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1040x hrblock Part Two -   Excise Taxes Other Than Fuel Taxes Table of Contents 3. 1040x hrblock   Environmental TaxesOil Spill Liability Tax ODCs Imported Taxable Products Floor Stocks Tax 4. 1040x hrblock   Communications and Air Transportation TaxesUncollected Tax Report Communications TaxLocal-only service. 1040x hrblock Private communication service. 1040x hrblock Exemptions Credits or Refunds Air Transportation TaxesTransportation of Persons by Air International Air Travel Facilities Transportation of Property by Air Special Rules on Transportation Taxes 5. 1040x hrblock   Manufacturers TaxesImporter. 1040x hrblock Use considered sale. 1040x hrblock Lease considered sale. 1040x hrblock Bonus goods. 1040x hrblock Taxable Event ExemptionsRequirements for Exempt Sales Credits or Refunds Sport Fishing EquipmentRelated person. 1040x hrblock Bows, Quivers, Broadheads, and Points Arrow ShaftsExemption for certain wooden arrows. 1040x hrblock CoalExported. 1040x hrblock Taxable TiresQualifying intercity or local bus. 1040x hrblock Qualifying school bus. 1040x hrblock Gas Guzzler TaxVehicles not subject to tax. 1040x hrblock Imported automobiles. 1040x hrblock VaccinesConditions to allowance. 1040x hrblock Taxable Medical Devices 6. 1040x hrblock   Retail Tax on Heavy Trucks, Trailers, and TractorsHighway vehicle. 1040x hrblock Vehicles not considered highway vehicles. 1040x hrblock Idling reduction device. 1040x hrblock Separate purchase. 1040x hrblock Leases. 1040x hrblock Exported vehicle. 1040x hrblock Tax on resale of tax-paid trailers and semitrailers. 1040x hrblock Use treated as sale. 1040x hrblock Sale. 1040x hrblock Long-term lease. 1040x hrblock Short-term lease. 1040x hrblock Related person. 1040x hrblock Exclusions from tax base. 1040x hrblock Sales not at arm's length. 1040x hrblock Installment sales. 1040x hrblock Repairs and modifications. 1040x hrblock Further manufacture. 1040x hrblock Rail trailers and rail vans. 1040x hrblock Parts and accessories. 1040x hrblock Trash containers. 1040x hrblock House trailers. 1040x hrblock Camper coaches or bodies for self-propelled mobile homes. 1040x hrblock Farm feed, seed, and fertilizer equipment. 1040x hrblock Ambulances and hearses. 1040x hrblock Truck-tractors. 1040x hrblock Concrete mixers. 1040x hrblock Registration requirement. 1040x hrblock Further manufacture. 1040x hrblock 7. 1040x hrblock   Ship Passenger Tax 8. 1040x hrblock   Foreign Insurance TaxesPremium. 1040x hrblock 9. 1040x hrblock   Obligations Not in Registered Form 10. 1040x hrblock   Indoor Tanning Services Tax 11. 1040x hrblock   Patient-Centered Outcomes Research Fee Prev  Up  Next   Home   More Online Publications
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The 1040x Hrblock

1040x hrblock Publication 908 - Main Content Table of Contents Bankruptcy Code Tax Compliance RequirementsTax Returns Due for Periods Ending Before the Bankruptcy Filing in Chapter 13 Cases Tax Returns Due After the Bankruptcy Filing Individuals in Chapter 12 or 13 Individuals in Chapter 7 or 11Debtor's Election To End Tax Year – Form 1040 Taxes and the Bankruptcy Estate Bankruptcy Estate – Income, Deductions, and Credits Tax Reporting – Chapter 11 Cases Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due Tax Return Example – Form 1041 Partnerships and CorporationsFiling Requirements Partnerships Corporations Receiverships Determination of TaxPrompt Determination Requests Court Jurisdiction Over Tax MattersBankruptcy Court Tax Court Federal Tax ClaimsUnsecured Tax Claims Discharge of Unpaid Tax Debt CancellationExclusions Reduction of Tax Attributes Partnerships Corporations Tax Attribute Reduction Example How To Get Tax HelpTaxpayer Advocacy Panel (TAP). 1040x hrblock Low Income Taxpayer Clinics (LITCs). 1040x hrblock Bankruptcy Code Tax Compliance Requirements Tax Returns Due for Periods Ending Before the Bankruptcy Filing in Chapter 13 Cases The Bankruptcy Code requires chapter 13 debtors to file all required tax returns for tax periods ending within 4 years of the debtor's bankruptcy filing. 1040x hrblock All such federal tax returns must be filed with the IRS before the date first set for the first meeting of creditors. 1040x hrblock The debtor may request the trustee to hold the meeting open for an additional 120 days to enable the debtor to file the returns (or until the day the returns are due under an automatic IRS extension, if later). 1040x hrblock After notice and hearing, the bankruptcy court may extend the period for another 30 days. 1040x hrblock Failure to timely file the returns can prevent confirmation of a chapter 13 plan and result in either dismissal of the chapter 13 case or conversion to a chapter 7 case. 1040x hrblock Note. 1040x hrblock Individual debtors should use their home address when filing Form 1040 with the IRS. 1040x hrblock Returns should not be filed “in care of” the trustee's address. 1040x hrblock Ordering tax transcripts and copies of returns. 1040x hrblock   Trustees may require the debtor to submit copies or transcripts of the debtor's returns as proof of filing. 1040x hrblock The debtor can request free transcripts of the debtor's income tax returns by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS or by placing a request on the IRS's free Automated Delivery Service (ADS), available by calling 1-800-829-1040. 1040x hrblock If requested through ADS, the transcript will be mailed to the debtor's most current address according to the IRS's records. 1040x hrblock Transcripts requested using Form 4506-T may be mailed to any address, including to the attention of the trustee in the debtor's bankruptcy case. 1040x hrblock Transcripts are normally mailed within 10 to 15 days of receipt of the request by the IRS. 1040x hrblock A transcript contains most of the information on the debtor's filed return, but it is not a copy of the return. 1040x hrblock To request a copy of the debtor's filed return, file Form 4506, Request for Copy of Tax Return. 1040x hrblock It may take up to 60 days for the IRS to provide the copies after receipt of the debtor's request, and there is a fee of $57. 1040x hrblock 00 per tax return for copies of the returns. 1040x hrblock Tax Returns Due After the Bankruptcy Filing For debtors filing bankruptcy under all chapters (chapters 7, 11, 12, or 13), the Bankruptcy Code provides that if the debtor does not file a tax return that becomes due after the commencement of the bankruptcy case, or obtain an extension for filing the return before the due date, the taxing authority may request that the bankruptcy court either dismiss the case or convert the case to a case under another chapter of the Bankruptcy Code. 1040x hrblock If the debtor does not file the required return or obtain an extension within 90 days after the request is made, the bankruptcy court must dismiss or convert the case. 1040x hrblock Tax returns and payment of taxes in chapter 11 cases. 1040x hrblock   The Bankruptcy Code provides that a chapter 11 debtor's failure to timely file tax returns and pay taxes owed after the date of the “order for relief” (the bankruptcy petition date in voluntary cases) is cause for dismissal of the chapter 11 case, conversion to a chapter 7 case, or appointment of a chapter 11 trustee. 1040x hrblock Disclosure of debtor's return information to trustee. 1040x hrblock   In bankruptcy cases filed under chapter 7 or 11 by individuals, the debtor's income tax returns for the year the bankruptcy case begins and for earlier years are, upon written request, open to inspection by or disclosure to the trustee. 1040x hrblock If the bankruptcy case was not voluntary, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered. 1040x hrblock    In bankruptcy cases other than those of individuals filing under chapter 7 or 11, the debtor's income tax returns for the current and prior years are, upon written request, open to inspection by or disclosure to the trustee, but only if the IRS finds that the trustee has a material interest that will be affected by information on the return. 1040x hrblock Material interest is generally defined as a financial or monetary interest. 1040x hrblock Material interest is not limited to the trustee's responsibility to file a return on behalf of the bankruptcy estate. 1040x hrblock   However, the U. 1040x hrblock S. 1040x hrblock Trustee (an officer of the Department of Justice, responsible for maintaining and supervising a panel of private trustees for chapter 7 bankruptcy cases) and the standing chapter 13 trustee (the administrator of chapter 13 cases in a specific geographic region) generally do not have a material interest in the debtor’s return or return information. 1040x hrblock Disclosure of bankruptcy estate's return information to debtor. 1040x hrblock    The bankruptcy estate's tax return(s) are open, upon written request, to inspection by or disclosure to the individual debtor in a chapter 7 or 11 bankruptcy. 