HOMEWORK – week 1

 
Problem 1 – Public Policy
 
What are the conflicting public policy objectives when advising financially troubled
taxpayers, who are either insolvent or considering filing a title 11 case?  Do you think that the
conflict is irreconcilable?  Briefly explain.
 
Problem 1 Answer
 
There is conflict between the “policy of promptly and efficiently collecting all taxes due
balanced against the orderly administration of the objectives of the Bankruptcy Code, the
concept of ‘fresh start’ and rehabilitation”. Collier on Bankruptcy at 101.5 (Richard Levin &
Henry J. Sommer eds., 16th ed.).
 
“The Internal Revenue Code seeks the full, complete, and prompt payment of taxes.” Id. at
101.3.
 
On the other hand,
 
Title 11 was designed by Congress in 1978 to provide debtors with a “fresh start” by granting
them a discharge from certain obligations, to distribute assets and pay claims in a
predetermined scheme with a statutory system of priorities, and to provide debtors with an
opportunity to reorganize, rehabilitate, or liquidate.
 
Id. at 101.4.
 
Problem 2 – Common Tax Issues
 
One of the most important skills that you need to develop and hone as a tax attorney is the
ability to identify or spot issues in a case. The ability to correctly identify the issues upfront
in a case has a direct bearing on your ability to help your client. One way to do this is through
attending ABA and State Bar of California CLE programs throughout the year. 
 
Suppose you have been retained to meet with a prospective client who is considering filing
bankruptcy.  The client would like to know a few of the tax issues that may arise.  Please
briefly identify and explain the tax issues that may arise:
 
1. prior to filing of a title 11 case,
 
1. during the administration of a title 11 estate, and
 
1. subsequent to the entry of discharge or confirmation of a plan of reorganization.
 
Problem 2 - Answer
 
Prior to filing of a title 11 case
 
1. Is there a difference in tax treatment if there is a taxable event generated by a transfer
of collateral to the lender (whether in a foreclosure or by deed in lieu of foreclosure) before
the title 11 filing?
 
2. Is the debtor an individual, a corporation, or a pass-through tax entity such as a
partnership or S corporation?
 
3. Prepetition taxes (property taxes, employment taxes or trust fund taxes, and state taxes
such as sales or use taxes and California income taxes).
 
During the administration of a title 11 estate
 
1. Whether a transfer of assets from the debtor to the estate on the filing of a title 11 case
is a separate taxable event.
 
2. Once a title 11 case is commenced and an order for relief is entered, tax questions
primarily revolve around issues of
 
1. dischargeability,
2. priority of tax payment,
3. amount of the tax claim,
4. responsibility for filing tax returns,
5. termination of tax years, and
6. whether the tax claim includes post or prepetition interest or post or prepetition
penalties.
Id.  at 106.21.
 
Post-filing issues
 
Postpetition tax issues are commonly generated because of
 
1. an abandonment of an asset during the title 11 case;
2. the setting aside of exempt property;
3. the denial or nondischargeability of tax claims;
4. the setoff rights of the Internal Revenue Service against a debtor’s tax refund;
5. the validity of a prior recorded tax assessment and lien on postpetition property;
6. the sales and disposition of property by the bankruptcy estate; or
7. franchise, sales, and use tax liability.
 
Id. at 106.31.
 
Problem 3 – Automatic Stay
 
What is the automatic stay in a title 11 case, what are some of the actions by the IRS that are
stayed, and what are some of the actions that are not barred?
 
Problem 3 – Answer
 
Filing a title 11 petition automatically invokes the stay. The automatic stay is an injunction of
all actions which may be brought against the debtor that could directly or indirectly interfere
with the administration of the title 11 case.
 
The IRS is barred, during the operation of the automatic stay, from taking the following
actions:
 
 it may not assess or collect taxes,
 it may not levy or execute on the debtor’s property,
 it may not issue a Notice of Intent to Levy, and
 it may not set off tax refunds owed to the debtor against the debtor’s tax liability owed
to the IRS.
 
Certain actions by the IRS and others are not barred by the automatic stay:
 
 tax audits;
 issuance of notice of tax deficiency;
 demand for tax returns; and
 making of an assessment, but a lien will not be attached unless the debt is
nondischargeable and the property is transferred out of the estate.
 
Id.  at 109.31-3.
 
Problem 4 – Property of the Estate
 
Debtor filed a 2014 Form 1040 for the taxable year 2014 and was entitled to a refund of
$5,000.  Shortly thereafter, the IRS set off the debtor’s overpayment for the taxable year 2014
against the debtor’s tax liability for the taxable year 2012.  The debtor then filed a chapter 7
bankruptcy and filed a motion to turn over the refund.  Is the debtor’s tax overpayment and
corresponding right to a refund property of the estate under section 541(a) such that section
553 would apply to this case?  Briefly explain.
 
