Collection

Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 2. The
Bankruptcy Code (11 U.S.C.) and Its Effect on
Collection
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25.17.2 The Bankruptcy Code (11 U.S.C.) and
Its Effect on Collection
25.17.2.1 (09-01-2004)
Introduction
1.
Federal bankruptcy law
embraces the entire field of debtor-creditor
relationships to provide a uniform and equitable
method of distribution of the debtor's assets to the
debtor's creditors. At the same time it gives the
debtor an opportunity to start over with a clean (or
at least improved) financial slate. This section
introduces the reader to the Bankruptcy Code and its
impact on tax collection.
Note:
Subsection
IRM
25.17.2.9.1, at the end of this section provides a
summary of how the various bankruptcy discharges
affect the overall collection process.
25.17.2.2 (09-01-2004)
Introduction to the Bankruptcy Code 11 U.S.C.
1.
The
Bankruptcy Code.
Initially
individual states, not the federal government,
enacted insolvency laws. Bankruptcy law is now
contained in a federal statute called the Bankruptcy
Code (11 U.S.C. for citations),
comprising Title 11 of the United States Code (11
U.S.C.). The Bankruptcy Code establishes the law
under which bankruptcy proceedings are commenced,
administered, and closed. These procedures apply to
all bankruptcies filed on or after
October 1, 1979
.
2.
Chapters
of the Bankruptcy Code.
The
Bankruptcy Code is divided into chapters:
·
Chapters
1, 3, and 5 contain general provisions applicable
to all types of bankruptcies
·
Chapter
7 deals with liquidating bankruptcies
·
Chapter
9 concerns debts of a municipality
·
Chapter
11 provides information on reorganizations of
individuals and corporations
·
Chapter
12 concerns family farmer reorganizations
·
Chapter
13 deals with reorganizations of individuals with
regular income
3.
Automatic
Adjustments of Dollar Amounts in Bankruptcy Code. At 3year intervals, automatic
adjustments of dollar amounts in effect under
certain sections of the Bankruptcy Code are made to
reflect changes in the Consumer Price Index. 11
U.S.C. § 104(b)(2). The latest scheduled automatic
adjustments were on
April 1, 2004
, and future adjustments will continue at each
3year period ending on April 1 thereafter. The
various sections of the Bankruptcy Code affected
include:
·
109(e) (allowable debt
limits for filing under Chapter 13)
·
507(a) (priority
claims)
·
522(d) (exemptions
allowed to the debtor)
These amounts will be published in the Federal
Register on their respective effective dates. These
adjustments shall not apply with respect to cases
filed before
the date of such adjustments. 11 U.S.C. § 104.
25.17.2.3 (09-01-2004)
Bankruptcy Code Chapter Organization
1.
Organization. Chapters 1, 3, and 5 of the Bankruptcy
Code apply to all proceedings unless modified by a
specific provision under a proceeding type. The
Bankruptcy Code sections listed under each chapter
are not all inclusive but have been added as a
general reference. Some of the chapters in the 11
U.S.C. are further subdivided into subchapters.
2.
Chapter
1, General Provisions
·
Section
101, Definitions
·
Section
105, Power of Court
·
Section
106, Waiver of Sovereign Immunity
·
Section
109, Who May be a Debtor
3.
Chapter
3, Case Administration
·
Section
302, Joint Cases
·
Section
361, Adequate Protection
·
Section
362, Automatic Stay
4.
Chapter
5, Creditors, Debtor, and the Estate
·
Section
522, Exemptions
·
Section
523, Exceptions to Discharge
·
Section
524, Effect of Discharge
·
Section
541, Property of the Estate
·
Section
542, Turnover of Property of the Estate
·
Section
553, Setoff
25.17.2.4 (09-01-2004)
Chapters in Bankruptcy
1.
Bankruptcy
Options.
A
debtor who files bankruptcy has two options:
a.
Liquidation Chapter 7 and liquidating Chapter 11
liquidation of assets to pay off debts; or
b.
Reorganization Chapters 11, 12, 13 reorganizing
to pay creditors over a period of time through a
plan.
2.
Chapters
of Bankruptcy.
The
chapters under which entities can file for
bankruptcy protection are as follows:
A.
Chapter
7
Liquidation.
