Closing

Overview
Bankruptcy Terms
Bankruptcy Legislation
Bankruptcy Section 6658
Bankruptcy Fraud
Statute of Limitations
Golden Parachute
Definition of "pending"
Chapter 9 Cases
Collection
Delinquent Accounts
Common Issues
IRS Case Processing
Proof of Claim
Chapter 7 Cases
Payments
Chapter 11
Chapter 12
Chapter 13
Closing

25.17.14  Closing a Bankruptcy Case

• 25.17.14.1   Overview
• 25.17.14.2   Lift of Stay
• 25.17.14.3   Timeframes for Required Actions
• 25.17.14.4   "OIs" and Exempt or Abandoned Property
• 25.17.14.5   Dismissal
• 25.17.14.6   Closing "Full Pay/Provided For" Cases
• 25.17.14.7   Discharge and Exceptions to Discharge
• 25.17.14.8   Discharge Injunction
• 25.17.14.9   Closing Chapter 7 and 11 Bankruptcies
• 25.17.14.10   Reversal of Freeze Codes (TC 521)
• 25.17.14.11   Release of Liens
• 25.17.14.12   ASED/CSED Considerations
• 25.17.14.13   Closing the Case
• 25.17.14.14   Maintenance of Closed File Information
• 25.17.14.15   Adjustment Methods for Discharged Liabilities

25.17.14.1  (09-01-2004)
Overview

1.       Closure of Accounts. Accounts unpaid at the close of bankruptcy proceedings must be adjusted, reactivated, or reported currently not collectible (for Chapter 7 corporations and Chapter 11 liquidations), as appropriate. A discharge of debt in bankruptcy relieves the debtor of any personal liability for the debt. However, the debt may still be collected by either a distribution in the proceedings, exercise of a right of setoff that existed prior to the filing of the bankruptcy petition, or from property encumbered by a valid pre-bankruptcy tax lien.

2.       Automated Discharge System (ADS). The Automated Discharge System (ADS) and Insolvency Interface Program (IIP) bridge the Automated Insolvency System (AIS) to Integrated Data Retrieval System (IDRS). Through ADS, the discharge process in Insolvency is largely automated.

·         ADS /IIP automate tasks that would otherwise be performed by Insolvency staff

·         ADS/IIP eliminate many manual tasks through automated processing

·         IIP performs automated research and inputs transactions on IDRS

·         ADS expands the functionality of AIS by automating the processes involved in the disposition of bankruptcy cases after discharge

·         the program selects tax modules eligible for abatement

·         the ADS process identifies additional cases that require further review by Insolvency employees

·         the program inputs case closing actions on IDRS after any required approval

3.       Preventing Violations of the Bankruptcy Code. Insolvency must adhere to the provisions of the Bankruptcy Code when closing bankruptcy cases by avoiding actions that may result in a violation of the Bankruptcy Code. See IRM 25.17.14.3, Timeframes for Required Actions.

25.17.14.2  (09-01-2004)
Lift of Stay

1.       Lift of Stay. "Lift of stay" means the freeze on collection actions no longer applies. However, the stay is in effect against specific property of the estate, and it continues until the property is no longer property of the estate. The stay otherwise continues until the earliest of:

·         the date the case is closed by the court

·         the date the case is dismissed

·         the date a discharge is granted or denied in the case of an individual Chapter 7 debtor, or

·         the date a discharge is granted or denied if a Chapter 9, 11, 12, or 13 bankruptcy

2.       Releasing the Bankruptcy Freeze Code. Insolvency employees must enter a TC 521 to reverse the bankruptcy freeze code at the earliest point possible when one of the above situations occurs and the case meets all other closing requirements.

Reminder:

NMF Accounts. Any account with "N" after the TIN , must be reversed at the Campus level. Insolvency can use Form 3177, Request for Terminal Action, for the TC 521 input on NMF cases. NMF accounts must have the CSED extended manually by input of TC 550.

Note:

Any TIN with an asterisk (*) must have its bankruptcy freeze code reversed at the close of a bankruptcy proceeding.

25.17.14.3  (09-01-2004)
Timeframes for Required Actions

1.       Closing Actions Commenced. All necessary closing actions on a case must be initiated by Insolvency within 30 calendar days of notification or receipt of the discharge order.

2.       Collection Determination. Prior to making adjustment(s), Insolvency must determine further collection is not probable from trustee payments or from property to which a valid prepetition Notice of Federal Tax Lien attaches.

Exception:

Adjustments may be delayed for a limited number of reasons, including an Other Investigation (OI) of abandoned or exempt property and consideration of exceptions to discharge under 11 U.S.C. § 523(a)(1)(C) such as fraudulent returns or willful attempts to evade or defeat taxes.

3.       Adjustments/Individual Chapters 7 and 11. According to local guidelines, Insolvency may adjust unsecured, dischargeable liabilities in individual Chapter 7 or 11 cases if:

·         the liabilities have been discharged

·         future distribution is non-existent or highly unlikely

·         no pending actions remain before the court

·         no likelihood of a violation of the Bankruptcy Code exists (e.g., the discharge injunction under 11 U.S.C. § 524)

Note:

See IRM 25.17.14.9, Closing Chapters 7 and 11 Bankruptcies.

