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Part 5. Collecting Process

Chapter 9. Bankruptcy and Other Insolvencies

Section 9. Processing Chapter 12 Bankruptcy Cases

5.9.9  Processing Chapter 12 Bankruptcy Cases

5.9.9.1  (05-20-2008)
Description of Chapter 12

  1. Permanent Reenactment of Chapter 12. Since its enactment in 1986, Chapter 12 has been subject to reenactments for time periods of limited duration. The passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made Chapter 12 a permanent part of the Bankruptcy Code effective July 1, 2005.

  2. Chapter 12 Debtors. Chapter 12 is the bankruptcy proceeding used for the adjustment of debts of a family farmer or family fisherman with regular annual income. Chapter 12 is closely modeled after Chapter 13 procedures, but incorporates some Chapter 11 concepts.

  3. Voluntary Filing Only. Relief under this chapter is "voluntary," meaning only the debtor may file a petition for Chapter 12 bankruptcy relief (11 USC § 303).

  4. Debt Reorganization. Chapter 12 allows the family farmer/fisherman to reorganize debts by paying debts through a payment plan. Secured debts may be reduced to the present value of the assets securing the debt and by extending the repayment periods.

  5. Debtor Operates Business. A debtor may continue to operate the farming or commercial fishing operation as a debtor-in-possession with the duties and rights of a trustee unless the court, for cause, appoints a trustee (11 USC §§ 1203 and 1204).

5.9.9.2  (03-01-2007)
Chapter 12 Eligibility

  1. Income Requirements. The Bankruptcy Code provides only a family farmer or fisherman, whose annual income is sufficiently stable and regular to enable the debtor to make payments under a Chapter 12 plan, is eligible to file this type of bankruptcy (11 USC § 101(19) and (19B)).

  2. Eligibility. The following table contrasts the eligibility requirements between the family farmer and the family fisherman.

    Characteristics Family Farmer Family Fisherman
    Entity individual, partnership or corporation individual, partnership or corporation
    Debt Limit $3,544,525.00, subject to periodic adjustment for inflation pursuant to 11 USC § 104(b) $1,642,500.00, subject to periodic adjustment for inflation pursuant to 11 USC § 104(b)
    Percent of Debt from Operation of Business 50% of liabilities must be attributable to farming operations (excluding debt for personal residence of the farmer or residence of the farmer partner/shareholder) 80% of liabilities must be attributable to fishing operations (excluding debt for personal residence of the fisherman or residence of the fisherman partner/shareholder)
    Gross Income more than 50% of the debtor's income is received from a farming operation in the tax year prior to the petition or more than 50% of the debtor's income is received from a farming operation in each of the second and third years before the petition. more than 50% of the debtor's gross income is received from commercial fishing operations for the tax year preceding the commencement of the case

  3. 50 and 80 Percent Rules — Partnerships/Corporations. The family farmer/fisherman partnership or corporation must have more than 50 percent ownership by one family, and the family or relatives must conduct the operation. Also, more than 80 percent of the value of its assets must consist of farm or fishing-related property. The same debt levels for the family farmer or family fisherman apply to the farming or fishing partnership/corporation, respectively. Finally, if the family farming/fishing corporation issues stock, that stock may not be publicly traded (11 USC §101(18)(B) and (19A)(B)).

5.9.9.3  (01-01-2006)
Processing Duties

  1. Centralized Insolvency Responsibilities. The Centralized Insolvency Operation (CIO) clerical units are responsible for loading new Chapter 12 cases on the Automated Insolvency System (AIS), resolving initial processing issues (e.g., Potential Invalid TINs, status notices, or IIP errors), inputting dismissal notices, and creating MFT 31 mirrored accounts when non-debtor spouses are present.

  2. Field Insolvency Groups. Field bankruptcy specialists handle all aspects of Chapter 12 case processing not specifically assigned to the CIO, including posting of payments and discharges.

5.9.9.4  (05-20-2008)
Initial Case Processing

  1. Initial Actions. Upon notification of a Chapter 12 filing, Insolvency must follow the processing procedures outlined in IRM 5.9.5,Opening a Bankruptcy Case.

