||October 2, 2006
Individual Chapter 11 Debtors
This notice provides guidance for individuals who file bankruptcy cases
under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 1101 et
seq.) on or after October 17, 2005. This notice also provides
guidance for (1) employers of these individuals, (2) persons filing Forms
W-2, 1099-INT, 1099-DIV, 1099-MISC, and other information returns (including
Schedule K-1) that report payments to these individuals, and (3) Chapter 11
trustees in bankruptcy cases filed by these individuals. Upon consideration
of the comments received concerning this notice, as requested in section 7,
additional guidance may be published.
The bankruptcy estate of a Chapter 11 debtor who is an individual is
a separate taxable entity under section 1398 of the Internal Revenue Code.
The estate, rather than the debtor, must include in its gross income all
of the debtor’s income to which the estate is entitled under the Bankruptcy
Code, except for amounts received or accrued by the debtor before the commencement
of the case. Section 1115 of the Bankruptcy Code was enacted by section 321(a)(1)
of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),
Pub. L. No. 109-8, 119 Stat. 23 (2005) and is effective for cases filed on
or after October 17, 2005. As a result of the enactment of section 1115,
the bankruptcy estate, rather than the debtor, must include in its gross income
both (1) the debtor’s gross earnings from his or her performance of
services after the commencement of the case (“post-petition services”)
and (2) the gross income from property acquired by the debtor after the commencement
of the case (“post-petition property”). I.R.C. § 1398(e)(1).
The gross earnings from post-petition services include wages and other compensation
earned by a debtor who is an employee and self-employment income earned by
a debtor who is a self-employed individual.
Section 2. BACKGROUND AND GENERAL LEGAL PRINCIPLES
.01 The commencement of a bankruptcy case creates an estate, which generally
includes all legal or equitable interests of the debtor in property as of
the commencement of the case. 11 U.S.C. § 541(a)(1). Specific
exclusions apply, however. See 11 U.S.C. § 541(b)
(excluded property). See also 11 U.S.C. § 522
(exempt property); 11 U.S.C. § 554 (abandoned property). Exempt
property and abandoned property are initially part of the bankruptcy estate,
but are subsequently removed from the estate. By contrast, property excluded
from the estate is never included in the estate.
.02 Confirmation of a Chapter 11 plan of reorganization generally vests
all the property of the estate in the debtor, except as otherwise provided
in the plan or in the court order confirming the plan. 11 U.S.C. § 1141(b).
If no plan is confirmed and a bankruptcy case is dismissed, the property
of the estate generally revests in the debtor, unless the court orders otherwise.
11 U.S.C. § 349(b)(3).
.03 When a trustee is appointed pursuant to section 1104 of the Bankruptcy
Code, the debtor generally must turn over to the trustee control over the
assets of the bankruptcy estate. In most Chapter 11 cases, a trustee is not
appointed and the debtor (referred to as the debtor in possession) remains
in control of the property of the bankruptcy estate. Under section 1107(a)
of the Bankruptcy Code, the debtor in possession must perform all the functions
and duties of a trustee, except for the duties specified in Bankruptcy Code
section 1106(a)(2), (3) and (4).
.04 Because the bankruptcy estate is a separate taxable entity, the
trustee or debtor in possession must obtain an employer identification number
(EIN) for the estate. I.R.C. § 6109. The trustee or debtor in
possession uses the EIN on any tax returns filed for the estate.
.05 Section 1398(e)(1) of the Code provides that the gross income of
the estate includes the gross income of the debtor to which the estate is
entitled under the Bankruptcy Code. Section 1398(e)(2) provides that the
gross income of the debtor does not include any item to the extent the item
is included in the gross income of the bankruptcy estate.
.06 In general, the determination of whether or not any amount paid
or incurred by the estate is allowable as a deduction or credit to the estate
shall be made as if the amount were paid or incurred by the debtor and as
if the debtor were still engaged in the trades and businesses, and in the
activities, the debtor was engaged in before the commencement of the case.
I.R.C. § 1398(e)(3)(A). The estate is, however, specifically allowed
a deduction for administrative expenses allowed under section 503 of the Bankruptcy
Code and for any fee or charge assessed against the estate under chapter 123
of title 28 of the United States Code. I.R.C. § 1398(h)(1).
.07 The individual debtor must continue to file his or her own individual
tax returns during the bankruptcy proceedings. I.R.C. § 6012(a)(1).
