Corporations in Bankruptcy & Tax Law Information

The following discussion covers only the highlights of the bankruptcy tax rules applying to corporations. Because the details of corporate bankruptcy reorganizations are beyond the scope of this publication, you may want to seek the help of a professional tax advisor.

See Corporations under Debt Cancellation, for information about a corporation’s debt canceled because of bankruptcy.

The tax-free reorganization provisions of the Internal Revenue Code apply to a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case, but only if, under the reorganization plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction qualifying under IRC section 354, 355, or 356.

A ‘‘title 11 or similar case,’’ for this purpose, is a bankruptcy case under title 11 of the United States Code, or a receivership, foreclo-sure, or similar proceeding in a federal or state court, but only if the corporation is under the jurisdiction of the court in the case and the transfer of assets is under a plan of reorganization approved by the court. In a receiver-ship, foreclosure, or similar proceeding before a federal or state agency involving certain financial institutions, the agency is treated as a court.

Generally, section 354 provides that no gain or loss is recognized if a corporation’s stock is exchanged solely for stock or securities in the same or another corporation under a qualifying reorganization plan. In this case, shareholders in the bankrupt corporation would recognize no gain or loss if they exchange their stock solely for stock or securities of the corporation acquiring the bankrupt’s assets.

Section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution. Section 356 provides that in an exchange that would qualify under section 354 or 355 except that other property or money besides the permitted stock or securities is received by the shareholder, gain is recognized by the shareholder only to the extent of the money and the fair market value of the other property received. No loss is recognized in this situation.

The filing requirements of a corporation involved in bankruptcy proceedings do not change. However, the filing of required returns becomes the responsibility of an appointed trustee, receiver, or a debtor-in-possession, rather than a corporate officer.

Exemption from tax return filing. If you are a trustee, receiver, or an assignee of a corporation that is in bankruptcy, receivership, dissolution, or in the hands of an assignee by court order, you may apply to your IRS District Director for relief from filing federal income tax returns for the corporation. To qualify, the corporation must have ceased business operations and must have neither assets nor income.

Your request to the District Director must include the name, address, and employer identification number of the corporation and a statement of the facts (with any supporting documents) showing why you need relief from the filing requirements. You must also include a statement that you are making the request and furnishing the information under penalties of perjury. The District Director will act on your request within 90 days.

A corporation that is subject to the jurisdiction of the court in a title 11 or similar case is exempt from the personal holding company tax, unless the main reason for beginning or continuing this case is to avoid paying this tax. A ‘‘title 11 or similar case’’ is defined earlier under Tax-Free Reorganizations.

Last reviewed October 2023