A proceeding filed by an individual, business, or
other entity, including corporations and
partnerships, to pay creditors through liquidation
and distribution of the debtor's assets.
B.
Chapter
9
Adjustment of a Municipal
Debt. A bankruptcy filed by a
municipality, generally authorized to be a debtor by
state law, which is insolvent or unable to meet its
debts as they mature, and desires to effect a plan
to adjust those debts.
C.
Chapter
11
Reorganization.
A proceeding filed by an individual, business, or
other entity (primarily a corporation) where
creditors are paid under a plan, often long term.
D.
Chapter
12
Family
Farmers. A reorganization proceeding for
family farming operation, with characteristics of
both Chapters 11 and 13. (Unlike Chapter 13, the
debtor does not receive a superdischarge. The farmer
is allowed to remain in business while formulating a
plan to pay creditors.)
E.
Chapter
13
Individuals. A
voluntary reorganization of debts for individual
debtors (including wage earners and sole
proprietors) under the direction of a trustee who
disburses payments to creditors. (Repayment is
through a plan, which the court can approve for up
to 60 months. The debtor receives a superdischarge
after successful completion of the plan.)
25.17.2.5 (09-01-2004)
Important Sections of the Bankruptcy Code
1.
Introduction. Particular sections of the Bankruptcy
Code impact the Service's position during the
pendency of a bankruptcy. Familiarity with the
Bankruptcy Code increases the Service's awareness of
debtor's rights so those rights are not violated
while the debtor is under court protection. Should
violations occur, the Service may be liable for
damages.
2.
Sovereign
Immunity.
Section
106 of the Bankruptcy Code waives the sovereign
immunity of
the
IRS
and other governmental units. The doctrine of
sovereign immunity asserts the United States cannot
be sued unless it specifically waives its exemption
from suit, such as by passing a statute permitting a
damages suit against the United states.
3.
Section
362,
Automatic Stay.
This
provision of the Bankruptcy Code imposes an automatic
stay (prohibition)
on certain actions of creditors, including the
United States, as of the petition date.
A.
Prohibits
Acts to Collect.
The
filing of a bankruptcy petition operates as an
automatic stay prohibiting acts to collect debts
incurred before the filing of the bankruptcy
petition and acts to take possession of, or exercise
control over, property of the estate and the debtor.
B.
Exceptions. Exceptions to the automatic stay are
found in 11 U.S.C. § 362(b). The Bankruptcy Reform
Act of 1994 (BRA 94) expanded the list of exceptions
to include: assessment of tax, issuance of notices
of deficiencies, audits to determine tax liability,
solicitation of tax returns, and the issuance of a
notice and demand for payment of an assessment.
4.
Section
522, Exemptions.
Provided
in this section of the code are the property
exemptions a debtor may select. The federal
exemptions apply unless the state in which the
debtor is domiciled has enacted specific legislation
authorizing or mandating the use of state exempted
property.
A.
Under 11 U.S.C. §§
362 and 522, collection may not be pursued against
exempt property while the automatic stay is in
effect.
B.
Upon discharge,
however, exempt property is subject to collection of
dischargeable taxes and non-dischargeable taxes for
which a Notice of Federal Tax Lien (NFTL) was filed
prior to the petition date.
Note:
Exempted property is not subject to liquidation by
the court.
5.
Section
523, Exceptions to Discharge.
Exceptions
to tax discharge for individual debtors are listed
in Subsection 523 (a)(1). Not discharged are those
tax liabilities given priority status by 11 U.S.C.
§ 507, except administrative expenses. In addition,
non-dischargeable taxes include taxes for which a
return was not filed, a late return filed within two
years of the bankruptcy petition, a fraudulent
return, trust fund taxes, and taxes the debtor
willfully attempted to evade or defeat.
Note:
In a Chapter 13 bankruptcy, an individual may
qualify for a superdischarge of all prepetition tax
debts without regard to § 523 exceptions.
6.
Section
524, Discharge Injunction.
The
collection of discharged tax liabilities is
prohibited by this code section. Tax determinations
made by bankruptcy courts are binding on the
IRS
. The Service can be sued for damages, including
attorney fees, for violating the automatic stay or
the discharge injunction under 11 U.S.C. § 524.
However, punitive damages cannot be awarded.
7.