.08 For bankruptcy cases filed before October 17,
2005, the property of the estate does not generally include any post-petition
property acquired by an individual Chapter 11 debtor. Nor in those cases
does the property of the estate include the individual Chapter 11 debtor’s
earnings from post-petition services, because section 541(a)(6) of the Bankruptcy
Code specifically excluded those earnings from the estate. See, e.g., In
re Fitzsimmons, 725 F.2d 1208 (9th Cir.
1984); In re Larson, 147 B.R. 39 (Bankr. D.N.D. 1992).
Therefore, in these cases income from post-petition property and earnings
from post-petition services are not generally includible in the estate’s
gross income. Instead, such income and earnings are generally includible
in the debtor’s gross income.
.09 Section 321 of BAPCPA made several changes to Chapter 11, effective
for bankruptcy cases filed by individuals on or after October 17,
2005. Although many of the provisions that apply to individual
Chapter 11 cases now operate in a manner similar to the provisions that apply
in Chapter 13 cases, section 1398 of the Internal Revenue Code has not been
amended and continues to apply to individual Chapter 11 cases, but not to
Chapter 13 cases. Based on section 1115 of the Bankruptcy Code, read in conjunction
with section 1398(e)(1) of the Internal Revenue Code, the debtor’s gross earnings
from post-petition services and gross income from post-petition
property are, in general, includible in the bankruptcy estate’s gross
income, rather than in the debtor’s gross income. This rule is subject
to the exceptions noted below in sections 2.10, 2.11, 2.12, and 2.13.
.10 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. I.R.C. § 1399.
.11 If the Chapter 11 case is converted to a Chapter 7 case, section
1115 will not apply after conversion and earnings from post-conversion services
will be taxed to the debtor, rather than the estate. 11 U.S.C. § 541(a)(6).
In such a case, the property of the Chapter 11 estate will become property
of the Chapter 7 estate. Any income on this property will be taxed to the
estate even if the income is realized after the conversion to Chapter 7.
.12 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. I.R.C. § 1398(b)(1).
.13 For Chapter 11 cases filed by individuals on or after October 17,
2005, the estate’s gross income includes gross income from property
held by the debtor when the case commenced (“pre-petition property”),
as was the case under pre-BAPCPA law. There are certain exceptions to this
general rule, however. The gross income on pre-petition property is included
in the gross income of the debtor, rather than the estate, if the pre-petition
property is excluded from the estate and the gross income is subject to taxation.
Also, the gross income on pre-petition property is included in the gross
income of the debtor, rather than the estate, after the
pre-petition property is removed from the estate by exemption or abandonment.
Section 3. FILING INCOME TAX RETURNS OF THE DEBTOR AND THE ESTATE;
NOTIFICATION TO PERSONS FILING INFORMATION RETURNS (OTHER THAN FORM W-2)
OF THE STATUS OF THE CHAPTER 11 BANKRUPTCY CASE
.01 The debtor in possession or trustee, if one is appointed, must prepare
and file the income tax returns of the bankruptcy estate if required under
section 6012(a)(9). I.R.C. § 6012(b)(4). In preparing the income
tax returns of the debtor and the bankruptcy estate, the debtor in possession
(or the trustee) must follow the rules stated in sections 2.09, 2.10, 2.11,
2.12, and 2.13 of this notice, and must attach to the returns the statement
discussed in section 6.
.02 A debtor in possession may be compensated by the estate to manage
or operate a trade or business that the debtor conducted before the commencement
of the bankruptcy case. Such payments should be reportable by the debtor
as miscellaneous income on his or her individual income tax return. I.R.C.
§ 61(a). 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. An administrative expense allowed by the bankruptcy
court under section 503 of the Bankruptcy Code will generally be deductible
by the estate as an administrative expense when it is paid or incurred. I.R.C.
