5.9.8. Processing Chapter 11 Bankruptcy Cases

(1) Purpose. This IRM section contains guidance on processing bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code (USBC).

(2) Audience. Caseworkers and management in Field Insolvency (FI) within Specialty Collection - Insolvency (SCI) are the primary users of this section. Caseworkers at the Centralized Insolvency Operation (CIO) within SCI, Advisors, Revenue Officers, and other SB/SE employees may also refer to this section. Employees in other functions may also refer to this section when dealing with a taxpayer that has filed Chapter 11 bankruptcy.

(3) Policy Owner. The Director of Collection Policy is responsible for issuing policy for the insolvency program.

(4) Program Owner. The program owner is Collection Policy, Insolvency an organization within Small Business Self Employed (SBSE) division.

(5) Primary Stakeholders. The primary stakeholders are SCI and SB/SE Collection.

(6) Program Goals. The goal is to provide fundamental knowledge and procedural guidance for working Chapter 11 cases. Following the guidance in this IRM will ensure cases are worked in accordance with bankruptcy laws and regulations.

(1) Eligibility. Any entity eligible to file a Chapter 7 petition (individual, Limited Liability Company (LLC), partnership, or corporation) can file Chapter 11, except a stockbroker or a commodity broker. As in Chapter 7, certain banks, savings and loan associations, and insurance companies cannot file a Chapter 11 petition. A railroad, which cannot file a Chapter 7 petition, may file a Chapter 11 petition.

(2) Main Chapter for Non-individual Debtors. Chapter 11 is the primary reorganization chapter of the Bankruptcy Code for non-individual debtors. Ideally, a reorganizing Chapter 11 plan is acceptable to most of the debtor's creditors because the plan is more likely (over time) to pay a greater amount of the debtor's pre-bankruptcy debts than if the business were liquidated. A Chapter 11 bankruptcy allows the debtor to continue business operations through a plan of reorganization which meets statutory criteria (11 USC 1123 and 1129). Cooperation among the various interests is crucial to a successful reorganization. Generally, reorganization, by preserving jobs and assets, is preferable to liquidation. However, a debtor may choose to liquidate in a Chapter 11 bankruptcy instead of reorganizing.

(3) Individuals and Chapter 11. An individual is eligible to file Chapter 11 even if the individual is not engaged in a business.

(4) Property of the Estate. Property of the estate in a Chapter 11 case includes the property listed in 11 USC 541. When the Chapter 11 debtor is an individual , 11 USC 1115 provides that property of the estate also includes earnings from services performed by the debtor after the petition date until the case is dismissed, converted, or closed.

(1) Notice. The bankruptcy courts provide the IRS with notice of all Chapter 11 cases whether or not the IRS is listed as a creditor. This notice provides the date, time, and location of the first meeting of creditors, as required by 11 USC 341. The court may also provide copies of the debtor’s schedules of assets and liabilities and the statement of financial affairs to the creditor.

(2) First Meeting of Creditors and Pre-packaged Chapter 11 Cases. The first meeting of creditors (also known as the 341 hearing) generally occurs 20-40 days after the filing of the petition. However, , under 11 USC 341(e), upon request of a party in interest and after notice and hearing, the court can order the US Trustee not to convene a meeting of creditors if the debtor files a pre-packaged Chapter 11. A pre-packaged Chapter 11 is where the debtor prepares a plan and solicits acceptance of the plan prior to the commencement of the case. FI, with Counsel's concurrence, may consider opposing the 11 USC 341(e) request if the lack of a 341 hearing will compromise the IRS's position.

(3) Preventing Violations of Automatic Stay. If FI research reveals no liabilities or pending assessments in a case, a TC 520 control should remain on the account until the potential for a violation of the USBC expires. The freeze also allows for monitoring of post-petition tax compliance.

(4) Proof of Claim. If the Automated Proof of Claim (APOC) system is unavailable and the debtor owes taxes above the tolerance specified in Exhibit 5.9.13-1, Manual Proofs of Claim and Common Bankruptcy Issues, Threshold for Claims, a manual claim should be prepared and timely filed in accordance with IRM 5.9.13, Manual Proofs of Claim and Common Claim Issues. Motions and hearings involving the IRS can begin early in Chapter 11 cases, so the IRS claim should be on record as soon as possible. The bar date for filing proofs of claim in Chapter 11 cases is set by the court, but the IRS has at least 180 days from the petition date pursuant to 11 USC 502(b)(9).

1. 11 USC 1111(a) provides a claim is deemed to be filed for any debt listed on the debtor’s schedules, except a debt listed as disputed, contingent, or unliquidated.

2. There may be unfiled pre-petition returns when the claim is prepared. Show potential liabilities for any unfiled returns as "unassessed" (formerly listed as estimated).

3. APOC generates estimated claims systemically. When no basis is found for an estimated claim, APOC annotates the period as "Not Filed" and the dollar amount as "$100.00".

(5) Proof of Claim Filing Criteria. The IRS should not rely on being listed in the bankruptcy schedules. A proof of claim should be filed in every case meeting the tolerances specified in Exhibit 5.9.13-1. However, the tolerance criterion does not prohibit FI from filing claims where liabilities fall below the stated dollar amounts. Local practice may specify filing claims on all balance due accounts.

(1) Initial Review. A timely and thorough initial case review is necessary to protect the interest of the IRS in a Chapter 11 bankruptcy case. The review will identify issues that the caseworker needs to address at the Section 341 Meeting of Creditors. The caseworker must establish the frequency of post-petition monitoring based on the debtor's prior tax liabilities and compliance history.

(1) The Small Business Debtor. A "fast track" Chapter 11 bankruptcy accelerates the plan confirmation process by an eligible small business debtor. The small business debtor provision is no longer optional for cases filed on or after October 17, 2005. Generally, the small business provisions will apply to Chapter 11 business debtors whose non contingent, liquidated debts do not exceed $3,024,725 (excluding any debts owed to affiliates and insiders):

• When the US Trustee has not appointed an unsecured creditors committee, or

• When the court has determined the committee of unsecured creditors is not sufficiently active and representative to provide oversight of the debtor.

(2) "Fast Track" Bankruptcies. For "fast track" cases, the debtor may file a plan within the first 180 days after the date of the order for relief. All plans must be filed within 300 days after the date of the order for relief. Under certain conditions, these time frames may be reduced or increased by the bankruptcy court (11 USC 1121(e)).

(3) Court-Conditional Approval. For all cases, the court can conditionally approve the disclosure statement, subject to final approval after notice and a hearing. The DIP may solicit acceptances and rejections of the plan based on the conditionally approved disclosure statement. . The conditionally approved disclosure statement must be mailed at least 25 days before the date of the plan confirmation hearing. For small business cases, a hearing on the disclosure statement may be combined with a hearing on confirmation, regardless of when the petition was filed. The court may determine the plan provides adequate information and a separate disclosure statement is not necessary. It may approve a disclosure statement submitted on standard forms approved by the court (11 USC 1125(f)).

(4) Monitoring the Small Business Debtor. Provisions applicable to the small business debtor are designed to be less cumbersome to these debtors. The provisions move the case more quickly to confirmation. Because BAPCPA has made the small business provisions mandatory, the IRS will receive more cases where:

• The debtor has solicited acceptances of a plan prior to filing the petition,

• The debtor has filed a request to eliminate the 341 hearing, or

• The court has determined that a separate disclosure statement is not necessary.

(1) Protection for Secured Creditors. Adequate protection safeguards a secured creditor against a decrease in the value of a creditor’s collateral during the period prior to confirmation of the plan when a creditor is not receiving plan payments. Adequate protection may be requested based on IRM 5.9.4.15.4, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡, to protect the value of the creditor's interest in the property being used by the DIP and a valid Notice of Federal Tax Lien (NFTL) has been recorded (11 USC 361).

