11 U.S.C. § 346 — Special provisions related to the treatment of State and local taxes

submitted 48 years ago by Pub. L. 95-598 to r/title-11-BANKRUPTCY · 1,109 words · no verdicts yet

in plain englishAI-generated · not legal advice

When federal tax law creates a separate bankruptcy estate for tax purposes, state and local tax law must too. The trustee files the needed state and local returns, and pays withholding taxes, on the estate's behalf. State and local tax rules mostly track federal bankruptcy tax rules on rates, attributes, and debt discharge.

(a) Whenever the Internal Revenue Code says a bankruptcy case creates a separate taxable estate — one taxed apart from the debtor — state and local income tax law must also treat it as a separate taxable estate. That estate's income, gains, losses, deductions, and credits are taxed to the estate, not the debtor, for state and local purposes too. This does not apply if the case gets dismissed. The trustee must file the estate's state and local income tax returns. (b) Whenever the Internal Revenue Code says no separate estate is created, and income is taxed to the debtor instead, state and local law must do the same — tax the debtor, not the estate. The trustee must still file state and local returns for any corporations or partnerships involved, though for partnerships only when a return is also required federally. The estate is liable for tax on such a corporation or partnership, but not for tax owed by individual partners or members. (c) For a partnership (or similar entity) that is a debtor, any gain, loss, or distributed share of income, gain, loss, deduction, or credit that a partner or member receives after the case starts belongs to that partner or member for tax purposes. If that partner or member is also a debtor in a bankruptcy case, it is taxed under (a) or (b), whichever applies. (d) For state and local income tax purposes, the debtor's tax year only ends early if — and to the extent — it ends early under the Internal Revenue Code. (e) The estate described in (a) must use the same accounting method the debtor used right before the case started, as long as that method follows applicable non-bankruptcy tax law. (f) For state and local income tax purposes, a transfer of property between the debtor and the estate is not treated as a taxable disposition, except to the extent it is treated that way under the Internal Revenue Code. (g) Whenever a state or local income tax applies under (a) or (b), it is charged at the normal rate for that type of entity under that state or local law. (h) The trustee must withhold or collect any amount required under state or local tax law from payments of wages, salaries, commissions, dividends, interest, or similar claims, and must pay it to the right government body on time, with the same priority as the underlying claim. (i) If state or local law lets a tax attribute carry over between tax years, the estate inherits that attribute in any case taxed under (a). After the case closes or is dismissed, the debtor gets back any attribute the estate had inherited, consistent with the Internal Revenue Code. The estate may carry a loss or attribute back to a tax year of the debtor that ended before the bankruptcy started, if state or local law allows carrybacks for the debtor and the same or similar attribute could be carried back federally. (j) For state and local tax purposes, forgiving debt in a bankruptcy case does not create taxable income for the estate, debtor, or a successor, except to whatever extent it is taxable under the Internal Revenue Code. Whenever the Internal Revenue Code applies excluded discharge-of-debt income to reduce the debtor's or estate's tax attributes, state or local law must make a similar reduction, to the extent it recognizes those attributes; it may also reduce other attributes if the full discharged amount has not already been used up. (k) Except as this section and section 505 provide, the timing and manner of filing tax returns, and how income, gains, losses, deductions, and credits are treated, follow ordinary non-bankruptcy law. For federal tax purposes, this section is subject to the Internal Revenue Code and other federal non-bankruptcy law.

the actual law source: uscode.house.gov ↗public domain

(a)

Whenever the Internal Revenue Code of 1986 provides that a separate taxable estate or entity is created in a case concerning a debtor under this title, and the income, gain, loss, deductions, and credits of such estate shall be taxed to or claimed by the estate, a separate taxable estate is also created for purposes of any State and local law imposing a tax on or measured by income and such income, gain, loss, deductions, and credits shall be taxed to or claimed by the estate and may not be taxed to or claimed by the debtor. The preceding sentence shall not apply if the case is dismissed. The trustee shall make tax returns of income required under any such State or local law.

(b)

Whenever the Internal Revenue Code of 1986 provides that no separate taxable estate shall be created in a case concerning a debtor under this title, and the income, gain, loss, deductions, and credits of an estate shall be taxed to or claimed by the debtor, such income, gain, loss, deductions, and credits shall be taxed to or claimed by the debtor under a State or local law imposing a tax on or measured by income and may not be taxed to or claimed by the estate. The trustee shall make such tax returns of income of corporations and of partnerships as are required under any State or local law, but with respect to partnerships, shall make such returns only to the extent such returns are also required to be made under such Code. The estate shall be liable for any tax imposed on such corporation or partnership, but not for any tax imposed on partners or members.