1040x hrblock Disclosure of the estate's return to the debtor may be necessary to enable the debtor to determine the amount and nature of the tax attributes, if any, that the debtor assumes when the bankruptcy estate terminates. 1040x hrblock Individuals in Chapter 12 or 13 Only individuals may file a chapter 13 bankruptcy. 1040x hrblock Chapter 13 relief is not available to corporations or partnerships. 1040x hrblock The bankruptcy estate is not treated as a separate entity for tax purposes when an individual files a petition under chapter 12 (Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income) or 13 (Adjustment of Debts of an Individual with Regular Income) of the Bankruptcy Code. 1040x hrblock In these cases the individual continues to file the same federal income tax returns that were filed prior to the bankruptcy petition, Form 1040, U. 1040x hrblock S. 1040x hrblock Individual Income Tax Return. 1040x hrblock On the debtor's individual tax return, Form 1040, report all income received during the entire year and deduct all allowable expenses. 1040x hrblock Do not include in income the amount from any debt canceled due to the debtor's bankruptcy. 1040x hrblock To the extent the debtor has any losses, credits, or basis in property that were previously reduced as a result of canceled debt, these reductions must be included on the debtor's return. 1040x hrblock See Debt Cancellation, later. 1040x hrblock Interest on trust accounts in chapter 13 cases. 1040x hrblock   In chapter 13 proceedings, do not include interest earned on amounts held by the trustee in trust accounts as income on the debtor's return. 1040x hrblock This interest is not available to either the debtor or creditors, it is available only to the trustee for use by the U. 1040x hrblock S. 1040x hrblock Trustee system. 1040x hrblock The interest is also not taxable to the trustee as income. 1040x hrblock Individuals in Chapter 7 or 11 When an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer. 1040x hrblock The bankruptcy estate in a chapter 7 case is represented by a trustee. 1040x hrblock The trustee is appointed to administer the estate and liquidate any nonexempt assets. 1040x hrblock In chapter 11 cases, the debtor often remains in control of the assets as a “debtor-in-possession” and acts as the bankruptcy trustee. 1040x hrblock However, the bankruptcy court, for cause, may appoint a trustee if such appointment is in the best interests of the creditors and the estate. 1040x hrblock During the chapter 7 or 11 bankruptcy, the debtor continues to file an individual tax return on Form 1040. 1040x hrblock The bankruptcy trustee files a Form 1041 for the bankruptcy estate. 1040x hrblock However, when a debtor in a chapter 11 bankruptcy case remains a debtor-in-possession, he or she must file both a Form 1040 individual return and a Form 1041 estate return for the bankruptcy estate (if return filing requirements are met). 1040x hrblock Although a husband and wife may file a joint bankruptcy petition whose bankruptcy estates are jointly administered, the estates are be treated as two separate entities for tax purposes. 1040x hrblock Two separate bankruptcy estate income tax returns must be filed (if each spouse separately meets the filing requirements). 1040x hrblock For information about determining the tax due and paying tax for a chapter 7 or 11 bankruptcy estate, see Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due, later. 1040x hrblock Debtor's Election To End Tax Year – Form 1040 Short tax years. 1040x hrblock   An individual debtor in a chapter 7 or 11 case may elect to close the debtor's tax year for the year in which the bankruptcy petition is filed, as of the day before the date on which the bankruptcy case commences. 1040x hrblock If the debtor makes this election, the debtor's tax year is divided into 2 short tax years of less than 12 months each. 1040x hrblock The first tax year ends on the day before the commencement date and the second tax year begins on the commencement date. 1040x hrblock   If the election is made, the debtor's federal income tax liability for the first short tax year becomes an allowable claim against the bankruptcy estate arising before the bankruptcy filing. 1040x hrblock Also, the tax liability for the first short tax year is not subject to discharge under the Bankruptcy Code. 1040x hrblock    If the debtor does not make an election to end the tax year, the commencement of the bankruptcy case does not affect the debtor's tax year. 1040x hrblock Also, no part of the debtor's income tax liability for the year in which the bankruptcy case commences can be collected from the bankruptcy estate. 1040x hrblock Note. 1040x hrblock The debtor cannot make a short tax year election if no assets, other than exempt property, are in the bankruptcy estate. 1040x hrblock Making the Election - Filing Requirements First short tax year. 1040x hrblock   The debtor can elect to end the debtor's tax year by filing a return on Form 1040 for the first short tax year. 1040x hrblock The return must be filed on or before the 15th day of the fourth full month after the end of that first tax year. 1040x hrblock Second short tax year. 1040x hrblock   If the debtor elects to end the tax year on the day before filing the bankruptcy case, the debtor must file the return for the first short tax year in the manner discussed above. 1040x hrblock   If the debtor makes this election, the debtor must also file a separate Form 1040 for the second short tax year by the regular due date. 1040x hrblock To avoid delays in processing the return, write “Second Short Year Return After Section 1398 Election” at the top of the return. 1040x hrblock Example. 1040x hrblock Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition under chapter 7 or 11 on May 8, 2012. 1040x hrblock If Jane elected to close her tax year at the commencement of her case, Jane's first short year for 2012 runs from January 1 through May 7, 2012. 1040x hrblock Jane's second short year runs from May 8, 2012, through December 31, 2012. 1040x hrblock To have a timely filed election for the first short year, Jane must file Form 1040 (or an extension of time to file) for the period January 1 through May 7 by September 15. 1040x hrblock To avoid delays in processing the return, write “Section 1398 Election” at the top of the return. 1040x hrblock The debtor may also make the election by attaching a statement to Form 4868, Automatic Extension of Time to File an U. 1040x hrblock S. 1040x hrblock Individual Tax Return. 1040x hrblock The statement must state that the debtor elects under IRC section 1398(d)(2) to close the debtor's tax year on the day before filing the bankruptcy case. 1040x hrblock The debtor must file Form 4868 by the due date of the return for the first short tax year. 1040x hrblock The debtor's spouse may also elect to close his or her tax year, see Election by debtor's spouse, below. 1040x hrblock Election by debtor's spouse. 1040x hrblock   If the debtor is married, the debtor's spouse may join in the election to end the tax year. 1040x hrblock If the debtor and spouse make a joint election, the debtor must file a joint return for the first short tax year. 1040x hrblock The debtor must elect by the due date for filing the return for the first short tax year. 1040x hrblock Once the election is made, it cannot be revoked for the first short tax year. 1040x hrblock However, the election does not prevent the debtor and the spouse from filing separate returns for the second short tax year. 1040x hrblock Later bankruptcy of spouse. 1040x hrblock    If the debtor's spouse files for bankruptcy later in the same year, he or she may also choose to end his or her tax year, regardless of whether he or she joined in the election to end the debtor's tax year. 1040x hrblock   As each spouse has a separate bankruptcy, one or both of them may have 3 short tax years in the same calendar year. 1040x hrblock If the debtor's spouse joined the debtor's election or if the debtor had not made the election to end the tax year, the debtor can join in the spouse's election. 1040x hrblock However, if the debtor made an election and the spouse did not join that election, the debtor cannot then join the spouse's later election. 1040x hrblock The debtor and the spouse are precluded from this election because they have different tax years. 1040x hrblock This results because the debtor does not have a tax year ending the day before the spouse's filing for bankruptcy, and the debtor cannot file a joint return for a year ending on the day before the spouse's filing of bankruptcy. 1040x hrblock Example 1. 1040x hrblock Paul and Mary Harris are calendar-year taxpayers. 1040x hrblock Paul's voluntary chapter 7 bankruptcy case begins on March 4. 1040x hrblock If Paul does not make an election, his tax year does not end on March 3. 1040x hrblock If he makes an election, Paul's first tax year is January 1–March 3, and his second tax year begins on March 4. 1040x hrblock Mary could join in Paul's election as long as they file a joint return for the tax year January 1–March 3. 