Electing to Close the Tax Year in Bankruptcy
Electing to Close the Tax Year in Bankruptc y
Neil E. Harl 0 1
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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
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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)