Hint: See Porter v. IRS (In re Porter), 2016 Bankr. LEXIS 4511 (Bankr. E.D. Va. Dec. 28,
2016).
 
Problem 4 – Answer
 
Yes. A debtor’s tax overpayment and corresponding right to a refund are property of the
estate under section 541(a); the IRS must seek relief from stay or act under an enumerated
exception under section 362(b) in order to use the overpayment as a setoff. Id.
 
Problem 5 – Property of the Estate
 
Are estimated tax payments made by the debtor prior to the filing of a title 11 case considered
property of the estate? 
 
Problem 5 – Answer
 
No. “Estimated tax payments made by the debtor prior to the filing of a title 11 case have
been deemed not to be property of the estate”. Collier on Bankruptcy at 109.56 (Richard
Levin & Henry J. Sommer eds., 16th ed.). Citing In re Halle, 25 C.B.C.2d 1113, 132 B.R.
186 (Bankr. D. Colo. 1991).
 
 
Problem 6 – Turnover of Property
 
Your client, Silicon Wireless Technologies (SWT), provides wireless technology services. 
SWT owed approximately $1.6 million to the IRS in unpaid federal employment taxes.  SWT
failed to respond to demands from the IRS to pay the balance due, and consequently, the IRS
filed a Notice of Federal Tax lien against all of SWT’s property and rights to property. 
Shortly thereafter, the IRS seized SWT’s tangible personal property (e.g., equipment,
inventory, and vehicles) pursuant to a levy.  The very next day, SWT filed a chapter 11
petition.  The United States moved to proceed with the tax sale of the property, but SWT
counterclaimed for an order requiring the IRS to turn over the seized property to the
bankruptcy estate pursuant to section 542(a).  Is the IRS required to turn over the property? 
Briefly explain.
 
See United States v. Whiting Pools, 462 U.S. 198, 103 S. Ct. 2309 (1983).
 
Problem 6 – Answer
 
Yes.  The Internal Revenue Service (IRS) is bound by 11 U.S.C.S. § 542(a) to the same
extent as any other secured creditor. Id. at 2309-2310.
 
Problem 7 – Jurisdiction of Bankruptcy Court
 
The bankruptcy court has jurisdiction to determine a debtor’s tax liability.  Identify two
instances where the court would abstain from determine the debtor’s tax liability.
 
Problem 7 – Answer
 
There are limitations on the bankruptcy court’s jurisdiction. The bankruptcy court may not
determine a tax liability that has already been adjudicated by a tribunal of competent
jurisdiction before the title 11 case is filed. This is pursuant to the res judicata rule.  In
addition, bankruptcy courts will not determine a tax liability that has no effect on unsecured
creditors.
 
Collier on Bankruptcy at 109.73 (Richard Levin & Henry J. Sommer eds., 16th ed.).
 
Problem 8 – Chapter 11
 
1. What is the purpose of a written plan in a chapter 11 reorganization case? Briefly
explain.
 
1. The plan does not have to provide for satisfaction of tax claims that are
nondischargeable and entitled to priority payment. True or false?
 
1. The plan must provide for full payment of tax claims entitled to administrative
priority under section 507(a)(2). True or false?
 
1. The plan may provide for the payment of priority tax claims in deferred cash
installments not exceeding three years after the date of assessment. True or false? 
 
Problem 8 Answer
 
109. “As a part of the reorganization process in a chapter 11 case, a written plan is
proposed to provide the manner and means by which the proponent will satisfy various
creditor claims and by which the debtor will reorganize or liquidate.” at 109.91.
 
109. False. “Because many tax claims are nondischargeable and are entitled to priority
payment, the plan must provide for the satisfaction of these tax claims” at 109.94.
 
1. True. “Since some tax claims are entitled to administrative priority, provision for
their payment in full must be made in the plan.”
 
1. “The plan may provide for the payment of other priority tax claims in deferred cash
installments, not exceeding six years after the date of assessment, so that the payments
provide the tax authority an amount equal to the present value of the claim.” Id.
 
 
Problem 9 – Filing Tax Returns in Chapter 13 Cases
 
The Bankruptcy Code has certain requirements with respect to the filing of tax returns for
periods ending before the bankruptcy filing in chapter 13 cases.  Answer the following true or
false questions:
 
1. The Bankruptcy Code states that chapter 13 debtors must file all required tax returns
for tax periods ending within four years of the debtor's filing for bankruptcy. True or false?
 