4.       Adjustment Delays. Delay of adjustment action(s) should be based on local guidelines and with managerial approval. If appropriate, written concurrence from Counsel should be sought. See IRM 25.17.3.11, Courtesy Investigations – Insolvency Initiated; IRM 25.17.7.18, The Discharge Injunction; and IRM 25.17.14.7.1,The Fraud or Willful Evasion Exception.

25.17.14.4  (09-01-2004)
"OIs" and Exempt or Abandoned Property

1.       Impact of RRA 98. The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) has a significant impact on the collection operations of the Service, including the need to reevaluate the proper use of Other Investigations (OIs) in bankruptcy. When investigating exempt and/or abandoned assets at the time of a bankruptcy discharge, Insolvency should issue OI's appropriately.

2.       Components of RRA 98. Prior to requesting an OI concerning exempt and/or abandoned property, Insolvency should weigh certain components of RRA 98, such as:

A.      alternative means of collection prior to seizure — I.R.C. § 6331(j);

B.      seeking advice of Counsel before requesting an OI for the possible seizure of a personal residence as a District Court judge or a magistrate must approve a levy on a principal residence — I.R.C. § 6334(e);

C.      the prohibition against seizure of real property used as the debtor's residence, or any non-rental real property used by the debtor, or any other individual as a residence, if the liability is less than $5,000 — I.R.C. § 6334(a)(13);

D.      the requirement the Area Director must approve all seizures of tangible personal property or real property used in the trade or business of the debtor — I.R.C. § 6334(e)(2)(A);

E.      the sale of seized property at less than minimum bid is a violation of the law— I.R.C. § 6335(e);

F.      "no equity" seizures are prohibited — I.R.C. § 6331(j);

G.     the value of personal effects exempted from seizure per RRA 98 increased to $6,250 — I.R.C. § 6334(a)(2); the value of books and tools exempted from seizure increased to $3,125 — I.R.C. § 6334(a)(3); and

H.      the value of personal effects, books and tools exempt from seizure is indexed for inflation — I.R.C. § 6334(g).

3.       Other Factors to Consider. Prior to issuing an OI, Insolvency must adhere to, and fully consider, the provisions of RRA 98, along with the Service's Mission Statement. Various factors for consideration include:

·         recent legal changes

·         Compliance workload priorities

·         Insolvency staffing and resources

·         (field) Compliance staffing and resources

·         reasonable expectations of potential net dollars to be applied towards the tax liability (for example, a valid lien is on file for a large amount of tax, but the equity in the asset(s) may be minimal)

·         discharge timeframes

·         commitment by the Service to work within the guidelines of the Bankruptcy Code while the taxpayer is emerging from bankruptcy, seeking a fresh start

4.       Mitigating Factors. Collection against exempt and/or abandoned property, including residences and retirement accounts, should employ an equitable and fair-minded approach to individuals who are emerging from the bankruptcy process. Mitigating factors may preclude sending out an OI, such as lack of equity in assets, complicated title issues, alternative means of collection, complex non-debtor spousal issues, or other unusual circumstances which may exist.

·         although assets may have equity, and collection may be readily accomplished (e.g., cash value of insurance, IRAs, etc.), Insolvency should pursue such equity at the discretion of local management

·         complex circumstances may be present, such as other lien creditors, title concerns, and community property issues

25.17.14.4.1  (09-01-2004)
Collection from Exempt or Abandoned Property

1.       Collection Determination. Upon discharge, exempt property is subject to collection of non-dischargeable taxes and dischargeable taxes for which a Notice of Federal Tax Lien was filed prior to the petition date, and the lien remains valid against the specific property. See IRM 25.17.5.7.2, Refiling of Liens.A determination must be made if collection action should be pursued against such property. See IRM 25.17.2.9.1.1, Collection From Exempt Property After Discharge, and IRM 25.17.7.21, Collection From Exempt or Abandoned Property.

2.       Collection of Dischargeable and Non-Dischargeable Liabilities. After consultation with Counsel, Insolvency must determine if the automatic stay provisions apply to any property.

A.      Dischargeable Taxes. For dischargeable liabilities, if a valid prepetition Notice of Federal Tax Lien has been filed, the Service must determine if it may collect on its lien from exempt property, or property that has been abandoned or otherwise not administered by the trustee.

B.      Non-Dischargeable Taxes. A determination may also be made if the Service can collect non-dischargeable liabilities from the exempt, abandoned, non-administered, or after-acquired property of an individual debtor.

3.       Maintain Freeze Codes Pending Determination. When a valid prepetition NFTL is on file for taxes to be discharged, the TC 520 control remains on the applicable account until the collection potential against the debtor’s exempt or abandoned property is reviewed. The equity in exempt or abandoned assets may be pursued, per local guidelines, when warranted.

Caution:

Freeze codes must remain on accounts while discharged accounts are under consideration for distraint activity, or when such activity is taking place. The Service must prevent refund offsets from occurring on dischargeable periods.