Section
541, Property of the Estate.
The
filing of a bankruptcy petition creates an estate
comprised of all property of the debtor as of the
commencement of the case. The estate comes under the
court's jurisdiction as of the date a bankruptcy
petition is filed.
8.
Section
542, Turnover of Property to the Estate. The conditions under which property must
be turned over to the estate for the trustee's use,
sale, or lease are defined. This
"turnover" may include a refund due an
individual debtor for prepetition taxes unless the
refund may be offset.
9.
Section
547, Preferences.
The
trustee is authorized to avoid certain transfers
of the debtor's property made on
or within 90 days
before the date of the bankruptcy filing
or between 90 days and
one year before
the petition date to an insider. An
"insider" may include a relative,
stockholder, or an officer or director of a
corporate debtor, among others. 11 U.S.C. § 101(5).
This section on preferences encompasses property
seized by the government, as the term transfer
also relates to involuntary
payments. However, it does not include payments of
tax liabilities made in the ordinary course of
business.
10.
Section
553, Setoff
A creditor's right to set off a mutual
debt owed by the creditor to the debtor
that arose before the bankruptcy proceeding began is
preserved. This authority allows the
IRS
to credit a refund that arose before the petition
date against a prepetition tax liability of the
debtor, provided the
automatic stay has been lifted.
25.17.2.6 (09-01-2004)
Bankruptcy Rules
1.
Bankruptcy
Rules.
The
Bankruptcy Rules and Forms govern procedures in
cases under Title 11 of the United States Code. The
rules shall be cited as the Federal
Rules of Bankruptcy Procedure and the
forms as the Official
Bankruptcy Forms (e.g., Form
B10, Proof of Claim). The Bankruptcy
Rules were adopted to secure the just, speedy, and
inexpensive determination of every case and
proceeding. Bankruptcy Rule 1001. These Rules
provide a structure to the bankruptcy process by
standardizing the formats, timeframes, and methods
to follow in the implementation of the Bankruptcy
Code.
2.
Important
Bankruptcy Rules.
Some
Bankruptcy Rules are more pertinent than others to
the Service, and Insolvency employees should
familiarize themselves with them. Examples of the
relevant Bankruptcy Rules include:
·
Rule
1007 when a debtor files a petition (order for
relief), certain schedules or statements must also
be filed
·
Rule
2002(a)(7) creditors must receive notice of
the bar date
·
Rule
2002(j) notice of a Chapter 11 case must be
mailed to the
IRS
where the case is pending, whether or not the
IRS
is a creditor; notice of Chapter 7, 12, and 13 cases
must be given to the
IRS
when it is listed as a creditor in the debtor's
schedules
·
Rule
2004 on motion of any party in interest, the court
may order the examination of any entity
·
Rule
7001 Adversary Proceedings are subject to the formal
procedural rules of Part
VII
of the Bankruptcy Rules; the rules in Part
VII
govern the procedural aspects of litigation
involving the matters referred to in this rule
Example:
A proceeding to object to or revoke a discharge, and
to determine the dischargeability of a debt, is
known as an Adversary Proceeding.
·
Rule
9014 contested matters are less formal than
adversary proceedings; most proceedings under the
Bankruptcy Code fall under the scope of this rule
Example:
Contested matters can include objections to
confirmation, relief from the automatic stay,
request for use of cash collateral, and avoidance of
liens.
25.17.2.7 (09-01-2004)
Local Rules and Standing Orders
1.
Local
Court Practices.
Each
bankruptcy court may make and amend its own local
rules governing its practices and procedures.
Insolvency should have access to any local
rules/agreements or standing orders that
provide specific guidelines for each bankruptcy
court in which Insolvency has control. Employees
need to become familiar with them as they impact the
judicial actions in a local area. Actions forbidden
in one judicial district may be allowed in another.
Similarly, actions requiring a court hearing and
ruling in one jurisdiction may be resolved
administratively in another district.
2.
Counsel
Assistance.
Insolvency
must confer with Counsel when interpretations are
required covering local court practices. Judges in
different districts may render divergent court
decisions, and even trustees in the same district
can each handle matters differently.
25.17.2.8 (09-01-2004)
Trustee
1.
Bankruptcy
Trustees.
The
fiduciary responsibility to administer the
bankruptcy estate rests with the bankruptcy trustee.
