Topic 49 - Taxation of Bankrupt Taxpayers

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You will need IRS Publication 908 and Collection Procedures Manual to complete this topic.

1. The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under which the petition was filed.

True False

2. If a debt is cancelled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes.

True False

3. A separate estate, for tax purposes, is created for an individual who files a petition under Chapter 12 or 13 or the Bankruptcy Code.

True False

4. On your return, report all income received during the entire year and deduct all allowable expenses and include any debt canceled (because of bankruptcy) in income.

True False

5. A separate "estate" is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual. A separate estate is created if you file bankruptcy under

a. Chapter 12 of the Bankruptcy Code.
b. Chapter 13 of the Bankruptcy Code.
c. Chapter 7 or Chapter 11 of the Bankruptcy Code.
d. Any of the above.

6. If a husband and wife file a joint bankruptcy petition and their estates are jointly administered,

a. Then their estates are joint entities and they must file just one return.
b. Treat their estates as separate entities and two separate returns must be filed. 
c. The husband and wife must decide if they want to file jointly on just one return or separately.
d. None of the above.

7. If your bankruptcy case began but was later dismissed by the bankruptcy court, the bankruptcy estate is treated as a separate entity and you must file a final return and write words "Dismissed Case" across the top.

True False

8. You, as the individual debtor, do not need to file income tax returns during the period of the bankruptcy proceedings because you have an automatic stay on everything for that period.

True False

9. The filing of a bankruptcy petition for an individual debtor under Chapter 7 of the bankruptcy code creates a separate taxable bankruptcy estate. The person that is generally responsible for preparing and filing the estate's tax returns and paying its taxes is

a. The trustee.
b. The debtor-in-possession.
c. The bankruptcy judge.
d. Both A and B.

10. The filing of a bankruptcy petition for an individual debtor under Chapter 11 of the bankruptcy code creates a separate taxable bankruptcy estate. The person that is generally responsible for preparing and filing the estate's tax returns and pay its taxes is

a. The Trustee.
b. The debtor-in-possession.
c. The bankruptcy judge.
d. Both A and B.

11. If you are an individual debtor and have assets (other than those you exempt from the bankruptcy estate), you

a. End your tax year on the day the bankruptcy becomes final.
b. May choose to end your tax year on the day before the filing of your bankruptcy case.
c. End your tax year on the last day of the year which is the date your tax year normally ends.
d. Any of the above.

12. If you choose to end your tax year on the day before the filing of your bankruptcy case, you may change your decision by filing an amended return on Form 1040X.

True False

13. The bankruptcy estate may change its accounting period (tax year)

a. Once by getting approval from the Internal Revenue Service.
b. Once without getting approval from the Internal Revenue Service.
c. As many times as needed so the Trustee can then file a return for the first short tax year to get a quick determination of the estate's tax liability.
d. None of the above.

14. The Social Security Number of the individual debtor cannot be used as the EIN for the bankruptcy estate.

True False

15. The trustee (or debtor-in-possession) must file an income tax return if the estate has gross income that meets or exceeds the amount required for filing. This amount is the total of the personal exemption amount and the basic standard deduction for a married individual filing separately. The return is filed on

a. Form 1040.
b. Form 1041.
c. Form 2119.
d. Both A and B.

16. The bankruptcy estate figures its taxable income the same way an individual figures his or her taxable income. The estate uses the rates to figure the tax on its taxable income of

a. The individual filing status of the person who filed the petition under the bankruptcy case.
b. The single filing status.
c. A married individual filing separately.
d. A flat 30% rate.

17. You, as the individual debtor, generally must file income tax returns during the period of the bankruptcy proceedings. Do not include on your return

a. The income belonging to the separate bankruptcy estate.
b. The deductions or credits belonging to the separate bankruptcy estate.
c. The debts canceled because of bankruptcy.
d. Any of the above.

18. Certain deduction and credit carryovers and decisions that you made in earlier years are taken over by the bankruptcy estate when you file for bankruptcy. These include carryovers of deduction, losses, and credits, your method of accounting, and the basis and holding period of assets. These are referred to as

a. Bankruptcy attributes.
b. Attribute carryovers.
c. Tax attributes.
d. None of the above.

19. If you choose to end your tax year, you do so by filing a return on Form 1040 for the first short tax year on or before

a. 15th day of the sixth full month after the end of that first tax year.
b. 15th day of the first full month after the end of that first tax year.
c. 15th day of the fourth full month after the end of that first tax year.
d. None of the above.

20. The bankruptcy estate must treat its tax attributes the same way that the debtor would have treated them. These items must be determined as of the first day of the debtor's tax year in which the bankruptcy case begins. The following is an attribute that the bankruptcy estate gets from the debtor.

a. Method of accounting.
b. Capital loss carryovers.
c. Net operating loss carryovers.
d. Any of the above.

21. A separate taxable estate is created when a partnership or corporation files a bankruptcy petition.

True False

22. For a partnership or a corporation bankruptcy petition, the court appointed trustee is responsible for filing the regular income tax returns on

a. Form 1065 or Form 1120.
b. Form 1041 or Form 1040.
c. Schedule D (Form 1040).
d. Form 4797.