(2) Initial Considerations for Adequate Protection. The caseworker must first determine if schedules of assets and liabilities have been filed. If so, and the IRS does not have copies, the caseworker must contact the DIP or trustee to request the schedules along with an aged list of the business' accounts receivable. Schedules may also be viewed electronically through PACER. From this information, the caseworker can establish a rationale for requesting adequate protection. The IRS may be entitled to adequate protection when a pre-petition NFTL attaches to equity in assets which will depreciate during the bankruptcy proceeding or which may be consumed in the normal course of business, as is the case with cash collateral or inventory. If the debtor arranges for post-petition financing for property subject to the NFTL, the IRS may also be entitled to adequate protection of its interest. When determining priority of competing security interests, including the NFTL, the caseworker should consider the "45-Day Rule". See IRC 6323(c) and IRM 5.17.2.6.6.1, Commercial Transaction Financing Agreements, for additional information.

(3) Turnover/Adequate Protection. A voluntary Chapter 11 filing is sometimes preceded by the IRS levying upon or seizing assets of the debtor. After filing bankruptcy the debtor may immediately file a motion with the bankruptcy court requesting a "turnover" order for the IRS to surrender the property to the debtor or to release a levy (11 USC 542). The Chapter 11 caseworker must ensure the debtor is providing adequate protection to the IRS for turnover of such property. Counsel guidance should be sought when holding levy funds in anticipation of an adequate protection order.

(4) Most Common Types. Adequate protection usually includes periodic cash payments (the most common form) on the secured claim and/or replacement liens on post-petition assets. SBSE Division Counsel has set minimum dollar criteria for pursuit of adequate protection with Area Counsel having leeway to adjust the dollar guidelines, if appropriate (IRM 5.9.4.15.4). FI offices must coordinate all adequate protection agreements with Counsel.

(5) Sources of Adequate Protection. Adequate protection can take the form of:

• Retaining a portion of any funds received

• Receiving monthly payments (with post-petition interest) before a plan is confirmed

• Obtaining replacement liens on after-acquired assets (for example, accounts receivable and inventory)

• Providing for post-petition tax compliance

• Any other appropriate relief

(6) Adequate Protection Agreement. The Adequate Protection Agreement should provide for protection to replace the property being released. This can include:

1. The IRS receiving all of, or a portion of, the cash (if cash is involved);

2. Periodic payments, including payment of post-petition interest;

3. A replacement lien on after-acquired assets, such as inventory or accounts receivable;

4. Requiring the debtor to file all delinquent returns, timely file all post-petition returns, and pay all post-petition tax obligations (11 USC 1112(b)(4)(I)); and

5. Default provisions. (See paragraph (7) below.)

(7) Default Provisions. Adequate protection agreements should include language outlining actions to be taken in the event of default. Those provisions can include:

1. Notice of default to the debtor and debtor's attorney with a short "cure" time frame;

2. A "drop dead" clause providing for unopposed conversion to Chapter 7 if the default is not cured;

3. An automatic lifting of the stay against collection if the default is not cured; or

4. Any other appropriate remedy.

(8) Time Constraints. Creditors, including the IRS, are only entitled to adequate protection if it is requested. If adequate protection is applicable, it must be requested before the assets are dissipated.

(1) Intangible Property. Under 11 USC 542, unless the automatic stay is lifted, the IRS must release pre-petition levies on bank accounts and accounts receivable when the debtor retains an interest in the cash or cash equivalent on the date of the petition (i.e., the IRS has not actually received the cash and applied it to the taxpayer’s account). (See IRM 5.9.3.12.1, Third-party Contacts.)

(2) Avoidance. If the IRS receives payment before the petition date as a result of a levy and applies the payment to the taxpayer’s account, the funds are no longer subject to turnover under 11 USC 542. However, they may be preferential transfers subject to avoidance under 11 USC 547, if the requirements of 11 USC 547 are met. (See IRM 5.9.4.7, Preferences.)

(3) Tangible Property. Absent extenuating circumstances which allow the automatic stay to be lifted, the IRS is required to release pre-petition levies on tangible property. If seized pre-petition, the property generally must be turned over to the estate as long as the debtor retains an interest in the property on the date of the petition (e.g., the property has not yet been sold at a tax sale).

(4) Right to Adequate Protection. Although the property is generally required to be turned over, the IRS is entitled to adequate protection of its secured interest in the property if a pre-petition NFTL has been filed. (See IRM 5.9.8.8(2), Lien Rights.)

(5) Release versus Referral. Negotiations involving adequate protection are the responsibility of FI employees and they are generally conducted with the debtor's attorney. Counsel should be consulted, as needed, for local procedures.

1. Release. If the value of the property does not exceed the minimum dollar criteria for a referral for a motion for relief from the stay or adequate protection, the levy or seizure should be released immediately.

2. Referral. If the value exceeds the minimum amount, FI should refer the case expeditiously to Counsel to consider a motion for relief from the stay or adequate protection while the agreement is being negotiated with the debtor.

(1) "Ordinary Course of Business." In a Chapter 11 case, the DIP typically wants to continue running the business until it can be reorganized or sold. The debtor may automatically continue its routine ("ordinary course") use, sale, or lease of most of its pre-petition property pursuant to 11 USC 363(c)(1) and 1107(a).

(2) Lien Rights. If the IRS has a secured claim, the IRS may be entitled to adequate protection when a NFTL, properly filed pre-petition, is still valid and attaches to equity in property and/or cash collateral. Consider the "45-Day Rule" when determining lien priority. IRC 6323(c).

(3) Cash Collateral. The Bankruptcy Code can significantly limit a debtor's ability to use its cash collateral without the consent of creditors with secured interests in such property. Cash collateral includes cash and cash equivalents, such as negotiable instruments and funds in depository accounts. (See Exhibit 5.9.1-1, Glossary of Common Insolvency Terms.) The unauthorized use of cash collateral that is substantially harmful to one or more creditors is an express basis for conversion or dismissal of the case per 11 USC 1112(b)(4)(D).

(4) Superpriority Liens in a Chapter 11 Proceeding. 11 USC 364 provides that the trustee or DIP may, with court approval, obtain post-petition financing. To induce lenders to grant this financing, superpriority liens can be offered. Such liens become senior to all other liens.

(5) Real Property and Adequate Protection. Adequate protection is seldom sought by the IRS regarding real property due to its unlikely depreciation. However, unusual situations might arise making adequate protection necessary. At a minimum, the debtor should be required to maintain sufficient insurance on buildings and other improvements.

(6) Insolvency Actions. If the IRS is entitled to adequate protection based on lien equity, FI should:

1. Send AIS Letter 2173, Adequate Protection, or an equivalent local letter to the debtor with a copy to the debtor’s attorney advising that the IRS does not consent to the use of the cash collateral;

2. Based on response(s) received, attempt to reach an agreement; negotiations for adequate protection of the government's lien interests will follow guidelines similar to those used when the IRS negotiates a pre-petition levy agreement; and

3. Make a prompt referral to Counsel, asking for a motion to provide adequate protection to the IRS if delay is experienced and/or nonproductive responses are received.

(1) Tentative Carryback Adjustments. Taxpayers who have net losses can sometimes carry back the losses to previous years where they paid taxes to reduce the liability in the prior year and generate a refund. Such taxpayers may also make a special request for such a refund, known as a tentative carryback adjustment, also called a "quickie refund." To request a quickie refund, the taxpayer must file an application for the tentative carryback adjustment and the IRS must make a limited review of the application and issue the refund within 90 days.

(2) IRS Offsets. The IRS has the right to offset the quickie refund against federal tax liabilities of the taxpayer. This right of offset becomes particularly important when the taxpayer is in bankruptcy, because dollar amounts of quickie refunds can be large, and offset may be the only assured way of collecting liabilities owing from the taxpayer. Difficult mutuality issues are raised, however, when losses from post-petition periods are carried back to pre-petition years or when a refund is owed to a consolidated group and the liabilities are owed by a single member of the group. FI should consult Counsel in such cases.