1040x hrblock They must make the election by July 15, the due date for filing the joint return. 1040x hrblock Example 2. 1040x hrblock Fred and Ethel Barnes are calendar-year taxpayers. 1040x hrblock Fred's voluntary chapter 7 bankruptcy case begins on May 6, and Ethel's bankruptcy case begins on November 1 of the same year. 1040x hrblock Ethel could elect to end her tax year on October 31. 1040x hrblock If Fred did not elect to end his tax year on May 5, or if he elected to do so but Ethel had not joined in his election, Ethel would have 2 tax years in the same calendar year if she decided to close her tax year. 1040x hrblock Her first tax year is January 1–October 31, and her second year is November 1–December 31. 1040x hrblock If Fred did not end his tax year as of May 5, he could join in Ethel's election to close her tax year on October 31, but only if they file a joint return for the tax year January 1–October 31. 1040x hrblock If Fred elected to end his tax year on May 5, but Ethel did not join in Fred's election, Fred cannot join in Ethel's election to end her tax year on October 31. 1040x hrblock Fred and Ethel cannot file a joint return for that short tax year because their tax years preceding October 31 were not the same. 1040x hrblock Example 3. 1040x hrblock Jack and Karen Thomas are calendar-year taxpayers. 1040x hrblock Karen's voluntary chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter 7 bankruptcy case began on October 3 of the same year. 1040x hrblock Karen elected to close her tax year on April 9 and Jack joins in Karen's election. 1040x hrblock Under these facts, Jack would have 3 tax years for the same calendar year if he makes the election relating to his own bankruptcy case. 1040x hrblock The first tax year would be January 1–April 9; the second, April 10–October 2; and the third, October 3–December 31. 1040x hrblock Karen may join in Jack's election if they file a joint return for the second short tax year (April 10–October 2). 1040x hrblock If Karen does join in, she would have the same 3 short tax years as Jack. 1040x hrblock Also, if Karen joins in Jack's election, they may file a joint return for the third tax year (October 3–December 31), but they are not required to do so. 1040x hrblock Annualizing taxable income. 1040x hrblock   If the debtor elects to close the tax year, the debtor must annualize taxable income for each short tax year in the same manner a change in annual accounting period is calculated. 1040x hrblock See Short Tax Year in Publication 538, for information on how to annualize the debtor's income and to figure the tax for the short tax year. 1040x hrblock Dismissal of bankruptcy case. 1040x hrblock   If the bankruptcy court later dismisses an individual chapter 7 or 11 case, the bankruptcy estate is no longer treated as a separate taxable entity. 1040x hrblock It is as if no bankruptcy estate was created for tax purposes. 1040x hrblock In this situation, the debtor must file amended tax returns on Form 1040X, to replace all full or short year individual returns (Form 1040) and bankruptcy estate returns (Form 1041) filed as a result of the bankruptcy case. 1040x hrblock Income, deductions, and credits previously reported by the bankruptcy estate must be reported on the debtor's amended returns. 1040x hrblock Attach a statement to the amended returns explaining why the debtor is filing an amended return. 1040x hrblock Taxes and the Bankruptcy Estate Property of the bankruptcy estate. 1040x hrblock   At the commencement of a bankruptcy case a bankruptcy estate is created. 1040x hrblock Bankruptcy law determines which of the debtor's assets become part of a bankruptcy estate. 1040x hrblock This estate generally includes all of the debtor's legal and equitable interests in property as of the commencement date. 1040x hrblock However, there are exceptions and certain property is exempted or excluded from the bankruptcy estate. 1040x hrblock Note. 1040x hrblock Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. 1040x hrblock Excluded property is never included in the estate. 1040x hrblock Transfer of assets between debtor and bankruptcy estate. 1040x hrblock   The transfer (other than by sale or exchange) of an asset from the debtor to the bankruptcy estate is not treated as a disposition for income tax purposes. 1040x hrblock The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits. 1040x hrblock For example, the transfer of an installment obligation to the estate would not accelerate gain under the rules for reporting installment sales. 1040x hrblock The estate assumes the same basis, holding period, and character of the transferred assets. 1040x hrblock Also, the estate generally accounts for the transferred assets in the same manner as debtor. 1040x hrblock   When the bankruptcy estate is terminated or dissolved, any resulting transfer (other than by sale or exchange) of the estate's assets back to the debtor is also not treated as a disposition for tax purposes. 1040x hrblock The transfer does not result in gain or loss, acceleration of income or deductions, or recapture of deductions or credits to the estate. 1040x hrblock Abandoned property. 1040x hrblock    The abandonment of property by the estate to the debtor is a nontaxable disposition of property. 1040x hrblock If the debtor received abandoned property from the bankruptcy estate, the debtor assumes the same basis in the property that the bankruptcy estate had. 1040x hrblock Separate taxable entity. 1040x hrblock   When an individual files a bankruptcy petition under chapter 7 or 11, the bankruptcy estate is treated as a separate taxable entity from the debtor. 1040x hrblock The court appointed trustee or the debtor-in-possession is responsible for preparing and filing all of the bankruptcy estate's tax returns, including its income tax return on Form 1041, U. 1040x hrblock S. 1040x hrblock Income Tax Return for Estates and Trusts, and paying its taxes. 1040x hrblock The debtor remains responsible for filing his or her own returns on Form 1040, U. 1040x hrblock S. 1040x hrblock Individual Income Tax Return, and paying taxes on income that does not belong to the estate. 1040x hrblock Employer identification number. 1040x hrblock   The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. 1040x hrblock The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax returns. 1040x hrblock See Employer identification number, under Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due, later. 1040x hrblock    The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate. 1040x hrblock Income, deductions, and credits – Form 1040. 1040x hrblock   In an individual chapter 7 or 11 bankruptcy case, do not include the income, deductions, and credits that belong to the bankruptcy estate on the debtor's individual income tax return (Form 1040). 1040x hrblock Also, do not include as income on the debtor's return the amount of any debt canceled by reason of the bankruptcy discharge. 1040x hrblock The bankruptcy estate must reduce certain losses, credits, and the basis in property (to the extent of these items) by the amount of canceled debt. 1040x hrblock See Debt Cancellation, below. 1040x hrblock Note. 1040x hrblock The debtor may not be able to claim certain deductions available to the bankruptcy estate such as administrative expenses. 1040x hrblock Additionally, the bankruptcy exclusion cannot be used to exclude income from a cancelled debt if the discharge of indebtedness was not within the bankruptcy case, even though the debtor was under the bankruptcy court's protection at the time. 1040x hrblock However, other exclusions, such as the insolvency exclusion, may apply. 1040x hrblock Bankruptcy Estate – Income, Deductions, and Credits Bankruptcy Estate Income Income of the estate in individual chapter 7 cases. 1040x hrblock    The gross income of the bankruptcy estate includes gross income of the debtor to which the estate is entitled under the Bankruptcy Code. 1040x hrblock Gross income also includes income generated by the bankruptcy estate from property of the estate after the commencement of the case. 1040x hrblock   Gross income of the bankruptcy estate does not include amounts received or accrued by the debtor before the commencement of the case. 1040x hrblock Additionally, in chapter 7 cases, gross income of the bankruptcy estate does not include any income that the debtor earns after the date of the bankruptcy petition. 1040x hrblock Income of the estate in individual chapter 11 cases. 1040x hrblock    In chapter 11 cases, under IRC section 1398(e)(1), gross income of the bankruptcy estate includes income that the debtor earns for services performed after the bankruptcy petition date. 1040x hrblock Also, earnings from services performed by an individual debtor after the commencement of the chapter 11 case are property of the bankruptcy estate under section 1115 of the Bankruptcy Code (11 U. 1040x hrblock S. 1040x hrblock C. 1040x hrblock section 1115). 