  2. Initial Review. Insolvency specialists and advisors must conduct an initial case review and take primary case actions within 10 business days of the case's being assigned to their inventory. Elements of this review may be required sooner, for example, to resolve stay violations or to respond to pending motions or defensive litigation. All actions taken and findings in the review must be documented in the AIS history.

  3. IDRS. The specialist must review IDRS to determine the debtor's:

    • filing requirements and return filing history

    • current balances due and delinquent returns

    • the latest period for which a Form 941 or Form 943 was filed if applicable

    • requirements for federal tax deposits (FTD) if applicable

    • currency with making FTDs since the latest Form 941 or Form 943 was filed if applicable

    • failure to make any FTDs if applicable

  4. Integrated Collection System (ICS). Specialists must review any ICS history for prior field Collection involvement.

  5. Lien Refile Determination. The specialist must determine if any liens should be refiled and take necessary actions to request the lien refiling. (See IRM 5.9.5.9.2, Refiling of Liens.)

  6. Adequate Protection. If the IRS has a significant secured claim, the Field bankruptcy specialist must evaluate adequate protection potential to determine if the IRS has an interest in the debtor’s cash collateral or inventory. Such actions are discussed in IRM 5.9.8.5,Adequate Protection, and IRM 5.9.8.7, Cash Collateral/Property Depreciation of the Estate.

  7. TFRP Issues. For corporations specialists must conduct an Automated Trust Fund Recovery (AFTR) review to determine what assessments periods are proposed against which corporate officers. This information should be paired with the data on IDRS using command code UNLCER. The current RO assignment should be annotated in the AIS history.

  8. TFRP Actions for Corporate Debtors. If unpaid trust fund taxes are part of a corporation's balances due, a Trust Fund Recovery Penalty (TFRP) investigation must be considered. Based on local procedures the investigation may be conducted by field Collection or by an Insolvency advisor. If local practice is to refer the investigation to field Collection, the balances due meet the LEM 5.19.7 criterion, and the case is not currently assigned to a revenue office, an OI must be issued to field Collection through ICS or Form 2209. Or the case may be assigned to an Insolvency advisor to conduct the required investigation. If the TFRP investigation is handled within Insolvency, the LEM dollar criterion need not be met. IRM 5.9.8.10, Trust Fund Considerations in Chapter 11;IRM 5.9.3.10, Trust Fund Recovery Penalty; and IRM 5.9.13.13, TFRP Assessments - Priority Status, provide additional TFRP investigation information.

  9. Exam Issues. IRM 5.9.4.3,Examination and Insolvency, provides guidance for addressing examination issues.

  10. LLCs. The specialist must identify the presence of LLCs. Consultation with Counsel is advised. IRM 5.9.13.14,Limited Liability Companies, provides more information about LLCs.

  11. Prior Bankruptcies. The specialist must check for evidence of prior bankruptcies and how they may affect tolling and bring into question the feasibility of the present plan of reorganization. In some instances debtors may contend, inasmuch as prior plans were supposed to have addressed the tax liabilities, those liabilities are no longer considered to be a tax claim.

5.9.9.5  (03-01-2007)
Chapter 12 Plans

  1. Timeframes. Generally a debtor is required to file a plan within 90 days of the petition date. A confirmation hearing is to be held within 45 days of the plan filing, but in practice the date for filing a plan is often extended. Plans range from three to five years. However, pursuant to 11 USC § 1222(b)(9), payment to secured claims may extend beyond five years.

  2. Notice to Creditors. Creditors must be given at least 20 days prior notice of the confirmation hearing. (See Federal Rules of Bankruptcy Procedure 2002(a)(8)).