.03 Within a reasonable time after the commencement of a Chapter 11
bankruptcy case, the trustee (if one is appointed) or the debtor in possession
should provide notification of the bankruptcy estate’s EIN to persons
that are required to file information returns with respect to the bankruptcy
estate’s gross income, gross proceeds, or other types of reportable
payments. I.R.C. § 6109(a)(2). Since these payments are property
of the estate under section 1115, such persons should report the gross income,
gross proceeds, or other reportable payment on an appropriate information
return using the estate’s name and EIN in the time and manner required
under the Internal Revenue Code and regulations (see, e.g.,
sections 6041 through 6049). The trustee or debtor in possession should not,
however, provide the EIN to the debtor’s employer or other person filing
Form W-2 with respect to the debtor’s wages or other compensation, since
section 1115 does not affect the determination of what constitutes wages for
purposes of Federal income tax withholding or the Federal Insurance Contributions
Act. I.R.C. §§ 3121(a) and 3401(a). As provided in section
5, an employer should continue to report all wage income and accompanying
tax withholdings, whether pre-petition or post-petition, on a Form W-2 issued
to the debtor under the debtor’s social security number. See sections
6721 through 6724 for applicable penalties for failure to comply with information
reporting requirements, including providing taxpayer identification numbers,
and provisions for penalty waivers for reasonable cause.
.04 When a Chapter 11 bankruptcy case is closed, dismissed, or converted
to a case under Chapter 12 or 13 of the Bankruptcy Code, the bankruptcy estate
ends as a separate taxable entity. The debtor should, within a reasonable
time, provide notification of the closing, dismissal, or conversion to the
persons that were previously notified of the bankruptcy case under section
3.03 to the extent notification is necessary to ensure that gross income,
gross proceeds, and other types of reportable payments realized after the
closing, dismissal, or conversion are reported to the proper person and with
the correct taxpayer identification number. Gross income, gross proceeds,
and other reportable payments realized after the closing, dismissal, or conversion
to Chapter 12 or 13 should, in general, be reported to the debtor, rather
than the estate.
.05 If the Chapter 11 case is converted to a Chapter 7 case, the bankruptcy
estate will continue to exist as a separate taxable entity and 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 the gross income, gross proceeds, or other reportable payment represents
property of the Chapter 7 estate. As section 2.11 notes, income from services
performed by the debtor after conversion to Chapter 7 is not property of the
Chapter 7 bankruptcy estate. Therefore, within a reasonable time after the
conversion to Chapter 7, the debtor should notify payors required to report
the debtor’s nonemployee compensation on Form 1099-MISC that such compensation
earned after the conversion to Chapter 7 should be reported using the debtor’s
name and taxpayer identification number, rather than the estate’s name
.06 The debtor is not required to file a new Form W-4 with an employer
adjusting the debtor’s withholding allowances solely because the debtor
has filed a Chapter 11 case and his or her post-petition wages are includible
in the gross income of the estate. This is true even though the estate may
be taxed at a higher tax rate than the debtor and is entitled to only one
personal exemption. A new Form W-4 may be necessary, however, under the applicable
regulations when, for instance, the debtor employee is no longer entitled
to claim the same number of allowances claimed on the Form W-4 previously
provided to the employer, such as for certain deductions or credits that now
belong to the estate. See § 31.3402(f)(2)-1
of the Employment Tax Regulations. Furthermore, even where not required,
in some circumstances it may be prudent for the debtor to file a new Form
W-4 to increase the amount of income tax withheld from the debtor’s
post-petition wages that will be allocated to the estate in accordance with
section 6. Otherwise, estimated tax payments on behalf of the estate may
be required in order to avoid a penalty for underpayment of estimated tax.
See section 6654(a).
Section 4. APPLICATION OF THE SELF-EMPLOYMENT TAX
.01 Section 1401 of the Internal Revenue Code imposes a tax upon the
self-employment income of every individual. The term “self-employment
income” means the net earnings from self-employment derived by an individual.
I.R.C. § 1402(b). The term “net earnings from self-employment”
means, in relevant part, the gross income derived by an individual from any
trade or business carried on by such individual less deductions allowed attributable
to such trade or business. I.R.C. § 1402(a).
.02 Under section 1115 of the Bankruptcy Code, the earnings from a Chapter
11 debtor’s post-petition services, including the debtor’s self-employment
income, constitute property of the estate under section 1115. As property
of the estate, the income from post-petition services is includible in the
income of the bankruptcy estate, rather than the income of the debtor. I.R.C.
§ 1398(e)(1). However, neither section 1115 of the Bankruptcy Code
nor section 1398 of the Internal Revenue Code addresses the application of
the self-employment tax to the earnings from the individual debtor’s
continuing services. Because 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 on Schedule SE
of the debtor’s individual income tax return the self-employment income
earned post-petition, which includes the attributable deductions, and must
pay the resulting self-employment tax imposed by section 1401.