4.       Counsel Guidance. Should collection concerns arise, (for example, if certain property is exempt, or if collection action against the property is allowable under the Bankruptcy Code) Insolvency should refer the matter to Counsel. See IRM 25.17.14.4 concerning the appropriate use of Other Investigations (OIs).

5.       Collection Determination. Local guidelines are to be followed when requesting revenue officer (RO) assistance. Or an Insolvency Advisor may determine the collection potential in the debtor's exempt or abandoned property.

6.       Insolvency Actions. If Insolvency determines assets merit investigation, the following actions should be taken.

a.       Assignment of OI. Insolvency employees should use the Integrated Collection System (ICS) process or manually issue Form 2209, Other Investigation, to the RO group, or assign the investigation to an Advisor.

b.       Information to OI Assignee. The bankruptcy schedules (for listing of exempt and/or abandoned assets) must be provided to the RO or Advisor, or the assigned employee may review bankruptcy court files to determine if such property is listed.

c.       Maintenance of Freeze Code. If collection from exempt/abandoned property is contemplated or is actively being pursued, a TC 520 freeze code with an appropriate closing code must be kept on the account module(s), following local procedures.

d.       Modified Final Notice. Prior to taking action on exempt or abandoned property, Insolvency must determine if the liabilities should be listed in a modified Final Notice. Counsel can provide guidance on specific language to be used in this situation.

Caution:

If Collection pursues distraint action against dischargeable taxes, the property subject to levy must be listed as property exempt or abandoned in the bankruptcy proceeding.

7.       Adjustments/Liens. After collection has been effected from exempt and/or abandoned property, or determination has been made no collection potential exists, Insolvency should adjust the accounts included on a prepetition Notice of Federal Tax Lien and discharged by the Bankruptcy Code. The NFTL generally should be released when adjustment, due to discharge, is requested. Counsel should be consulted on any significant issues that arise concerning lien releases. IRM 25.17.4.1.1, Levies and Bankruptcy, and IRM 25.17.4.1.2,Exempt and Abandoned Property, provide additional information.

Reminder:

At the end of a bankruptcy, when investigations involving exempt/abandoned property may be conducted, the Service must adhere to all CDP requirements of RRA 98. See IRM 25.17.3.6, Collection Due Process (CDP) Cases.

25.17.14.5  (09-01-2004)
Dismissal

1.       The Effect of the Dismissal Order. Except for certain confirmed Chapter 11 cases, the dismissal order, per 11 U.S.C. § 349, returns the debtor to a prepetition status, including the accrual of applicable penalties and interest. Aside from CSED extensions and potential tolling issues, the tax account is unaffected, as if the bankruptcy petition were never filed. Property of the estate is "revested" in the debtor.

2.       CSED. The Collection Statute Expiration Date (CSED) on all cases is extended for the period of time during which the IRS was prohibited from collecting the tax due to the bankruptcy case, and for six additional months – even in a case that is subsequently dismissed. IRM 25.17.4.2, ASED/CSED, provides ASED and CSED information.

3.       Effective Date. A dismissal becomes effective only when the judge signs the order and when the clerk enters it on the docket and not when the order is orally stated from the bench. This is the date to be used when inputting TC 521 to remove the bankruptcy freeze on IDRS. According to Federal Rules of Civil Procedure Rule 58, which is applicable to Bankruptcy Practice Rule 9021, "judgment is effective only when so set forth and when entered..."

25.17.14.5.1  (09-01-2004)
Closing Dismissed Cases

1.       Insolvency Actions. When closing dismissed cases, required actions include those listed below:

A.      resolutions of any unpostable assessments through IDRS, if applicable (see IRM 25.17.4.9, Unpostables);

B.      input of TC 521 — in the majority of cases, the input is done by IIP;

C.      monitoring to ensure the TC 521 posts;

D.      documentation on AIS History Screen of all closing actions taken as they occur;

E.      documentation on AIS Entity Screen of the method of closure and the date the case was dismissed by the court.

Note:

IRM 25.17.14.2(2) and IRM 25.17.14.10 address reversal of freeze codes.

25.17.14.5.2  (09-01-2004)
Reinstatements

1.       Reinstatements. Sometimes debtors, despite being dismissed, are soon back in bankruptcy (often within 30 days), reinstated by the trustee,usually by becoming current on their delinquent plan payments. This situation may inadvertently cause a violation of the automatic stay to occur.

Caution:

Before final closing of a dismissed case, Insolvency should research the current court status of the case to see if the debtor has been reinstated, or if the dismissal order still stands. Results of the research should be documented on AIS.

2.       Preventing Violations of the Bankruptcy Code If the debtor has been reinstated, Insolvency must follow procedures to return the tax account to the bankruptcy process to avoid a violation of the Bankruptcy Code.

3.       Proper Documentation. Once a reinstatement is discovered, Insolvency must promptly and accurately document all actions taken on the case. The Service needs to protect the rights of the debtor, but it also must protect the interests of the government.