(c)

With respect to a partnership or any entity treated as a partnership under a State or local law imposing a tax on or measured by income that is a debtor in a case under this title, any gain or loss resulting from a distribution of property from such partnership, or any distributive share of any income, gain, loss, deduction, or credit of a partner or member that is distributed, or considered distributed, from such partnership, after the commencement of the case, is gain, loss, income, deduction, or credit, as the case may be, of the partner or member, and if such partner or member is a debtor in a case under this title, shall be subject to tax in accordance with subsection (a) or (b).

(d)

For purposes of any State or local law imposing a tax on or measured by income, the taxable period of a debtor in a case under this title shall terminate only if and to the extent that the taxable period of such debtor terminates under the Internal Revenue Code of 1986.

(e)

The estate in any case described in subsection (a) shall use the same accounting method as the debtor used immediately before the commencement of the case, if such method of accounting complies with applicable nonbankruptcy tax law.

(f)

For purposes of any State or local law imposing a tax on or measured by income, a transfer of property from the debtor to the estate or from the estate to the debtor shall not be treated as a disposition for purposes of any provision assigning tax consequences to a disposition, except to the extent that such transfer is treated as a disposition under the Internal Revenue Code of 1986.

(g)

Whenever a tax is imposed pursuant to a State or local law imposing a tax on or measured by income pursuant to subsection (a) or (b), such tax shall be imposed at rates generally applicable to the same types of entities under such State or local law.

(h)

The trustee shall withhold from any payment of claims for wages, salaries, commissions, dividends, interest, or other payments, or collect, any amount required to be withheld or collected under applicable State or local tax law, and shall pay such withheld or collected amount to the appropriate governmental unit at the time and in the manner required by such tax law, and with the same priority as the claim from which such amount was withheld or collected was paid.

(i)

(1)

To the extent that any State or local law imposing a tax on or measured by income provides for the carryover of any tax attribute from one taxable period to a subsequent taxable period, the estate shall succeed to such tax attribute in any case in which such estate is subject to tax under subsection (a).

(2)

After such a case is closed or dismissed, the debtor shall succeed to any tax attribute to which the estate succeeded under paragraph (1) to the extent consistent with the Internal Revenue Code of 1986.

(3)

The estate may carry back any loss or tax attribute to a taxable period of the debtor that ended before the date of the order for relief under this title to the extent that—

(A)

applicable State or local tax law provides for a carryback in the case of the debtor; and

(B)

the same or a similar tax attribute may be carried back by the estate to such a taxable period of the debtor under the Internal Revenue Code of 1986.

(j)

(1)

For purposes of any State or local law imposing a tax on or measured by income, income is not realized by the estate, the debtor, or a successor to the debtor by reason of discharge of indebtedness in a case under this title, except to the extent, if any, that such income is subject to tax under the Internal Revenue Code of 1986.

(2)

Whenever the Internal Revenue Code of 1986 provides that the amount excluded from gross income in respect of the discharge of indebtedness in a case under this title shall be applied to reduce the tax attributes of the debtor or the estate, a similar reduction shall be made under any State or local law imposing a tax on or measured by income to the extent such State or local law recognizes such attributes. Such State or local law may also provide for the reduction of other attributes to the extent that the full amount of income from the discharge of indebtedness has not been applied.

(k)

(1)

Except as provided in this section and section 505, the time and manner of filing tax returns and the items of income, gain, loss, deduction, and credit of any taxpayer shall be determined under applicable nonbankruptcy law.

(2)

For Federal tax purposes, the provisions of this section are subject to the Internal Revenue Code of 1986 and other applicable Federal nonbankruptcy law.

Source credit: (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2565; Pub. L. 98–353, title III, § 438, July 10, 1984, 98 Stat. 370; Pub. L. 99–554, title II, §§ 257(g), 283(c), Oct. 27, 1986, 100 Stat. 3114, 3116; Pub. L. 103–394, title V, § 501(d)(4), Oct. 22, 1994, 108 Stat. 4143; Pub. L. 109–8, title VII, § 719(a)(1), Apr. 20, 2005, 119 Stat. 131.)

history & why it existsrecord from the source credit

1978Enacted · Pub. L. 95-598 · 92 Stat. 2565
1984Amended · Pub. L. 98-353 · 98 Stat. 370
1986Amended · Pub. L. 99-554 · 100 Stat. 3114, 3116
1994Amended · Pub. L. 103-394 · 108 Stat. 4143
2005Amended · Pub. L. 109-8 · 119 Stat. 131

A history note hasn’t been published yet. The record shows enactment by Pub. L. 95-598 on 1978-11-06.

all 0 arguments · sorted by: best

no arguments yet — make the first case