Section 5. APPLICATION OF EMPLOYMENT TAXES AND OBLIGATION TO FILE FORM
.01 As a result of the enactment of section 1115, post-petition wages
earned by a debtor are generally treated for income tax purposes
as gross income of the estate, rather than the debtor. The reporting and
withholding obligations of a debtor’s employer, however, have not changed
as a result of the enactment of section 1115. Section 1115 has no effect
on the determination of wages under the Federal Insurance Contributions Act
(FICA), including application of the contribution and benefit base (as determined
under section 230 of the Social Security Act). I.R.C. § 3121(a).
Similarly, the enactment of section 1115 has no effect on the determination
of wages for Federal Unemployment Tax Act (FUTA) tax or Federal Income Tax
Withholding purposes. See I.R.C. §§ 3306(b) and 3401(a).
.02 Since section 1115 does not affect the application of FICA tax,
FUTA tax, or Federal Income Tax Withholding, with respect to the wages of
a Chapter 11 debtor in a case commenced on or after October 17, 2005, an employer
should continue to reflect such wages and accompanying tax withholdings on
a Form W-2 issued to the debtor under the debtor’s name and social security
Section 6. ALLOCATION OF INCOME AND CREDITS ON INFORMATION RETURNS
AND REQUIRED STATEMENT FOR RETURNS
.01 When an employer issues a Form W-2 to a Chapter 11 debtor reporting
all of the debtor’s wages, salary, or other compensation to the debtor
for a calendar year, and a portion of the wages, salary, or other compensation
represents earnings from post-petition services includible in the estate’s
gross income under section 1398(e)(1), an allocation of the amounts reported
on the Form W-2 must be made. The debtor in possession, or the trustee, if
one is appointed, must allocate in a reasonable manner wages, salary, or other
compensation reported in box 1 and the withheld income tax reported in box
2 of Form W-2 between the debtor and the estate. The allocations must be
in accordance with all the rules stated in sections 2.09, 2.10, 2.11, 2.12,
and 2.13 of this notice. If reasonable, the debtor and trustee may use a
simple percentage method for allocating income and withheld income tax between
the debtor and the estate. The same method used to allocate income must be
used to allocate withheld income tax. For example, if one-sixth of the wages
reported on Form W-2 for the calendar year ending December 31, 2005, was earned
after the commencement of the case and must therefore be included in the estate’s
gross income, one-sixth of the withheld income tax reported on Form W-2 must
be claimed as a credit on the estate’s income tax return and five-sixths
of the withheld income tax must be claimed as a credit on the debtor’s
income tax return. See I.R.C. § 31(a).
.02 In some cases, persons filing information returns may report to
the debtor gross income, gross proceeds, or other reportable payments that
should have been reported to the bankruptcy estate using Forms 1099-INT, 1099-DIV,
1099-MISC, Schedule K-1 or other information returns. This may occur, for
instance, if the debtor in possession fails to notify the payor of the bankruptcy
in accordance with section 3.03. In these cases, the debtor in possession,
or the trustee, must allocate the improperly reported income in a reasonable
manner between the debtor and the estate. In general, the allocation must
ensure that any income (and any 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. The allocations, however, must be in accordance with all the rules
stated in sections 2.09, 2.10, 2.11, 2.12, and 2.13 of this notice.
.03 The debtor must attach a statement to his or her income tax return
stating that he or she filed a Chapter 11 bankruptcy case. The statement
must reflect the foregoing allocations of income and withheld income tax and
must describe the method used to allocate income and withheld tax between
the debtor and the estate. The statement should 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. The debtor in possession
or trustee must attach a similar statement to the income tax return of the
.04 The following model statement may be used by debtors, debtors in
possession and trustees in complying with the requirements of section 6 of
The taxpayer, , filed a
bankruptcy petition under Chapter 11 of the Bankruptcy Code on in the Bankruptcy
Court for the District of . The bankruptcy court case number is . Gross
income, and withheld federal income tax, reported on Form W-2, Forms 1099,
K-1, 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 and the bankruptcy estate (EIN-) as follows,
using [describe allocation method]:
||Form W-2 from Co.
||Withheld income tax shown on Form W-2
||Form 1099-INT from Bank
||Withheld income tax (if any) shown on Form 1099-INT
||Form 1099-DIV from Co.
||Withheld income tax (if any) shown on Form 1099-DIV
||Form 1099-MISC from Co.
||Withheld income tax (if any) shown on Form 1099-MISC
Section 7. REQUEST FOR COMMENTS
.01 The IRS and the Treasury Department are aware that further guidance
may be needed as a consequence of the enactment of section 1115 and request
comments from the public.