4.       Counsel. Prompt consultation with Counsel on a reinstatement issue may be appropriate.

25.17.14.6  (09-01-2004)
Closing "Full Pay/Provided For" Cases

1.       Abatement of Small Balances Prior to Discharge. After all plan payments have been received and/or all plan provisions have been met, an abatement may be done when the aggregate amount of the liability remaining on any prepetition period, whether dischargeable or nondischargeable, including tax, penalties and interest, falls below the criteria prescribed for IMF taxpayers in LEM 5.3.2, Routine BAL DUE Issuance.

2.       Exceptions to Small Balance Abatements. Abatement of small tax balances does not apply in the following situations:

·         the debtor is under a pending or active investigation by the Criminal Investigation Division regardless of whether the investigation relates to a tax liability otherwise eligible for abatement

·         the debtor is a party to any pending litigation with the Service regarding the liability to be abated

3.       Closing Actions. The following actions should be taken when preparing to close a case that is full paid, or is otherwise provided for in a plan, no actions are pending, the likelihood a violation of the Bankruptcy Code will occur is remote, and the case meets all other closing requirements.

A.      Input of TC 521(s) after TC 971(s) posts. See IRM 25.17.14.15 for MFT 31 procedures for split liabilities.

B.      If a NMF account, preparation of Form 3177, Request for TerminalInput, for input of TC 521 and input of TC 550 to extend the CSED.

C.      Monitoring to ensure all TC 521s have posted.

D.      Documentation on AIS history screen of all closing actions taken.

E.      Documentation on AIS entity screen of the method and date of closure.

25.17.14.6.1  (09-01-2004)
Joint Account and Non-Debtor Spouse

1.       Joint Tax Liability. When appropriate, after the debtor has received (or will be receiving) a discharge from a joint tax liability, the Service may consider pursuing collection from the non-petitioning (non-debtor) spouse.

Caution:

See IRM 25.17.3.4.1.1, Community Property.

A.      Split Accounts. MFT 31 procedures are outlined in IRM 25.17.14.15, Adjustment Methods for Discharged Liabilities. Joint accounts are split when only one spouse files bankruptcy and receives a discharge of tax(es).

B.      NFTL Name Change. When it is appropriate to make adjustments to the tax account on behalf of a spouse who has received a discharge from tax(es), and a valid lien exists, Insolvency should notify the Automated Lien System ( ALS ) Unit of the necessary lien changes to ensure the lien will reflect only the name of the non-debtor spouse.

C.      Return to Regular Collection. After the transfer of the non-debtor spouse's liability (to an MFT 31 individual account), the account will return to the collection stream and be treated as a routine collection account.

25.17.14.7  (09-01-2004)
Discharge and Exceptions to Discharge

1.       Bankruptcy Discharges. A discharge may be granted to:

·         individual debtors in Chapters 7 or 13

·         corporations, partnerships, and individual debtors in Chapters 11 or 12

Note:

Discharges are not granted in corporate or partnership Chapter 7 cases or liquidation Chapter 11 cases.

2.       When a Discharge Becomes Effective. A discharge is effective:

A.      in an individual Chapter 7 – when the discharge order is entered by the court;

B.      in Chapter 11 – upon confirmation of the plan. 11 U.S.C. § 1141(d);

C.      in Chapters 12 and 13 – upon completion of all payments due/provided for under the plan and the entry of a discharge order; and

D.      in Chapters 12 and 13 hardship cases — when the plan cannot be completed due to circumstances beyond the debtor's control. Refer to 11 U.S.C. § 1228(b) and 11 U.S.C. § 1328(b).

Note:

The date of the TC 521 releasing the bankruptcy freeze on IDRS for Chapters 7, 12, and 13 is the date the case is closed by the court.

3.       Exceptions to Discharge. 11 U.S.C. § 523 enumerates exceptions to discharge. These exceptions apply only to individual Chapters 7, 11, and 12 cases and Chapter 13 hardship discharge cases.

4.       Exceptions include:

 .        taxes entitled to priority under 11 U.S.C. § 507(a)(8), including the trust fund portion of employment taxes and TFRP assessments;

A.      in an involuntary case, taxes that arise during the "gap" between the dates of the filing of the bankruptcy petition and the order for relief under 11 U.S.C. § 507(a)(2);

B.      taxes with respect to which a tax return was not filed;

C.      taxes due on returns filed late (within two years before the petition date); and

D.      taxes for which the debtor filed a fraudulent return or otherwise attempted willfully to evade or defeat payment.

Reminder:

Serial Bankruptcy Filings (Tolling). The three-year "lookback" provision in 11 U.S.C. § 507(a)(8) is automatically tolled during a prior bankruptcy while the automatic stay is in effect. See IRM 25.17.6.5.2.1, Tolling of the Priority Periods.

5.       Non-Pecuniary Loss Penalties — Non-Dischargeable (Within 3–Year Rule). Pursuant to 11 U.S.C. § 523(a)(7), Exceptions to Discharge, a non-pecuniary loss penalty (a punitive penalty) is non-dischargeable if:

 .        it relates to a tax that is non-dischargeable under 11 U.S.C. § 523(a)(1), and

a.       if the transaction or event that gave rise to the penalty occurred within the 3 years before the bankruptcy was filed (in the 3 years prior to the petition date).