  3. The Chapter 12 Plan. The bankruptcy specialist must secure a copy of the debtor’s plan and schedules as soon as possible for evaluation. 11 USC §§ 1222 and 1225 deal with Chapter 12 plans. The debtor's plan must provide for payment of the Service's claim as follows:

    1. Full payment of secured claims with post-confirmation interest;

    2. Full payment of priority claims in deferred cash payments unless the holder of the claim agrees to different treatment; and

      Note:

      For cases filed on or after October 17, 2005, Chapter 12 was amended to create an exception to the full-payment requirement for priority claims; tax claims that arise as a result of the disposition of any farm asset are treated as non-priority claims (11 USC § 1222(a)(2)(A)). Insolvency should contact Counsel when plans raise this issue.

    3. Payment of general unsecured claims in an amount not less than the IRS would receive in a Chapter 7 liquidation.

      Note:

      A feature unique to Chapter 12 bankruptcies allows plan payments to be due seasonally when the debtor receives income (such as, after the harvesting of crops).

    For cases filed on or after July 1, 2005, the plan may provide for postpetition interest on claims that are non-dischargeable, only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims (11 USC §§ 1222(b)(11) and 1228(a)(1) and (2)).

5.9.9.5.1  (03-01-2007)
Determinations of Tax Implications of Chapter 12 Plans

  1. Tax Effects of Proposed Plans. BAPCPA amended 11 USC § 1231(b) allowing bankruptcy courts to authorize proponents of Chapter 12 plans to request determinations of the federal income tax effects of proposed plans of reorganization, limited to questions of law. Should a controversy arise between the Service and the debtor, the court may declare the tax effects of a proposed plan after the earlier of the date on which the governmental unit responds to the request or 270 days after the request.

  2. Mailing Address. Requests for determinations of income tax effects must be filed in writing with the Centralized Insolvency Operation, Post Office Box 21126, Philadelphia, PA 19114. The envelope must be marked, "Request for Determination of Tax Effects of Chapter 12 Plan."

  3. Required CIO Action. CIO clerks must forward the Chapter 12 determination requests via overnight carrier to the appropriate Examination PSP function within two business days of receipt at the CIO. PSP will complete all review and follow-up actions required.

  4. Timeframe. Within 270 days from receipt of a processable application, Examination will notify the plan proponent of the determination.

  5. Effects of Determination. Unless the bankruptcy court declares otherwise pursuant to 11 USC § 1231(b), a field office examining the debtor's return must follow the determination if:

    1. a copy of the determination is attached to the tax return to which it relates;

    2. the determination is properly reflected in the return;

    3. the representations upon which the determine was made reflected an accurate statement of the controlling facts;

    4. the transactions proposed in the plan were carried out substantially as proposed; and

    5. no change has occurred in the law that applies to the period during which the transactions were consummated.

5.9.9.5.2  (01-01-2006)
Plan Modification

  1. Modified Plans. Upon occasion, changed circumstances necessitate the debtor's modifying or amending a Chapter 12 plan either before or after confirmation. Insolvency should review a modification of a plan as carefully as if it were the original plan. Insolvency may confer with Counsel if plans require clarification. An objection may be needed to protect the government's interests.

  2. Modification after Confirmation. For cases filed on or after October 17, 2005, USC § 1229(d) lists exceptions to post-confirmation plan modifications. These exceptions serve to protect the debtor against any increase in payments beyond the debtor's disposable income and in particular, any increase in the last year of the plan, as no one but the debtor may seek payment increases under these circumstances.

5.9.9.6  (01-01-2006)
Reasons to Object to the Plan

  1. Inadequate Plan Provisions. If the plan does not provide for appropriate payment of the Service's claims, the Insolvency specialist should contact debtor's counsel to discuss the deficiencies. If the debtor can demonstrate acceptance of a deficient plan is in the best interests of the government, the case should be referred to Counsel recommending acceptance of the plan in lieu of objection. The referral must include the debtor's TIN(s).

    Note:

    This recommendation may be made only if no other creditor benefits to the detriment of the Service. Under no circumstances will the IRS accept less than would be recoverable in a Chapter 7 case.

  2. Decision Factors for Evaluating Deficient Plans. IRM 5.9.10.5.5(6),Factors for Evaluating Deficient Plans, lists factors to consider when determining if the IRS should agree to treatment of its claims that provides less than required by the Bankruptcy Code.