1040x hrblock Note. 1040x hrblock A debtor-in-possession may be compensated by the estate for managing or operating a trade or business that the debtor conducted before the commencement of the bankruptcy case. 1040x hrblock Such payments should be reported by the debtor as miscellaneous income on his or her individual income tax return (Form 1040). 1040x hrblock Amounts paid by the estate to the debtor-in-possession for managing or operating the trade or business may qualify as administrative expenses of the estate. 1040x hrblock See Administrative expenses, below. 1040x hrblock Conversion or dismissal of chapter 11 cases. 1040x hrblock   If a chapter 11 case is converted to a chapter 13 case, the chapter 13 estate is not a separate taxable entity and earnings from post-conversion services and income from property of the estate realized after the conversion to chapter 13 are taxed to the debtor. 1040x hrblock If the chapter 11 case is converted to a chapter 7 case, 11 U. 1040x hrblock S. 1040x hrblock C. 1040x hrblock section 1115 does not apply after conversion and: Earnings from post-conversion services will be taxed to the debtor, rather than the estate, and The property of the chapter 11 estate will become property of the chapter 7 estate. 1040x hrblock Any income on this property will be taxed to the estate even if the income is realized after the conversion to chapter 7. 1040x hrblock If a chapter 11 case is dismissed, the debtor is treated as if the bankruptcy case had never been filed and as if no bankruptcy estate had been created. 1040x hrblock Bankruptcy Estate Deductions and Credits A bankruptcy estate deducts expenses incurred in a trade, business, or activity, and uses credits in the same way the debtor would have deducted or credited them had he or she continued operations. 1040x hrblock Note. 1040x hrblock Expenses may be disallowed under other provisions of the IRC (such as the disallowance of certain capital expenditures or expenses relating to tax-exempt interest). 1040x hrblock Administrative expenses. 1040x hrblock   Allowable expenses include administrative expenses. 1040x hrblock    Administrative expenses can only be deducted by the estate, never by the debtor. 1040x hrblock   The bankruptcy estate is allowed deductions for bankruptcy administrative expenses and fees, including accounting fees, attorney fees, and court costs. 1040x hrblock These expenses are deductible on Form 1040, Schedule A as miscellaneous itemized deductions not subject to the 2% floor on miscellaneous itemized deductions, because they would not have been incurred if property had not been held by the bankruptcy estate. 1040x hrblock See IRC section 67(e). 1040x hrblock Administrative expenses of the bankruptcy estate attributable to conducting a trade or business for the production of estate rents or royalties are deductible in arriving at adjusted gross income on Form 1040, Schedules C, E, and F. 1040x hrblock Note. 1040x hrblock The bankruptcy estate uses Form 1041 as a transmittal for the tax return prepared using Form 1040 and its schedules. 1040x hrblock See Transmittal for Form 1040 under Tax Return Filing Requirements and Payment of Tax, later. 1040x hrblock Administrative expense loss. 1040x hrblock   If the administrative expenses of the bankruptcy estate are more than its gross income for a tax year, the excess amount may be carried back 3 years and forward 7 years. 1040x hrblock The amounts can only be carried to a tax year of the estate and never to a debtor's tax year. 1040x hrblock The excess amount to be carried back or forward is treated like a net operating loss (NOL) and must first be carried back to the earliest year possible. 1040x hrblock For a discussion of NOLs, see Publication 536. 1040x hrblock Attribute carryovers. 1040x hrblock   The bankruptcy estate may use its tax attributes the same way that the debtor would have used them. 1040x hrblock These items are determined as of the first day of the debtor's tax year in which the bankruptcy case begins. 1040x hrblock The bankruptcy estate assumes the following tax attributes from the debtor: NOL carryovers, Carryovers of excess charitable contributions, Recovery of tax benefit items, Credit carryovers, Capital loss carryovers, Basis, holding period, and character of assets, Method of accounting, Passive activity loss and credit carryovers, Unused at-risk deductions, and Other tax attributes provided in the regulations. 1040x hrblock   Certain tax attributes of the bankruptcy estate must be reduced by the amount of income that was previously excluded as a result of cancellation of debt during the bankruptcy proceeding. 1040x hrblock See Debt Cancellation, later. 1040x hrblock   When the bankruptcy estate is terminated (for example, when the case ends), the debtor assumes any remaining tax attributes previously taken over by the bankruptcy estate. 1040x hrblock The debtor also generally assumes any of the tax attributes, listed above, that arose during the administration of the bankruptcy estate. 1040x hrblock Note. 1040x hrblock The debtor does not assume the bankruptcy estate's administrative expense losses because they cannot be used by an individual taxpayer filing Form 1040. 1040x hrblock See Administrative expense loss, above. 1040x hrblock Passive and at-risk activities. 1040x hrblock   For bankruptcy cases beginning after November 8, 1992, passive activity carryover losses and credits and unused at-risk deductions are treated as tax attributes passing from the debtor to the bankruptcy estate, which the estate then passes back to the debtor when the bankruptcy estate terminates. 1040x hrblock Additionally, transfers to the debtor (other than by sale or exchange) of interests in passive or at-risk activities are treated as non-taxable exchanges. 1040x hrblock These transfers include the return of exempt property and abandonment of estate property to the debtor. 1040x hrblock Carrybacks from the debtor's activities. 1040x hrblock   The debtor cannot carry back any NOL or credit carryback from a tax year ending after the bankruptcy case has begun to any tax year ending before the case began. 1040x hrblock Carrybacks from the bankruptcy estate. 1040x hrblock   If the bankruptcy estate has an NOL that did not pass to the estate from the debtor under the attribute carryover rules, the estate can carry the loss back not only to its own earlier tax years but also to the debtor's tax years before the year the bankruptcy case began. 1040x hrblock The estate may also carry back excess credits, such as the general business credit, to the pre-bankruptcy tax years. 1040x hrblock Tax Reporting – Chapter 11 Cases Allocation of income and credits on information returns and required statement for returns for individual chapter 11 cases. 1040x hrblock    In chapter 11 cases, when an employer issues a Form W-2 reporting all of the debtor's wages, salary, or other compensation for a calendar year, and a portion of the earnings represent post-petition services includible in the estate's gross income, the Form W-2 amounts must be allocated between the estate and the debtor. 1040x hrblock The debtor-in-possession or trustee must allocate the income amount reported in box 1 and the income tax withheld reported in box 2 between the debtor and the estate. 1040x hrblock These allocations must reflect that the debtor's gross earnings from post-petition services and gross income from post-petition property are, generally, includible in the estate's gross income and not the debtor's gross income. 1040x hrblock The debtor and trustee may use a simple percentage method to allocate income and income tax withheld. 1040x hrblock The same method must be used to allocate the income and the withheld tax. 1040x hrblock Example. 1040x hrblock If 20% of the wages reported on Form W-2 for a calendar year were earned after the commencement of the case and are included in the estate's gross income, 20% of the withheld income tax reported on Form W-2 must also be claimed as a credit on the estate's income tax return. 1040x hrblock Likewise, 80% of wages must be reported by the debtor and 80% of the income tax withheld must be claimed as a credit on the debtor's income tax return. 1040x hrblock See IRC section 31(a). 1040x hrblock   If information returns are issued to the debtor for gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate, the debtor-in-possession or trustee must allocate the improperly reported income in a reasonable manner between the debtor and the estate. 1040x hrblock In general, the allocation must ensure that any income and income tax withheld attributable to the post-petition period is reported on the estate's return, and any income and income tax withheld attributable to the pre-petition period is reported on the debtor's return. 1040x hrblock    IRS Notice 2006-83 requires the debtor to attach a statement to his or her individual income tax return (Form 1040) stating that the return is filed subject to a chapter 11 bankruptcy case. 1040x hrblock The statement must also: Show the allocations of income and income tax withheld, Describe the method used to allocate income and income tax withheld, and List the filing date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, and the bankruptcy estate's EIN. 1040x hrblock Note. 1040x hrblock The debtor-in-possession or trustee must attach a similar statement to the bankruptcy estate's income tax return (Form 1041). 