Note:

The "transaction or event" with respect to failure to file and failure to pay penalties means the failure to file a return and pay the tax on the due date.

6.       Example:

7.       Examples of non-pecuniary loss penalties are failure to file penalties, frivolous filing penalties, and penalties for fraud or willful misconduct.

8.       Non-Pecuniary Loss Penalties — Dischargeable (Over 3–Year Rule). Courts have also held any non-pecuniary tax penalty more than 3 years old from the bankruptcy petition filing date isdischargeable, even if the underlying tax is deemed to be non-dischargeable. Therefore, any non-pecuniary tax penalty imposed with respect to a transaction or event that occurred more than 3 years before the date the debtor filed for bankruptcy is dischargeable.

Note:

This includes penalties for fraud or willful misconduct.

9.       Interest and Postpetition Penalties on Non-Dischargeable Taxes. Prepetition and postpetition interest on non-dischargeable taxes are non-dischargeable, as are any postpetition penalties on these taxes.

10.   Pecuniary Loss Penalties. The Trust Fund Recovery Penalty, a pecuniary loss penalty (assessed to reimburse and compensate the government for an actual loss of taxes), is not dischargeable, even if the TFRP assessment date is more than three years from the bankruptcy petition date.

Note:

However, the superdischarge provisions in a Chapter 13 case will apply, including a TFRP assessment.

11.   Valid Prepetition Tax Liens. 11 U.S.C. § 524 bars creditors, including the IRS , from seeking to collect discharged debts from the debtors personally. However, tax liens that are still valid may be enforceable against property owned by the debtor before bankruptcy, even though the tax debt was discharged.

12.   Caution – Adjustment of Tax Accounts/Collection Determination. Insolvency should not immediately adjust tax accounts which are discharged even though a discharge relieves the debtor of any personal liability. The debt may still be collected through:

 .        a distribution in the proceedings;

a.       from property encumbered by a pre-bankruptcy tax lien as noted in (9) above; or

b.       a right of offset that existed prior to the bankruptcy petition.

13.   TABLE – Showing Basic Discharge Information.

Showing When/If a Discharge is Available and the Timing and Effect of Discharge on Taxpayer Entities
(by Bankruptcy Chapter)

25.17.14.7.1  (09-01-2004)
The Fraud or Willful Evasion Exception

1.       Exception to Discharge — Fraud or Willful Evasion. Written concurrence of Counsel must be obtained to withhold adjustment actions on an otherwise dischargeable tax liability based on the fraud or willful evasion exception under 11 U.S.C. § 523(a)(1)(C). See IRM 25.17.7.20(1), Non-Dischargeable Taxes.

2.       Local Guidelines. Insolvency employees should follow local guidelines for determining which cases to refer under 11 U.S.C. § 523(a)(1)(C) for the fraud or willful evasion exceptions to discharge.

25.17.14.7.2  (09-01-2004)
Denial of Discharge

1.       Like a Dismissal. If a discharge is denied, debts are not forgiven. A denial of discharge is treated the same as a dismissal.

25.17.14.8  (09-01-2004)
Discharge Injunction

1.       Preventing Violations of the Discharge Injunction. Under 11 U.S.C. § 524, Effect of Discharge, a discharge operates as an injunction against the continuation or commencement of any act to collect the discharged debt. General collection actions must not be taken, including sending balance due notices, serving wage levies, or making offsets of postpetition refunds to discharged liabilities.

2.       Service Prohibition. The Service can be liable for damages if the discharge injunction is violated. See I.R.C. § 7433(e). The Service, therefore, is prohibited from taking any actions to collect, recover, or offset against postpetition refunds any discharged debt against the debtor.

3.       Adjusting Accounts. Insolvency should take timely and precautionary measures when adjusting accounts having discharged liabilities to prevent violations of the discharge injunction under 11 U.S.C. § 524.

25.17.14.9  (09-01-2004)
Closing Chapter 7 and 11 Bankruptcies

1.       Non-Discharges. Discharges are not granted in corporate or partnership Chapter 7 cases or liquidating Chapter 11 cases.

2.       CNC – 53s. Form 53 for Currently Not Collectible ( CNC ) accounts must be prepared for liquidating Chapter 11 cases and for Chapter 7 corporate cases when appropriate, per existing CNC / IRM procedures.

3.       Chapter 11 Corporations/Partnerships. In a Chapter 11 bankruptcy, non-individual debtors (i.e., corporations, partnerships, and limited liability companies) generally receive a "superdischarge" of all pre-confirmation debts (including tax debts), except to the extent that the plan or the plan confirmation order provides otherwise. 11 U.S.C. § 1141(d)(1)(A).

4.       Chapters 7 and 11 Individuals. A Chapter 11 discharge for an individual is similar to the 11 U.S.C. § 727 discharge available to an individual in a Chapter 7 case. Tax debts excepted from discharge are not discharged whether or not the IRS files a claim for the tax in the bankruptcy case.

