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
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
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
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.