1040x hrblock   The model Notice 2006-83 Statement, shown above, may be used by debtors, debtors-in-possession, and trustees to satisfy the reporting requirement. 1040x hrblock Self-employment taxes in individual chapter 11 cases. 1040x hrblock   IRC section 1401 imposes a tax upon the self-employment income, that is, the net earnings from self-employment of an individual. 1040x hrblock Net earnings from self-employment are equal to the gross income derived by an individual from any trade or business carried on by such individual, less deductions attributable to the business. 1040x hrblock   Neither section 1115 of the Bankruptcy Code nor IRC section 1398 addresses the application of self-employment tax to the post-petition earnings of the individual debtor. 1040x hrblock Therefore, if the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report the debtor's self-employment income on Schedule SE (Form 1040) of the debtor's income tax return. 1040x hrblock This schedule includes self-employment income earned post-petition and the attributable deductions. 1040x hrblock The debtor must pay any self-employment tax imposed by IRC section 1401. 1040x hrblock Employment taxes and employer's obligation to file Form W-2 in individual chapter 11 cases. 1040x hrblock   In chapter 11 cases, post-petition wages earned by a debtor are generally treated as gross income of the estate. 1040x hrblock However, section 1115 of the Bankruptcy Code (11 U. 1040x hrblock S. 1040x hrblock C. 1040x hrblock section 1115) does not affect the determination of what are deemed wages for Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, or Federal Income Tax Withholding purposes. 1040x hrblock See Notice 2006-83. 1040x hrblock   The reporting and withholding obligations of a debtor's employer also do not change. 1040x hrblock An employer should continue to report the wages and tax withholding on a Form W-2 issued under the debtor's name and social security number. 1040x hrblock Notice to persons required to file information returns (other than Form W-2, Wage and Tax Statement) in individual chapter 11 cases. 1040x hrblock   Within a reasonable time after the commencement of a chapter 11 bankruptcy case, the trustee or debtor-in-possession should provide notification of the bankruptcy estate's EIN to all persons (or entities) that are required to file information returns for the bankruptcy estate's gross income, gross proceeds, or other types of reportable payments. 1040x hrblock See IRC section 6109(a)(2). 1040x hrblock As these payments are the property of the estate under section 1115 of the Bankruptcy Code, the payors should report the gross income, gross proceeds, or other reportable payments on the appropriate information return using the estate's name and EIN as required under the IRC and regulations (see IRC sections 6041 through 6049). 1040x hrblock   The trustee or debtor-in-possession should not, however, provide the EIN to a person (or entity) filing Form W-2 reporting the debtor's wages or other compensation, as section 1115 of the Bankruptcy Code does not affect the determination of what constitutes wages for purposes of federal income tax withholding or FICA. 1040x hrblock See Notice 2006-83. 1040x hrblock An employer should continue to report all wage income and tax withholding, both pre-petition and post-petition, on a Form W-2 to the debtor under the debtor's social security number. 1040x hrblock   The debtor in a chapter 11 case is not required to file a new Form W-4 with an employer solely because the debtor filed a chapter 11 case and the post-petition wages are includible in the estate's income and not the debtor's income. 1040x hrblock However, a new Form W-4 may be necessary if the debtor is no longer entitled to claim the same number of allowances previously claimed because certain deductions or credits now belong to the estate. 1040x hrblock See Employment Tax Regulations section 31. 1040x hrblock 3402(f)(2)-1. 1040x hrblock Additionally, the debtor may wish to file a new Form W-4 to increase the income tax withheld from post-petition wages allocated to the estate to avoid having to make estimated tax payments for the estate. 1040x hrblock See IRC section 6654(a). 1040x hrblock Notice required in converted and dismissed cases. 1040x hrblock   When a chapter 11 bankruptcy case is closed, dismissed, or converted to a chapter 12 or 13 case, the bankruptcy estate ends as a separate taxable entity. 1040x hrblock The debtor should, within a reasonable time, send notice of such event to the persons (or entities) previously notified of the bankruptcy case. 1040x hrblock This helps to ensure that gross income, proceeds, and other reportable payments realized after the event are reported to the debtor under the correct TIN rather than to the estate. 1040x hrblock   When a chapter 11 case is converted to a chapter 7 case, the bankruptcy estate will continue to exist as a separate taxable entity. 1040x hrblock Gross income (other than post-conversion income from the debtor's services), gross proceeds, or other reportable payments should continue to be reported to the estate if they are property of the chapter 7 estate. 1040x hrblock However, income from services performed by the debtor after conversion of the case to chapter 7 is not property of the chapter 7 estate. 1040x hrblock After the conversion, the debtor should notify payors required to report the debtor's nonemployee compensation that compensation earned after the conversion should be reported using the debtor's name and TIN, not the estate's name and EIN. 1040x hrblock Employment taxes. 1040x hrblock   The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. 1040x hrblock See Publication 15, Circular E, Employer's Tax Guide, for details on employer tax responsibilities. 1040x hrblock   The trustee also has the duty to prepare and file Forms W-2 for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. 1040x hrblock For a further discussion of employment taxes, see Employment Taxes, later. 1040x hrblock Notice 2006-83 Statement Pending Bankruptcy Case The taxpayer, , filed a bankruptcy petition under chapter 11 of the Bankruptcy Code in the bankruptcy court for the District of . 1040x hrblock The bankruptcy court case number is . 1040x hrblock Gross income, and withheld federal income tax, reported on Form W-2, Forms 1099, Schedule K-1, and other information returns received under the taxpayer's name and social security number (or other taxpayer identification number) are allocated between the taxpayer's TIN and the bankruptcy estate's EIN as follows, using [describe allocation method]:. 1040x hrblock   Year Taxpayer   Estate 1. 1040x hrblock Form W-2, Payor: $   $     Withheld income tax shown on Form W-2 $   $   2. 1040x hrblock Form 1099-INT Payor: $   $     Withheld income tax (if any) shown on Form 1099-INT $   $   3. 1040x hrblock Form 1099-DIV Payor: $   $     Withheld income tax (if any) shown on Form 1099-DIV $   $   4. 1040x hrblock Form 1099-MISC Payor: $   $     Withheld income tax (if any) shown on Form 1099-MISC $   $   Bankruptcy Estate Tax Return Filing Requirements and Payment of Tax Due Filing Requirements Filing threshold. 1040x hrblock   If the bankruptcy estate has gross income that meets or exceeds the minimum amount required for filing, the trustee or debtor-in-possession must file an income tax return on Form 1041. 1040x hrblock This amount is equal to the sum of the personal exemption amount plus the basic standard deduction for a married individual filing separately. 1040x hrblock   For 2012, the threshold filing amount for a bankruptcy estate is $9,750 (the sum of the $3,800 personal exemption plus the $5,950 standard deduction for married individuals filing separately). 1040x hrblock   These amounts are generally adjusted annually. 1040x hrblock See the present year Form 1041 Instructions at www. 1040x hrblock irs. 1040x hrblock gov/form1041 for the current dollar amounts. 1040x hrblock Accounting period. 1040x hrblock   A bankruptcy estate may have a fiscal year. 1040x hrblock However, this period cannot be longer than 12 months. 1040x hrblock Change of accounting period. 1040x hrblock   The bankruptcy estate may change its accounting period (tax year) once without IRS approval. 1040x hrblock This rule allows the bankruptcy trustee to close the estate's tax year early, before the expected termination of the bankruptcy estate. 1040x hrblock The trustee can then file a return for the first short tax year to get a quick determination of the estate's tax liability. 1040x hrblock Employer identification number. 1040x hrblock   The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate. 1040x hrblock The trustee or debtor-in-possession uses this EIN on all tax returns filed for the bankruptcy estate with the IRS, including estimated tax returns. 