Administrative expenses of bankruptcy estate are deductible from gross income.

• Author: Fiore, Nicholas J.

Is a trustee of a Chapter 7 bankruptcy estate entitled to deduct expenses of administering the estate "above the line," as a deduction from gross income under Sec. 67(e), or is he limited to deducting the expenses as an itemized deduction subject to the two-percent floor for miscellaneous deductions under Sec. 67(a)?

Analysis

Sec. 1398 allows special tax treatment for individuals who are in bankruptcy pursuant to Chapter 7 or Chapter 11 of the Bankruptcy Code. Sec. 1398(c)(1) sets forth the general rule that the taxable income of a bankruptcy estate is computed in the same manner as it is computed for an individual. Sec. 1398(e)(3) states that, except as otherwise provided in this section, the determination of whether any amount paid or incurred by the estate is allowable as a deduction must be made as if the amount were paid or incurred by the debtor.

According to Sec. 1398(h)(1), "[a]ny administrative expense allowed under section 503 of title 11 of the United States Code, ... to the extent not disallowed under any other provision of this title, shall be allowed as a deduction."

Sec. 61(a) defines gross income as all income from whatever source, except as otherwise provided. Sec. 62(a) defines adjusted gross income (AGI) as gross income minus the deductions listed in that subsection. Under Sec. 63(d), itemized deductions are the deductions allowed under this chapter, other than the deductions allowed in arriving at AGI (i.e., those listed in Sec. 62(a)) and personal exemptions.

Under Sec. 67(a), for an individual taxpayer, miscellaneous itemized deductions are allowed only to the extent that the aggregate of such deductions exceeds two percent of gross income. Sec. 67(b) lists the itemized deductions that are not miscellaneous itemized deductions and thus not subject to the two-percent floor. Administrative expenses are not specifically listed in Sec. 62(a) or 67(b). Therefore, absent another provision, taxpayers would treat such expenses as...