Carryover of passive losses and other tax attributes to an individual bankruptcy estate.

• Author: Scott, Don E.

When an individual bankruptcy, a separate taxable entity--the bankruptcy estate--is created. Both the Bankruptcy Code and the Internal Revenue Code provide for the bankruptcy estate to succeed to certain of the debtor's tax attributes. While the Bankruptcy Code provides a list of tax attributes that are to carry over, the statute states that the list is not exhaustive; see Bankruptcy Code Section 346(i)(1). However, an Internal Revenue Code provision takes precedence over the tax provisions of the Bankruptcy Code. A bankruptcy estate must look to Sec. 1398(g) to determine which attributes pass from the debtor. Sec. 1398(g) allows for the carryover of seven specific attributes and any other attributes to the extent provided in regulations. The question arises as to whether an individual debtor's unused passive activity losses and credits, suspended at-risk losses and other tax attributes not specifically listed in Sec. 1398(g) pass in bankruptcy to the bankruptcy estate or remain with the debtor.

On Nov. 6, 1992, the U.S. Bankruptcy Court (Md.) held, in The Official Committee of Unsecured Creditors of D.F. Antonelli Jr., that a bankruptcy estate did not succeed to an individual debtor's passive activity losses and credits, because there were no regulations under Sec. 1398 specifically providing that such losses and credits pass from the individual debtor to the bankruptcy estate.

On the same date as the Antonelli decision, the Service issued Prop. Regs. Sec. 1.1398-1(c), providing that a bankruptcy estate does succeed to the unused passive activity losses and credits of an individual debtor in a Chapter 7 or Chapter 1 1 case; the proposed rules also offer parallel treatment for losses suspended under the at-risk rules. Note that the proposed regulations deal only with suspended at-risk losses and passive activity losses and credits. Following the Antonelli court's reasoning, other tax attributes not specifically listed under Sec. 1398(g) (e.g., investment interest carryovers, percentage depletion carryovers, losses suspended under Secs. 704(d) and 1366(d)) should remain with the debtor.

The proposed regulations and the Antonelli case may create refund opportunities for individual debtors. Furthermore, to the extent bankruptcy estates can benefit from a debtor's unused passive activity losses and credits and suspended at-risk losses, the proposed regulations may provide an opportunity to reduce estate tax liabilities.

Antonelli

The unsecured...