1. All such federal tax returns must be filed with the IRS prior to the filing date of the
petition. True or false?
 
1. Failure to file the returns on time can prohibit confirmation of a chapter 13 plan and
result in either dismissal of the chapter 13 case or change to a chapter 7 case. True or false?
 
Hint: See IRS Publication 908 (10/2012), Bankruptcy Tax Guide.
 
Problem 9 Answer
 
1. True.
 
1. False. “All such federal tax returns must be filed with the IRS before the date first set
for the first meeting of creditors.”
2. True.
 
 
Problem 10 – Dismissal for Failure to Timely File Tax Returns
 
The Bankruptcy Code requires certain tax returns to be filed after the filing of a bankruptcy
case.  Answer the following questions:
 
1. For debtors that are filing bankruptcy under all chapters (chapters 7, 11, 12, or 13),
the Bankruptcy Code provides that if the debtor does not file a tax return that becomes due
after the commencement of the bankruptcy case, or obtain an extension for filing the return
before the due date, the taxing authority may request that the bankruptcy court either dismiss
the case or convert the case to a case under another chapter of the Bankruptcy Code. True or
false?
 
1. The Bankruptcy Code provides that a chapter 11 debtor's failure to timely file tax
returns and pay taxes owed after the date of the "order for relief" (the bankruptcy petition
date in voluntary cases) is cause for dismissal of the chapter 11 case, conversion to a chapter
7 case, or appointment of a chapter 11 trustee. True or false?
 
Id. at pge 3.
 
Problem 10 – Answer
 
1. True.
2. True.
 
 
Problem 11 – Separate Bankruptcy Estate
 
When an individual debtor files for bankruptcy under chapters 7, 11, or 13 of the Bankruptcy
Code, the bankruptcy estate is treated as a new taxable entity separate from the individual
taxpayer.  True or false?
 
Problem 11 Answer
 
False.  A separate bankruptcy estate is created for chapters 7 and 11 only.
 
Problem 12 – United States Tax Court
 
Suppose your client has a filed a petition for the taxable year of 2014 with the United States
Tax Court, and the government (respondent) has filed an answer.  The case currently is set for
trial at the trial session commencing on June 18, 2018.  Shortly before the calendar call, your
client files a chapter 7 petition in the bankruptcy court for the Northern District of California. 
To what extent will the filing of the bankruptcy case impact the Tax Court proceedings? 
Briefly explain.
 
Problem 12 – Answer
 
A bankruptcy petition filing operates as a stay, in connection with the commencement or
continuation of a United States Tax Court proceeding concerning the debtor. Such a stay is
applicable to a corporate debtor’s tax liability for the taxable period determined by the
bankruptcy court and is also applicable to an individual debtor’s tax liability for the period of
time ending before the filing date of the bankruptcy proceeding.
 
Collier, supra  at TX1.10.
 
Problem 13 – Turnover
 
Briefly explain the concept of turnover and how it might apply to the Internal Revenue
Service in a title 11 case.
 
Problem 13 – Answer
 
“Property which the IRS has levied on or seized prior to the filing of the title 11 case must be
turned over to the estate.” Id.  at TX1.09, citing United States v. Whiting Pools, Inc., 462
U.S. 198, 103 S. Ct. 2309, 76 L. Ed. 2d 515, 8 C.B.C.2d 710 (1983); 11 U.S.C. § 542(a).
 
Problem 14 – Chapter 7 versus 11
 
In your own words, briefly explain the difference between a chapter 7 and a chapter 11 case
and why an individual would file an 11 over a 7.
 
Problem 14 – Answer
 
In a chapter 11 bankruptcy (reorganization), the debtor will seek adjustment of debts by
extending time of repayment or reducing the amount owed. In a chapter 7 bankruptcy
(liquidation), the debtor must sell non-exempt assets to pay creditors.
 
Problem 15 – IRS Seizure of Property
 
Is property seized by the IRS immediately prior to the filing of a title 11 case considered
property of the estate? 
 
Problem 15 Answer
 
Yes.  Property seized by the IRS immediately prior to the filing of the title 11 case is property
of the estate.  Collier, supra at TX1, citing United States v. Whiting Pools, Inc., 462 U.S.
198, 103 S. Ct. 2309, 76 L. Ed.2d 515, 8 C.B.C.2d 710 (1983).
 
Problem 16 – Chapter 13
 
Bob is a former officer of a software company in San Jose, California, and the IRS conducted
a trust fund investigation and assessed trust fund penalty against him for various quarters. 
The IRS recently filed a Notice of Federal Tax Lien in the amount of $1,450,000 against
Bob’s property.  Is Bob eligible to file a chapter 13 case?  Briefly explain.  
 