(3) The Automatic Stay Against Setoffs. While the automatic stay sometimes prevents the IRS from making the setoff by crediting the refund against the liability, the IRS may freeze the refund until the stay is lifted. FI caseworkers must consult Counsel if the debtor is owed a quickie refund and the IRS has a claim.

(4) Pre-petition IRS Offsets . 11 USC 362(b)(26) provides that the IRS can setoff a pre-petition income tax refund against a pre-petition income tax liability without a lift of the automatic stay. If the quickie refund comes from a post-petition period or the liability is not for income tax, a lift of stay or local rules/standing orders allowing the offset are required regardless of the petition date.

(5) Inappropriate Refunds. To prevent these special refunds from going out to taxpayers who are in bankruptcy and owe federal taxes, procedures have been set in place to review the quickie refund claims expeditiously so Counsel may file a motion for lift stay for offset, if necessary.

(6) Interagency Offset Requests. The federal government is considered one creditor for purposes of offset. Upon becoming aware of a potential tax refund, a federal agency other than the IRS may seek to have the refund offset against its claim. However, the IRS does not have the authority to disclose the refund to another federal agency. If FI receives a request to freeze a refund on behalf of another federal agency, the caseworker assigned to the account must consult Counsel before taking any action. If an interagency offset is required, see IRM 5.9.4.5.3, Offset to Other Agencies.

(7) TCB Units. Tentative carrybacks for business returns originate from the filing of either a Form 1139, Corporation Application for Tentative Refund, or Form 1120-X, Amended U.S. Corporation Income Tax Return. For individuals, the appropriate forms are Form 1045, Application of Tentative Refund, or Form 1040-X, Amended U.S. Individual Income Tax Return. Tentative Carryback (TCB) Units responsible for processing the carryback requests are located at the Ogden and Cincinnati campuses. Generally, when the TCB Units determine a tentative carryback claim is processable, they research IDRS to see if the taxpayer owes federal taxes and if a bankruptcy freeze is on the account.

(8) Insolvency Contact. When a bankruptcy freeze is on an account, the TCB Unit must contact the FI caseworker assigned the case. The TCB unit should contact Insolvency by utilizing the contact information listed in the Insolvency Field Liaisons on SERP. The TCB Unit caseworker will advise the FI caseworker of the amount of the carryback credit and the processing time remaining.

(9) Counsel Contact. Following the IRM criteria for referrals to Counsel, when appropriate, the FI caseworker should advise Counsel of the tentative carryback through a referral asking for a motion to lift the stay to setoff the refund against the taxes owed. Also, as mentioned above, Counsel should be consulted before the setoff of a quickie refund arising from the carryback of losses from a post-petition year to a pre-petition year, or when the refund is owed to a consolidated group and the liabilities are owed by a single member of the group.

(10) Interest Free Period. Decisions to offset the tentative carryback credit or refund it to the debtor are under strict time constraints. By statute, quickie refunds must be issued within 90 days unless the government has a right of setoff. The statutory period during which the IRS is exempt from paying interest to the taxpayer is only 45 days from the date the quickie refund request is received by the IRS to the date of refund issuance. Therefore, if setoff is not appropriate under 11 USC 362(b)(26) because of the petition date or the period generating the refund, to minimize the amount of interest the IRS may have to pay the debtor, both the TCB Units and FI need to react quickly in determining if a lift of stay should be requested.

(1) Tax Collection Waivers. Pursuant to IRC 6502(a), as amended by the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS can no longer obtain waivers of the statute of limitations for collection (Form 900) except in conjunction with IRC 6159 installment agreements or the release of a levy.

(2) Chapter 11 Plans Are Not Installment Agreements. Although Chapter 11 plans frequently require the debtor to make a series of periodic (installment) payments to the IRS, the Chapter 11 plan differs in many ways from an installment agreement. The Chapter 11 plan is not considered an installment agreement under IRC 6159.

(3) Collection Statute Expiration Date (CSED) and Confirmed Plans. The limitation period for collecting a tax provided for by a confirmed Chapter 11 plan is suspended automatically by IRC 6503(h)(2) during the time the IRS is prohibited by reason of the bankruptcy from collecting the tax. In a non-individual Chapter 11 case, the taxpayer in bankruptcy receives a discharge when the plan is confirmed. Although the automatic stay ends at discharge, the IRS is still prohibited from collecting while it is bound by the Chapter 11 plan. The limitation periods is therefore suspended via IRC 6503(h)(2) while the taxpayer is current on Chapter 11 plan payments up to the time the taxpayer is in substantial default on the plan payments, plus six months. In the individual case, the discharge no longer occurs at confirmation in most cases. The stay remains in place until completion of plan payments and entry of a discharge order by the court, unless the court closes the case at an earlier date.

(4) Waiver Expiration Date. Collection statute limitation waivers (Form 900) obtained from taxpayers before December 31, 1999, outside of the context of an installment agreement, expired automatically on or before December 31, 2002.

(5) CSED and Corporate Cases in Chapter 11. In corporate cases and other cases where the debtor is not an individual, the IRS may generally rely on the suspension of the limitation period provided for in IRC 6503(h)(2) to collect tax payments after confirmation of Chapter 11 plans. The IRS should, nevertheless, insist Chapter 11 plans be paid in full within the time frames required by the Bankruptcy Code.

(6) CSED and Individuals in Chapter 11. As stated in paragraph (3) above, the stay against the collection of pre-petition debts stays in effect after confirmation of the plan, unless the court orders otherwise for cause, for individuals . The IRS may generally rely on IRC 6503(h)(2) for the suspension of the collection period if the debtor is current on plan payments. However, for cases filed before October 17, 2005, or for more recent cases where the court for cause allows the individual a discharge before completion of the plan (11 USC 1141(d)(5)), the IRS cannot rely on the IRC 6503(h)(2) suspension where the debtor is an individual with respect to taxes that are both (1) non-dischargeable and (2) for which full payment is not provided in the plan.

(7) CSED and Non-dischargeable Taxes in Individual Chapter 11. In bankruptcy cases of individuals filed before October 17, 2005, where a confirmed Chapter 11 plan does not provide for full payment of non-dischargeable tax liabilities, such as priority tax claims, gap interest on those claims, penalties claimed as general unsecured for a return filed late within two years of the petition date, or others; or where surviving federal tax liens are not provided for fully by the confirmed plan, the IRS must consider the following:

1. CSED on Non-dischargeable Taxes in Plan. Collection, outside of the plan, of non-dischargeable liability not provided for in the plan, may be considered when the CSED will expire on the non-dischargeable period in question before the plan completion date.

2. Adverse Plan Language. The plan should be reviewed for language restricting property of the estate from being revested in the debtor at confirmation or providing the bankruptcy estate will retain control of the property to some future point after confirmation. Language restricting collection outside of the plan should be considered when contemplating collection of non-dischargeable, non-plan liability concurrently with plan payments. Whenever possible, the IRS should request deficient plans be modified prior to plan confirmation. The IRS should request that the plan provide for administrative remedies for collecting the debtor's unpaid taxes following a substantial default in the plan. Additionally, the IRS should request language in the plan which specifies that the Collection Statute Expiration Date (CSED) for tax debts is extended per IRC 6503(h)(2). Specifically, the CSED will be suspended as long as the plan is in effect, not in substantial default, and for six months thereafter. Alternatively, the IRS should request language that provides that the CSED will not expire for a reasonable period (as negotiated) after completion of plan payments or the plan falls into substantial default. Consultation with Counsel may be necessary to determine local practice with respect to default language. (See IRM 5.9.8.17.1(4), Plan Provisions.)

