CBS CBS Tax Implications of Bankruptcy 1 — Questions and Answers
Question 1: Under the Internal Revenue Code, what is a 'bankruptcy estate' for tax purposes?
- A separate taxable entity created when an individual files Chapter 7 or Chapter 11 bankruptcy (Correct answer)
- The total assets listed in the bankruptcy petition
- The amount owed to the IRS at the time of filing
- A special trust established by the bankruptcy court
Correct answer: A separate taxable entity created when an individual files Chapter 7 or Chapter 11 bankruptcy
Under IRC Section 1398, the bankruptcy estate is a separate taxable entity created when an individual files Chapter 7 or Chapter 11 bankruptcy.
Question 2: Which type of tax debt is generally NOT dischargeable in bankruptcy?
- Trust fund taxes (payroll taxes withheld from employees but not remitted to the IRS) (Correct answer)
- Income taxes that are more than 3 years old with a timely-filed return
- Income taxes assessed more than 240 days before filing with no fraud
- State income taxes that meet all dischargeability timing requirements
Correct answer: Trust fund taxes (payroll taxes withheld from employees but not remitted to the IRS)
Trust fund taxes representing employee withholdings never remitted to the IRS are non-dischargeable under 11 U.S.C. § 523(a)(1)(A) because they were held in trust for the government.
Question 3: What is the 'three-year rule' regarding potential discharge of income tax debt in bankruptcy?
- The tax return must have been due at least 3 years before the bankruptcy filing date (Correct answer)
- The debtor must have owed the tax for at least 3 years
- The IRS must have assessed the tax at least 3 years before filing
- The debtor must have filed for bankruptcy within 3 years of the tax debt arising
Correct answer: The tax return must have been due at least 3 years before the bankruptcy filing date
Under 11 U.S.C. § 523(a)(1), income taxes may be eligible for discharge if the return was due (including extensions) at least 3 years before the bankruptcy petition date.
Question 4: What happens to a debtor's net operating loss (NOL) carryforward when debt is discharged in a bankruptcy case?
- The NOL must be reduced dollar-for-dollar by the amount of excluded cancellation of debt income (Correct answer)
- The NOL can be carried forward without any reduction
- The NOL is completely eliminated upon discharge
- The NOL is transferred to secured creditors as compensation
Correct answer: The NOL must be reduced dollar-for-dollar by the amount of excluded cancellation of debt income
Under IRC Section 108(b), tax attributes such as NOLs must be reduced dollar-for-dollar by the amount of COD income excluded from gross income.
Question 5: Under the '240-day rule' for income tax debt dischargeability, the IRS assessment must have occurred:
- More than 240 days before the bankruptcy petition date (Correct answer)
- Less than 240 days before the bankruptcy petition date
- Exactly 240 days before the bankruptcy petition date
- At least 240 days after the tax return due date
Correct answer: More than 240 days before the bankruptcy petition date
The 240-day rule requires that the IRS assessed the tax liability more than 240 days before the bankruptcy petition date as one condition for potential dischargeability.
Question 6: Which IRS form does a bankruptcy estate created in an individual Chapter 7 or Chapter 11 case file for its annual income tax return?
- Form 1041 (U.S. Income Tax Return for Estates and Trusts) (Correct answer)
- Form 1040 (U.S. Individual Income Tax Return)
- Form 1120 (U.S. Corporation Income Tax Return)
- Form 990 (Return of Organization Exempt From Income Tax)
Correct answer: Form 1041 (U.S. Income Tax Return for Estates and Trusts)
A bankruptcy estate in an individual Chapter 7 or Chapter 11 case files Form 1041 because it is treated as a separate fiduciary entity similar to a trust or estate.
CBS CBS Tax Implications of Bankruptcy 1
Under the Internal Revenue Code, what is a 'bankruptcy estate' for tax purposes?