Problem 16 Answer
 
No.  Bob is not eligible for chapter 13 relief because the IRS is a secured creditor, and the
secured debts in this case are not less than $1,184,200. 
 
Any individual, even if self-employed or operating an unincorporated business, is eligible for
chapter 13 relief as long as the individual's unsecured debts are less than $394,725 and
secured debts are less than $1,184,200. 11 U.S.C. § 109(e). These amounts are adjusted
periodically to reflect changes in the consumer price index. A corporation or partnership may
not be a chapter 13 debtor. Collier, supra at TX1.09.
 
Problem 17 – Relief from Automatic Stay —Levies—Disability Pension Benefits
 
Review In Re: Trammell, Bktcy Ct TN, 121 AFTR 2d ¶2018-569.  Why did the bankruptcy
court grant the IRS’ motion to modify the automatic stay in a chapter 7 case, so as to permit
the IRS to continue to levy the taxpayer/former Major League Baseball player’s disability
pension benefits, under a pre-petition levy for his outstanding tax debts? 
 
Problem 17 – Answer
 
The IRS was entitled to stay relief because its levy was a continuing levy against the MLB
disability pension benefits.  Although an IRS levy is generally a one-time occurrence, here
the levy seized a future stream of payments to which the taxpayer had unqualified fixed
rights.  Thus, the IRS’ levy reached future payment from the debtor’s pension plan.  The IRS
was entitled to retroactive relief form the automatic stay, in part, because the IRS would be
unduly prejudiced had the court not granted such relief (the MLB disability pension benefits
would flow to the debtor and likely be forever lost to the IRS).
 
Take Away: 11 U.S.C. 362(b)(1) is one of the ways for a secured creditor, the IRS in this
instance, to get the stay lifted.  The IRS was a secured creditor because it had recorded
Notices of Federal Tax Lien prior to the debtor filing chapter 7 case.
 
Problem 18 – Proof of Claim
 
What is a proof of claim?  What is some of the information set forth in a proof of claim?
 
Problem 18 – Answer
 
Definition from the form: “A proof of claim is a form used by the creditor to indicate the
amount of the debt owed by the debtor on the date of the bankruptcy filing. The creditor must
file the form with the clerk of the same bankruptcy court in which the bankruptcy case was
filed”. The form must include
 
 the name of debtor and bankruptcy case number;
 the creditors name, address, and telephone number;
 the amount of the claim;
 the basis for the claim;
 information regarding security for debt, if any;
 copies of supporting documents must be provided; and
 specification of whether claim has priority under BKC 507(a).
 
Problem 19 – Trustee
 
Who is a trustee, and what are his duties?
 
Problem 19 Answer
 
The trustee is the individual that administers the bankruptcy estate on behalf of the creditors.
 
Sometimes the bankruptcy court appoints a trustee; if one is not appointed then the debtor
must follow all of the rules and complete all of the required filings under IRC Sec. 1398.
 
An individual debtor and the bankruptcy estate are separate entities. If the debtor is a
corporation or a partnership, then the entity and the bankruptcy estate are not separate entities
under IRC Sec. 1398.
 
Problem 20 – Bankruptcy Petition and Forms
 
Max, your client, said that he recently filed a chapter 7 bankruptcy petition and plans to stop
by your office to discuss the matter because he has some tax questions about his bankruptcy. 
Max plans to bring a copy of his petition and additional documents that Max filed with the
court.  What information generally is contained in these forms?
 
Problem 20 – Answer
 
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the
area where the individual lives or where the business debtor is organized or has its principal
place of business or principal assets.  In addition to the petition, the debtor must also file with
the court: (1) schedules of assets and liabilities, (2) a schedule of current income and
expenditures, (3) a statement of financial affairs, and (4) a schedule of executory contracts
and unexpired leases. Fed. R. Bankr. P. 1007(b).
 
In order to complete the Official Bankruptcy Forms that make up the petition, statement of
financial affairs, and schedules, the debtor must provide the following information:
 
1. a list of all creditors and the amount and nature of their claims;
2. the source, amount, and frequency of the debtor's income;
3. a list of all of the debtor's property; and
4. a detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter,
utilities, taxes, transportation, medicine, etc.
 
See http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-
bankruptcy-basics (Links to an external site.) (Chapter 7 – Bankruptcy Basics).
 
Problem 21 – Failure to Notify IRS
 
What happens if the IRS fails to receive proper notice of an individual debtor’s petition? 
See In re Cassara, 2010 Bankr. LEXIS 776 (Bankr. E.D. La. Feb. 24, 2010). 
 
Problem 21 Answer
 
The IRS’ claims are not discharged.  11 U.S.C. § 502(b)(9).  The debtor is required to list all
creditors in a creditor mailing matrix.