The trustee ensures creditors are paid according to
the provisions of the Bankruptcy Code as reflected
in the debtor's plan. Trustees are appointed to
serve in specific Chapter 7 or 11 cases as panel
or case trustees. For Chapters 12 and 13,
standing trustees
are appointed to serve in all cases in the district.
2.
The
United States Trustee.
The
role of the United States Trustee (employed by the
Justice Department) is a supervisory entity charged
with monitoring:
·
the performance of all
Chapter 7 trustees
·
the performance of each
Chapter 12 and 13 standing trustee
·
certain matters in
Chapter 11 cases
Note:
IRM
25.17.1.6 Glossary
Bankruptcy Terms and other specific
sections of this
IRM
pertain to the role of trustees in the different
chapters of bankruptcy.
25.17.2.9 (09-01-2004)
The Effect of Bankruptcy on Collection
1.
How
Bankruptcy Affects Collection of Taxes. The filing of a bankruptcy petition
immediately affects the collection of taxes. The
actions the
IRS
may take depend on various factors, including, but
not limited to:
A.
whether the debtor is
an individual, corporation, or partnership;
B.
what chapter of
bankruptcy is filed;
C.
existence of complex or
unusual issues, such as community property, trust
fund, adequate protection, pyramiding of taxes;
D.
whether the tax is owed
for pre- or post- petition periods; and
E.
where the case
currently stands in the bankruptcy process.
2.
Table
Showing How Bankruptcy Can Affect Collection. The following table demonstrates the
impact bankruptcy has on collection actions. Because
of the variance of permissible actions among the
courts, guidance on all possible actions cannot be
provided in this
IRM
.
Note:
Service employees should contact Insolvency, which,
in turn, may need to consult with Counsel when
assistance is required on complex bankruptcy-related
issues.
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Circumstance
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CH
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Comments
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Bankruptcy
Code Section
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Bankruptcy Petition Filed
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All Cases
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The automatic stay is imposed upon the filing of the
petition.
All actions against the property of the estate
must be suspended, and all actions to collect
prepetition liabilities must be suspended as
of the date the bankruptcy petition is filed.
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11
U.S.C. § 362, Automatic Stay; 11 U.S.C. §541,
Property of the Estate; 11 U.S.C. § 1306,
Property of the Estate (Chapter 13s only)
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Case Dismissed
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All Cases
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Collection
may be pursued for any tax and against any
property after the order of dismissal is
final. A debtor generally is allowed 10 days
to file an appeal of a dismissal order, if so
desired. Exception
and Caution.
Counsel should be consulted on
Chapter 11 cases with confirmed plans.
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11
U.S.C. § 362(c), Automatic Stay; 11 U.S.C. §
707, Dismissal (Chapter 7); 11 U.S.C. § 1112,
Conversion or Dismissal (Chapter 11); 11 U.S.C.
§ 1208, Conversion or Dismissal (Chapter 12);
11 U.S.C. § 1307, Conversion or Dismissal
(Chapter 13)
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Case Awaiting Confirmation
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CH 11, 12, and 13
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Automatic stay remains in effect.
In Chapter 11 or 12 cases, substantial
liability may accrue between the petition date
and the filing of the plan and its
confirmation. In Chapter 13 cases the delay is
usually limited. Insolvency should monitor
these bankruptcy cases to reduce pyramiding of
delinquent postpetition tax liabilities. Possible
options include: requesting a
motion to dismiss or convert, or, for Chapter
11, the filing of an administrative
claim for taxes that accrue postpetition and
pre-confirmation; or, for Chapter
13 cases, a Section 1305
postpetition claim.
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11
U.S.C. § 503, Allowance of Admin. Expenses
(Chapter 11); 11 U.S.C. § 1305 postpetition
claim (Chapter 13)
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CH 7
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Not
applicable
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At Confirmation
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CH 11
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The automatic stay is lifted unless the plan provides
otherwise,
for instance, through the plan effective date.
Prepetition
taxes are paid through the plan. Postpetition
taxes, that are administrative expense taxes,
should be paid in full by
the plan effective date. However,
in some jurisdictions, these taxes may be paid
in deferred installments under the terms of
the plan. Post-confirmation
taxes are fully collectible through the normal
collection process. Field Compliance may need
to contact Insolvency to ensure the taxes in
question are post-confirmation taxes.
