies to the making of an assessment. The Service can be liable for damages and attorneys fees for willful violations of the automatic stay, but punitive damages cannot be awarded. The automatic stay against most actions automatically terminates as to all creditors upon the earliest of the time the case is closed, the time the case is dismissed, or the time a discharge is granted or denied. The automatic stay against acts to collect estate property continues, however, until the property is no longer property of the estate. 11 USC 362(c).

Bankruptcy Petition

The bankruptcy petition is the form filed by the debtor (or against the debtor by creditors in an involuntary bankruptcy) with the bankruptcy court requesting bankruptcy relief. Bankruptcy petitions must be filed under one of a number of specific chapters of the Bankruptcy Code (Chapters 7, 11 and 13 are the most common).

Bankruptcy Reform Act of 1994

The Bankruptcy Reform Act of 1994 was signed into law and effective for all bankruptcy cases filed on or after October 22, 1994. It made changes to the bankruptcy law such as permitting assessments and issuing notice and demand during the automatic stay and the filing of late proofs of claim in Chapter 7 cases.

Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA)

Most of the provisions of BAPCPA are effective for cases filed on or after October 17, 2005. Many provisions of BAPCPA are intended to keep debtors from abusing the bankruptcy system. Such provisions may limit the imposition of the automatic stay in cases of serial filings, require tax compliance from individual debtors, and establish a means test for Chapter 7 debtors. BAPCPA limited the automatic stay on Tax Court cases of individual debtors. BAPCPA also added a new Chapter 15 to deal with crossborder bankruptcies.

Bar Date

1. The bar date is the last date the filing of a proof of claim will be considered timely.

2. In all cases, a proof of claim is considered timely if it is filed before 180 days after the date of the petition, except in involuntary cases. 11 USC 502(b)(9). The date of the order for relief is the same as the petition date except in involuntary cases.

3. For Chapter 13 cases filed on or after October 17, 2005, debtors are required by 11 USC 1308 to file returns for all taxable periods ending during the four-year period prior to bankruptcy, including returns due after the petition date. The Service is allowed 60 days after a return is filed under 11 USC 1308 to file a proof of claim for the tax shown on such returns. 11 USC 502(b)(9).

4. In Chapter 11 cases, the court sets the bar date. If the bar date set by the court is later than 180 days after the order for relief, the Service will have the benefit of the additional time.

5. The Court may grant extensions of the bar date if there is sufficient reason. To request an extension for the Service, Area Counsel or the Department of Justice should file a motion with the Bankruptcy Court at least 30 days prior to the bar date.

Campus TEFRA Bankruptcy Coordinator

Acts as a liaison between the CPF and the field offices, Appeals, and counsel for TEFRA bankruptcy cases. They also provide technical support for the CPF.

Campus Pass-through Function (CPF) (Formally CTF)

The CPF is the suspense unit for investor returns located in the Brookhaven and Ogden campuses. The two CPFs will be maintained to obtain and control, through the AIMS and PCS, any partner, shareholder or investor returns related to key cases within their jurisdiction. For details see Campus Pass-through Function (CPF) IRM 4.31.3 and IRM 4.31.6.

Chapter 7 - Liquidation

In Chapter 7 cases, a trustee is appointed and the debtor’s assets, if any, are liquidated for the benefit of creditors. The petition may be filed voluntarily or involuntarily. Typically, the debtor has no hope of continuing business operations and/or paying all his debts.

Chapter 11 - Reorganization

The presumption in Chapter 11 cases is that the debtor will continue its business operations post-petition and propose a reorganization plan. The plan, if confirmed, has the effect of a contract between the debtor and its creditors. Debts not provided for in the plan may be discharged. A trustee may be appointed by the court for cause, such as the inability to propose a feasible plan or to pay post-petition taxes. Chapter 11 plans can also provide for the liquidation and distribution of the debtors assets. Individuals, as well as corporations and other entities, may file under Chapter 11. As a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Chapter 11 cases of individuals filed after October 17, 2005 are similar to Chapter 13 cases, without the Chapter 13 debt limits.

