Sub Chapter II Collection, Liquidation and Distribution of the Estate
Sec. 728. Special tax provisions
(a) For the purposes of any State or local law imposing a tax on or
measured by income, the taxable period of a debtor that is an individual
shall terminate on the date of the order for relief under this chapter,
unless the case was converted under section 1112 or 1208 of this title.
(b) Notwithstanding any State or local law imposing a tax on or
measured by income, the trustee shall make tax returns of income for the
estate of an individual debtor in a case under this chapter or for a
debtor that is a corporation in a case under this chapter only if such
estate or corporation has net taxable income for the entire period after
the order for relief under this chapter during which the case is
pending. If such entity has such income, or if the debtor is a
partnership, then the trustee shall make and file a return of income for
each taxable period during which the case was pending after the order
for relief under this chapter.
(c) If there are pending a case under this chapter concerning a
partnership and a case under this chapter concerning a partner in such
partnership, a governmental unit's claim for any unpaid liability of
such partner for a State or local tax on or measured by income, to the
extent that such liability arose from the inclusion in such partner's
taxable income of earnings of such partnership that were not withdrawn
by such partner, is a claim only against such partnership.
(d) Notwithstanding section 541 of this title, if there are pending
a case under this chapter concerning a partnership and a case under this
chapter concerning a partner in such partnership, then any State or
local tax refund or reduction of tax of such partner that would have
otherwise been property of the estate of such partner under section 541
of this title--
(1) is property of the estate of such partnership to the extent
that such tax refund or reduction of tax is fairly apportionable to
losses sustained by such partnership and not reimbursed by such
(2) is otherwise property of the estate of such partner.
(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2611; Pub. L. 98-353, title III,
Sec. 481, July 10, 1984, 98 Stat. 382; Pub. L. 99-554, title II,
Sec. 257(t), Oct. 27, 1986, 100 Stat. 3116.)
Historical and Revision Notes
Section 728 of the House amendment adopts a provision contained in
the House bill that was deleted by the Senate amendment.
Liquidations: The House bill contained special tax provisions
concerning the treatment of liquidations cases for State and local tax
laws. These provisions deal with the taxable years of an individual
debtor, return-filing requirements, and rules allocating State and local
tax liabilities and refunds between a bankrupt partner and the
partnership of which he is a member. The Senate amendment deleted these
rules pending consideration of the Federal tax treatment of bankruptcy
in the next Congress. The House amendment returns these provisions to
the bill in order that they may be studied by the bankruptcy and tax
bars who may wish to submit comments to Congress in connection with its
consideration of these provisions in the next Congress.
senate report no. 95-989
Section 728 of title 11 applies only to state and local taxation.
This provision contains four subsections which embody special tax
provisions that apply in a case under chapter 7. Subsection (a)
terminates the taxable year of an individual debtor on the date of the
order for relief under chapter 7 of title 11. The date of termination of
the individual's taxable year is the date on which the estate first
becomes a separate taxable entity. If the case was originally filed
under chapter 11 of title 11, then the estate would have been made a
separate taxable entity on the date of the order for relief under that
chapter. In the rare case of a multiple conversion, then the date of the
order for relief under the first chapter under which the estate was a
separate taxable entity is controlling.
Subsection (b) permits the trustee of the estate of an individual
debtor or a corporation in a case under chapter 7 of title 11 to make a
tax return only if the estate or corporation has net taxable income for
the entire case. If the estate or corporation has net taxable income at
the close of the case, then the trustee files an income tax return for
each tax year during which the case was pending. The trustee of a
partnership debtor must always file returns for each such taxable
Subsection (c) sets forth a marshalling rule pertaining to tax
claims against a partner and a partnership in a case under chapter 7 of
title 11. To the extent that the income tax liability arose from the
inclusion of undistributed earnings in the partner's taxable income, the
court is required to disallow the tax claim against the partner's estate
and to allow such claim against the partnership estate. No burden is
placed on the taxing authority; the taxing authority should file a
complete proof of claim in each case and the court will execute the
marshalling. If the partnership's assets are insufficient to satisfy
partnership creditors in full, then section 723(c) of title 11 will
apply, notwithstanding this subsection, to allow any unsatisfied tax
claims to be asserted by the partnership trustee against the estate of
the partner. The marshalling rule under this subsection applies only for
purposes of allowance and distribution. Thus the tax claim may be
nondischargeable with respect to an individual partner.
Subsection (d) requires the court to apportion any tax refund or
reduction of tax between the estate of a partner and the estate of his
partnership. The standard of apportionment entitles the partnership
estate to receive that part of the tax refund or reduction that is
attributable to losses sustained by the partnership that were deducted
by the partner but for which the partner never reimbursed the
partnership. The partner's estate receives any part not allocated to the
partnership estate. The section applies notwithstanding section 541 of
title 11, which includes the partner's right to a tax refund or to
reduction of tax as property of the partner's estate.
1986--Subsec. (a). Pub. L. 99-554 inserted reference to section 1208
of this title.
1984--Subsec. (c). Pub. L. 98-353, Sec. 481(a), substituted
``taxable income'' for ``taxable income,''.
Subsec. (d)(2). Pub. L. 98-353, Sec. 481(b), substituted ``is
otherwise property of the estate of such partner'' for ``is property of
the estate of such partner otherwise''.
Effective Date of 1986 Amendment
Amendment by 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 Procedure.
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, 346, 348, 723 of this