Insolvency can monitor these cases (see LAMS
and LTS information in
IRM
25.17.4.12) to expedite field involvement
where needed and when appropriate.
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11
U.S.C. § 1141, Effect of Confirmation
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At Confirmation
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CH 12 & 13
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The automatic stay remains in effect after confirmation and
during the entire pendency of the plan.
Collection of all prepetition taxes, and also
postpetition taxes for which claims are filed
under 11 U.S.C. § 1305 and
provided for in the plan, is
limited to payments under the plan. Limited
administrative collection of postpetition
taxes may be possible depending on local law
and practice. Counsel should be consulted to
formulate the most effective legal means of
dealing with postpetition non-compliance in a
particular bankruptcy court jurisdiction.
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11
U.S.C. § 1227, Effect of Confirmation
(Chapter 12); 11 U.S.C. § 1327, Effect of
Confirmation (Chapter 13)
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At Confirmation
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CH 7
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Not
applicable
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At Discharge
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CH 7
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In
an asset case, the trustee liquidates certain
assets to pay prepetition claims. The stay is
lifted at discharge against all property
including exempt or abandoned property, except
for property that remains property of the
estate (i.e., the property is being
administered by the trustee). Caution:
Care
must be taken when releasing either
non-discharged prepetition taxes or
postpetitiontaxes to systemic collection
procedures when the risk of attaching property
that is being liquidated by the trustee
exists.Local procedures may call
for control of these cases through the use of Other
Investigations (OIs).
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11
U.S.C. § 727, Discharge; 11 U.S.C. § 522,
Exemptions; 11 U.S.C. § 523, Exceptions to
Discharge;
IRM
25.17.7.21, Collection
from Exempt or Abandoned Property;
and
IRM
25.17.7.8 and 25.17.7.9, concerning Chapter 7
asset and no asset case processing.
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The
principal difference between no asset and
asset cases, for collection purposes is,
usually, in a no asset case, unlike an asset
case, no property will be distributed through
the bankruptcy case, and the
IRS
will generally not participate in the case.
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At
discharge, property exempted by the debtor, or
abandoned by the trustee, is available to
collect prepetition discharged taxes for which
a NFTL was filed before the filing of the
petition. (This can be done in either 7 asset
or no asset cases.) Also, the Service can
include, in its collection efforts,
non-dischargeable liabilities from any exempt,
abandoned, non-administered, or after-acquired
property of an individual
debtor.
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In
both asset and no asset cases, unless the
taxes are excepted from discharge under 11
U.S.C. § 523, all prepetition debts are
discharged.
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At Discharge
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CH 11
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Discharge
is generally granted after the plan has been
confirmed and becomes effective. Exception:
In a corporate case, if the plan
provides for liquidation
of all or most of all the property of the
estate, confirmation will not
result in a discharge. Reminder:
Confirmation does not discharge an
individual debtor from certain taxes under 11
U.S.C. § 523.
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11
U.S.C. § 1141(d), Effect of Confirmation; 11
U.S.C. § 523(a), Exceptions to Discharge; 11
U.S.C. § 727(a), Discharge; and
IRM
25.17.11.6, The
Chapter 11 Discharge and theEffects of
Confirmation
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At Discharge
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CH 12
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Discharge
granted at completion of payments, or if the
debtor cannot complete the plan, a hardship
discharge is granted, which is similar to a
Chapter 7 discharge. Certain debts are
excepted under 11 U.S.C. § 523.
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11
U.S.C. § 522, Exemptions; 11 U.S.C. § 523,
Exceptions to Discharge; 11 U.S.C. § 1228 (a)
and §1228 (b),
IRM
25.17.12.12, Discharge;
IRM
25.17.12.13, Hardship
Discharge;
IRM
25.17.7.19, Discharge
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At Discharge
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CH
13
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Chapter 13
Superdischarge:
All
prepetition taxes and any postpetition taxes
provided for in the plan are discharged.
Postpetition taxes not provided for in the
plan can be released to normal collection.
Hardship:
The discharge granted is identical
to the discharge granted under a Chapter 7
case, in that all prepetition debts, except
for debts excepted from discharge under 11
U.S.C. § 523, are discharged.