  3. Acceptance of Deficient Plans. If a debtor demonstrates agreeing to treatment different than is statutorily required under the Bankruptcy Code is in the government's best interest in his case, the specific payment terms must be incorporated into the debtor's plan of reorganization and are subject to the approval of the bankruptcy court. Provisions protecting the government's rights to collect upon a default in plan payments should be included in the terms of the plan. IRM 5.9.10.5.5(7),Acceptance of Deficient Plans , outlines other requirements for deficient plan provisions.

    Note:

    The AIS history must reflect the factors considered in the decision to accept treatment of the IRS's claims irrespective of Bankruptcy Code requirements.

  4. Prompt Objections. If debtor's counsel is unresponsive to Insolvency contacts, unable to demonstrate the government's best interest lies in agreeing to a different treatment of its claims than is required under the Bankruptcy Code, or the interests of the government are at risk, Insolvency must refer the case to Counsel to object to the plan if LEM 5.9.4 criteria are met.

  5. Contents of Objection Referral. IRM 5.9.10.5.5(9),Contents of Objection Referral, explains information needed on the referral to Counsel objecting to a deficient plan.

  6. Common Problems with Plans. The debtor may add provisions to a plan adversely affecting the Service's position. Insolvency should consult Counsel if the plan does not appear to provide for the IRS's claim. Common reasons for the Service's objection to a Chapter 12 plan include the following:

    1. The debtor does not meet the requirements for a Chapter 12 bankruptcy.

    2. The debtor is not in compliance.

    3. The plan is not feasible because payments to creditors provided by the plan are more than the debtor can generate after necessary living and operating expenses are taken into account.

    4. The plan proposes to discharge taxes not dischargeable under the Bankruptcy Code.

    5. The plan includes individual(s), other than the debtor, in the discharge (for example, seeking a discharge of a related Trust Fund Recovery Penalty for another responsible party).

    6. The plan allows the debtor to change provisions of the plan affecting the payment of the Service's claim without a court hearing, depriving the IRS of an opportunity to object.

    7. In lieu of cash payments, the plan proposes to distribute physical property to the IRS in payment of the IRS's claim. (See 11 USC § 1222(b) and IRM 5.9.9.7(3),When Property is Proposed as Payment);

    8. The plan allows for payments to be made outside the plan.

    9. All of the debtor’s disposable income is not committed to the plan while the general unsecured tax claim will not be paid in full under the plan.

    10. The plan proposes a balloon payment at the end of the plan instead of consistent regular payments throughout the plan.

    11. The plan discriminates against the general unsecured claims of the IRS by proposing to pay a larger percentage of the general unsecured claims of other creditors.

5.9.9.7  (01-01-2006)
Chapter 12 "Pay-out" Arrangements

  1. Debtor's Disposable Income. All of the debtor’s disposable income (which excludes amounts reasonably necessary for postpetition domestic support obligations) must be committed to the plan if unsecured claims are not paid in full (11 USC § 1225(b)(2)(A)).

  2. Secured Claims and Collateral. The time allowed for payment of secured claims must be evaluated on the nature and worth of the collateral securing the claim.

  3. When Property Is Proposed as Payment. While 11 USC § 1225(b)(1)(C) provides that a plan may be confirmed if the value of property being distributed under the plan is not less than the debtor's projected disposable income for the plan period, an objection to the plan may be in order if the plan proposes distribution of property in lieu of cash payments. Some factors to consider when determining if an objection is warranted are:

    • value of the property is less than the allowed amount of the claim

    • disposition of the property is burdensome or costly

    • costs may be incurred to store/maintain the property (i.e. livestock)

    • costs incurred to dispose of the property result in reduction of the value of the property to less than the allowed amount of the claim

    • overall not in the best interest of the government

    • holders of other claims in the same classification receive different or more favorable repayment options

    • proposes property in lieu of deferred cash payments to claims entitled to priority under 11 USC § 507, in violation of 11 USC § 1222(a)(2).

    If property, other than cash payments, is received as part of the plan, Insolvency should follow procedures in IRM 5.9.8.16.1, Disposition of Acquired Property.

