BankruptcyProf Blog

New IRS Form for Mortgage Forgiveness Income

Here is the IRS Announcement and their new form for reporting income under the Mortgage Forgiveness Debt Relief Act of 2007.  Surprisingly, the IRS will permit the new law to apply to refinance debts even though, by its terms, the Act applies to the discharge of "qualified principal residence indebtedness" which means "acquisition indebtedness."   

10 Year Tax Collection Limitation Tolled During Bankruptcy per Tax Court Decision

Severo v. I.R.S.,  129 T.C. No. 17 (U.S. Tax Court, November, 2007)

Issue:   Is the 10 year statute of limitations for IRS collection tolled during a bankruptcy filing?               

Holding:   Yes, at least during the period the automatic stay protecting the debtor is in effect, i.e., until the discharge is entered, plus six months thereafter

Judge Swift
The debtor owed income taxes for the year 1991 which were not discharged in his 1994 bankruptcy case, a chapter 11 later converted to chapter 7.  “[B]ecause of the above automatic stay provided by the Bankruptcy Code, under subsections (b) and (h) of section 6503 the 10-year collection period of limitations relating to Federal taxes owed by a debtor in bankruptcy is suspended generally during part or all of a bankruptcy proceeding.”

“Section 6503(b) provides that the collection period of limitations is suspended for the period of time in which a taxpayer's assets are in the custody or control of any court plus an additional 6 months.”

“[S]ection 6503(h)(2) provides more specifically that the 10-year collection period of limitations on Federal income taxes also is suspended for the period of time that respondent is prevented from collecting taxes by reason of a pending bankruptcy proceeding, plus 6 months.”

The Tax Court ruled that 6503(h)(2) is not limited by 6503(b) because (h)(2) specifically refers to bankruptcy.  The Tax Court also ruled that the tolling extended to post-petition assets acquired by the debtor since the IRS was prevented by the stay from proceeding against those assets, at least until the discharge was entered which terminates the stay as to the debtor. 

IRS Standards Announcement

This came from the IRS Newswire:

WASHINGTON — On October 1, 2007, the Internal Revenue Service issued the 2007 allowable living expense standards.

Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. For purposes of federal tax administration the standards are effective Oct. 1, 2007.

This year the standards have been redesigned to incorporate:
• a new category for out of pocket health care expenses
• the elimination of income ranges for national standards for food, clothing and other items
• a nationwide set of tables for national standard expenses, eliminating separate tables for Alaska and Hawaii
• an expanded number of household categories for housing and utilities
• an allowance for cell phone costs in housing and utilities
• equal allowances for first and second vehicles under transportation expenses
• fewer Metropolitan Statistical Areas for vehicle operating costs
• a separate nationwide public transportation allowance

The Allowable Living Expense standards rely on data from the Bureau of Labor Statistics, the Medical Expense Panel Survey and other governmental surveys of actual consumer expenditures and provide a basis for allowances. The IRS adjusts survey data for inflation according to the Consumer Price Index.
Expense information for use in bankruptcy calculations can be found on the Department of Justice U.S Trustee Program Web site. For bankruptcy purposes, the effective date for the new standards will be Jan. 1, 2008.

Taxation of Foreclosure Sales

This is a post from my friend Dennis McGoldrick in Torrance, Cal.  Dennis is a former chapter 7 trustee, a certified bankruptcy specialist and one of the best bankruptcy lawyers I know. The issue of who is taxed on the gain on the foreclosure sale when a bankruptcy has been filed can get complicated. As I tell my students over and over, know when to call a specialist! This is a complicated area. Do not depend on this short summary. Make sure you have all the facts, etc. etc.

Jon Hayes

"Taxation of foreclosure sales is one of the toughest questions. The entity who/which owns the property at the time of the sale is the entity who/which is responsible for the tax on the gain. If a foreclosure sale occurs before the bankruptcy, the debtor is liable for the tax, as the sale is really a debtor sale of the property. The Foreclosure Trustee sells the property under a power of sale given by the debtor.

In order to avoid tax in this situation, the bankruptcy must be filed before the sale, and must not close before the sale. Under section 541, the filing of the bankruptcy creates an estate and the estate then is the owner and seller of the property (the power of sale would also inure to the estate). The estate is responsible for its own taxes and files its own tax return. Trapping the foreclosure sale in the estate is therefore paramount when there is a taxable gain. Under section 349, the closing of a bankruptcy gives (abandons) all of the unadministered property of the estate back to the debtor. As a result, a foreclosure sale after a bankruptcy would be taxable to the debtor. If the debtor does not live in any of the properties to be foreclosed, the debtor will not be able to claim the $250,000 tax free gain (requires living in the property for 2 years). So you must trap the sales of properties which will generate a gain in the estate. If there is no other asset to administer, the trustee will not take notice of the foreclosure as the trustee will have no real income and cannot pay any tax, so no tax return for the estate is ever filed. The real problem comes when/if the trustee has another asset to administer. A competent trustee will realize the foreclosure sales will generate a tax, so the trustee will move to abandon the foreclosure properties back to the debtor."

Dennis