3. Post-Confirmation NFTL Filing on Non-plan Portion of Non-dischargeable Liability. 11 USC 1141(a) states that the provisions concerning non-dischargeability in 11 USC 1141(d)(2) and (3) are exceptions to the general rule that a confirmed plan binds debtors. As non-dischargeable taxes are excepted from the binding effect of a plan, the argument can be made that 11 USC 1141(a) does not bar the filing of a NFTL for non-dischargeable taxes. 11 USC1141(c) provides that after confirmation, all the property dealt with by a plan is free and clear of the claims of pre-petition creditors except as otherwise provided in the plan. Subsection (c) contains the same exception for subsections (d)(2) and (d)(3) as subsection (a). Therefore, it appears 1141(c) does not apply to non-dischargeable taxes and that it typically does not bar the filing of NFTLs, post-confirmation, for non-dischargeable taxes. However, property of the estate includes property acquired by the debtor post-petition (as it does in Chapter 13) if the debtor is an individual (11 USC 1115).

   Caution: When filing any NFTL, Insolvency must ensure the debtor receives all rights required by law. (See IRM 5.12.2.2, Taxpayer Contact.)

4. Plan Defaults. The IRS should consider the impact collection of a non-dischargeable liability not provided for in the confirmed plan may have on the successful completion of the confirmed plan, but at the same time must take appropriate action when the CSED is no longer suspended after the automatic stay is lifted. Where the plan has already defaulted, this should not be a concern since the harm has already occurred.

5. Setoff. The IRS may use setoff opportunities to collect non-dischargeable, non-plan liability outside of the plan before the plan is in substantial default.

6. Secured Claims and Exempt, Abandoned, or Excluded Property (EAEP). Where the confirmed plan does not provide for full payment of the secured tax liability, the IRS takes the position that its pre-petition, perfected NFTLs remain enforceable against the debtor's exempted, excluded, or abandoned property outside of the plan.

7. Excluded Property. Retirement plans with spendthrift provisions are excluded from the bankruptcy estate pursuant to 11 USC 541. It is the position of the IRS that collection can be pursued from excluded property due to the statutory lien. This is true even when a NFTL is not on file to pay non-dischargeable periods with a CSED that will expire prior to plan completion. Collection may also be pursued against excluded property to enforce a pre-petition lien for dischargeable periods.

8. Revenue Officer Coordination. Where collection of any non-dischargeable, non-plan liability is being considered outside the plan, the caseworker may request the assistance of a RO through an OI.

9. Counsel Coordination. In any case where collection of non-dischargeable liability is proposed outside the plan for liabilities not provided for in the confirmed plan, the FI caseworker should consult Counsel to determine an appropriate course of action.

10. IDRS Status. Where the plan provides for partial payment of non-dischargeable liability, the account will be kept in IDRS status 72 until there is a substantial plan default or until the plan is completed.

(8) CSED - Individuals and Secured Claims. The IRS cannot rely on the suspension of the collection statute regarding secured claims if the plan does not provide for full payment of the secured claim. The following situations apply these principles:

1. The tax is non-dischargeable, and the IRS did not file a proof of claim (for example, the IRS was not aware of the liability before the bar date).

2. The tax or tax penalty is non-dischargeable but is not entitled to priority claim treatment (for example, non-priority taxes and tax penalties described in 11 USC 523(a)(1)(B), 523(a)(1)(C), or 523(a)(7), and the IRS filed a general unsecured claim for these taxes or penalties; the plan provided for less than full payment of these claims).

3. The tax, though otherwise dischargeable, was secured by property that was excluded or exempted from, or abandoned by, the bankruptcy estate.

(1) Policy Statement P-5-14. Absent statute of limitations considerations, the general policy of the IRS is to refrain from asserting the TFRP against non-debtor responsible persons in cases where the corporate debtor's Chapter 11 plan provides for full payment of trust fund taxes, as long as the plan is not in default (IRS Policy Statement P-5-14).

(2) RO Assigned Accounts. When the trust fund balance due accounts (e.g., corporate Forms 941) are assigned to FC at the time of the bankruptcy petition, the RO manager is responsible for issuing an ICS Other Investigation to a RO to conduct the investigation as soon as possible. The RO should periodically update FI on the progress of the investigation.

(3) Non-RO Assigned Balance Due Accounts. FI is responsible for initiating the TFRP investigation in bankruptcies not involving balance due accounts already assigned to FC as of the bankruptcy petition filing date. FI may either issue an ICS Other Investigation or assign the TFRP investigation to a FI caseworker. Also, see IRM 5.9.3.10, Trust Fund Recovery Penalty, and IRM 5.9.8.4.2(18), TFRP Issues.

(4) Tolerance Criteria for a TFRP Investigation. Generally, FI should initiate a TFRP investigation based on ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) Withholding of TFRP Investigation. If a TFRP investigation is withheld based on the above criteria, expiration of the assessment statute may be allowed without FI intervention. In that circumstance, established procedures must be followed and clearly documented on AIS explaining the reason the TFRP investigation was withheld.

(6) In Chapter 11 – Withholding Assessment Against Responsible Persons. For any case that exceeds tolerance criterion, the trust fund investigation must be conducted. If the corporate debtor has a confirmed reorganization plan providing for full payment of the trust fund taxes, assertion of the TFRP may be deferred. Each of the following conditions must be met to withhold assessment of the TFRP:

• The corporate debtor must have a confirmed plan,

• All payments under the confirmed plan are current, and

• Responsible persons have signed Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty. The waiver should extend the ASED of the responsible persons to one year beyond anticipated plan completion.

• Potentially responsible persons will not sign Form 2750

• Additional unpaid liabilities pyramid after the petition date

• The corporation continues to operate at a loss

• Assets are liquidated

• Excessive compensation is paid to officers during the bankruptcy proceeding

• The debtor defaults on plan payments or is only paying on the plan sporadically

(7) Withholding Collection of Assessed TFRPs. If the TFRP has been assessed against responsible persons, the IRS may withhold from collecting the TFRP from the persons unless factors indicate ultimate collection is doubtful from the corporate debtor. (See IRM 5.9.8.10(6), above.) The FI caseworker may withhold collection of the TFRP assessed against responsible persons by inputting a TC 470 cc 93 on the TFRP modules of the responsible persons. However, before inputting the TC 470 cc 93 on the accounts of the responsible persons, the caseworker must:

1. Make a NFTL filing determination against responsible persons. If appropriate, NFTLs should be filed. When filing any NFTL, Insolvency must ensure the debtor receives all rights required by law. (See IRM 5.12.2.2, Taxpayer Contact)

2. Determine if the responsible persons have the ability to pay from current assets or income.

3. In most cases, no action other than offsetting a Form 1040 refund to the TFRP, will be taken to collect from responsible persons while the corporate bankruptcy plan is current. However, if the responsible persons have the ability to pay and do not make plans to pay the TFRP from personal assets, other collection actions may be taken. Managerial concurrence must be secured prior to taking collection action.

   Caution: If the confirmed plan of the non-individual Chapter 11 debtor contains language prohibiting the collection of the TFRP from corporate officers or other responsible persons, the IRS may not be permitted to offset the income tax refunds to the assessed TFRP. In these instances, a manual refund will be required. Consult with Counsel for guidance in these instances.

(8) Designation of Payments in Chapter 11 Plans. In Chapter 11 cases, when a corporate debtor owes the IRS significant pre-petition trust fund taxes, the DIP may seek in its plan to designate IRS application of the earliest payments required under the plan to satisfy the corporation's outstanding trust fund taxes first.

1. A corporate debtor's designation of plan payments first to trust fund taxes can be an attempt to shift the risk of a failed Chapter 11 plan from the corporation's "responsible persons" onto the IRS. The DIP may be seeking to shield its "responsible persons" from the assertion and collection of a TFRP should the plan not be completed.