1040x hrblock    The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate. 1040x hrblock   Obtain an EIN for a bankruptcy estate by applying: Online by clicking on the EIN link at www. 1040x hrblock irs. 1040x hrblock gov/businesses/small. 1040x hrblock The EIN is issued immediately once the application information is validated. 1040x hrblock By telephone at 1-800-829-4933 from 7:00 a. 1040x hrblock m. 1040x hrblock to 7:00 p. 1040x hrblock m. 1040x hrblock in the trustee's or debtor-in-possession's local time zone. 1040x hrblock Assistance provided to callers from Alaska and Hawaii will be based on the hours of operation in the Pacific time zone, or By mailing or faxing Form SS-4, Application for Employer Identification Number. 1040x hrblock   If the trustee or debtor-in-possession has not received the bankruptcy estate's EIN by the time the return is due, write “Applied for” and the date you applied in the space for the EIN. 1040x hrblock For more details, see Pub. 1040x hrblock 583, Starting a Business and Keeping Records. 1040x hrblock   Trustees representing ten or more bankruptcy estates (other than estates that will be filing employment or excise tax returns) may request a series or block of EINs. 1040x hrblock Figuring tax due. 1040x hrblock   The bankruptcy estate figures its taxable income the same way an individual figures taxable income. 1040x hrblock However, the estate uses the tax rates for a married individual filing separately to calculate the tax on its taxable income. 1040x hrblock The estate is entitled to one personal exemption and may either itemize deductions or take the basic standard deduction for a married individual filing a separate return. 1040x hrblock The estate cannot take the higher standard deduction allowed for married persons filing separately who are 65 or older or blind. 1040x hrblock Tax rate schedule. 1040x hrblock The tax on income for bankruptcy estates is calculated using the tax rate schedule for Married Individuals Filing Separately not the Estates and Trusts tax rate schedule. 1040x hrblock When to file. 1040x hrblock   Calendar year bankruptcy estates must file Form 1041 by April 15th. 1040x hrblock Fiscal year bankruptcy estates must file on or before the 15th day of the 4th month following the close of its tax year. 1040x hrblock For example, an estate that has a tax year that ends on June 30th must file Form 1041 by October 15th of the tax year. 1040x hrblock If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. 1040x hrblock Note. 1040x hrblock The bankruptcy estate is allowed an automatic 6-month extension of time to file the bankruptcy estate tax return upon filing the required application, Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. 1040x hrblock Transmittal for Form 1040. 1040x hrblock   Form 1041 is used as a transmittal for Form 1040. 1040x hrblock If a return is required, the trustee or debtor-in-possession must complete the identification area at the top of Form 1041 and indicate the chapter under which the bankruptcy estate filed, either chapter 7 or chapter 11. 1040x hrblock   Prepare the bankruptcy estate's return by completing Form 1040. 1040x hrblock In the top margin of Form 1040, write “Attachment to Form 1041 —DO NOT DETACH. 1040x hrblock ” Then, attach Form 1040 to the Form 1041 transmittal. 1040x hrblock Enter the tax and payment amounts on lines 23 through 29 of Form 1041, then sign and date the return. 1040x hrblock An example of a bankruptcy estate's tax return is prepared below. 1040x hrblock Note. 1040x hrblock The filing of the bankruptcy estate's tax return does not relieve a debtor from the requirement to file his or her individual tax return on Form 1040. 1040x hrblock Payment of Tax Due Payment methods. 1040x hrblock   Payment of tax due may be made by check or money order or by credit or debit card. 1040x hrblock For information on how to make payments electronically by credit or debit card, go to irs. 1040x hrblock gov/e-pay. 1040x hrblock      Payments may also be made electronically using the Electronic Federal Tax Payment System (EFTPS), a free tax payment system that allows you to make payments online or by phone. 1040x hrblock To enroll in EFTPS, go to eftps. 1040x hrblock gov or call 1-800-555-4477. 1040x hrblock For more information see Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. 1040x hrblock Payment voucher – Form 1041-V. 1040x hrblock   Form 1041-V accompanies payments made by check or money order for Form 1041. 1040x hrblock The voucher includes information about the bankruptcy estate, including the name of the bankruptcy estate, trustee, EIN, and amount due. 1040x hrblock Using Form 1041-V assists the IRS in processing the payment more accurately and efficiently. 1040x hrblock We recommend the use of Form 1041-V; however, there is no penalty if the voucher is not used. 1040x hrblock Estimated tax – Form 1041-ES. 1040x hrblock   In most cases, the trustee or debtor-in-possession must pay any required estimated tax due for the bankruptcy estate. 1040x hrblock See the Form 1041-ES Instructions for information on the minimum threshold amount required for filing Form 1041-ES, paying the estimated tax, and exceptions to filing. 1040x hrblock Employment Taxes The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. 1040x hrblock Until these employment taxes are deposited as required by the IRC, they should be set aside in a separate bank account to ensure that funds are available to satisfy the liability. 1040x hrblock If the employment taxes are not paid as required, the trustee may be held personally liable for payment of the taxes. 1040x hrblock   See Publication 15, (Circular E), Employer's Tax Guide, for details on employer tax responsibilities. 1040x hrblock Also see IRS Notice 931, Deposit Requirements for Employment Taxes, for details on the deposit rules, including the requirement that federal employment tax deposits be made by electronic funds transfer. 1040x hrblock The trustee also has a duty to prepare and file Forms W-2, Wage and Tax Statement, for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. 1040x hrblock If the debtor fails to prepare and file Forms W-2 for wages paid before bankruptcy, the trustee should instruct the employees to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040x hrblock , with their individual income tax returns. 1040x hrblock Tax Return Example – Form 1041 This publication is not revised annually. 1040x hrblock Future changes to the forms and their instructions may not be reflected in this example. 1040x hrblock Note. 1040x hrblock The following return was prepared for tax year 2011. 1040x hrblock In 2011, the threshold filing amount for a bankruptcy estate was $9,500 (the sum of the $3,700 personal exemption plus the $5,800 standard deduction for married individuals filing separately). 1040x hrblock Facts and circumstances. 1040x hrblock   On December 15, 2010, Thomas Smith filed a bankruptcy petition under chapter 7. 1040x hrblock Joan Black was appointed trustee to administer the bankruptcy estate and to distribute the assets. 1040x hrblock   The estate received the following assets from Mr. 1040x hrblock Smith: A $100,000 certificate of deposit, Commercial rental real estate with a fair market value (FMV) of $280,000, and His personal residence with an FMV of $200,000. 1040x hrblock   Also, the estate received a $251,500 capital loss carryover. 1040x hrblock   Mr. 1040x hrblock Smith's bankruptcy case was closed on December 31, 2011. 1040x hrblock During 2011, Mr. 1040x hrblock Smith was relieved of $70,000 of debt by the bankruptcy court. 1040x hrblock The estate chose a calendar year as its tax year. 1040x hrblock Joan, the trustee, reviews the estate's transactions and reports the taxable events on the estate's final return. 1040x hrblock Schedule B (Form 1040). 1040x hrblock    The certificate of deposit earned $5,500 of interest during 2011. 1040x hrblock Joan reports this interest on Schedule B. 1040x hrblock She completes this schedule and enters the result on Form 1040. 1040x hrblock Form 4562. 1040x hrblock   Joan enters the depreciation allowed on Form 4562. 1040x hrblock She completes the form and enters the result on Schedule E. 1040x hrblock Schedule E (Form 1040). 1040x hrblock   The commercial real estate was rented through the date of sale. 1040x hrblock Joan reports the income and expenses on Schedule E. 1040x hrblock She enters the net income on Form 1040. 1040x hrblock Form 4797. 1040x hrblock   The commercial real estate was sold on July 1, 2011, for $280,000. 1040x hrblock The property was purchased in 2001 at a cost of $250,000. 1040x hrblock The total depreciation allowable as of the date of sale was $120,000. 1040x hrblock Additionally, $25,000 of selling expenses were incurred. 1040x hrblock Joan reports the gain or loss from the sale on Form 4797. 1040x hrblock She completes the form and enters the gain on Schedule D (Form 1040). 