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11
U.S.C. § 1328(a), Discharge; 11 U.S.C. §
522, Exemption; 11 U.S.C. § 523, Exceptions
to Discharge; 11 U.S.C. § 1338(b), Discharge;
and
IRM
25.17.7.19 Discharge
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Closing
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All
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Collection
may be pursued from any remaining assets for
all non-discharged taxes. Exception:
In Chapter 11 the
IRS
is bound by terms of the plan and cannot
collect non-discharged taxes, except where the
debtor has defaulted on plan payments. Reminder:
In a Chapter 13 superdischarge, all
prepetition and postpetition liabilities
provided for in a plan are discharged.
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25.17.2.9.1 (09-01-2004)
Bankruptcy Discharges Impact on the Overall
Collection Process
1.
Introduction. A debtor's ultimate goal in bankruptcy
is to gain relief from indebtedness by obtaining a
discharge from debt. The discharge bars creditors
from collecting discharged debts. Specific sections
of
IRM
25.17 deal in depth with discharge issues for the
various bankruptcy chapters. Listed
below is a summary of the overall impact of
bankruptcy discharges on the Service's collection
process.
2.
Discharge
Individual Debtors.
A.
Chapter
7.
In
a Chapter 7 case, the court grants a discharge,
subject to the exceptions in 11 U.S.C. § 523 for individual
debtors. 11 U.S.C. § 727(a). A court may deny a
discharge if one of the criteria in 11 U.S.C. § 727
is met.
B.
Chapter
11.
In
a Chapter 11 case, the confirmation of a plan
discharges all pre-confirmation debts, except for
those listed in 11 U.S.C. § 523 for individual
debtors, whether or not a proof of claim has been
filed. 11 U.S.C. § 1141(d)(1).
Note:
A Chapter 11 confirmation does not act as a
discharge (1) if the plan provides for the
liquidation of all or substantially all of the
property of the estate; (2) if the debtor does not
engage in business after the plan is confirmed; or
(3) if one of the criteria of 11 U.S.C. § 727 is
met. 11 U.S.C. § 1141(d)(3).
C.
Chapter
12.
In
a Chapter 12 case, once the debtor has completed
payments under the plan, the court will issue a
discharge of all debts provided for in the plan,
except for those listed in 11 U.S.C. § 523. See 11
U.S.C. § 1228(a). In certain circumstances, a judge
can also issue a hardship
discharge before
the plan is completed. 11 U.S.C. § 1228(b).
D.
Chapter
13.
In
a Chapter 13 case, once a debtor has completed plan
payments, the court grants a superdischarge.
11 U.S.C. § 1328(a). All tax debts
provided for in the plan and disallowed claims are
discharged. After a plan is confirmed, but before it
is completed, the court may grant a hardship
discharge, subject
to the exceptions in 11 U.S.C. § 523.
Note:
In a hardship discharge, the Chapter 13 debtor must
show: (1) the failure to complete the plan is due to
circumstances beyond the debtor's control; (2) the
value of the property actually distributed is at
least what would have been distributed in a Chapter
7 proceeding; and (3) modification of the plan is
not practical.
3.
Discharge
Corporate Debtors.
A.
Chapter
7.
A
Chapter 7 discharge is not available for corporate
debtors. 11 U.S.C. § 727(a)(1).
B.
Chapter
11.
A
corporate discharge in Chapter 11 cases is a
superdischarge without exception. 11 U.S.C. §
1141(d)(1).
C.
Liquidating
Chapter 11.
A
corporation is not entitled to a discharge in a
liquidating Chapter 11 proceeding. 11 U.S.C. §
1141(d)(3).
D.
Chapter
12 (Family Farmer).
Refer
to
IRM
25.17.12.3, Chapter 12
Eligibility. Note in particular paragraph
(3), 50 and 80 Percent Rules
Partnerships/Corporations
for Chapter 12 bankruptcies.
4.
Exceptions
from Discharge Individuals.
Under
11 U.S.C. § 523(a), the following taxes are not
discharged in an individual
Chapter 7, 11, or 12 bankruptcy:
A.
Priority
tax claims. See
IRM
25.17.6.5.2, Unsecured
Priority Claims.
B.
Taxes
for which a return was not filed.
