Introduction: Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq. ("USBC") governs liquidation of a debtor corporation. [1] The following changes relating to Massachusetts tax return filing requirements of a Chapter 7 Trustee are based, in part, on the amendments to 11 U.S.C. § 346 and the repeal of 11 U.S.C. § 728 by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective October 17, 2005. This Directive revokes and replaces Directive 02-15 with respect to all Chapter 7 Trustees who file tax returns on behalf of debtor corporations.

Issue: What are the tax reporting obligations for a Chapter 7 Trustee in bankruptcy, charged with the duty of administration of the Chapter 7 debtor corporation's bankruptcy estate?

Directive:
For Chapter 7 cases in which the order for relief under the USBC is entered on or after October 17, 2005: The Chapter 7 Trustees of such cases are required to file a Form 355, Business or Manufacturing Corporate Excise Return, for each tax year that the bankruptcy case is open, including the entire year in which the order for relief is entered. The bankruptcy estate is liable for and is required to pay the greater of the tax shown as due on the return for the taxable year, or the minimum tax.

For Chapter 7 cases in which the order for relief under the USBC was entered prior to October 17, 2005, and for which no Form 2, Fiduciary Income Tax Return has been filed as previously required by Directive 02-15: The Chapter 7 Trustees of such cases are required to file Form 355, Business or Manufacturing Corporate Excise Return if, pursuant to 11 U.S.C. § 728, the corporation has net taxable income for the entire period after the order for relief during which the case is pending. This Directive does not require that a Form 355, Business or Manufacturing Corporate Excise Return, be filed or that the minimum excise be paid with respect to any tax year that a Form 2, Fiduciary Income Tax Return, has already been filed with the Department in reliance on Directive 02-15.

A Chapter 7 Trustee in a case filed either prior to October 17, 2005 or after October 16, 2005, who has not yet filed a Form 2 is now required to file Form 355 if, pursuant to 11 U.S.C. § 728, the corporation has net taxable income for the entire period after the order for relief during which the case is pending.

Discussion of Law:
Prior to the enactment of Section 346 of the USBC (effective October 17, 2005), Section 728(b) governed the filing requirements for a Chapter 7 Trustee of a debtor corporation. Section 728(b) provided that notwithstanding any state or local law imposing a tax on or measured by income, the Chapter 7 Trustee was required to file tax returns for a debtor corporation only if the corporation had net taxable income for the entire period after the order for relief during which the case was pending. Section 728 did not prescribe the type of tax return that should be filed by the trustee, but instead left the form of the return to be prescribed by state law.

As provided in DOR Directive 02-15, the Commissioner required that the Chapter 7 Trustee of a debtor corporation in bankruptcy file Form 2, Fiduciary Income Tax Return, as the annual return, but only if the debtor corporation's bankruptcy estate recognized net taxable income during the applicable period. A trustee was required to file Form 355 only in rare instances, for example, if the Bankruptcy Court authorized the Chapter 7 Trustee to continue operation of the debtor corporation during the pendency of the debtor corporation's Chapter 7 case.

Effective October 17, 2005, USBC § 728 was repealed and § 346 became effective for all cases filed on or after October 17, 2005. (S. 256, sec. 1501). Bankruptcy Code § 346(b) states that whenever the Internal Revenue Code (IRC) provides that no separate taxable estate or entity is created upon filing for bankruptcy protection, for purposes of federal taxation, no separate taxable estate is created for purposes of state or local law imposing a tax on or measured by income.

Pursuant to § 346(b), Massachusetts will follow IRC § 1399, which provides the general rule that no separate taxable entity is created when a corporation files for bankruptcy protection under Title 11 of the United States Bankruptcy Code. If no separate taxable entity is created under the IRC, then USBC § 346(b) requires that "the trustee shall make such tax returns of income of corporations . . . as required under any state or local law . . . [and] the estate shall be liable for any tax imposed on such corporation …."

Under Massachusetts law, corporations are required to file corporate excise tax returns each year, and to pay the greater of the tax due or the minimum tax. [2] This requirement continues to apply after the corporation commences a bankruptcy case under Chapter 7. Accordingly, for Chapter 7 cases filed on or after October 17, 2005, a Chapter 7 Trustee of a debtor corporation should file a Form 355 for the entire taxable year in which the corporation commenced the bankruptcy case as well as for each additional year that the case remains open until the Bankruptcy Court approves the final account, enters an order discharging the trustee and closes the case. [3]

Directive 02-15 is revoked because it is inconsistent with the amendments to 11 U.S.C § 346 and the repeal of 11 U.S.C. § 728 by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In addition, a uniform requirement for filing Form 355 by all Chapter 7 Trustees is now adopted by this Directive. The revocation of Directive 02-15 is not retroactive as to any returns already filed with the Department. Therefore, any Chapter 7 Trustee who has already filed Form 2, in reliance on Directive 02-15, is not required to file a Form 355 or to pay the minimum excise. However, a Chapter 7 Trustee in a case filed either prior to October 17, 2005 or after October 16, 2005, who has not yet filed a Form 2 is now required to file Form 355 if, pursuant to 11 U.S.C. § 728, the corporation has net taxable income for the entire period after the order for relief during which the case is pending.

Effective Date: The rules set forth in this Directive will apply to all tax returns filed on or after October 17, 2005 on behalf of debtor corporations in Chapter 7 cases, except to the extent Chapter 7 Trustees have already filed Form 2 in reliance on Directive 02-15.

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:wm

February 16, 2006

DD 06-1



[1] Chapter 7 debtors may include individuals, partnerships and municipalities, as well as corporations; this Directive focuses on Chapter 7 debtors that are corporations.

[2] G.L. c. 63, § 32(a) and (b).

[3] See 11 U.S.C. §§ 704(a)(9) and 350(a).