1040x hrblock   Mr. 1040x hrblock Smith's former residence was sold on September 30, 2011. 1040x hrblock The sale price was $200,000, the selling expenses were $20,000, and his adjusted basis was $130,000. 1040x hrblock This sale is excluded from gross income under IRC section 121. 1040x hrblock Note. 1040x hrblock Gains from the sale of personal residences are excluded from gross income up to $250,000 under IRC section 121 ($500,000 for married couples filing a joint return). 1040x hrblock Bankruptcy estates succeed to this exclusion at the commencement of the case. 1040x hrblock See Regulation section 1. 1040x hrblock 1398-3. 1040x hrblock Schedule D (Form 1040). 1040x hrblock   Joan completes Schedule D, taking into account the $250,000 capital loss carryover from 2010 ($251,500 transferred to the estate minus $1,500 used on the estate's 2010 return). 1040x hrblock She enters the results on Form 1040. 1040x hrblock Form 1040, page 1. 1040x hrblock   Joan completes page 1 of the Form 1040 and enters the adjusted gross income on the first line of Form 1040, page 2. 1040x hrblock Schedule A (Form 1040). 1040x hrblock   During 2011, the estate paid mortgage interest and real property tax on Mr. 1040x hrblock Smith's former residence. 1040x hrblock It also paid income tax to the state. 1040x hrblock Joan enters the mortgage interest, real estate tax, and income tax on Schedule A. 1040x hrblock Also, she reports the bankruptcy estate's administrative expenses as a miscellaneous deduction not subject to the 2% floor on miscellaneous itemized deductions. 1040x hrblock She completes the Schedule A and enters the result on page 2 of Form 1040. 1040x hrblock Form 1040, page 2. 1040x hrblock   Joan determines the estate's taxable income and figures its tax using the tax rate schedule for married filing separately. 1040x hrblock She then enters the estate's estimated tax payments and figures the amount the estate still owes. 1040x hrblock Form 982. 1040x hrblock   Joan completes the Schedule D Tax Worksheet to figure the capital loss carryover. 1040x hrblock Because $70,000 of debt was canceled, Joan must reduce the tax attributes of the estate by the amount of the canceled debt. 1040x hrblock See Debt Cancellation, later. 1040x hrblock After the bankruptcy case ends, Mr. 1040x hrblock Smith will assume the estate's tax attributes. 1040x hrblock Mr. 1040x hrblock Smith will assume a capital loss carryover of $53,500 ($123,500 carryover minus the $70,000 attribute reduction) for use in preparation of his individual tax return (Form 1040). 1040x hrblock Note. 1040x hrblock If the bankruptcy estate had continued, the capital loss carryover would be available to the bankruptcy estate for the 2012 tax year. 1040x hrblock Form 1041. 1040x hrblock   Joan enters the total tax, estimated tax payments, and tax due from Form 1040 on Form 1041. 1040x hrblock She completes the identification area at the top of Form 1041, then signs and dates the return as the trustee on behalf of the bankruptcy estate. 1040x hrblock This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 1040 - page 1 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 1040 - page 2 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Schedule A This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Schedule B This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Schedule D This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Schedule E This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 4797 - page 1 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 2119 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 4797 - page 2 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 4562 This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Capital Loss Carryover Worksheet This image is too large to be displayed in the current screen. 1040x hrblock Please click the link to view the image. 1040x hrblock Sample Form 982 Capital Loss Carryover Worksheet—Lines 6 and 14 Use this worksheet to figure your capital loss carryovers from 2010 to 2011 if your 2010 Schedule D, line 21, is a loss and (a) that loss is a smaller loss than the loss on your 2010 Schedule D, line 16, or (b) the amount on your 2010 Form 1040, line 41 (or your 2010 Form 1040NR, line 38, if applicable) is less than zero. 1040x hrblock Otherwise, you do not have any carryovers. 1040x hrblock 1. 1040x hrblock Enter the amount from your 2010 Form 1040, line 41, or Form 1040NR, line 38. 1040x hrblock If a loss, enclose the amount in parentheses 1. 1040x hrblock 19,880   2. 1040x hrblock Enter the loss from your 2010 Schedule D, line 21, as a positive amount 2. 1040x hrblock 1,500   3. 1040x hrblock Combine lines 1 and 2. 1040x hrblock If zero or less, enter -0- 3. 1040x hrblock 21,380   4. 1040x hrblock Enter the smaller of line 2 or line 3 4. 1040x hrblock 1,500     If line 7 of your 2010 Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9. 1040x hrblock       5. 1040x hrblock Enter the loss from your 2010 Schedule D, line 7, as a positive amount 5. 1040x hrblock 0   6. 1040x hrblock Enter any gain from your 2010 Schedule D, line 15. 1040x hrblock If a loss, enter -0- 6. 1040x hrblock         7. 1040x hrblock Add lines 4 and 6 7. 1040x hrblock 1,500   8. 1040x hrblock Short-term capital loss carryover for 2011. 1040x hrblock Subtract line 7 from line 5. 1040x hrblock If zero or less, enter -0-. 1040x hrblock If more than zero, also enter this amount on Schedule D, line 6 8. 1040x hrblock 0     If line 15 of your 2010 Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13. 1040x hrblock       9. 1040x hrblock Enter the loss from your 2010 Schedule D, line 15, as a positive amount 9. 1040x hrblock 251,500   10. 1040x hrblock Enter any gain from your 2010 Schedule D, line 7. 1040x hrblock If a loss, enter -0- 10. 1040x hrblock 0       11. 1040x hrblock Subtract line 5 from line 4. 1040x hrblock If zero or less, enter -0- 11. 1040x hrblock 1,500       12. 1040x hrblock Add lines 10 and 11 12. 1040x hrblock 1,500   13. 1040x hrblock Long-term capital loss carryover for 2011. 1040x hrblock Subtract line 12 from line 9. 1040x hrblock If zero or less, enter -0-. 1040x hrblock If more than zero, also enter this amount on Schedule D, line 14 13. 1040x hrblock 250,000                       Partnerships and Corporations Filing Requirements A separate taxable estate is not created when a partnership or corporation files a bankruptcy petition and their tax return filing requirements do not change. 1040x hrblock The debtor-in-possession, court appointed trustee, assignee, or receiver must file the entity's income tax returns on Form 1065, Form 1120 or, Form 1120S. 1040x hrblock In cases where a trustee or receiver is not appointed, the debtor-in-possession continues business operations and remains in possession of the business' property during the bankruptcy proceeding. 1040x hrblock The debtor-in-possession, rather than the general partner of a partnership or corporate officer of a corporation, assumes the fiduciary responsibility to file the business' tax returns. 1040x hrblock Partnerships The filing requirements for a partnership in a bankruptcy proceeding do not change. 1040x hrblock However, the responsibility to file the required returns becomes that of the court appointed trustee, receiver, or debtor-in-possession. 1040x hrblock A partnership's debt that is canceled as a result of the bankruptcy proceeding is not included in the partnership's income. 1040x hrblock However, It may or may not be included in the individual partners' income. 1040x hrblock See Partnerships, below under Debt Cancellation. 1040x hrblock Corporations The filing requirements for a corporation in a bankruptcy proceeding also do not change. 1040x hrblock A bankruptcy trustee, receiver, or debtor-in-possession, having possession of or holding title to substantially all of the property or business operations of the debtor corporation, must file the debtor's corporate income tax return for the tax year. 1040x hrblock The following discussion only highlights bankruptcy tax rules applying to corporations. 1040x hrblock The complex details of corporate bankruptcy reorganizations are beyond the scope of this publication. 1040x hrblock Therefore, you may wish to seek the help of a professional tax advisor. 1040x hrblock See Corporations under Debt Cancellation for information about a corporation's debt canceled in a bankruptcy proceeding. 1040x hrblock Tax-Free Reorganizations The tax-free reorganization provisions of the Internal Revenue Code allow a corporation to transfer all or part of its assets to another corporation in a bankruptcy under title 11 of the United States Code or in a similar case. 1040x hrblock However, under the reorganization plan, the stock or securities of the corporation to which the assets are transferred must be distributed in a transaction that qualifies under IRC section 354, 355, or 356. 1040x hrblock A “similar case” includes a receivership, foreclosure, or other similar proceeding in a federal or state court. 