11 U.S.C. § 523(a)(1)(B) denies a debtor a
discharge of taxes when a return was not filed.
IRM
25.17.2.9.1.2 deals with what does and does not
constitute a valid tax return.
C.
Taxes
for which a late return was filed within two years
of the bankruptcy filing.
D.
Taxes
for which the debtor filed a fraudulent return or
willfully attempted to evade or defeat the tax. It is not always clear what constitutes
a willful attempt to evade or defeat taxes under 11
U.S.C. § 523(a)(1)(C).
5.
Fraud
Restrictions.
To
judge actions as fraudulent, the Service must
consider the following strictures:
A.
A preponderance of the
evidence must be able to prove willful evasion.
B.
Failure to file and pay
taxes is usually not enough to demonstrate fraud.
But the Service holds a debtor's voluntary,
conscious, and intentional failure to file returns
for an extended period of time, and a failure to pay
taxes when the debtor had the ability to do so,
qualifies as willful evasion under B. C. §
523(a)(1)(C).
C.
Some courts require the
Service to prove some affirmative misconduct, such
as the debtor concealed or fraudulently transferred
assets.
Caution:
Insolvency must obtain written approval from Counsel
before beginning collection actions for taxes
non-discharged on the grounds of fraud.
25.17.2.9.1.1 (09-01-2004)
Collection from Exempt Property after Discharge
1.
Exemptions. Pursuant to 11 U.S.C. § 522(b), an
individual debtor may choose to exempt certain
property from the bankruptcy estate. The debtor may
elect to follow state exemptions or the federal
exemptions listed in 11 U.S.C. § 522(d).
2.
Property
of the Estate.
Some
of the debtor's property may be excluded from the
estate under 11 U.S.C. § 541.
3.
Pension
Plans.
Pension
plans with enforceable anti-alienationprovisions
are not
property of the estate. 11 U.S.C. § 541(c)(2). An
anti-alienation provision is a clause put into the
pension plan that restricts the ability of the
employee to transfer ownership of the funds in the
plan. If a pension plan is excluded from the
bankruptcy estate under § 541(c)(2) because it
contains an enforceable anti-alienation provision,
the Service will not include the value of the
debtor's interest in such a plan in its secured
claim. The Service's lien continues to exist outside
of bankruptcy and can be considered in collecting
discharged taxes if a valid Notice of Federal Tax
Lien was filed prepetition.
Caution:
If questions arise as to whether a particular
pension plan should be included or excluded from
property of the estate, Counsel's guidance should be
sought.
4.
Valid
Federal Tax Lien Survives Bankruptcy Discharge. If the Service has properly filed a
prepetition Notice of Federal Tax Lien and the
lien is still valid (e.g., refiled correctly, if
applicable) the lien survives the bankruptcy
discharge. 11 U.S.C. § 522(C)(2)(B). Thus, the
Service may collect discharged taxes from property
that is either exempt from the estate, excluded from
the estate, or abandoned by the trustee.
Caution:
The
Service must follow normal collection procedures
while ensuring the provisions of the Bankruptcy Code
are not violated.
25.17.2.9.1.2 (09-01-2004)
A Valid Tax Return
1.
A
Valid Tax Return for Discharge Purposes. The Bankruptcy Code does not define a
"valid" tax return. Courts generally hold
for a document to qualify as a return, it must:
A.
purport to be a return;
B.
be executed under
penalty of perjury;
C.
contain sufficient data
to allow calculation of tax; and
D.
represent an honest and
reasonable attempt to satisfy the requirements of
the tax law.
2.
Invalid
Returns.
Following
the above criteria, under 11 U.S.C. § 523, a blank
return is not a valid return, nor is a Substitute
for Return (SFR) prepared by the Service without the
taxpayer's signature.
Note:
However, an SFR prepared by the Service with
the taxpayer's signature is generally considered to
be a valid return for discharge purposes.
Rule of Thumb for Evaluating the Dischargeability
of SFRs. The
general rule on determining dischargeability of an
SFR is a return filed after
an assessment is made based upon an SFR is not a
valid return for dischargeability purposes unless
the taxpayer presents evidence the return
constitutes an honest and genuine attempt to comply
with the tax laws. Advice from Counsel
may be needed in specific cases where
dischargeability is in question
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