Chapter 12 - Adjustment of Debts of a Family Farmer or Fisherman with a Regular Annual Income

This chapter is designed to enable a debtor, who is a family farmer or fisherman, to reorganize rather than liquidate a farming/fishing operation. The debtor proposes a plan of reorganization to repay creditors. This type of case has some similarities to both Chapters 11 and 13 cases. Family farmers or fishermen can include sole proprietorships, partnerships, and corporations.

Chapter 13 - Adjustment of Debts of an Individual with Regular Income

Only individuals, including self employed individuals, with regular income may file for bankruptcy under this chapter. There are specific limits as to the kind and amount of debt that an individual may have in order to qualify. The debtor makes the regular payments to creditors through the trustee under a plan similar to a Chapter 11 reorganization plan. The debtor has three to five years in which to complete the plan, upon which he/she will be discharged of the debts.

Command Code (CC)

A five-character command code (CC) must be entered with every IDRS screen transmission. The CC will indicate what function is to be performed.

Commencement Date

The commencement date is the date on which a bankruptcy petition is filed.

Confirmation Date

The confirmation date is the date of the court’s order that confirms a Chapter 11, 12, or 13 plan. Chapter 11 cases need to be followed closely since Insolvency generally makes notations only for dismissed or discharged cases on the bankruptcy status report.

Conversion

When a debtor voluntarily or involuntarily changes from one chapter of bankruptcy to another chapter with the approval of the bankruptcy court.

Creditor

Person or entity with a claim against the debtor and/or property of the debtor at the time the bankruptcy petition is filed.

Debtor

The person or entity (e.g., corporation, partnership, municipality) that:

1. files a voluntary petition, or

2. has an order for relief entered against it when an involuntary petition is filed by creditors.

Debtor in Possession

Unless a trustee is appointed to take control of the bankruptcy estate, the debtor in a Chapter 11 or 12 case is known as a debtor-in-possession (DIP). The debtor remains in control of all of the assets. The DIP has the powers of a bankruptcy trustee.

Discharge Date

This is the date of the order of the bankruptcy court granting the debtor a discharge. The discharge order enjoins the collection of discharged debts. Many types of debts are excepted from the bankruptcy discharge. Generally, a discharge is granted:

1. to an individual debtor in a Chapter 7 case, 60 days after the date set for the first meeting of creditors;

2. in a Chapter 11 reorganization case, when the plan is confirmed;

3. in a Chapter 11 case filed by an individual on or after October 17, 2005, when plan payments are completed; and

4. in Chapter 12 and 13 cases, when the plan is completed (3-5 years).

Discharge, Denial of

The bankruptcy court makes a determination that a discharge will not be granted, i.e., debtor goes through a bankruptcy case and is still held responsible (usually for cause) for all of the pre-petition liabilities.

Dismissal Date

This is the date the bankruptcy court orders that the case be dismissed. Once the case is dismissed, there is no longer a case before the bankruptcy court. Under IRC 1398, the bankruptcy estate of an individual debtor in a Chapter 7 or 11 cases is treated as a separate taxable entity, but if the case is dismissed, the estate is not treated as a separate entity. The debtor should include on his/her tax returns any income, deductions, or credits belonging to the bankruptcy estate. However, the dismissed bankruptcy case may still have suspended a statute of limitations period or tolled a bankruptcy priority period.

Estate, Bankruptcy

A bankruptcy estate is created upon the filing of the bankruptcy case. It generally consists of all the debtor’s interests in property at the time the case is filed plus property acquired by the estate after the petition is filed.

