Issue: Are trustees for the bankruptcy estates of individuals, partnerships, or corporations under Chapter 7 of the Bankruptcy Code responsible for interest and penalty charges that are calculated for periods before the required date for filing the tax returns under the Bankruptcy Code?

Directive: At the close of a bankruptcy case, the Chapter 7 trustee for the bankruptcy estates of individuals, partnerships, or corporations in bankruptcy is required to file a separate income tax return for each taxable period during which the bankruptcy case was pending. Interest and penalties do not begin to accrue on any prior year returns until after the due date established by the Bankruptcy Code for filing the returns. Any assessment of interest and penalties for periods before the due date is invalid.

Discussion: Massachusetts law provides that taxes are due and payable when the tax return is required to be filed, which is on or before the fifteenth day of the fourth month following the close of each taxable year. G.L. c. 62C §§ 6 (c), 32 (a). If any amount of tax is not paid by its due date, the debt accrues interest and penalties. G.L. c. 62C §§ 32, 33. These interest and penalty charges are calculated automatically by the Department of Revenue's MASSTAX computer system.

Chapter 7 of the Bankruptcy Code preempts the normal Massachusetts rule. A trustee for the estate of an individual, partnership, or corporation in bankruptcy under Chapter 7 is required to file income tax returns if the estate or the corporation has net taxable income for the entire taxable period during which the case is pending. 11 U.S.C. 728 (b). Separate income tax returns for each year the case was pending are due only at the conclusion of the case. Id.

Interest and penalties begin to accrue for individual estates and corporations in bankruptcy under Chapter 7 of the Bankruptcy Code, even for prior tax years, when the tax returns are due. In some circumstances, bills may be issued to certain trustees in Chapter 7 bankruptcy cases containing interest and penalty charges relating to periods prior to the date of filing the income tax returns. These bills are generated in error. Trustees in bankruptcy who have received bills from the Department containing erroneous interest charges attributable to periods before the income tax returns were due under the Bankruptcy Code should forward copies of such bills, together with a copy of this Directive and a brief cover letter, to:

Department of Revenue
Customer Service Bureau
PO Box 7010
Boston, MA 02204

Penalties and interest that accrue after the date of filing the tax returns at the end of a Chapter 7 bankruptcy case are valid, but can be averted by paying the tax shown on the return in full at the time the return is filed.

Example: An individual files for bankruptcy under chapter 7 of the Bankruptcy Code in 1995. A bankruptcy estate is created, and a trustee is appointed. The case is concluded in 1997, at which time the trustee in bankruptcy determines there is net income for the entire three year period the estate was in bankruptcy. The trustee files income tax returns for the bankruptcy estate for tax years 1995, 1996, and 1997. The trustee pays all tax liabilities.

In 1998, the Department issues a "Notice of Assessment" for tax years 1995 and 1996, showing interest and penalty charges. These charges are erroneous, and the trustee should return the bill according to the instructions in this Directive.

If, however, the trustee did not pay the full tax liability at the time of filing the returns, then all interest and penalty charges that accrue after the date of filing are valid. Please contact the Customer Service Bureau for assistance in determining which portion of the interest and penalty charges is valid.

/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.,
Acting Commissioner of Revenue

BFC:DMS:dt

November 30, 1998

DD 98-4