.02 In particular, section 1115 does not address whether, or to what
extent, the income earned by the debtor from services performed after confirmation
of the Chapter 11 plan is property of the estate or property of the debtor.
Nor does section 1115 address whether, or to what extent, property of the
estate retains its character as such after it vests in the debtor upon plan
confirmation under section 1141(b) of the Bankruptcy Code. Courts have addressed
the effects of plan confirmation on the scope and extent of the Chapter 13
estate under the analogous provisions of that Chapter, but the courts have
reached varying and conflicting results. See, for example, Telfair
v. First Union Mortgage Corp., 216 F.3d 1333, 1340 (11th Cir.
2000) (describing the estate termination approach, the preservation approach,
and the transformation approach) and Barbosa v. Soloman,
235 F.3d 31, 36, 37 (1st Cir. 2000) (describing
a fourth, hybrid, approach). Comments are requested as to the proper treatment
of post-confirmation income, given the conflicting holdings under analogous
provisions of Chapter 13. Comments are also requested as to whether the terms
of the Chapter 11 plan and the order confirming the plan may affect the taxation
of post-confirmation earnings of the debtor and post-confirmation income on
property of the estate.
.03 Section 3.02 of this notice addresses the tax consequences of compensation
that a debtor in possession receives from the estate for managing or operating
a trade or business carried on by the debtor before the commencement of the
bankruptcy case. In some cases, however, the estate might not conduct a trade
or business because the debtor was the employee of a third party before the
commencement of the case and continues as an employee post-petition. Comments
are requested on the tax treatment to the estate and the debtor of the portion
of the post-petition compensation from a third party employer that the bankruptcy
court allows the debtor to retain to pay for the debtor’s personal or
living expenses. In particular, comments are requested regarding whether
such post-petition compensation is subject to double taxation as gross income
to the debtor under section 61 and earnings under section 1115(a)(2) of the
Bankruptcy Code includible in the estate’s gross income under section
1398(e)(1), without a corresponding deduction for the estate.
.04 Comments should be submitted on these and other relevant issues
in writing on or before December 1, 2006, to the Internal Revenue Service,
P.O. Box 7604, Washington, D.C. 20044, Attn: CC:PA:CBS (Notice 2006-83).
Submissions may also be hand-delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to the Courier’s Desk at Room 105, First Floor,
Internal Revenue Service, 1901 S. Bell Street, Jeff Davis Highway, Arlington,
Va., Attn: CC:PA:CBS (Notice 2006-83). Submissions may also be sent electronically
via the internet to the following email address: [email protected].
Include the notice number (Notice 2006-83) in the subject line. All comments
will be available for public inspection and copying.
Section 8. PAPERWORK REDUCTION ACT
.01 The collection of information in the notice has been reviewed and
approved by the Office of Management and Budget (OMB) in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-2033.
.02 An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of information
displays a valid OMB control number.
.03 The collection of information in the notice is in section 6 of this
notice entitled “Allocation of Income and Credits on Information Returns
and Required Statement for Returns.” The collection of information
is required for compliance with I.R.C. § 1398. The collection of
information is required to comply with the Internal Revenue Code. The likely
respondents are individuals and their chapter 11 bankruptcy estates.
.04 The estimated total annual reporting burden is 1,500 hours. The
estimated annual burden per respondent is 1/2 hour.
The estimated number of respondents is 3,000. The estimated frequency of
responses is annually.
.05 Books or records relating to a collection of information must be
retained as long as their contents may become material to the administration
of the internal revenue law. Generally, tax returns and tax return information
are confidential, as required by 26 U.S.C. 6103.
Section 9. DRAFTING INFORMATION
The principal author of this notice is William F. Conroy of the Office
of Associate Chief Counsel (Procedure & Administration). For further
information regarding this notice, contact William F. Conroy at (202) 622-3620
(not a toll-free call).
Internal Revenue Bulletin 2006-40
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