CBS Tax Implications of Bankruptcy Flashcards

What is IRS Form 982 used for in the context of a bankruptcy discharge?

Answer: To report the exclusion of COD income from gross income and document the corresponding reduction of tax attributes

Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) is attached to the debtor's tax return to claim the Title 11 exclusion and report the mandatory reduction of tax attributes like NOLs.

What is a 'priority tax claim' in a bankruptcy case?

Answer: A tax claim entitled to full payment before general unsecured creditors receive any distribution

Under 11 U.S.C. § 507(a)(8), certain tax claims hold eighth-priority status and must be paid in full under a Chapter 11 or Chapter 13 plan before unsecured creditors receive any distribution.

What is the 'Trust Fund Recovery Penalty' (TFRP) and how does it interact with a business bankruptcy?

Answer: A personal liability imposed on responsible persons for unpaid payroll taxes that survives the company's bankruptcy

Under IRC Section 6672, officers or employees who willfully failed to collect or remit trust fund taxes face personal liability for the TFRP, which is not affected by the employer's bankruptcy filing.

When a Chapter 11 reorganized debtor emerges from bankruptcy, how are pre-petition tax attributes such as NOLs typically treated?

Answer: They are reduced by the amount of COD income excluded from gross income during the bankruptcy case

Under IRC Section 108(b), pre-petition tax attributes including NOL carryforwards must be reduced by the excluded COD income, reducing future tax benefits in exchange for the upfront exclusion.

Which of the following income tax debts would remain NON-DISCHARGEABLE in a Chapter 7 bankruptcy?

Answer: Income taxes for a year in which the debtor filed a fraudulent return

Under 11 U.S.C. § 523(a)(1)(C), any tax for which the debtor filed a fraudulent return or willfully attempted to evade payment is permanently non-dischargeable, regardless of how old the debt is.

How does bankruptcy affect the IRS's 10-year statute of limitations for collecting tax debts?

Answer: The statute of limitations is tolled (paused) during the bankruptcy case plus an additional 6 months after discharge

Under IRC Section 6503(h), the IRS's 10-year collection statute is tolled during the period the automatic stay prevents collection, plus an additional 6-month period following discharge or dismissal.