Note:

IRM 25.17.11.3.7, Chapter 11 No Liability Cases, provides information on closing cases in Chapter 11 when no federal tax liabilities are due.

25.17.14.9.1  (04-01-2004)
Consolidated Chapter 11 Filings

1.       Taxpayers Filing as a Consolidated Group. Members of a consolidated group that have not received a discharge in a bankruptcy proceeding remain liable for the corporate income tax.

2.       When the Parent Receives a Discharge. Consolidated group regulations allow the Service to make one assessment against the parent entity for the entire consolidated group's income tax liability. When the assessment in the name of the parent is abated, even though the other members of the group remain liable for the group liability, the Service no longer has an assessment for the group liability.

A.      Case histories must include information regarding the presence of large corporate indicators on the bankruptcy parent entity and specify the need to maintain the bankruptcy freeze.

B.      No abatement of the group liability after the parent receives a discharge can occur until the subsidiaries' collection potential has been investigated through an OI to a revenue officer group.

C.      Courtesy investigations on these cases should be worked promptly with Insolvency being notified of the results and anticipated actions against subsidiary assets.

D.      Revenue officers working these cases should be reminded the parent entity or any subsidiary receiving a discharge should not be listed on notices of lien or levies.

E.      When applicable, local Counsel should be consulted.

Note:

Regardless of whether a bankruptcy has been filed, the Service can collect group liabilities from subsidiaries of the group parent when the parent does not pay. The responsibility for the collection of these taxes lies with field Compliance. (Subsidiaries remain individually liable for employment and most excise taxes.)

25.17.14.9.2  (09-01-2004)
Trust Fund Recovery Penalty Adjustments

1.       TFRP Required Adjustments. When the trust fund tax has been paid in full in a corporate Chapter 11 plan, Insolvency must adjust any corresponding responsible person's Trust Fund Recovery Penalty (TFRP). See Table below.

25.17.14.10  (09-01-2004)
Reversal of Freeze Codes (TC 521)

1.       Closing Code Reversal Determination. Before input of a TC 521, reversing the bankruptcy freeze code (TC 520), a determination should be made if a TC 520 with a particular closing code is to be reversed or if all of the TC 520 closing codes will be reversed.

A.      Reversing a Single TC 520. A TC 521 with the same closing code as the TC 520 to be reversed (for example, TC 520 CC 85 and TC 521 CC 85) must be used to prevent an unpostable transaction. This will reverse both the bankruptcy freeze and the statistical indicator for the specific closing code.

B.      Reversing Multiple TC 520s. A TC 521 with 999 statistical indicator reverses all open TC 520s in a module.

Reminder:

When reversing a TC 520 with a closing code of 84, the TC 521 does not require a closing code or date.

2.       Table — Information on TC 521 Input

25.17.14.11  (09-01-2004)
Release of Liens

1.       Pre-Adjustment/Lien Release Determinations. Prior to requesting adjustment of a dischargeable tax and release of a NFTL, a determination must be made that:

·         no exempt or abandoned assets exist, or they are not worth pursuing

·         collection from assets is concluded

·         future collection potential does not warrant keeping the account in the Service's inventory

·         no litigation is pending

·         further monitoring is not required (except for appropriate closing actions)

·         no other case actions are pending

2.       Lien Releases. When processing a release of a NFTL, Insolvency should adhere to the following guidelines:

3.       ALS Automatic Release. The Automated Liens System ( ALS ) will automatically generate a NFTL release after the adjustment posts to zero out the account. See IRM 25.17.5.7, Liens and Insolvency, and IRM 25.17.5.7.2, Refiling of Liens.

25.17.14.12  (09-01-2004)
ASED/CSED Considerations

1.       MF Computes ASED/CSED. The Master File automatically computes extensions of the Assessment Statute Expiration Date (ASED) when applicable (see below) and automatically computes the Collection Statute Expiration Date (CSED) when the TC 521 is input.

2.       Exceptions. Exceptions to the above are listed in Table below.

3.       Management/Counsel. Should ASED and/or CSED concerns arise at any time during the pendency of a bankruptcy case while it is assigned to Insolvency, management must be made aware and kept informed of the issues, including imminent or missed ASEDs/CSEDs. Insolvency should consult with Counsel on statute issues as needed.

25.17.14.13  (09-01-2004)
Closing the Case

1.       After Discharge Determination. Terminal actions to close the bankruptcy can be taken only after a discharge determination has been made, and the account meets adjustment criteria.

2.       Disposition of Cases . When no further case action is necessary, accounts not paid at the close of the bankruptcy should be adjusted or released to collection. Also, as appropriate, some accounts may be reported as "Currently Not Collectible" ( CNC ) (e.g., Chapter 7 corporate and Chapter 11 liquidation tax accounts).

