Electing to Close the Tax Year in Bankruptcy

Agricultural Law Digest, Dec 2010

The economic downturn in the past couple of years coupled with low commodity prices for milk, hogs and a few other commodities has focused attention on appropriate strategies if the decision is made to file bankruptcy.1 Among those strategies, and one of the most important, is the decision to elect to close an individual debtor’s tax year if the filing is under Chapter 7 liquidation or Chapter 11 reorganization.2 The election opportunity does not apply to those filing under other chapters of the Bankruptcy Code (Chapters 9, 12 or13) nor does it apply to partnerships, corporations and other types of entities as debtors regardless of the chapter under which the filing occurs.3

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Electing to Close the Tax Year in Bankruptcy

Electing to Close the Tax Year in Bankruptc y Neil E. Harl 0 1 Part of the Agricultural 0 1 Resource Economics Commons 0 1 Agricultural Economics Commons 0 1 Agriculture Law Commons 0 1 the Public Economics Commons 0 1 0 This Article is brought to you for free and open access by the Journals at Iowa State University Digital Repository. It has been accepted for inclusion in Agricultural Law Digest by an authorized editor of Iowa State University Digital Repository. For more information , please contact , USA 1 Iowa State University , USA Follow this and additional works at; http; //lib; dr; iastate; edu/aglawdigest - Agricultural Agricultural Law Press Publisher/Editor Robert P. Achenbach, Jr. Contributing Editor Dr. Neil E. Harl, Esq. * * * * Issue Contents Bankruptcy General Exemptions 91 Federal taxation Discharge 91 Federal Farm Programs Conservation stewardship program 91 Federal Estate and Gift Taxation Late filing of return 91 Marital deduction 91 Power of appointment 91 Transfers made within three years of death 92 Federal Income Taxation Accounting method 92 Charitable organizations 92 Community property 92 Constructive receipt 92 Court awards and settlements 92 Debt instruments 92 Dependents 92 Disability payments 92 Disaster losses 93 Discharge of indebtedness 93 Expense method depreciation 93 Health savings accounts 93 Hybrid motor vehicle credit 93 Innocent spouse 94 Passive activity losses 94 Partnerships Administrative adjustments 94 Travel expenses 94 Withholding taxes 94 Nuisance Right-to-farm 95 In the News 2008 Farm Bill provisions 95 Information returns 95 Tax return preparers 95 Agricultural Law Digest is published by the Agricultural Law Press, P.O. Box 835, Brownsville, OR 97327 (ph 541-466-5544), bimonthly except June and December. Annual subscription $120 ($90 by e-mail). Copyright 2010 by Robert P. Achenbach, Jr. and Neil E. Harl. No part of this newsletter may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without prior permission in writing from the publisher. http://www.agrilawpress.com Printed on recycled paper. 89 Volume 21, No. 12 June 11, 2010 ISSN 1051-2780 Electing to Close the Tax Year in Bankruptcy -by Neil E. Harl* The economic downturn in the past couple of years coupled with low commodity prices for milk, hogs and a few other commodities has focused attention on appropriate strategies if the decision is made to file bankruptcy.1 Among those strategies, and one of the most important, is the decision to elect to close an individual debtor’s tax year if the filing is under Chapter 7 liquidation or Chapter 11 reorganization.2 The election opportunity does not apply to those filing under other chapters of the Bankruptcy Code (Chapters 9, 12 or 13) nor does it apply to partnerships, corporations and other types of entities as debtors regardless of the chapter under which the filing occurs.3 Electing two short years As a general rule, the bankrupt’s tax year does not change when bankruptcy filing occurs.4 However, a debtor with assets other than those that will be exempt may elect to end the debtor’s tax year as of the day before the day of filing bankruptcy.5 This creates two short years for the debtor, one beginning on January 1 (for calendar-year taxpayers) and running through the day before bankruptcy filing; the other beginning the day of bankruptcy filing and running through December 31 (again, for calendar-year taxpayers). Thus, the taxable year may not end on the last day of a month even though the general rule is that a fiscal year must end on the last day of a month.6 The decision to divide the bankrupt’s tax year is made by election filed by the due date for the return for the first short year.7 Thus, the election is made by filing an election by the 15th day of the fourth full month after the end of the month in which bankruptcy is filed.8 The election is made with the filing of the return and can be made without the prior approval of the Internal Revenue Service.9 Once made, the election is irrevocable.10 The election cannot be made after the tax return has been filed.11 To show that the election has been made, “Section 1398 Election” should be printed or typed at the top of the debtor’s first short-year return.12 A similar statement should be attached to Form 4868, Application for Extension of Time.” The income tax return filed for the second short year should be marked “Second Short Period Year Return After Sec. 1398 Election.”13 _______________________________________________________________________ * Charles F. Curtiss Distinguished Professor in Agriculture and Emeritus Professor of Economics, Iowa State University; member of the Iowa Bar. Next issue will be published on July 2, 2010. The election is voided if the Chapter 7 or Chapter 11 bankruptcy filing is dismissed or is converted to a Chapter 12 or (...truncated)


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Neil E Harl. Electing to Close the Tax Year in Bankruptcy, Agricultural Law Digest, 2010, pp. 1, Volume 21, Issue 12,