Frequently Asked Questions
Who is eligible for the Bankruptcy Short-Year Election?
Available to individuals in Chapter 7 or 11 bankruptcy cases who have non-exempt assets.
How does the Bankruptcy Short-Year Election work?
An individual debtor in a Chapter 7 or 11 case can elect to split their tax year into two short years, ending the first on the day before the bankruptcy commencement. This allows the debtor to apply pre-petition tax liabilities against pre-petition assets.
What law authorizes the Bankruptcy Short-Year Election?
The Bankruptcy Short-Year Election is authorized under IRC §1398(d)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1398
Source: Internal Revenue Code, Title 26, United States Code
§ 1398. Rules relating to individuals’ title 11 cases(a) Cases to which section appliesExcept as provided in subsection (b), this section shall apply to any case under chapter 7 (relating to liquidations) or chapter 11 (relating to reorganizations) of title 11 of the United States Code in which the debtor is an individual.
(b) Exceptions where case is dismissed, etc.(1) Section does not apply where case is dismissedThis section shall not apply if the case under chapter 7 or 11 of title 11 of the United States Code is dismissed.
(2) Section does not apply at partnership levelFor purposes of subsection (a), a partnership shall not be treated as an individual, but the interest in a partnership of a debtor who is an individual shall be taken into account under this section in the same manner as any other interest of the debtor.
(c) Computation and payment of tax; basic standard deduction(1) Computation and payment of taxExcept as otherwise provided in this section, the taxable income of the estate shall be computed in the same manner as for an individual. The tax shall be computed on such taxable income and shall be paid by the trustee.
(2) Tax ratesThe tax on the taxable income of the estate shall be determined under subsection (d) of section 1.
(3) Basic standard deductionIn the case of an estate which does not itemize deductions, the basic standard deduction for the estate for the taxable year shall be the same as for a married individual filing a separate return for such year.
(d) Taxable year of debtors(1) General ruleExcept as provided in paragraph (2), the taxable year of the debtor shall be determined without regard to the case under title 11 of the United States Code to which this section applies.
(2) Election to terminate debtor’s year when case commences(A) In generalNotwithstanding section 442, the debtor may (without the approval of the Secretary) elect to treat the debtor’s taxable year which includes the commencement date as 2 taxable years—(i) the first of which ends on the day before the commencement date, and
(ii) the second of which begins on the commencement date.
(B) Spouse may join in electionIn the case of a married individual (within the meaning of section 7703), the spouse may elect to have the debtor’s election under subparagraph (A) also apply to the spouse, but only if the debtor and the spouse file a joint return for the taxable year referred to in subparagraph (A)(i).
(C) No election where debtor has no assetsNo election may be made under subparagraph (A) by a debtor who has no assets other than property which the debtor may treat as exempt property under section 522 of title 11 of the United States Code.
(D) Time for making electionAn election under subparagraph (A) or (B) may be made only on or before the due date for filing the return for the taxable year referred to in subparagraph (A)(i). Any such election, once made, shall be irrevocable.
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