3.       Closing Cases Through AIS. Closure of a case and conversion from one chapter to another, or a change from a no asset case to an asset case, are counted as a case disposition for inventory control purposes. A case closing checklist is available through AIS for:

·         reversal of TC 136

·         notification to other impacted functions such as, Compliance examination function and Counsel (should outstanding legal issues remain)

·         resolution of any unpostables

·         closure of AIS payment monitoring screen

·         closure of AIS referral screen, if applicable

·         Other Investigations, receipt and closure

·         preparation of adjustment documents per local guidelines (e.g., Form 3870, Form 53, TC 971, etc.); updating of CSED, if necessary; assessment of accrued interest and penalty for MFT 31 or NMF transfers; preparation of requests for lien releases; input of TC 521s; and other closing actions, as appropriate

·         updates of AIS closure Information

25.17.14.14  (09-01-2004)
Maintenance of Closed File Information

1.       AIS/Paperless Systems. AIS is an electronic information and storage system. Due to the volume of cases in bankruptcy, and since AIS was introduced in Insolvency, some Insolvency offices have tried to institute a "paperless" system.

2.       Required Retention Periods. All files, including AIS and paper case files, must be maintained in conformance with the required documentation retention period.

3.       Litigation Cases. Files to be retained until the end of the required retention period include all cases where litigation has occurred during the pendency of the bankruptcy.

Note:

With increasing numbers of serial/multiple filings and resultant litigation, prior bankruptcy case files, if retained and available, may provide beneficial information to Insolvency employees as they work their currently-assigned bankruptcy inventories.

25.17.14.15  (09-01-2004)
Adjustment Methods for Discharged Liabilities

1.       Adjusting a Discharged Account. At the close of a bankruptcy, when Insolvency takes actions to adjust discharged tax accounts, various transaction codes and forms must be used for the required adjustments.

2.       Forms and Actions. Listed below is a recap of the forms to use and the actions required to make the proper and necessary (partial or full) adjustment actions.

·         to request a TC 971 input, Form 3177, Form 4844, or an AIS or locally-devised form is used

·         TC 971 AC 31 is input to adjust the discharged taxes systemically on MF to zero (a full adjustment)

·         TC 971 AC 33 is input to identify a partial adjustment and is not a systemic adjustment but requires preparation of Form 3870, Request for Adjustment

·         TC 971 AC 100 identifies a bankruptcy split of a joint MFT 30 module to MFT 31 and is input with a cross-reference SSN of the non-discharged (non-debtor) spouse

Note:

This action systemically creates MFT 31 for the non-discharged spouse on Master File and is used in conjunction with Form 12810, Transfer Request Checklist, the form used to prepare the transaction codes for transfer to MFT 31.

3.       Full Adjustment — Adjusting a Discharged Liability to Zero.

A.      TC 971 AC 31 — is input to indicate a full adjustment.

B.      TC 521 may be input with a two-week posting delay to allow time for the TC 971 to post first; or after waiting until TC 971 AC 31 has posted, a TC 521 may be input.

Caution:

If TC 971 fails to post, and a module balance remains with an open TC 520, Form 3870 is used to zero out the discharged tax before input of TC 521.

4.       Partial Adjustment — Adjusting Only a Partial Amount of a Tax Liability. Partial adjustment requests are used only when:

 .        a portion of the tax is discharged (for example, the non-trust fund portion of the liability);

A.      TC 971 unposts, as noted above;

B.      a penalty meets criteria for a discharge, but the tax and applicable interest remain (see IRM 25.17.14.7(6), Discharge and Exceptions to Discharge); or

C.      an account is established on NMF.

5.       Form 3870. Form 3870, Request for Adjustment, is prepared for the discharged amounts, including a statement of the reason for the adjustment. The form is processed per local procedures.

Note:

Non-Master File transfers require Form 12810, which is available on line.

6.       Input Requests. Locally acceptable IDRS terminal input forms (Form 3177 or 4844) or AIS or a locally-devised form can be used to request input of:

·         TC 971 Action Code 33 — indicating a Partial Adjustment

·         TC 470 with closing code 93 — with a 2–week posting delay

·         TC 521 through AIS when the TC 470 posts, or, alternatively, with a 2–week posting delay

7.       Split of a Joint MFT 30 Module to MFT 31. A split of a joint MFT 30 module is processed using MFT 31 procedures. Split accounts are not sent to NMF unless the non-petitioning spouse has an invalid TIN , or other conditions exist that prevent the establishment of an MFT 31 account. Accounts processed to NMF will remain on NMF until expiration of the CSED. At least one year must remain on the CSED of the non-debtor spouse before creating an MFT 31 or NMF to split an account.

8.       MFT 31 Tolerance Criteria. In all bankruptcy chapters where one spouse is discharged of a prepetiton joint tax liability with a non-petitioning spouse, abatements may be completed - splitting of the accounts to MFT 31 or NMF is not necessary - if one of the following conditions (A through E) is met:

 .        Condition A: The aggregate amount of the liability owing is below the IMF criteria in LEM 5.3.2, Routine BAL Due Issuance.

A.      Condition B: 1) The aggregate amount owing is below the requirements for filing a proof of claim under the specific Chapters in LEM 5.5.3 Bankruptcy; and 2) the non-petitioning spouse has less than one year left on the CSED; and 3) the account was previously determined currently non-collectible (unreversed TC 530) prior to bankruptcy; or a determination is made the account is presently uncollectible based on the facts of the case.

Note:

All three of the above criteria in Condition B must be met.