FPAA

Notice of Final Partnership Administrative Adjustment (FPAA) - The statutory notice of adjustments (as distinguished from a statutory notice of deficiency) in a partnership proceeding that is subject to judicial review, if a petition is filed under IRC 6226, in the Tax Court, the Court of Federal Claims, or the district court of the United States where the partnership’s principle place of business is located. Only partnership adjustments are identified. An FPAA may also include penalties the applicability of which is determined at the partnership level. FPAAs should only be issued by the Technical Services TEFRA/Pass-Through Coordinator or the CPF, and not field agents.

Insolvency

Generally, understood to mean an inability to pay debts as they become due. However, the Bankruptcy Code (BC) refers to an insolvent entity as one whose debts are greater than the fair market value of its assets (11 USC 101 (32)). A debtor need not be insolvent to file bankruptcy.

Insolvency Function

The Insolvency function within Compliance is comprised of two operations, Field Insolvency and the Centralized Insolvency Operation (CIO). Together they handle the administrative processing of bankruptcy cases for the Service and the collection of delinquent taxes from bankruptcy estates.

Insolvency Specialist

Insolvency specialists are professional employees located primarily in the Field Insolvency offices. They handle Chapter 7 asset cases and Chapter 9, 11, 12, and 15 cases. They also work Chapter 13 cases through plan confirmation. The CIO has a limited number of specialists who act as team leads. The names of Insolvency specialists appear in the "Insolvency Technician" field on the AIS entity screen. Phone numbers for Field Insolvency offices may be found under the "Who/Where" tab on SERP.

Insolvency Technician

1. Insolvency technicians are paraprofessional employees located at the CIO who work Chapter 13 cases with confirmed plans and Chapter 7 no-asset cases. Because technicians are not assigned specific cases, CIO managers’ names appear in the "Insolvency Technician" field on AIS rather than a technician’s name. The phone number for a CIO liaison can be found under the "Who/Where" tab on SERP.

2. The name of the Insolvency Technician will be found on the AIS database. The technician name and telephone number will be listed. The Insolvency Technician listed is the contact person for that bankruptcy case. The proof of claim for each bankruptcy claim is sent to the Technician list on AIS.

Investor

Partner, Shareholder, or Beneficiary - An investor return that reflects pass-through items from a pass-through entity return, which is controlled (via PCS and AIMS). Examples of investor returns include, but are not limited to, Form 1040, Form 1041, Form 1120, Form 1120-S and Form 1065.

IRC

Internal Revenue Code (IRC).

Joint Return/Separate Bankruptcy Petitions Filed by Each Spouse

The situation in which spouses file a joint income tax return and file separate bankruptcy petitions either on the same date or on different dates. The cases may or may not be "consolidated" into a single case.

Joint Return/Single Petitioner (Petitioning and Non-Petitioning Spouse

The situation in which spouses file a joint income tax return but only one spouse declares bankruptcy. The person who files for bankruptcy protection is known as the debtor or petitioning spouse, and the other spouse, who does not file bankruptcy, is known as the non-debtor spouse or the non-petitioning spouse.

Key Case

A pass-through return established on PCS, usually a Form 1065, U. S. Return of Partnership Income (NonTEFRA), or a Form 1120S, U. S. Income Tax Return for an S Corporation, that results in pass-through items to partners, shareholders, or investors (individual returns or another pass-through entity).

LB&I

Large Business and International (LB&I). Serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million.

Lifting the Automatic Stay

Relief obtained by a specific creditor from the bankruptcy court that lifts the injunction under 11 U.S.C. 362 against that creditor to permit a certain action, such as exercising a right of setoff.

Linkage

The electronic relationship between a pass-through entity and its investor.

No-Asset Case

A Chapter 7 case in which the trustee has determined that no assets will be administered, as where the debtor has no equity in non-exempt assets. The trustee notifies creditors that no proof of claim need be filed and that they will be notified if assets are discovered. Generally, the Service and other creditors do not file claims in no asset cases, unless or until the bankruptcy trustee provides further notice that assets have been found. Bankruptcy Rules 2002(e) and 3002(c)(5).