2. The Supreme Court has ruled bankruptcy courts can approve Chapter 11 plans which order the IRS to apply a Chapter 11 debtor's plan payments to trust fund taxes first if the court concludes the designation of payments in this manner is necessary for the success of the reorganization plan. (U.S. v. Energy Resources., Inc., 495 U.S. 545 (1990))

3. However, the IRS may challenge whether proposed designations of payments to trust fund taxes are necessary to the success of reorganizing Chapter 11 plans on the ground that the continued existence of personal liability for taxes of the debtor corporation provide an incentive for responsible officers to make the reorganization a success. Given the IRS’s policy that, absent statute of limitations considerations, the IRS will generally refrain from asserting the TFRP against non-debtor responsible officers where the plan provides for full payment as long as the plan is not in default (Policy Statement P-5-14), designations should rarely be necessary. Courts remain split on if a bankruptcy court may designate the application of payments made under a Chapter 11 plan to trust fund taxes when the plan provides for the debtor's liquidation, rather than the debtor's continuation as a reorganized business. (In re Kare Kemical, Inc., 935 F.2d 243 (11th Cir. 1991) and In re Indiana Grocery Co., Inc., 136 B.R. 182 (Bankr. S.D. Ind., 1990))

4. Application of the bankruptcy plan payments will be made according to the Designated Payment Code (DPC) shown on the transaction as outlined in Document 6209. DPC 99 signifies the payment is "Miscellaneous". If a payment posts with DPC 03, the payment is "Bankruptcy, Non-Designated". DPC 11 identifies the payment as "Bankruptcy, Designated to Trust Fund".

   Reminder: A TFRP assessment is classified as priority (unless secured by a NFTL) on the IRS's proof of claim. A TFRP is never to be paid as a general unsecured claim. Despite being called a penalty, the TFRP is treated as a tax.

(1) Significant Bankruptcy Cases. Cases meeting the Significant Bankruptcy Case Processing Procedures criteria in IRM 5.9.4.15.3, Significant Bankruptcy Case Referrals, must be referred to Area Counsel upon initial case review regardless of a "no liability" determination.

(2) No Liability Closures - Caution. If a "no liability" determination is made in a Chapter 11 case, caution must be exercised in early closure of the case. Closure, in all instances, must conform to the provisions of the USBC to protect the debtor's rights.

(3) Required Research Prior to Closure. At a minimum, current research must be done which shows all of the following conditions have been met:

• No balance due periods

• No pending assessments

• No unfiled returns

• No pending examinations

• No potential liability to the IRS indicated by the plan review

• Debtor is current for at least one complete post-petition quarter (Business Master File (BMF) taxes). If a debtor files bankruptcy in the middle of the quarter, the caseworker must monitor for BMF taxes for the remainder of that quarter and the next complete quarter.

• No other issues requiring Insolvency's attention

(4) Amended Plan or Disclosure Statement Received After Case Closure. If the IRS receives an amended disclosure statement or plan after closing a no liability Chapter 11 case, FI should conduct another liability review taking any necessary actions, which may include reopening the case on AIS.

(1) After Initial Case Review. Once the initial case review has been completed, FI caseworkers must monitor the debtor's compliance with filing, making FTDs, and adherence to adequate protection orders prior to plan confirmation. Compliance monitoring must be conducted for all in-business debtors, including those cases where no proof of claim will be filed or no money is owed. FI caseworkers may schedule follow-ups to monitor compliance using the "Follow-ups" tab on AIS.

(2) Deposit Requirements. Caseworkers should review pre-confirmation compliance for making federal tax deposits based on the business' FTD requirements. A business required to make deposits monthly or more frequently should be reviewed on a monthly basis. Businesses required to make quarterly deposits should be reviewed quarterly. If the debtor has been non-compliant pre-petition or becomes non-compliant post-petition/pre-confirmation, it may be advisable to review the case after each required deposit.

(3) Contact with Debtor. At any time the debtor is found to be delinquent in making FTDs, the caseworker must attempt to contact the debtor by phone. During the phone call, the caseworker must advise the debtor that the business has 10 calendar days to deposit all delinquent FTDs. The caseworker must enumerate the possible consequences of non-compliance, which may include the IRS:

• Filing Form 6338-A(C), Request for Payment of Internal Revenue Taxes, with the court (see paragraph (8) below)

• Requesting the appointment of a trustee

• Filing a motion to have the Chapter 11 case converted to a Chapter 7 bankruptcy

• Filing a motion to have the case dismissed

• Filing a motion for relief from the automatic stay

(4) Contact Ineffective. If contact with the debtor or debtor's attorney by phone or letter does not bring the debtor into FTD compliance, the caseworker should file an administrative claim, Form 6338-A(C), and send a copy to the US Trustee. Further actions to be considered are:

1. Negotiating an agreed order for compliance with FTD requirements containing a "conversion" or "drop dead" clause (referral to Counsel required to finalize an agreement in court), or

2. Referring the case to Counsel to consider conversion or dismissal, if the post-petition unpaid tax meets the tolerance criteria in IRM 5.9.4.15.4. (See paragraph (9) below.)

(5) LAMS. The Litigation Account Management System (LAMS) is a sub-system within AIS used to monitor compliance for all debtors in Chapters 11, 12, and 13. LAMS generates a report to match closed cases on AIS with unreversed TC 520s on IDRS. This report should be worked timely to identify violations of the automatic stay. Through LAMS, timely reviews can be conducted when working on large dollar and chronic repeater cases.

(6) TC 136 BMF Monitoring. The use of TC 136 assists FI when monitoring for BMF compliance. For compliance monitoring, the Insolvency Interface Program (IIP) inputs a systemic TC 136 reflecting the Last Return Amount Code of "1".

1. The input of TC 136 suppresses both litigation transcripts for TC 650 and FTD alerts. See IRM 5.7.1.5 (2)(e), Pre-Contact Research and Analysis.

2. A FTD-FIDUC transcript is generated when a systemic check discloses substantial under-depositing.

3. When systemic monitoring is no longer necessary, a TC 137 should be input.

(7) Large Dollar/Chronic Delinquency Cases. In lieu of systemic monitoring, FI should consider periodic manual monitoring of large dollar or chronic repeater cases on IDRS (as established by local management guidelines).

(8) Request for Payment. If the post-petition liabilities remain unpaid, the caseworker must consider listing the liabilities on Form 6338-A(C), Request for Payment of Internal Revenue Taxes. The request for payment should be filed with the court. Under 11 USC 503(b)(1)(D), the IRS is not required to file a request for the payment of administrative expense taxes and related penalties. However, it is the IRS’s position that IRS will file the request for payment of these post-petition liabilities. (IRM 5.9.13.11, Administrative Claims) Filing the Form 6338-A(C) puts the debtor and creditors on notice as to the amounts due. Failure to include these liabilities on Form 6338-A(C) may result in the liabilities being discharged in the bankruptcy case. Depending upon local court practices, the IRS may find it beneficial to continue to file administrative claims to establish a basis for a motion for conversion or dismissal. FI should consult Counsel for guidance, if necessary.

1. The caseworker should send a copy of the Form 6338-A(C) to the debtor and debtor's attorney. Include a letter advising them that IRS will request a motion to convert or dismiss the case if the non-compliance is not cured by the specified target date.

2. Include an estimate of the current tax period liability and an estimate of the amount due on any unfiled returns on the Form 6338-A(C).

(9) Referral. If the delinquency is not resolved, the case should be referred to Counsel for court intervention. Failure to pay or file post-petition taxes as they become due are grounds for conversion, dismissal, or appointment of a trustee. (See 11 USC 1112(b)(4)(I) for additional information.) Additionally, if the debtor fails to file a tax return that becomes due post-petition or fails to properly obtain an extension, the IRS may request that the case be converted or dismissed. The court is required to grant the request if the debtor does not file the return or obtain an extension within 90 days of the request. (11 USC 521(j)(2)) The referral to Counsel must include the debtor's full TINs.

