Tax Procedure: The Impact of Bankruptcy on Refund Claims

bankruptcy-tax-returnLast week, a district court addressed a series of refund claims that had an unusual jurisdictional complication: The Taxpayers initiated the refund claims while they were debtors in a Chapter 7 bankruptcy case, and the refunds they sought were property of the bankruptcy estate. The government sought to dismiss their refund action on a variety of grounds; while the motion was denied, the resulting opinion addresses a number of interesting issues concerning the complications that a bankruptcy case can add to a refund claim. Martin v. United States, No. 3:13-cv-03130, 2017 U.S. Dist. LEXIS 1285 (C.D. Ill. Jan. 5, 2017).… Read More

Trust Fund Taxes: Trust Fund Tax Payments Are Not Preferences Under the Bankruptcy Code.

When a company files a bankruptcy petition, a variety of potential claims against its creditors arise under the Bankruptcy Code. Preferential transfers are an example; under the Bankruptcy Code, transfers made within ninety days of the bankruptcy filing can be recovered if a creditor received an interest in a debtor’s property on account of a pre-existing debt while the debtor was insolvent, and the transfer of property puts the creditor in a better position than it would have had in a Chapter 7 liquidation. 11 U.S.C. § 547(b). There are some additional nuances, including a longer preference period for insiders and a variety of potential defenses.… Read More

Details Matter: Tax Refund Claims in Bankruptcy Court.

Federal tax refund claims are generally subject to an exhaustion requirement under Section 7422(a) of the Internal Revenue Code, which requires that a claim for a refund be “duly filed” according to applicable law “and the regulations of the Secretary . . . .” While this language would appear to require strict compliance, courts have periodically recognized informal claims to be sufficient to satisfy the exhaustion requirement.

In the bankruptcy context, Section 505(a) of the Bankruptcy Code gives the bankruptcy court the power to address the propriety of taxes owed or paid by the debtor’s estate. That power is subject to certain limits, which include an exception indicating that the court cannot determine a tax refund “before the earlier of 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed”; or until the relevant tax authority rules on the request.Read More

Who Controls Tax Status? S-Corps., QSubs and Bankruptcy.

Corporations can be classified in different ways for tax purposes. The default, a C corporation, is a taxable entity under the Internal Revenue Code. Certain corporations are eligible to elect status as a small business corporation or S-Corp. under Section 1362 of the Code, which means that they are pass-through entities: their income and losses are passed through to the shareholders, who report the income or loss on their own returns. I.R.C. §§ 1363(b); 1366(a). An S-Corp. can, in turn, have a subsidiary that is also treated as a pass-through entity, which is known as a QSub, by making an election under Section 1361(b)(3)(B).Read More