Notice of Beginning of Administrative Proceeding (NBAP)

The NBAP is the required notice sent to the TMP and all notice partners or groups which officially begins the examination of the partnership under the TEFRA proceeding. IRC 6223(a)(1).

NMF

Non-Master File (NMF) is a system of accounting which provides for not only outstanding liabilities but for all types of return and tax adjustment processing that can not be processed on Master File (MF).

Notice Partner

Every direct partner in a partnership under examination is a notice partner unless that partnership has more than 100 partners. When there are more than 100 partners, only partners with ownership of more than 1% and those partners with less than 1% that form a notice group are notice partners. Those partners will less than 1%, and are not part of a notice group, are non-notice partners.

One Year Date (OYD)

This is a statute date applicable only to TEFRA partnerships. Adjustments to the partner returns must be made within one year of a final partnership determination that finalizes the key case adjustments.

Public Access to Court Electronic Records (PACER).

PACER is an electronic court information system allowing the public ready access to information on federal court cases. PACER maintains case records, including electronic copies of documents filed in a case, and provides a current status on the majority of bankruptcy cases.

PCS

Pass-through Control System (PCS) (formerly, Partnership Control System) - Database used to establish an electronic linkage between a key case pass-through and it's underlying investors. The database is used to manage inventory, systemically generate notices, and control statutes.

Petition Date

The date the bankruptcy petition is filed with the Bankruptcy Court is the petition date. The petition date is also the date of the order for relief except in involuntary cases (where creditors, rather than the debtor, filed the bankruptcy petition).

Post-Petition Taxes

1. Tax liabilities incurred, whether or not assessed, after the filing of the bankruptcy petition for tax periods ending after the petition date. An income tax is incurred on the last day of the tax year.

2. Certain post-petition taxes are treated as administrative expenses of the bankruptcy estate (See IRM 4.31.7.5.1, Administrative Claims, for the definition of administrative expenses). The Service can file an administrative expense claim for such taxes using the appropriate form. In a liquidation case, administrative expenses will be paid by the trustee from the assets of the estate. In a reorganization case, administrative expenses will be paid pursuant to a confirmed bankruptcy plan.

3. When the debtor is an individual in a Chapter 7 or 11 case, the bankruptcy estate is a separate taxable entity under IRC 1398 . Post-petition income taxes incurred by the Chapter 7 or 11 individual debtor are therefore tax liabilities of the debtor, not the estate, and cannot be claimed against the estate. IRC 1398 gives the individual debtor in a Chapter 7 or 11 case the option of splitting the tax year in which the bankruptcy petition was filed into two tax years, the first ending on the day before the bankruptcy petition was filed. The pre-petition portion should therefore be included on the Service’s proof of claim as a pre-petition tax if the election is made.

4. In cases where IRC 1398 does not apply, the bankruptcy estate is not a separate taxable entity. IRC 1399. When the debtor is a corporation in Chapter 7, 11, or 12, the debtor is not considered to have a separate taxable existence from the bankruptcy estate. post-petition taxes incurred by the corporate debtor during a Chapter 7 case or incurred prior to plan confirmation in a Chapter 11 or 12 case are, therefore, claimable as administrative expenses of the estate.

5. Although there is no separate taxable estate in Chapter 13 cases or in individual Chapter 12 cases, the Service does not file administrative expense claims for post-petition income taxes in those cases. However, the Service has the option under 11 USC 1305 to file a claim for post-petition taxes due from the debtor in Chapter 13 cases. The 1305 claim is treated as though it arose before the bankruptcy petition was filed. The Bankruptcy Code does not contain a similar provision for Chapter 12 cases. As a result, the Service does not have an option under the Bankruptcy Code for filing claims for post-petition taxes due from an individual debtor in a Chapter 12 case.

Pre-Petition Taxes

Pre-petition taxes are tax liabilities (tax, penalty and interest to the petition date) incurred, whether or not assessed, prior to the filing of the bankruptcy. An income tax is incurred on the last day of the tax year.

