IRS Publication 908 Bankruptcy Tax Guide

IRS releases revised Bankruptcy Tax Guide

Bankruptcy Tax Guide, Publication 908 (Rev. October 2012)

IRS has recently released the revised Bankruptcy Tax Guide, Publication 908 (Rev. October 2012). It provides updated information on the availability of catch-up contributions for Code Sec. 401(k) participants whose employer filed bankruptcy and the automatic extension of time to file a bankruptcy estate return.

Background. The debtor-in-possession or trustee, if one is appointed, for a bankruptcy estate for an individual under Chapter 7 or 11 must file an income tax return (Form 1041) if the estate's gross income equals at least the sum of the exemption amount plus the basic standard deduction for unmarried taxpayers who weren't surviving spouses or heads of household. (Code Sec. 6012(a)(8)) This amount is $9,750 for 2012 ($10,000 for 2013, as calculated by RIA based on inflation-adjusted CPI amounts). As a new taxable entity, the bankruptcy estate can adopt either the calendar year or any acceptable fiscal year as its tax year in its first return. (Reg. § 1.441-1(b)(2))

In June of 2011, IRS issued final regs on the automatic extensions of time to file returns for partnership, trust, and estate taxpayers (i.e., pass-through entities). The final regs generally provide that these pass-through entities will continue to receive an automatic 5-month extension of time to file. However, the final regs provide that, although fiduciaries of individual bankruptcy estates under Chapter 7 or 11 of the Bankruptcy Code (trustees or debtors-in-possession) may be required to file Forms 1041, these bankruptcy estates aren't pass-through entities. The 5-month automatic extension under the final regs doesn't apply to them. (Reg. § 1.6081-6(a)(2)) Pass-through entities eligible to file bankruptcy petitions, such as partnerships, are covered by the final regs, and the 5-month automatic extension applies, since the filing of a bankruptcy petition doesn't change the information reporting requirements of pass-through entities, such as partnerships. (T.D. 9531, 06/23/2011, 

For tax years beginning before Jan. 1, 2010, participants in a Code Sec. 401(k) plan, whose contributions the employer matched at least 50% with employer stock, could make IRA contributions in addition to the otherwise applicable maximum for individuals under age 50 where the employer was a debtor in bankruptcy, and an indictment or conviction resulted from transactions related to the bankruptcy. Specifically, for an applicable individual who elected to make a qualified retirement contribution in addition to the maximum deductible amount, the maximum deductible amount for any tax year was increased by an amount equal to three times the applicable amount of catch-up contributions that an individual who would reach age 50 before the close of the tax year could contribute to an IRA. (Code Sec. 219(b)(5), 

What's new. The Bankruptcy Tax Guide indicates that there are two important changes:

• Automatic 6-month extension of time to file. Beginning June 24, 2011, IRS clarified in Reg. § 1.6081-6(a)(2) that an automatic 6-month extension of time (rather than 5 months) is available to file a bankruptcy estate income tax return for individuals in Chapter 7 or 11 bankruptcy proceedings upon filing a required application (Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns).
• Expiration of catch-up contributions for 401(k) participants. The provision previously allowing additional contributions of up to $7,000 in a traditional or Roth IRA for employees who participated in a Code Sec. 401(k)plan of an employer that filed bankruptcy in an earlier year hasn't been extended for tax years beginning on or after Jan. 1, 2010.

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