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90 Second Lesson: Application of Federal Tax Laws in Insolvency Cases

Editors’ Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to info@dailydac.com and we will try to answer it.

90 Second Lesson


Are insolvent or bankruptcy debtors exempt from federal income tax laws?


In general, neither the Internal Revenue Code nor the Bankruptcy Code exempts an insolvent or bankrupt debtor from the application of federal income tax laws. The Bankruptcy Code contains a number of provisions that affect the application of federal, state and local taxes in a bankruptcy case. These provisions include, but are not limited to federal, state and local income tax treatment of the debtor, the ability of the taxing authorities to assess and/or collect prepetition and postpetition taxes, including the rights of taxing authorities to set off tax claims against tax refunds, the treatment of tax claims in bankruptcy, including claims for interest and penalties, the treatment of tax liens and priority and discharge of taxes, the Bankruptcy Court’s jurisdiction to decide tax claims, and the filing of federal, state and local tax returns. However, the Bankruptcy Code generally defers to provisions of the Internal Revenue Code for purposes of determining the debtor’s federal income Tax Items and the debtor’s federal income tax liability. This complex subject is explained in further detail by David Alger here.

Note: This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.

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The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.

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