(10) Conversion Limitations. Generally, a Chapter 11 case can be converted or dismissed voluntarily by the debtor or involuntarily by the request of a party in interest. However, for three types of debtors, the court is prevented from converting a case from Chapter 11 to Chapter 7 unless the conversion is requested by the debtor. In instances involving these special debtors, the court may only dismiss the case (assuming grounds exist to do so). The three types of debtors listed under 11 USC 1112(c) are:

1. A farmer;

2. A corporation which is not moneyed, business or commercial; or

3. Any entity not eligible to file Chapter 7.

(1) Special Tax Provisions. IRC 1398 contains special tax provisions for an individual filing Chapter 11. For an individual who files bankruptcy under Chapter 11 provisions, two taxpayers exist post-petition:

1. The trustee or DIP files a return (Form 1041) for all income, which belongs to the estate; and

2. The individual debtor files a return (Form 1040) for all income of the debtor, which is not part of the estate.

   Note: These same provisions are applicable to individual Chapter 7 cases. (See IRM 5.9.6.14, Bankruptcy Estate Income Taxes — Separate Taxable Entity.)

(2) Post-petition Property. 11 USC 1115 makes property acquired by an individual debtor post-petition property of the estate, as in Chapter 13 cases. However, unlike in Chapter 13 cases, the bankruptcy estate of an individual in Chapter 11 is a separate taxable entity. Gross earnings from a Chapter 11 debtor's performance of services and gross income from property they acquired once the petition was filed must be included in the bankruptcy estate's gross income, not in the debtor's gross income. If the debtor is self-employed, the debtor remains responsible for paying the self-employment tax on post-petition income on their individual Form 1040 Schedule SE, even though that income must be reported on the estate’s return for income tax purposes. Notice 2006-83, IRB 2006-40, provides detailed guidance on property of the bankruptcy estate for individuals .

(3) Individuals Can Terminate Tax Year. Although the practice is not common, individuals may elect to terminate their tax year when the bankruptcy petition is filed. (IRC 1398(d))

1. If this election is made, the tax year is terminated as of the day before the bankruptcy filing, which will result in the debtor's filing two "short-year" returns. This election is made by filing the first short year return on or before the due date, which is the 15th day of the fourth month following the close of the first short year.

2. The debtor must write at the top of the first short year return: SECTION 1398 ELECTION. At the top of the second short year return, the debtor must write: SECOND SHORT YEAR RETURN AFTER SECTION 1398 ELECTION.

   Note: The election can also be made by filing an extension to file on or before the due date of this return.

3. The spouse can join in this election. If the spouse does join, a joint return must be filed for the first short year. If the spouse does not join, a joint return cannot be filed for that year.

4. If an individual files Chapter 11 and makes the IRC 1398 election, the spouse may join in this election. If the spouse subsequently files Chapter 11, the second filing creates a second IRC 1398 election opportunity. If the election should be made again, three short year returns are required.

5. Once this election is made, it may not be changed unless the case is dismissed. (See paragraph (4) below.)

(4) The Bankruptcy Estate in the Individual Chapter 11 Case. The bankruptcy estate in an individual Chapter 11 case is a separate taxable entity. A separate Employer's Identification Number (EIN) must be obtained for the estate.

1. An income tax return must be filed on Form 1041, if the estate has sufficient income to meet the filing requirements. The Form 1041 filing requirements are the total of the amount of one exemption plus the standard deduction for a married person filing separately.

2. The estate may initially choose its own taxable period (i.e., when its first tax year ends) as long as the initial period does not exceed one year.

3. The DIP or the trustee must determine what portion of income, deductions, and/or credits belongs to the individual debtor and what portion belongs to the estate. For cases of individuals, property and earnings acquired post-petition are property of the estate, as in Chapter 13 cases. See IRM 5.9.8.14.1, Post-petition Debts - Chapter 11 Individuals, and 11 USC 1115 for further information. Income derived from assets of the estate should be reported on the estate's Form 1041.

   Example: A loss derived from rental property that is property of the estate would not be available to reduce the debtor's Form 1040 income as the rental property is part of the estate, and the loss should be reported on the estate's Form 1041.

4. The bankruptcy estate will succeed to and take into account any pre-petition net operating loss (NOL) available to the individual. The NOL will become part of the estate when the petition is filed and will not be available to the individual so long as the estate exists. When the estate terminates, any remaining NOL will revert to the individual, but first it must be reduced by the amount of any discharged debt. (IRC 108)

5. A joint bankruptcy petition actually creates two bankruptcy estates – unless the court has substantively consolidated the estates. If the estates have not been consolidated, two 1041 obligations exist.

6. Caseworkers should send Letter 4914, Notice to Individual Chapter 11 Debtor Regarding Income Tax Filing Responsibilities, to individual Chapter 11 debtors and trustees advising them of these opportunities and their subsequent tax responsibilities.

7. If the Chapter 11 case is dismissed, the effect is as if a bankruptcy petition was never filed. Therefore, the debtor must file amended returns to replace any short year returns filed or Form 1041s filed.

(5) Determining if Income is Property of the Estate or Property of the Debtor. Income earned by the debtor for services performed is "personal service income". Personal service income is reported and taxed on Form 1041, U.S. Income Tax Return for Estates and Trusts. There are other forms of income reported and taxed on the Form 1041. Examples of income reported on Form 1041 are:

• Wages and other compensation earned as an employee,

• Independent contractor income,

• Self-employment income, such as, income earned as a painter, CPA, consultant, attorney, plumber, etc., and

• Rental income from real property purchased with income of the estate after the filing of the bankruptcy petition.

• Rental income from real property purchased using excluded, exempt, or abandoned assets.

• Rental income from real property using funds obtained from gifts, inheritance, or insurance proceeds received more than 180 days after the bankruptcy petition date.

• Income from excluded property, such as, an ERISA retirement plan.

• Self-employment tax on self-employment income earned by the bankruptcy estate and reported on the Form 1041 filed by the estate. The self-employment tax is included on the debtor's Form 1040.

(1) General Information. Effective 2014, the Affordable Care Act, IRC 5000A, required all individuals to have qualifying health care coverage (called minimum essential coverage or MEC) in each month of the year, qualify for an exemption, or make an individual shared responsibility payment (SRP) when they file their tax return for the year. For more information see IRM 5.9.4.19.1, Individual Shared Responsibility Payment (SRP).

(2) Assessments and Treatment in Bankruptcy. The SRP liability is treated as an excise tax under 11 USC 507(a)(8)(E). It is reported on the appropriate line of the debtor's federal income tax return. The amount shown on the respective line of the income tax return is then assessed on IDRS as a MFT 35 module for the respective tax year. Since the liability for the SRP module is derived from an individual's federal income tax return, certain information from that return is used in determining dischargeability of the SRP liability.

(3) Post-Petition SRP Liabilities are Treated in the Same Manner as the Post-Petition Form 1040 Liability. The individual SRP liability of the debtor is taken from the appropriate line on the debtor's income tax return, when the debtor's gross income reportable on Form 1040 meets the threshold requiring the debtor to file Form 1040. For the tax year ending December 31, 2014 (201412), the SRP liability is reported on:

• Form 1040, U.S. Individual Income Tax Return, Line 61

• Form 1040A, U.S. Individual Income Tax Return, Line 38

• Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, Line 11

• While collection of the post-petition SRP liability is not prohibited by the automatic stay, a TC 520 cc 84 must be placed on post-petition SRP liabilities to prevent any inadvertent collection activity against any property of the bankruptcy estate.

• Like income tax reported on the debtor's Form 1040, the post-petition SRP liability is not claimable as an administrative expense on Form 6338-A(C), Request for Payment of Internal Revenue Taxes.

• The post-petition SRP liability is non-dischargeable in the individual or joint debtor's Chapter 11 bankruptcy case.

(4) SRP Mirrored Modules. Beginning in January of 2016, certain joint SRP liabilities assessed under Master File Transaction (MFT) 35 on IDRS are mirrored as individual SRP modules under MFT 65 on IDRS. For example, a joint SRP liability may be mirrored when one spouse filed bankruptcy and the bankruptcy case was dismissed or discharged. The SRP liability of the debtor is treated in the same manner in a bankruptcy case. It does not matter if the SRP is assessed under MFT 35 or MFT 65.

