The IRS released Internal Revenue Bulletin 2006-40, Notice 2006-83 on October 2, 2006 to provide guidance to individuals filing bankruptcy under Chapter 11 on or after October 17, 2005. It further provides guidance for the employers of these individuals, persons filing Forms W-2, 1099 or other information returns that report payment to these individuals, and Chapter 11 trustees in cases filed by an individual.
The bankruptcy estate of an individual who files under Chapter 11 is a separate taxable entity under section 1398 of the Internal Revenue Code. In general, the estate, rather than the individual, must include in its gross income all of the debtor’s income to which the estate is entitled under the Bankruptcy Code. As a result of the enactment of section 1115 of the Bankruptcy Code by BAPCPA, the bankruptcy estate rather than the individual must include in its gross income both 1. the debtor’s gross earnings from post-petition services and 2. the gross income from post-petition acquired property. IRC Section 1398(e)(1).
Because the bankruptcy estate is a separate taxable entity, the trustee or debtor in possession must obtain an employer identification number for the estate and use it on any tax returns filed for the estate.
The individual must continue to file his own individual tax returns during the bankruptcy proceedings. IRC Section 6012(a)(1). The trustee or debtor in possession must prepare and file the income tax returns of the bankruptcy estate if required under IRC Section 6012(a)(9).
Although post-petition wages earned by a debtor are generally treated for income tax purposes as gross income of the estate rather than the individual, the reporting and withholding obligations of a debtor’s employer however have not changed as a result of the enactment of section 1115 of the Bankruptcy Code. Section 1115 has no effect on the determination of wages under FICA, FUTA, or for income tax withholding purposes. See IRC Section 3306(b) and 3401(a). An employer should continue to reflect such wages and accompanying tax withholding on a Form W-2 issued to the debtor under the debtor’s name and social security number.
