11 USC 505: Determination of Tax Liability in Bankruptcy

The United States Bankruptcy Code contains a provision, 11 U.S.C. § 505, that grants bankruptcy courts the power to resolve tax disputes arising during a case. This authority allows the court to determine the correct amount and legality of a debtor’s tax obligations. The purpose is to provide a single, centralized forum for these issues, which streamlines the bankruptcy process and prevents delays in the administration of the estate and distribution of assets to creditors.

Scope of the Bankruptcy Court’s Authority

The power granted to the bankruptcy court under Section 505 is extensive, covering a wide array of taxes from various government levels. This includes federal taxes administered by the Internal Revenue Service (IRS), such as income and employment taxes, as well as state and local liabilities like sales, property, and franchise taxes. The court’s jurisdiction extends beyond the principal tax amount to include any related additions, fines, or penalties asserted by a taxing agency.

This authority applies to two distinct categories of tax liabilities. The first is pre-petition taxes, which are obligations the debtor incurred before the date the bankruptcy case was filed. For instance, if a debtor files for bankruptcy in 2024, the court can determine the correct liability for their 2022 personal income tax return. The court can examine the filed return, any assessments made by the IRS, and the underlying financial data to arrive at a final, binding figure.

The second category concerns administrative taxes, which are liabilities incurred by the bankruptcy estate itself after the case has commenced. A common example is the income tax on earnings generated by the estate’s assets, such as from the sale of property. A trustee can ask the court to determine these post-petition tax liabilities to ensure they are correctly calculated and paid as an administrative expense, which helps in finalizing the estate’s financial affairs.

Limitations on Judicial Power

While the court’s authority is broad, it has constraints. A significant limitation prevents the bankruptcy court from deciding a tax issue if its amount or legality was already contested and adjudicated by a judicial or administrative body before the bankruptcy filing. This provision ensures that the bankruptcy court does not serve as an appellate court for tax decisions that have already become final.

In this context, “adjudicated” means a formal decision was rendered on the merits of the tax dispute. For example, if a debtor disputed a tax deficiency in the U.S. Tax Court and received a final ruling before filing for bankruptcy, the bankruptcy court cannot re-examine that same liability. This respects the finality of prior legal proceedings.

Another constraint relates to the estate’s property taxes. The court may not redetermine the amount of an ad valorem property tax if the time period for challenging that tax under non-bankruptcy law has already expired. This means if a trustee fails to contest a property tax assessment within the window provided by state or local law, they cannot later turn to the bankruptcy court for a redetermination.

Information Required to Request a Tax Determination

To ask the court to determine a tax liability, the debtor or trustee must file a formal request known as a Motion to Determine Tax Liability. The motion must clearly state the amount the debtor believes is correct versus the amount the taxing authority claims is due. It must also identify key details, including the specific type of tax, the exact tax period, and the name of the taxing authority, such as the IRS or a state department of revenue.

The moving party must also collect and attach all relevant paperwork as exhibits. These documents provide the court with the necessary evidence to understand and rule on the dispute and should include:

• Copies of the tax returns filed for the period
• Notices of deficiency
• Audit reports
• Formal assessments received from the taxing agency
• All correspondence between the debtor and the tax authority

The Process for Seeking a Determination

Once the Motion to Determine Tax Liability and its supporting documents are prepared, it must be formally filed with the bankruptcy court. Filing is done through the court’s electronic Case Management/Electronic Case Files (CM/ECF) system. While there is often no standard filing fee for this type of motion, specific local court rules may require one.

After filing, the motion must be officially delivered, or “served,” to the relevant taxing authorities. For federal taxes, the motion must be served on the IRS, the local U.S. Attorney’s office for the district where the case is pending, and the Attorney General of the United States in Washington, D.C. For state and local taxes, service must be made on the specific state or municipal agency responsible for the tax.

Following service of the motion, the taxing authority is given a specific deadline to file a response. When the motion is served on a federal agency like the IRS, the government has 35 days to file its response. The agency will either agree with the debtor’s position or state its own arguments for why its assessed tax amount is correct. If the parties cannot reach an agreement, the court will schedule a hearing for both sides to present evidence before the judge makes a final determination.