(5) Discharge Eligibility. A debtor must be eligible to receive a discharge in the current Chapter 11 bankruptcy case for any of the debtor's liabilities to be discharged. Liabilities owed by the individual or joint debtor may not be discharged if the IRS was not properly notified of the bankruptcy case. See IRM 5.9.17.8.9, Procedures for Processing Bankruptcy Discharges when the IRS Received No Notice or Late Notice in the Asset Case, for additional information. This also includes SRP liabilities.

(6) Discharge Upon Completion of the Chapter 11 Plan. When an individual or joint debtor receives a discharge upon completion of the Chapter 11 plan under 11 USC 1141(d)(5)(A), the pre-petition SRP liability:

1. Is non-dischargeable if the Form 1040 was due, with extensions, within the three-years prior to the bankruptcy petition date. (11 USC 523(a)(1)(A) and 11 USC 507(a)(8)(E)(i))

2. May be non-dischargeable if the tax on the Form 1040 is non-dischargeable due to willful evasion or fraud. However, IRS must be able to show that the debtor willfully evaded the SRP or committed fraud as to the SRP. When the SRP may be non-dischargeable for these reasons, concurrence that the liability is non-dischargeable is required from Area Counsel. (IRM 5.9.17.8.2(1), Exception to Discharge, and 11 USC 523(a)(1)(C))

3. May be non-dischargeable if the tax on the Form 1040 was assessed before the debtor filed a return. Discharge can depend upon the jurisdiction where the bankruptcy case was filed. Discharge can also depend upon when/if the debtor filed their return for the respective year. See IRM 5.9.17.8.1, Determining Dischargeability of Late Filed Returns in Which a SFR was Prepared, and 11 USC 523(a)(1)(B)(i).

4. Is non-dischargeable if the Form 1040 was filed late and after the date that is two-years before the date of the bankruptcy petition. (11 USC 523(a)(1)(B)(ii))

   Note: The two year period with regard to late filed returns is tolled during a prior bankruptcy. See IRM 5.9.13.19.3(4), BAPCPA Tolling, for additional information.

(7) Hardship Discharge. The exceptions to discharge above apply to a hardship discharge as well.

(8) Interest. If the SRP liability is non-dischargeable, the interest is non-dischargeable. No penalty is assessed or accrued on the SRP liability.

(1) General Information. Effective January 1, 2015, the Affordable Care Act required applicable large employers (ALE) to offer affordable, minimum value health coverage to full-time employees (and their dependents) or potentially be liable for an Employer Shared Responsibility Payment (ESRP) under IRC 4980H. For more information see IRM 5.9.4.19.2, Employer Shared Responsibility Payment (ESRP).

(2) Assessment and Treatment in Bankruptcy. ESRP liabilities are claimable as an excise tax on the IRS's proof of claim. For additional information on claiming these liabilities, see IRM 5.9.13.18.6(3), IRC 4980H-Employer Shared Responsibility Provisions.

(3) Post-petition ESRP MFT 43 Liabilities and Chapter 11 Cases. The enrollment date and the Letter 226-J issuance date need to be considered when determining to file a pre-petition claim, post-petition claim or both. See IRM 5.9.4.19.2(10) , Determining if the ESRP Liability is Pre-Petition/Post-Petition. The enrollment date is usually November 1st of the year before the ESRP year. The date the Letter 226-J was issued is identified by a TC 971 AC 782 in the MFT 43 module.

1. Individual Chapter 11 Cases. Post-petition/pre-confirmation ESRP MFT 43 liabilities owed by an individual debtor who is an ALE sole-proprietor qualify as an administrative expense of the Chapter 11 estate if the estate was the employer for the purposes of the ESRP. If the estate filed employment tax returns, contact Counsel to determine if it was the employer for purposes of the ESRP. If the post- petition/pre-confirmation ESRP MFT 43 liability was incurred by the estate and is claimable as an administrative expense, use Form 6338-A(C), Request for Payment of Internal Revenue Taxes. Include proof of claim statement "Z9", caption ESRP on the Form 6338-A(C) stating, "ESRP is post-petition since Letter 226-J was issued post-petition".

2. Non-Individual Chapter 11 Cases. In Chapter 11 non-individual cases, the bankruptcy estate is not a separate taxable entity. Post-petition/pre-confirmation ESRP MFT 43 liabilities owed by the non-individual debtor in a Chapter 11 case are claimable as administrative expenses on Form 6338-A(C). The Form 6338-A (C) should include proof of claim statement "Z9", caption ESRP stating, "ESRP is post-petition since Letter 226-J was issued post-petition".

(4) Discharge and ESRP Liabilities. The ESRP is treated as an excise tax under 11 USC 507(a)(8)(E). When the L226-J issuance date, F1094-C due date, or employees’ return due date are within three years before the petition date,. the ESRP MFT 43 liability is a priority excise tax debt.

1. Individual Chapter 11 Cases. Pre- petition ESRP priority taxes in individual Chapter 11 cases are excepted from discharge pursuant to 11 USC 523(a)(1)(A) unless the confirmed plan provides otherwise. Any portion of the post-petition ESRP (whether incurred by the estate or the debtor) that should have been paid under the plan will be non-dischargeable.

2. Non-Individual Chapter 11 Cases. In reorganizing Chapter 11 cases of non-individual debtors, debtors generally receive a "super discharge" of pre-confirmation tax debts when the Chapter 11 plan is confirmed except to the extent that the plan or confirmation order provides otherwise (11 USC 1141(d)(1)(A)).

(1) Requirement. Chapter 11 is the only chapter of the Bankruptcy Code requiring a disclosure statement to accompany a proposed plan of reorganization.

(2) Describes Plan. The disclosure statement may be brief or lengthy. It should explain what the proposed plan means to particular creditors and to other interested persons. The contents of the disclosure statement are not binding on the IRS. The approval process for the disclosure statement provides the IRS with an opportunity to explore relevant facts regarding the debtor. The process also affords the IRS a chance to clarify any plan issues.

(3) Tax Consequences. The disclosure statement is required to include a discussion of the potential federal tax consequences to the debtor, any successor to the debtor, and a typical "hypothetical investor." Among other issues, plans providing for liquidation or the sale of property should be reviewed for the tax impact.

(4) Notice of Hearing. Once the debtor submits a disclosure statement and plan of reorganization, the court schedules a hearing on the disclosure statement. Notice of the hearing is sent to all creditors. The FI caseworker should immediately request a copy of the disclosure statement and plan from the debtor's attorney upon receipt of the notice of hearing. These documents can also be reviewed on PACER. If mailed, these documents should be sent directly to the FI office instead of the national Insolvency post office box address.

(5) Insolvency Review. The FI caseworker should review the claim and IDRS to ensure all tax liabilities, assessed and estimated, are included on a proof of claim. The pre-petition claim should be amended, if appropriate. This review will also identify if administrative tax liabilities have been incurred. 11 USC1112(b)(4)(I) provides that failure to timely pay taxes owed after the petition date or failure to file post-petition tax returns is cause for dismissal or conversion. The IRS is not required to file an administrative claim before requesting dismissal or conversion of the case. However, the IRS takes the position that IRS will file Form 6338-A(C), Request for Payment of Internal Revenue Taxes, when actual or potential post-petition liabilities are present. The filing of the administrative claim puts the debtor and creditors on notice of the post-petition amounts due. (See IRM 5.9.8.13, Post-petition/Pre-confirmation BMF Monitoring, IRM 5.9.8.14.1, Post-petition Debts - Chapter 11 Individuals, and IRM 5.9.8.17.1(4), Plan Provisions.)

(6) Lien and Equity Issues. If the IRS has filed a NFTL allowing for a secured claim, schedules must be reviewed to determine if the equity to which the lien attaches is at least equal to the claim. If the equity is less than the secured claim, the portions of the claim to be reclassified as unsecured priority or unsecured general must be calculated. The claim must be amended accordingly. (See IRM 5.9.13.19.2, Secured Claim.)

(7) Objections. The disclosure statement must provide sufficient information for the reviewer to make a judgment about the plan. Comparison of debtors' schedules and statements of financial affairs should be made against other financial information. Examples of financial information that can be reviewed include:

• Accurint

• Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals

• Form 433-B, Collection Information Statement for Businesses

(1) Bankruptcy Estate upon Confirmation. All property of the non-individual debtor generally vests back to the debtor upon confirmation. However, the plan or the confirmation order may provide otherwise in accordance with 11 USC 1141(b). The automatic stay in cases other than individuals usually terminates at confirmation per 11 USC 362(c) because the debtor is granted or denied a discharge. Treatment of the individual debtor case is different. As in Chapter 13 cases, there is a provision that post-petition property is included in the estate; and, as in Chapter 13 cases, there is confusion as to what property revests in the debtor at confirmation. The automatic stay in the case of an individual remains in effect until the earlier of dismissal, discharge, or closure of the case by the court. In any event, there is always a stay against collection from property of the estate. The discharge does not occur in the individual case until completion of all payments provided for in the plan. Caseworkers must be alert to plans that provide for premature closure of the case by the court, prior to the discharge. In such cases, the automatic stay will terminate prior to the discharge. Early termination of the stay may pose difficulties in calculation of the tolling of the Assessment Statute Expiration Date (ASED).

(2) Effective Date of Plan. The effective date of the plan is usually defined in the plan. If not defined in the plan, the effective date is the date the confirmation order becomes final.

(3) Plan Confirmation Binding. A Chapter 11 plan is confirmed when the court enters an order confirming the plan. Confirmation binds the debtor and creditors to the terms of the plan.

(4) Discharge. The individual debtor does not receive a discharge upon confirmation unless the court orders otherwise for cause. Rather, the individual receives a discharge after completion of payments, as in Chapter 13 cases. Additionally, similar to the Chapter 13 case, the court may grant the individual a hardship discharge in appropriate circumstances per 11 USC 1141(d)(5).

(5) Automatic Stay Terminated. The automatic stay is usually terminated at confirmation for all non-individual debtors. There is no need to input a TC 520 cc 81 at confirmation. (See IRM 5.9.8.19, Post-Confirmation Actions.) For Chapter 11 cases of individuals, the stay usually remains in effect after confirmation and during the plan.

(6) Non-Discharge. For a debt to be discharged, the debtor must first be eligible to receive a discharge. Per 11 USC 1141(d)(3), a debtor is not eligible to receive a discharge if:

1. The plan provides for liquidation of all or substantially all property of the estate;

2. The debtor does not engage in business after the confirmation of the plan; and

3. The debtor would be denied a discharge in Chapter 7.

• Committed fraud.

• Not been open and truthful during the bankruptcy. For example, the debtor failed to explain satisfactorily the loss of assets when questioned at the meeting of creditors. Another example is the debtor knowingly changing the books and records of the non-individual to conceal income earned by the non-individual to creditors. These examples are not all-inclusive.

• Been granted a discharge in prior Chapter 11 case with a petition date within eight years of the current petition date.

• Been granted a discharge in prior Chapter 12 case with a petition date within six years of the current petition date. Payments in the Chapter 12 plan in the prior case must have either totaled 100% of allowed unsecured claims, or the debtor must show that the Chapter 12 plan was proposed in good faith, was the debtor's best effort, and the debtor paid 70% of such claims.

(7) Individuals/Certain Taxes Not Discharged. Confirmation in a Chapter 11 case does not discharge an individual debtor from certain taxes. 11 USC 523(a)(1) lists the exceptions to discharge and includes:

• Priority taxes under 11 USC 507(a)(8)

• Taxes on unfiled returns

• Taxes on returns that were filed late and within the two years prior to the bankruptcy petition date

• Taxes on fraudulent returns

• Any tax that the debtor willfully attempted to evade or defeat

(8) Non-Collection Outside of Plan. Confirmation does not discharge an individual debtor from taxes excepted from discharge under 11 USC 523(a). However, it is the IRS's practice not to attempt to collect non-dischargeable pre-petition taxes outside of the plan unless:

1. A substantial default has occurred;

2. Circumstances allowing collection through setoff arise, or

3. The plan does not provide for full payment of the non-dischargeable taxes.

(1) Actions. Take the following post-confirmation actions on all non-individual debtors cases :

1. Input TC 520 cc 64 on all pre-confirmation modules.

   Note: Unusual language in the confirmed plan or confirmation order regarding offset provisions or post-confirmation collection actions may require the use of a TC 520 closing code other than TC 520 cc 64. If provisions are unclear, contact Counsel for assistance in interpreting the plan.

2. Verify that the TC 520 cc 64 has posted.

3. Reverse any TC 520 bankruptcy closing code that is present on the account except the TC 520 cc 64.

4. Input TC 137 on all accounts having a TC 136.

5. Request assessment of any unagreed deficiencies, as appropriate, with the exception stated in paragraph (2) below.

6. Document the terms of the confirmed plan in the AIS history. (See IRM 5.9.5.4(4), Chapters 11 and 12 Plan Documentation.)

7. Send the debtor Letter 6237, Amortization Letter for Non-Individuals, advising of the terms of the plan . Include the name, telephone number, and mailing address of the caseworker in the letter. (See IRM 5.9.8.17.1(11), Written Notice to Debtor.)

8. If there are assessed TFRP liabilities owned by non-individual debtor. send the responsible officer Letter 6241, TFRP Gap Interest for Responsible Officers.

9. Add the plan to the Confirmed Plan Monitoring (CPM) screen on AIS. (Exhibit 5.9.8-1, Adding the Confirmed Plan to AIS.)

10. Schedule a follow-up for receipt of the first plan payment.

(2) Individual Debtors. For individual debtors the automatic stay generally remains in place until the discharge upon completion of plan payments. The TC 520 code should not be changed without a specific need to do so. Unagreed deficiencies on pre-petition periods cannot be assessed until the stay is lifted. The stay is lifted at the earliest of closure of the case by the court, dismissal, discharge, or denial of discharge. The caseworker must:

1. Document the terms of the confirmed plan in the AIS history. (See IRM 5.9.5.4(4), Chapters 11 and 12 Plan Documentation.)

2. Send the debtor Letter 6240, Amortization Letter for Individuals, advising of the terms of the plan. Include the name, telephone number, and mailing address of the caseworker in the letter. (See IRM 5.9.8.17.1(11), Written Notice to Debtor.)

3. Add the plan to the Confirmed Plan Monitoring (CPM) screen on AIS. (See Exhibit 5.9.8-1, Adding the Confirmed Plan to AIS.)

4. Schedule a follow-up for receipt of the first plan payment.

(1) Reasons for Closure. Events that may close a Chapter 11 case are:

• Dismissal (including voluntary)

• Conversion to a Chapter 7 liquidation proceeding

• Default of the payment plan

• Plan completion

• Discharge

(2) Closing Actions. IRM 5.9.17, Closing a Bankruptcy Case, provides information on closing bankruptcy cases, including Chapter 11 cases. Dismissal is discussed in IRM 5.9.17.6, Dismissal, and subsections. Discharge is discussed in IRM 5.9.17.8, Discharge and Exceptions to Discharge, and subsections. In addition to these subsections, caseworkers should refer to:

• IRM 5.9.17.11, Closing Chapter 7 and Liquidating Chapter 11 Partnerships

• IRM 5.9.17.12, Closing Chapter 7 and Chapter 7 Limited Liability Companies (LLCs)

• IRM 5.9.17.13, Closing Liquidating Chapter 11 Corporations and Liquidating Chapter 11 LLCs

• IRM 5.9.17.13.1, Closing Chapter 11 Non-Individual Entities that Reorganize in Chapter 11

• IRM 5.9.17.13.2, Consolidated Chapter 11 Filings

• IRM 5.9.17.13.3, Closing Chapter 11 Cases Filed by Individuals

• IRM 5.9.17.16, Trust Fund Recovery Penalty Adjustments