1040x hrblock In these cases, any party to the reorganization must be under the jurisdiction of the court and the transfer of assets under the plan of reorganization must be approved by the court. 1040x hrblock In a receivership, foreclosure, or similar proceeding before a federal or state agency involving certain financial institutions, the agency is treated as a court. 1040x hrblock Generally, IRC section 354 provides that no gain or loss is recognized if a corporation's stock is exchanged solely for stock or securities in a corporation that is a party to the reorganization under a qualifying reorganization plan. 1040x hrblock In this case, shareholders in the bankrupt corporation would recognize no gain or loss if they exchange their stock solely for stock or securities of the corporation acquiring the bankrupt corporation's assets. 1040x hrblock IRC section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution. 1040x hrblock IRC section 356 allows tax-free exchanges in situations that would qualify under IRC section 354 or 355, except that other property or money, in addition to the permitted stock or securities, is received by the shareholder. 1040x hrblock In this situation, gain is recognized by the shareholder, but only to the extent of the money and the FMV of the other property received. 1040x hrblock No loss is recognized in this situation. 1040x hrblock Exemption from tax return filing A trustee, receiver, or assignee of a corporation in bankruptcy, receivership, or in the process of dissolving, may apply to the IRS for relief from filing federal income tax returns for the corporation. 1040x hrblock To qualify, the corporation must have ceased business operations and have no assets nor income for the tax year. 1040x hrblock The exemption request must be submitted to the local IRS Insolvency Office handling the case. 1040x hrblock The request to the IRS must include the name, address, and EIN of the corporation and a statement of the facts (with any supporting documents) showing why the debtor needs relief from the filing requirements. 1040x hrblock The request must also include the following statement: “I hereby request relief from filing federal income tax returns for tax years ending _____ for the above-named corporation and declare under penalties of perjury that to the best of my knowledge and belief the information contained herein is correct. 1040x hrblock ” The statement must be signed by the trustee, receiver or assignee. 1040x hrblock The statement must also include notice of appointment to act on behalf of the corporation (this is not required for bankruptcy trustees or debtors-in-possession). 1040x hrblock The IRS will act on your request within 90 days. 1040x hrblock Disclosure of return information to trustee. 1040x hrblock   Upon written request, current and earlier returns of the debtor are open to inspection by or disclosure to the trustee or receiver. 1040x hrblock However, in bankruptcy cases other than those of individuals filing under chapter 7 or 11, such as a corporate bankruptcy, the IRS must find that the trustee has a material interest that will be affected by information on the return. 1040x hrblock Material interest is generally defined as a financial or monetary interest. 1040x hrblock Material interest is not limited to the trustee's responsibility to file a return on behalf of the bankruptcy estate. 1040x hrblock Receiverships Court-established receiverships sometimes arise in connection with bankruptcies. 1040x hrblock Certain court-established receiverships should be treated as qualified settlement funds ("QSFs") for purposes of IRC section 468B and the underlying Treasury Regulations. 1040x hrblock QSFs are required to file an annual income tax return, Form 1120-SF, U. 1040x hrblock S. 1040x hrblock Income Tax Return for Settlement Funds. 1040x hrblock More information about QSFs may be found in Treasury Regulation sections 1. 1040x hrblock 468B-1 through -5. 1040x hrblock Determination of Tax The determination of the proper amount of tax due for a tax year begins with the bankruptcy estate's filing of Form 1041, and the individual debtor's filing of Form 1040, or for bankrupt entities filing Forms 1065, 1120, or 1120S. 1040x hrblock After a return is filed, the IRS will either accept the return as filed or select the return for examination. 1040x hrblock Under examination the IRS may redetermine the tax liability shown on the return. 1040x hrblock If the bankruptcy estate or debtor disagrees with the redetermined tax due, the tax as redetermined by the IRS may be contested in the bankruptcy court, or Tax Court, as applicable. 1040x hrblock See Court Jurisdiction over Tax Matters, later. 1040x hrblock Prompt Determination Requests Pursuant to Rev. 1040x hrblock Proc. 1040x hrblock 2006-24, 2006-22 I. 1040x hrblock R. 1040x hrblock B. 1040x hrblock 943, www. 1040x hrblock irs. 1040x hrblock gov/irb/2006-22_IRB/ar12, as modified by Announcement 2011-77, www. 1040x hrblock irs. 1040x hrblock gov/irb/2011-51_IRB/ar13, the bankruptcy trustee may request a determination of any unpaid tax liability incurred by the bankruptcy estate during the administration of the case, by filing a tax return and a request for such determination with the IRS. 1040x hrblock Unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability upon payment of the tax: As determined by the IRS, As determined by the bankruptcy court, after completion of the IRS examination, or As shown on the return, if the IRS does not: Notify the trustee within 60 days after the request for determination that the return has been selected for examination, or Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court). 1040x hrblock Making the request for determination. 1040x hrblock   As detailed in Rev. 1040x hrblock Proc. 1040x hrblock 2006-24, as modified by Announcement 2011-77, to request a prompt determination of any unpaid tax liability of the estate, the trustee must file a signed written request, in duplicate, with the Internal Revenue Service, Centralized Insolvency Operation, P. 1040x hrblock O. 1040x hrblock Box 7346, Philadelphia, PA 19101–7346 (marked “Request for Prompt Determination”). 1040x hrblock   The request must be submitted in duplicate and must be executed under penalties of perjury. 1040x hrblock In addition, the trustee must submit along with the request an exact copy of the return(s) filed by the trustee with the IRS for each completed tax period. 1040x hrblock The request must contain the following information: A statement indicating that it is a Request for Prompt Determination of Tax Liability, specifying the type of return and tax period for each return being filed. 1040x hrblock The name and location of the office where the return was filed. 1040x hrblock The name of the debtor. 1040x hrblock Debtor's social security number, TIN, or EIN. 1040x hrblock Type of bankruptcy estate. 1040x hrblock Bankruptcy case number. 1040x hrblock Court where the bankruptcy case is pending. 1040x hrblock   The copy of the return(s) submitted with the request must be an exact copy of a valid return. 1040x hrblock A request for prompt determination will be considered incomplete and returned to the trustee if it is filed with a copy of a document that does not qualify as a valid return. 1040x hrblock    To qualify as valid, a return must meet certain criteria, including a signature under penalties of perjury. 1040x hrblock A document filed by the trustee with the jurat stricken, deleted, or modified will not qualify as a valid return. 1040x hrblock Examination of return. 1040x hrblock   The IRS will notify the trustee within 60 days from receipt of the request whether the return filed by the trustee has been selected for examination or has been accepted as filed. 1040x hrblock If the return is selected for examination, it will be examined as soon as possible. 1040x hrblock The IRS will notify the trustee of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court. 1040x hrblock   If a prompt determination request is incomplete, all the documents received by the IRS will be returned to the trustee by the assigned Field Insolvency Office with an explanation identifying the missing item(s) and instructions to re-file the request once corrected. 1040x hrblock   Once corrected, the request must be filed with the IRS at the Field Insolvency Office address specified in the correspondence accompanying the returned incomplete request. 1040x hrblock   In the case of an incomplete request submitted with a copy of an invalid return document, the trustee must file a valid original return with the appropriate IRS office and submit a copy of that return with the corrected request when the request is re-filed. 1040x hrblock Note. 1040x hrblock An incomplete request includes those submitted with a copy of a return form, the original of which does not qualify as a valid return. 1040x hrblock   The 60-day period to notify the trustee whether the return is accepted as filed or has been selected for examination does not begin to run until a complete request package is recei