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Jackson Hewitt client, December bankruptcy, necessity of bankruptcy estate?

Hi Everyone,

I recognized I was in over my head, and I properly told her that she really needed to go back and talk with her attorney. A young lady came in with a seemingly simple tax return of two W-2s. In the course of talking with her, she shared with me that she had declared bankruptcy, that it had been finalized in December, and that it had been chapter 7 wiping-the-slate-clean type of bankruptcy, as opposed to a chapter 11 re-structuring. I know that debt forgiveness generally is taxable. So I looked it up in Quickfinder, saw that release of debt through title 11 bankruptcy was not taxable income, but no mention of 7, mmm? I told her that I would do some more research and call her back. She accepted that (not all clients do!). Do you see the initial confusion? 'Chapter' 11 vs. 'Title

11.' Title 11 is the over-arching bankruptcy law of which there are various chapters. And she was probably thinking of ch 13 which is personal restructuring of debt, as opposed to the often-mentioned ch 11 which is for business restructuring. But, in my research, I did find that she would have to file a separate tax return for the bankruptcy estate. I called her that evening and told her (I've found that people like a prompt call-back even if you're only able to give them a partial answer). I expected the law firm to tell her that they had done the bankruptcy, everything was finished, she would have to do the taxes on her own. Most people just aren't good at after sales service, and that's the fact of the matter. Then I got to thinking, how could they not have done the tax return for the bankruptcy estate? And then we might get to, in my opinion, that most people aren't good at educating the client. I'm a nerd, I like understanding things. I probably overdo it the other way (for example, Hope Credit vs. Lifetime Learning Credit and how you might want to save your first year of the Hope, I just don't know a way of explaining that short, concise, but also lays out what the person needs to know). I guess it's like being a doctor, some people want to know what's going on, other people just want to be told what to do. So you kind of have to be a poker player and get pretty good at reading people. You kind of make a medium raise and see which way the person wants to go. Okay, so I'd like to know some more about the bankruptcy estate. Or, comment about any of the above. I worked for H&R Block tax season 2003, did other stuff for the last couple of years, and am working for Jackson Hewitt this year. I am emphatically not a CPA (but I am interested!) I don't expect to be able to do one (bankruptcy estate), certainly not at this stage in my career. I just want to be able to recognize the animal in the forest so to speak. Thanks,

Doug

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Reply to
Doug
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Tax filing requirements for the bankruptcy estate (there aren't any for a chapter 7) are the concern of the trustee, not the debtor. Her bankrutpcy attorney should have told her if her refund will go to the creditors rather than to her. (I don't remember the exact timing rules on that one.)

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

You're right, chapter 11 is not the same as Title 11. Title

11 is the bankruptcy code, which includes Chapter 7, 11 and 13 bankruptcies, among others. So if "title 11" cancellation of debt is not income, that would include "chapter 7." Incidentally, one of the rules, as I recall, is that cancellation of debt income is not taxable if the person is insolvent at the time. You can't get a chapter 7 discharge unless you are insolvent.

Right, under §1398.

Bankruptcy attorneys often know nothing about taxes, that's why. Under the current bankruptcy laws, the procedures have become so burdensome that lawyers have had to raise their rates a lot just to file what should be a simple bankruptcy. I'm sure they'd have a hard time getting money out of the client for doing tax returns as well.

Go read §1398 and the regulations under that section. That should tell you what you need to know.

From my reading of the statute it looks like it shouldn't be more difficult than doing a partnership or corporate return. But then I don't do returns so for me they're all easy. Stu

Reply to
Stuart A. Bronstein

check with the bankruptcy trustee to find out what they filed

___________________________________

-----> real address on hobokeni or hobokenx

Reply to
Benjamin Yazersky CPA

Thanks for the info, guys.

Now, I have learned that a return for a bankruptcy estate is a 1041, where basically you just fill out the top and reference an attached (or enclosed?) 1040. And, if you don't mind, one question about bankruptcy in general, can you please give me a couple of examples as far as who the trustee commonly is? And, Phil, I take it from the parenthetic comment of yours that there is in fact no requirement to file a return for the bankruptcy estate for a chapter 13, which would of course be great news! Am I reading you correctly?

-Doug

Reply to
Doug

Not sure where you learned that. Try IRS Publication 908. It might clear things up for you.

In a chapter 11 it's usually the debtor as debtor-in-possesion (DIP) unless he misbehaves and the creditors get an independent trustee appointed. For chapters 7 and 13 the Bankruptcy Courts have standing trustees who do this for a living.

I don't think there is, but even if there is, it's the trustee's problem, not the debtor's.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

The trustee in bankruptcy is a federal employee, and is the trustee for many bankruptcies. The US trustee is always at the forefront in chapter 7 cases. In Chapter 11 and 13 cases, though, there is the possibility that the debtor can continue to control the assets of the bankruptcy estate. In those cases he's called a debtor in possession. Stu

Reply to
Stuart A. Bronstein

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