B.      Condition C: The penalty to be abated is a non-pecuniary loss penalty (such as failure to file or failure to pay) and falls below the IMF criteria in LEM 5.3.2 Routine BAL Due Issuance.

C.      Condition D: Any prepetition amount where a spouse died prior to the bankruptcy filing and the estate has no assets.

D.      Condition E: For any prepetition amount in community property states, as if both spouses filed the bankruptcy.

9.       Exceptions to MFT 31 Tolerance Abatements. Abatement of cases below the MFT 31 tolerance level does not apply in the following situations:

·         the non-petitioning spouse has an installment agreement to pay the prepetition tax liability

·         the non-petitioning spouse has a pending or accepted offer-in-compromise on the prepetition tax liability

·         the non-petitioning spouse has an accepted collateral agreement on the prepetition tax liability (notification by RO)

·         Criminal Investigation has a pending or active investigation on either the petitioning spouse or the non-petitioning spouse regardless of whether such investigation relates to a tax liability otherwise eligible for abatement

·         the Service is a party to any pending litigation with the non-petitioning spouse regarding the liability to be abated

10.   MFT 31 Checklist Form. Form 12810, Account Transfer Request Checklist, is standard for transfers, including NMF transfers. Transactions identified for transfer are listed on this form or highlighted on a current TXMOD with the reversal transaction codes listed next to the transactions being moved.

11.   MFT 31 Established for Non-Debtor. To establish an MFT 31 account for the non-debtor (the non-discharged) spouse after a joint balance due return was assessed by the Service, TC 971 AC 100 with the XREF SSN of the non-discharged spouse is input. A TC 971 AC 100 with the primary SSN will systemically post to the MFT 31 after it is created. This will identify where the MFT 31 account originated. Once the MFT 31 entity is established, transactions may be input to the module.

Note:

TC 971 AC 100 should not be input when effecting a Non-Master File transfer.

12.   Required Inputs to MFT 30. Transaction codes required to be input to the MFT 30 module include:

 .        TC 470 cc 90 (with a 2–week posting delay) — to prevent notices and offsets into the account; and

a.       TC 521 to reverse the bankruptcy freeze.

13.   Invalid Social Security Numbers. The SSN used to establish the MFT 31 should be a valid SSN .

 .        Invalid Primary SSN . An invalid Primary SSN will post to MFT 31 because the Master File recognizes it as a "valid" SSN for the MFT 30 module.

Exception:

9XX numbers

Note:

Master File will allow the MFT 31 to be created, because it is identified by the system as a valid SSN , but the transaction codes will go unpostable because of the name control mismatch.

A.      Name Control Mismatch. If the SSN is valid, but there is a name control mismatch, the name control must be corrected.

Example:

In 2000 Mary Smith filed a return under her maiden name, Mary Smith. In 2001 she married John Jones, and they filed a joint return for 2001 as John and Mary (Smith) Jones. Her SSN is a valid number, but her name is not considered to be a "valid" name because it did not match SSA records and an asterisk is placed next to the year. However, if the following year was validated by the SSA, the year with the asterisk can be validated by preparing Form 2363.

B.      Invalid Secondary SSN . An invalid Secondary SSN will not post to MFT 31. IDRS CC ENMOD/INOLE may verify if the SSN and name control are valid for the year of the transfer before input of TC 971 AC 100.

C.      Correcting an SSN or Invalid Name. When an "invalid" name or SSN can be corrected, Insolvency should prepare Form 2363, Master File Entity Change, and forward it to the appropriate function for input through IDRS command code INCHG and monitor using ENMOD or INOLE.

Note:

The entity change should post to the Master File in approximately three weeks.

D.      Invalids to NMF. Insolvency must transfer an invalid SSN or name control that cannot be validated to the NMF.

14.   Additional Instructions.

 .        if the address of the MFT 31 account is different than MFT 30, Master File will search for a current address on the MFT 31 taxpayer;

a.       the MFT 31 account (TC 971 AC 100) must be allowed time to post;

b.       if the address of the MFT 31 on ENMOD is incorrect, an address change must be input through IDRS CC ENREQ;

c.       the address change must be done within 4 weeks of the MFT 31 posting so the 4th notice, issued 5 weeks later, will be mailed to the correct address.

15.   Reviewing the TXMOD. The MFT 30 module must be reviewed to determine if at least one year remains on the CSED before requesting the split of a joint account. If more than one year remains on the CSED, review the MFT 30 TXMOD to ensure —Z is the only freeze code to be resolved before the transfer and the module freeze codes —L, L—, and/or —Y have been successfully coordinated with the responsible function(s).

16.   TABLE — Appropriate Actions to Take on Certain Transaction Codes:

17.   Penalty and Interest. The TXMOD is reviewed to identify restricted and unrestricted penalty and interest to determine how they must be listed for the transfer. See Table below:

18.   Monitoring and Preparation of Form 12810. Insolvency must monitor to ensure the transaction codes have posted to the MFT 30 module. Then the transfer form can be prepared and forwarded to the appropriate Campus. Form 12810 is completed as follows: