CHAPTER 3CASE ADMINISTRATION
Sub Chapter III Administration
Sec. 346. Special tax provisions
(a) Except to the extent otherwise provided in this section,
subsections (b), (c), (d), (e), (g), (h), (i), and (j) of this section
apply notwithstanding any State or local law imposing a tax, but subject
to the Internal Revenue Code of 1986.
(b)(1) In a case under chapter 7, 12, or 11 of this title concerning
an individual, any income of the estate may be taxed under a State or
local law imposing a tax on or measured by income only to the estate,
and may not be taxed to such individual. Except as provided in section
728 of this title, if such individual is a partner in a partnership, any
gain or loss resulting from a distribution of property from such
partnership, or any distributive share of income, gain, loss, deduction,
or credit of such individual that is distributed, or considered
distributed, from such partnership, after the commencement of the case
is gain, loss, income, deduction, or credit, as the case may be, of the
(2) Except as otherwise provided in this section and in section 728
of this title, any income of the estate in such a case, and any State or
local tax on or measured by such income, shall be computed in the same
manner as the income and the tax of an estate.
(3) The estate in such a case shall use the same accounting method
as the debtor used immediately before the commencement of the case.
(c)(1) The commencement of a case under this title concerning a
corporation or a partnership does not effect a change in the status of
such corporation or partnership for the purposes of any State or local
law imposing a tax on or measured by income. Except as otherwise
provided in this section and in section 728 of this title, any income of
the estate in such case may be taxed only as though such case had not
(2) In such a case, except as provided in section 728 of this title,
the trustee shall make any tax return otherwise required by State or
local law to be filed by or on behalf of such corporation or partnership
in the same manner and form as such corporation or partnership, as the
case may be, is required to make such return.
(d) In a case under chapter 13 of this title, any income of the
estate or the debtor may be taxed under a State or local law imposing a
tax on or measured by income only to the debtor, and may not be taxed to
(e) A claim allowed under section 502(f) or 503 of this title, other
than a claim for a tax that is not otherwise deductible or a capital
expenditure that is not otherwise deductible, is deductible by the
entity to which income of the estate is taxed unless such claim was
deducted by another entity, and a deduction for such a claim is deemed
to be a deduction attributable to a business.
(f) The trustee shall withhold from any payment of claims for wages,
salaries, commissions, dividends, interest, or other payments, or
collect, any amount required to be withheld or collected under
applicable State or local tax law, and shall pay such withheld or
collected amount to the appropriate governmental unit at the time and in
the manner required by such tax law, and with the same priority as the
claim from which such amount was withheld was paid.
(g)(1) Neither gain nor loss shall be recognized on a transfer--
(A) by operation of law, of property to the estate;
(B) other than a sale, of property from the estate to the
(C) in a case under chapter 11 or 12 of this title concerning a
corporation, of property from the estate to a corporation that is an
affiliate participating in a joint plan with the debtor, or that is
a successor to the debtor under the plan, except that gain or loss
may be recognized to the same extent that such transfer results in
the recognition of gain or loss under section 371 \1\ of the
Internal Revenue Code of 1986.
\1\ See References in Text note below.
(2) The transferee of a transfer of a kind specified in this
subsection shall take the property transferred with the same character,
and with the transferor's basis, as adjusted under subsection (j)(5) of
this section, and holding period.
(h) Notwithstanding sections 728(a) and 1146(a) of this title, for
the purpose of determining the number of taxable periods during which
the debtor or the estate may use a loss carryover or a loss carryback,
the taxable period of the debtor during which the case is commenced is
deemed not to have been terminated by such commencement.
(i)(1) In a case under chapter 7, 12, or 11 of this title concerning
an individual, the estate shall succeed to the debtor's tax attributes,
(A) any investment credit carryover;
(B) any recovery exclusion;
(C) any loss carryover;
(D) any foreign tax credit carryover;
(E) any capital loss carryover; and
(F) any claim of right.
(2) After such a case is closed or dismissed, the debtor shall
succeed to any tax attribute to which the estate succeeded under
paragraph (1) of this subsection but that was not utilized by the
estate. The debtor may utilize such tax attributes as though any
applicable time limitations on such utilization by the debtor were
suspended during the time during which the case was pending.
(3) In such a case, the estate may carry back any loss of the estate
to a taxable period of the debtor that ended before the order for relief
under such chapter the same as the debtor could have carried back such
loss had the debtor incurred such loss and the case under this title had
not been commenced, but the debtor may not carry back any loss of the
debtor from a taxable period that ends after such order to any taxable
period of the debtor that ended before such order until after the case
(j)(1) Except as otherwise provided in this subsection, income is
not realized by the estate, the debtor, or a successor to the debtor by
reason of forgiveness or discharge of indebtedness in a case under this
(2) For the purposes of any State or local law imposing a tax on or
measured by income, a deduction with respect to a liability may not be
allowed for any taxable period during or after which such liability is
forgiven or discharged under this title. In this paragraph, ``a
deduction with respect to a liability'' includes a capital loss incurred
on the disposition of a capital asset with respect to a liability that
was incurred in connection with the acquisition of such asset.
(3) Except as provided in paragraph (4) of this subsection, for the
purpose of any State or local law imposing a tax on or measured by
income, any net operating loss of an individual or corporate debtor,
including a net operating loss carryover to such debtor, shall be
reduced by the amount of indebtedness forgiven or discharged in a case
under this title, except to the extent that such forgiveness or
discharge resulted in a disallowance under paragraph (2) of this
(4) A reduction of a net operating loss or a net operating loss
carryover under paragraph (3) of this subsection or of basis under
paragraph (5) of this subsection is not required to the extent that the
indebtedness of an individual or corporate debtor forgiven or
(A) consisted of items of a deductible nature that were not
deducted by such debtor; or
(B) resulted in an expired net operating loss carryover or other
(i) did not offset income for any taxable period; and
(ii) did not contribute to a net operating loss in or a net
operating loss carryover to the taxable period during or after
which such indebtedness was discharged.
(5) For the purposes of a State or local law imposing a tax on or
measured by income, the basis of the debtor's property or of property
transferred to an entity required to use the debtor's basis in whole or
in part shall be reduced by the lesser of--
(A)(i) the amount by which the indebtedness of the debtor has
been forgiven or discharged in a case under this title; minus
(ii) the total amount of adjustments made under paragraphs (2)
and (3) of this subsection; and
(B) the amount by which the total basis of the debtor's assets
that were property of the estate before such forgiveness or
discharge exceeds the debtor's total liabilities that were
liabilities both before and after such forgiveness or discharge.
(6) Notwithstanding paragraph (5) of this subsection, basis is not
required to be reduced to the extent that the debtor elects to treat as
taxable income, of the taxable period in which indebtedness is forgiven
or discharged, the amount of indebtedness forgiven or discharged that
otherwise would be applied in reduction of basis under paragraph (5) of
(7) For the purposes of this subsection, indebtedness with respect
to which an equity security, other than an interest of a limited partner
in a limited partnership, is issued to the creditor to whom such
indebtedness was owed, or that is forgiven as a contribution to capital
by an equity security holder other than a limited partner in the debtor,
is not forgiven or discharged in a case under this title--
(A) to any extent that such indebtedness did not consist of
items of a deductible nature; or
(B) if the issuance of such equity security has the same
consequences under a law imposing a tax on or measured by income to
such creditor as a payment in cash to such creditor in an amount
equal to the fair market value of such equity security, then to the
(i) the extent that such issuance has the same such
(ii) the extent of such fair market value.
(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2565; Pub. L. 98-353, title III,
Sec. 438, July 10, 1984, 98 Stat. 370; Pub. L. 99-554, title II,
Secs. 257(g), 283(c), Oct. 27, 1986, 100 Stat. 3114, 3116; Pub. L. 103-
394, title V, Sec. 501(d)(4), Oct. 22, 1994, 108 Stat. 4143.)
Historical and Revision Notes
Section 346 of the House amendment, together with sections 728 and
1146, represent special tax provisions applicable in bankruptcy. The
policy contained in those sections reflects the policy that should be
applied in Federal, State, and local taxes in the view of the House
Committee on the Judiciary. The House Ways and Means Committee and the
Senate Finance Committee did not have time to process a bankruptcy tax
bill during the 95th Congress. It is anticipated that early in the 96th
Congress, and before the effective date of the bankruptcy code [Oct. 1,
1979], the tax committees of Congress will have an opportunity to
consider action with respect to amendments to the Internal Revenue Code
[title 26] and the special tax provisions in title 11. Since the special
tax provisions are likely to be amended during the first part of the
96th Congress, it is anticipated that the bench and bar will also study
and comment on these special tax provisions prior to their revision.
Special tax provisions: State and local rules. This section provides
special tax provisions dealing with the treatment, under State or local,
but not Federal, tax law, of the method of taxing bankruptcy estates of
individuals, partnerships, and corporations; survival and allocation of
tax attributes between the bankrupt and the estate; return filing
requirements; and the tax treatment of income from discharge of
indebtedness. The Senate bill removed these rules pending adoption of
Federal rules on these issues in the next Congress. The House amendment
returns the State and local tax rules to section 346 so that they may be
studied by the bankruptcy and tax bars who may wish to submit comments
Withholding rules: Both the House bill and Senate amendment provide
that the trustee is required to comply with the normal withholding rules
applicable to the payment of wages and other payments. The House
amendment retains this rule for State and local taxes only. The
treatment of withholding of Federal taxes will be considered in the next
Section 726 of the Senate amendment provides that the rule requiring
pro rata payment of all expenses within a priority category does not
apply to the payment of amounts withheld by a bankruptcy trustee. The
purpose of this rule was to insure that the trustee pay the full amount
of the withheld taxes to the appropriate governmental tax authority. The
House amendment deletes this rule as unnecessary because the existing
practice conforms essentially to that rule. If the trustee fails to pay
over in full amounts that he withheld, it is a violation of his
trustee's duties which would permit the taxing authority to sue the
trustee on his bond.
When taxes considered ``incurred'': The Senate amendment contained
rules of general application dealing with when a tax is ``incurred'' for
purposes of the various tax collection rules affecting the debtor and
the estate. The House amendment adopts the substance of these rules and
transfers them to section 507 of title 11.
Penalty for failure to pay tax: The Senate amendment contains a rule
which relieves the debtor and the trustee from certain tax penalties for
failure to make timely payment of a tax to the extent that the
bankruptcy rules prevent the trustee or the debtor from paying the tax
on time. Since most of these penalties relate to Federal taxes, the
House amendment deletes these rules pending consideration of Federal tax
rules affecting bankruptcy in the next Congress.
senate report no. 95-989
Subsection (a) indicates that subsections (b), (c), (d), (e), (g),
(h), (i), and (j) apply notwithstanding any State or local tax law, but
are subject to Federal tax law.
Subsection (b)(1) provides that in a case concerning an individual
under chapter 7 or 11 of title 11, income of the estate is taxable only
to the estate and not to the debtor. The second sentence of the
paragraph provides that if such individual is a partner, the tax
attributes of the partnership are distributable to the partner's estate
rather than to the partner, except to the extent that section 728 of
title 11 provides otherwise.
Subsection (b)(2) states a general rule that the estate of an
individual is to be taxed as an estate. The paragraph is made subject to
the remainder of section 346 and section 728 of title 11.
Subsection (b)(3) requires the accounting method, but not
necessarily the accounting period, of the estate to be the same as the
method used by the individual debtor.
Subsection (c)(1) states a general rule that the estate of a
partnership or a corporated debtor is not a separate entity for tax
purposes. The income of the debtor is to be taxed as if the case were
not commenced, except as provided in the remainder of section 346 and
Subsection (c)(2) requires the trustee, except as provided in
section 728 of title 11, to file all tax returns on behalf of the
partnership or corporation during the case.
Subsection (d) indicates that the estate in a chapter 13 case is not
a separate taxable entity and that all income of the estate is to be
taxed to the debtor.
Subsection (e) establishes a business deduction consisting of
allowed expenses of administration except for tax or capital expenses
that are not otherwise deductible. The deduction may be used by the
estate when it is a separate taxable entity or by the entity to which
the income of the estate is taxed when it is not.
Subsection (f) imposes a duty on the trustee to comply with any
Federal, State, or local tax law requiring withholding or collection of
taxes from any payment of wages, salaries, commissions, dividends,
interest, or other payments. Any amount withheld is to be paid to the
taxing authority at the same time and with the same priority as the
claim from which such amount withheld was paid.
Subsection (g)(1)(A) indicates that neither gain nor loss is
recognized on the transfer by law of property from the debtor or a
creditor to the estate. Subparagraph (B) provides a similar policy if
the property of the estate is returned from the estate to the debtor
other than by a sale of property to debtor. Subparagraph (C) also
provides for nonrecognition of gain or loss in a case under chapter 11
if a corporate debtor transfers property to a successor corporation or
to an affiliate under a joint plan. An exception is made to enable a
taxing authority to cause recognition of gain or loss to the extent
provided in IRC [title 26] section 371 (as amended by section 109 of
Subsection (g)(2) provides that any of the three kinds of
transferees specified in paragraph (1) take the property with the same
character, holding period, and basis in the hands of the transferor at
the time of such transfer. The transferor's basis may be adjusted under
section 346(j)(5) even if the discharge of indebtedness occurs after the
transfer of property. Of course, no adjustment will occur if the
transfer is from the debtor to the estate or if the transfer is from an
entity that is not discharged.
Subsection (h) provides that the creation of the estate of an
individual under chapter 7 or 11 of title 11 as a separate taxable
entity does not affect the number of taxable years for purposes of
computing loss carryovers or carrybacks. The section applies with
respect to carryovers or carrybacks of the debtor transferred into the
estate under section 346(i)(1) of title 11 or back to the debtor under
section 346(i)(2) of title 11.
Subsection (i)(1) states a general rule that an estate that is a
separate taxable entity nevertheless succeeds to all tax attributes of
the debtor. The six enumerated attributes are illustrative and not
Subsection (i)(2) indicates that attributes passing from the debtor
into an estate that is a separate taxable entity will return to the
debtor if unused by the estate. The debtor is permitted to use any such
attribute as though the case had not been commenced.
Subsection (i)(3) permits an estate that is a separate taxable
entity to carryback losses of the estate to a taxable period of the
debtor that ended before the case was filed. The estate is treated as if
it were the debtor with respect to time limitations and other
restrictions. The section makes clear that the debtor may not carryback
any loss of his own from a tax year during the pendency of the case to
such a period until the case is closed. No tolling of any period of
limitation is provided with respect to carrybacks by the debtor of post-
Subsection (j) sets forth seven special rules treating with the tax
effects of forgiveness or discharge of indebtedness. The terms
``forgiveness'' and ``discharge'' are redundant, but are used to clarify
that ``discharge'' in the context of a special tax provision in title 11
includes forgiveness of indebtedness whether or not such indebtedness is
``discharged'' in the bankruptcy sense.
Paragraph (1) states the general rule that forgiveness of
indebtedness is not taxable except as otherwise provided in paragraphs
(2)-(7). The paragraph is patterned after sections 268, 395, and 520 of
the Bankruptcy Act [sections 668, 795, and 920 of former title 11].
Paragraph (2) disallows deductions for liabilities of a deductible
nature in any year during or after the year of cancellation of such
liabilities. For the purposes of this paragraph, ``a deduction with
respect to a liability'' includes a capital loss incurred on the
disposition of a capital asset with respect to a liability that was
incurred in connection with the acquisition of such asset.
Paragraph (3) causes any net operating loss of a debtor that is an
individual or corporation to be reduced by any discharge of indebtedness
except as provided in paragraphs (2) or (4). If a deduction is
disallowed under paragraph (2), then no double counting occurs. Thus,
paragraph (3) will reflect the reduction of losses by liabilities that
have been forgiven, including deductible liabilities or nondeductible
liabilities such as repayment of principal on borrowed funds.
Paragraph (4) specifically excludes two kinds of indebtedness from
reduction of net operating losses under paragraph (3) or from reduction
of basis under paragraph (5). Subparagraph (A) excludes items of a
deductible nature that were not deducted or that could not be deducted
such as gambling losses or liabilities for interest owed to a relative
of the debtor. Subparagraph (B) excludes indebtedness of a debtor that
is an individual or corporation that resulted in deductions which did
not offset income and that did not contribute to an unexpired net
operating loss or loss carryover. In these situations, the debtor has
derived no tax benefit so there is no need to incur an offsetting
Paragraph (5) provides a two-point test for reduction of basis. The
paragraph replaces sections 270, 396, and 522 of the Bankruptcy Act
[sections 670, 796, and 922 of former title 11]. Subparagraph (A) sets
out the maximum amount by which basis may be reduced--the total
indebtedness forgiven less adjustments made under paragraphs (2) and
(3). This avoids double counting. If a deduction is disallowed under
paragraph (2) or a carryover is reduced under paragraph (3) then the tax
benefit is neutralized, and there is no need to reduce basis.
Subparagraph (B) reduces basis to the extent the debtor's total basis of
assets before the discharge exceeds total preexisting liabilities still
remaining after discharge of indebtedness. This is a ``basis solvency''
limitation which differs from the usual test of solvency because it
measures against the remaining liabilities the benefit aspect of assets,
their basis, rather than their value. Paragraph (5) applies so that any
transferee of the debtor's property who is required to use the debtor's
basis takes the debtor's basis reduced by the lesser of (A) and (B).
Thus, basis will be reduced, but never below a level equal to
Paragraph (6) specifies that basis need not be reduced under
paragraph (5) to the extent the debtor treats discharged indebtedness as
taxable income. This permits the debtor to elect whether to recognize
income, which may be advantageous if the debtor anticipates subsequent
net operating losses, rather than to reduce basis.
Paragraph (7) establishes two rules excluding from the category of
discharged indebtedness certain indebtedness that is exchanged for an
equity security issued under a plan or that is forgiven as a
contribution to capital by an equity security holder. Subparagraph (A)
creates the first exclusion to the extent indebtedness consisting of
items not of a deductible nature is exchanged for an equity security,
other than the interests of a limited partner in a limited partnership,
issued by the debtor or is forgiven as a contribution to capital by an
equity security holder. Subparagraph (B) excludes indebtedness
consisting of items of a deductible nature, if the exchange of stock for
debts has the same effect as a cash payment equal to the value of the
equity security, in the amount of the fair market value of the equity
security or, if less, the extent to which such exchange has such effect.
The two provisions treat the debtor as if it had originally issued stock
instead of debt. Subparagraph (B) rectifies the inequity under current
law between a cash basis and accrual basis debtor concerning the
issuance of stock in exchange for previous services rendered that were
of a greater value than the stock. Subparagraph (B) also changes current
law by taxing forgiveness of indebtedness to the extent that stock is
exchanged for the accrued interest component of a security, because the
recipient of such stock would not be regarded as having received money
under the Carman doctrine.
References in Text
The Internal Revenue Code of 1986, referred to in subsec. (a), is
classified generally to Title 26, Internal Revenue Code.
Section 371 of the Internal Revenue Code of 1986, referred to in
subsec. (g)(1)(C), was repealed by Pub. L. 101-508, title XI,
Sec. 11801(a)(19), Nov. 5, 1990, 104 Stat. 1388-521.
1994--Subsec. (a). Pub. L. 103-394, Sec. 504(d)(4)(A), substituted
``Internal Revenue Code of 1986'' for ``Internal Revenue Code of 1954
(26 U.S.C. 1 et seq.)''.
Subsec. (g)(1)(C). Pub. L. 103-394, Sec. 501(d)(4)(B), substituted
``Internal Revenue Code of 1986'' for ``Internal Revenue Code of 1954
(26 U.S.C. 371)''.
1986--Subsec. (b)(1). Pub. L. 99-554, Sec. 257(g)(1), inserted
reference to chapter 12.
Subsec. (g)(1)(C). Pub. L. 99-554, Sec. 257(g)(2), inserted
reference to chapter 12.
Subsec. (i)(1). Pub. L. 99-554, Sec. 257(g)(3), inserted reference
to chapter 12.
Subsec. (j)(7). Pub. L. 99-554, Sec. 283(c), substituted ``owed''
1984--Subsec. (c)(2). Pub. L. 98-353 substituted ``corporation'' for
Effective Date of 1994 Amendment
Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not
applicable with respect to cases commenced under this title before Oct.
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under
section 101 of this title.
Effective Date of 1986 Amendment
Amendment by section 257 of Pub. L. 99-554 effective 30 days after
Oct. 27, 1986, but not applicable to cases commenced under this title
before that date, see section 302(a), (c)(1) of Pub. L. 99-554, set out
as a note under section 581 of Title 28, Judiciary and Judicial
Amendment by section 283 of Pub. L. 99-554 effective 30 days after
Oct. 27, 1986, see section 302(a) of Pub. L. 99-554.
Effective Date of 1984 Amendment
Amendment by Pub. L. 98-353 effective with respect to cases filed 90
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out
as a note under section 101 of this title.
Section Referred to in Other Sections
This section is referred to in sections 106, 1146, 1231 of this