The Intersection of Bankruptcy and Taxation in Individual Debtor Chapter 11 Cases

The Intersection of Bankruptcy and Taxation in Individual Debtor Chapter 11 Cases

by Daniel M. Press and Brett Weiss


The intersection of bankruptcy and taxation is, in many respects, a complicated area of the law, and entire treatises can and have been written about it. This article does not attempt to provide a complete survey of this area of the law, but only to provide information on some of the key points about taxation as it relates particularly to individual chapter 11 debtors.

Separate Taxable Estate

Section 1398 of the Internal Revenue Code ("IRC") (and, for state and local taxes, Bankruptcy Code section 346) provides that for individual debtors in chapters 7 and 11, the bankruptcy estate is a separate taxable entity. This makes perfect sense in chapter 7, where the debtor cedes control of nonexempt assets to the trustee, and it made sense in chapter 11 cases prior to the 2005 amendments, where the debtor's postpetition earnings were not property of the estate. But under the current Bankrutpcy Code, section 1115 makes postpetition earnings of the debtor part of the chapter 11 bankruptcy estate, and thus taxable to the estate and not to the debtor.

This creates significant complications for taxation of individuals in chapter 11. In chapter 13, there is no separate taxable estate under IRC section 1398, so the debtor reports all individual and estate income on Form 1040, just as if there were no bankruptcy case. However, in chapter 11, the Internal Revenue Service ("IRS") takes the position that the estate must file Form 1041, U.S. Income Tax Return for Estates and Trusts, subject to special instructions, which adopt Form 1040 as an attachment to the return. The tax rate for such a return is as married filing separately, which could result in higher taxes. [footnoted omitted]

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Daniel M. Press is a bankruptcy lawyer with the law firm of Chung & Press, P.C., in McLean Virginia, and Cumberland and Greenbelt, Maryland. A 1988 magna cum laude graduate of Georgetown University Law Center, he was an editor of the Georgetown Law Journal. He received his B.A. from The Johns Hopkins University. After graduating from law school, Mr. Press served as a judicial law clerk for Judge Jaime Pieras Jr. in the U.S. District Court for the District of Puerto Rico.

Mr. Press practices in the Bankruptcy and Federal District Courts in Maryland, the District of Columbia, and the Eastern and Western Districts of Virginia, as well as other U.S. Appellate, District and Bankruptcy Courts around the country. He is a State Chair for the National Association of Consumer Bankruptcy Attorneys, a contributing attorney with the Bankruptcy Law Network, and is a member of the Section Council of the Consumer Bankruptcy Section of the Maryland State Bar Association. He is a regular speaker on bankruptcy and related topics at Continuing Legal Education seminars and programs locally and nationwide.

Brett Weiss has experience in complex individual chapter 7, chapter 11 and chapter 13 bankruptcy cases, and in chapter 11 small business restructuring and reorganization. He represents individual and corporate debtors and creditors in all phases of bankruptcy.

Mr. Weiss is currently the managing partner at Chung & Press, LLC in Greenbelt, Maryland.

Mr. Weiss has received international media attention in connection with the bankruptcy cases he had handled. He has been inter-viewed by Barbara Walters on The View, appeared on the Montel Williams Show, the Today Show, Good Morning America, ABC News with Peter Jennings and German State television, been interviewed on the BBC World Service, appeared on numerous local radio and television programs, and been quoted in Money magazine, The New York Times, The Washington Post and The Baltimore Sun, among others. At the invitation of John Conyers, Jr., Chairman of the House Judiciary Committee, he has twice testified before Congress on bankruptcy and credit issues.

Mr. Weiss has been involved in a number of cases of first impression, with opinions issued by the U.S. Bankruptcy Court, the Maryland Court of Appeals, and the U.S. Court of appeals. He regularly lectures across the country on various aspects of bankruptcy law.