23. The filing requirements for a partnership in bankruptcy proceedings do not change. However, the filing of required returns becomes the responsibility of a general partner. 

True False

24. The filing requirements of a corporation involved in bankruptcy proceedings do not change. However, the filing of required returns becomes the responsibility of a corporation officer.

True False

25. If you are a trustee, receiver, or a assignee of a corporation that is in bankruptcy, receivership, dissolutions, or in the hands of an assignee by court order, you may apply to your IRS District Director for relief from filing federal income tax returns for the corporation. To qualify,

a. The corporation must show that its operations are back to normal and show a true fresh start. 
b. The corporation must have ceased business operations and must have neither assets nor income.
c. The corporation must have ceased business operations and must have enough assets and income to cover its creditors.
d. None of the above.

26. The filing of a bankruptcy petition automatically results in a stay (suspension) of any U.S. Tax Court proceeding to determine your tax liability as the debtor. This stay continues until one of the acts removing it occurs. The stay may be lifted by

a. The bankruptcy court upon your request. 
b. The request of the IRS.
c. The request of any party in interest.
d. Any of the above.

27. Generally, the automatic stay rules prevent a creditor from taking actions to collect pre-petition debts. However, the automatic stay does not apply to

a. An audit to determine tax liability or a demand for tax returns.
b. The issuance of a notice of deficiency to the debtor.
c. The making of an assessment for any tax and the sending of a notice and demand for payment of the tax assessed (for bankruptcy cases filed after October 22, 1994).
d. Any of the above.

28. A penalty for failure to pay tax, including failure to pay estimated tax, will not be imposed for any period during which a title 11 bankruptcy case was pending. If the tax was incurred by the bankruptcy estate, the penalty will not be imposed if the failure to pay resulted from an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses. If the tax was incurred by you as the debtor, the penalty will not be imposed if

a. The tax was incurred before the earlier of the order for relief or (in an involuntary case) the appointment of a trustee.
b. The bankruptcy petition was filed before the due date for the tax return (including extensions) or the date for imposing the penalty occurs on or after the day the bankruptcy petition was filed.
c. The penalty was for failure to pay or deposit tax withheld or collected from others and required to be paid over to the U.S. government or a penalty for failure to timely file a return.
d. Both A and B.

29. If a debt is canceled or forgiven, the debtor never includes the canceled amount in gross income for tax purposes.

True False

30. The exceptions and exclusions from the inclusion of canceled debt in income includes

a. The cancellation of a student loan for a student required to work for certain employers.
b. The cancellation of debt that would have been deductible if paid.
c. The reduction of a debt by the seller of property if the debt arose from the purchase of the property.
d. Any of the above.

31. The filing of the bankruptcy petition triggers an automatic stay enjoining any collection action against the entity or individual.

True False

32. Bankruptcy is a legal process found under Title 11 of the United States Code (U.S.C.) that allows relief from certain obligations in exchange for turning over assets or income

True False

33. The Franchise Tax Board must first verify that the employee/depositor/debtor has in fact filed for bankruptcy and

a. If the taxpayer has any other pending bankruptcies within the last 365 days.
b. The length of the automatic stay may be reduced or even eliminated.
c. The debtor may need to provide a copy of their bankruptcy petition and/or proof that they are allowed an automatic stay.
d. All of the above.

34. Although the Bankruptcy Code (11 U.S.C.) has several chapters under which petitions are filed, practically all amounts involving the department fall into the general class of

a. Liquidation, Chapter 7.
b. Reorganization, Chapter 11.
c. Adjustment of Debts of an individual with regular Income, Chapter 13.
d. Any of the above.

35. In most instances, the Bankruptcy Unit will automatically be notified of the bankruptcy petition by the Internal Revenue Service.

True False

36. A discharge in Chapter 7 or 11 bankruptcies will not release a debtor if

a. Taxes become legally due and owing within three years preceding bankruptcy.
b. The debtor failed to file a return required by law or debtor made a false or fraudalent return, or willfully attempted in any manner to evade or defeat the tax.
c. Taxes were based on a late filed return that was filed within two years before the petition filing date.
d. Any of the above.

37. A bankruptcy discharge is granted to a debtor by the Bankruptcy court when the bankruptcy plan is completed. A discharge order permanently prohibits the state, or any other entity, from taking any action to enforce collection of debts relieved under the Bankruptcy Code.

True False

38. The Bankruptcy Unit of the Franchise Tax Board is responsible for any action taken on the accounts of a bankrupt taxpayer.

True False

39. A bankruptcy discharge is granted to a debtor by the Bankruptcy Court when the bankruptcy plan is completed. A discharge order allows the state, or any other entity, to take action to enforce collection of debts.

True False

40. The Franchise Tax Board (FTB) staff that locates an account with an active bankruptcy or a past bankruptcy that was not reviewed by the Bankruptcy Unit should refer the account to the Bankruptcy Court.

True False