Proof of Claim

1. A form filed by a creditor with the Bankruptcy Court which specifies the nature and extent of the debtor's liability and asserts a right of payment from the estate for pre-petition debts. The Service’s proof of claim is typically filed through the Automated Proof of Claim system. Sometimes, the Service’s proof of claim is based on an estimate, as when the debtor has not yet filed returns. When the correct and complete amount due can be determined, the claim will be superseded by an amended claim. However, some bankruptcy courts will not permit claims to be amended to list larger liabilities after the bar date has passed and/or plan confirmation has occurred. See IRM 5.9.6.12, Proof of Claim.

2. There are three types of claims: secured, priority, and unsecured general.

3. Secured Claim: A claim secured by a lien on property of the estate or a right of setoff. A creditor is considered secured to the extent of the value of the collateral or to the extent of the creditor’s right to offset a mutual pre-petition debt owed to the debtor against the creditor’s pre-petition claim against the debtor. A properly filed Notice of Federal Tax Lien secures the tax liability up to the value of equity in the assets. A federal tax liability is secured by virtue of a setoff when the Service has the right to credit the liability against the debtor’s right to a tax refund. See 11 USC 506(a).

4. Priority Claim: An unsecured claim entitled to be paid before other unsecured claims are paid. Priority claims are identified and ranked in 11 USC 507. Priority claims include taxes which qualify as administrative expenses, taxes with return due dates of less than three years prior to the petition date, income taxes assessed within 240 days before the petition date, income tax deficiencies that are unassessed but were assessable prior to the petition date, and trust fund taxes. Administrative expense taxes receive the second highest priority among priority claims.

5. Unsecured General Claim: A claim that is not entitled to either secured or priority

RA

Revenue Agent (RA)

Short Year Election

Pursuant to IRC 1398, an individual debtor in a Chapter 7 or 11 case can elect to split the income tax year in which the bankruptcy petition was filed into two short years; the first ending on the day before the bankruptcy petition was filed. This allows the pre-petition portion to be treated (and paid) as a pre-petition priority claim in the bankruptcy case, reducing the amount the debtor will owe after the bankruptcy case on this (non-dischargeable) liability.

SB/SE

Small Business and Self-Employed (SB/SE). Serves taxpayers who file Form 1040, Schedules C, E, F or Form 2106, as well as small businesses with assets under $10 million.

SNOD

Statutory of Deficiency (SNOD). A notice of deficiency, also called a "statutory notice of deficiency" or "90 day letter", is a legal notice in which the Commissioner determines the taxpayer's tax deficiency.

TCO

Tax Compliance Officer (TCO)

TE

Tax Examiner (TE)

TIN

A taxpayer identification number (TIN) is a nine digit identification number required on all documents. The TIN can be either a social security number (SSN) or an employer identification number (EIN).

TMP

Tax Matters Partner (TMP) - The TMP is the partner designated to represent the partnership in all TEFRA proceedings before the Service and the courts.

TS

Technical Services (TS) is the field review staff.

Technical Services TEFRA/Pass-Through Coordinator

The Technical Services TEFRA/Pass-Through Coordinator in Technical Services acts as a liaison between the area and the CPFs for both TEFRA and linked nonTEFRA cases. The field examiner can locate their Technical Services TEFRA/Pass-Through Coordinator by searching their geographical area on the TEFRA web site's TEFRA Coord Locator tab.

TEFRA

Tax Equity and Fiscal Responsibility Act of 1982. (TEFRA)

Tier

A pass-through entity that is a partner of a pass-through entity. An S-corporation would be a tier partner of a partnership.

60-Day Letter

Contains the letter (1827 or 1829) sent to the TMP and notice partners proposing adjustments to partnership items, notifying them of their right to file a protest to Appeals, the schedule of adjustments, and a Form 870-PT or a Form 870-LT. 60-Day letters should only be issued by the Technical Services TEFRA/Pass-Through Coordinator or the CPF, and not field agents.