    Note:

    Under no circumstance should the IRS accept less than would be recoverable in a Chapter 7 case.

5.9.9.8  (01-01-2006)
Confirmation

  1. Confirmed Plan. When no objections are filed, or after objections are resolved, the plan will be confirmed by the court. The trustee or DIP then begins distribution of the funds to the creditors. Once the court confirms the plan, it is incumbent upon the debtor to make it succeed.

5.9.9.9  (03-01-2007)
Monitoring Compliance

  1. Monitoring No Liability Cases. Insolvency must monitor Chapter 12 no liability cases for compliance until plan confirmation at which time the case can be closed on AIS.

  2. Monitoring Liability Cases. In Chapter 12 liability cases, Insolvency must monitor the debtor’s compliance from the petition date to the date the debtor’s case is discharged, dismissed, converted, or closed.

    1. Insolvency should establish a follow-up schedule to monitor plan payments after confirmation or use AIS plan reports.

    2. Systemic monitoring for Forms 941 can be conducted in the same manner as in Chapter 11 proceedings. (See IRM 5.9.8.11,Postpetition/Preconfirmation BMF Monitoring.)

    3. Manual monitoring for Form 943 will be necessary. However, the Last Return Amount code (LRA-CD) may be input with a TC 136 to cause postpetition Form 943 delinquencies to appear on the Postpetition Monitoring Report.

    4. If the debtor becomes delinquent in the plan payments, the Insolvency caseworker should contact the trustee, if one has been appointed, or the debtor-in-possession to determine the cause of and a cure for the delinquencies/default.

    5. If the debtor fails to comply with current filing and payment requirements, including plan payments, the Insolvency specialist must advise the debtor in writing of the non-compliance and give a deadline to come into full compliance.

    6. If a secured claim has been filed and has not been fully paid, Insolvency must make an NFTL refile determination during the window of time in which a lien may be refiled if that window occurs during the pendency of the bankruptcy. ( See IRM 5.9.5.9.2,Refiling of Liens.)

5.9.9.9.1  (03-01-2007)
Referral to Counsel

  1. Serious Delinquencies. The debtor may continue to incur significant postpetition tax liabilities, or problems with unfiled tax returns may continue. If the debtor is not addressing these concerns or cannot resolve them given present circumstances, the Insolvency caseworker must take appropriate actions to protect the government's interests.

  2. Referral. The debtor may have continuing non-compliance problems with plan provisions. If the debtor's explanation for the delinquencies is unsatisfactory, and the delinquencies are not cured, Insolvency should consider a referral to Counsel. The options generally available to the Service are to have the debtor's case dismissed or to have the stay lifted so administrative collection can be pursued.

5.9.9.9.2  (01-01-2006)
After-Acquired Property

  1. Property of the Estate. Much of the property the debtor acquires after the bankruptcy petition is filed becomes property of the bankruptcy estate. Therefore, such property is not subject to administrative collection (11 USC § 1207(a)).

5.9.9.9.3  (01-01-2006)
Postpetition Liabilities in Chapter 12

  1. No Provision for Postpetition Tax Debts. Unlike a Chapter 13 proceeding, no provision exists for filing claims for postpetition taxes of a debtor who is an individual in a Chapter 12 bankruptcy.

  2. Refer for Dismissal. If the debtor does not pay significant postpetition liabilities timely, Insolvency should consider a referral to have the bankruptcy dismissed. The specialist should make this decision early on; the court is more inclined to grant a dismissal request on a plan in its early stages, rather than to grant a dismissal on an advanced plan.

  3. Removal of Debtor as Debtor in Possession. Removal of the debtor as debtor-in-possession, allowing administration of the debtor's affairs to continue under the supervision of the trustee, pursuant to 11 USC § 1202, may be an appropriate alternative when the debtor is incurring postpetition liabilities (11 USC § 1204). Insolvency may consider a referral to have the debtor removed as a debtor in possession for cause including:

    • fraud

    • dishonesty

    • incompetence

    • gross mismanagement of the affairs of the debtor

5.9.9.10  (01-01-2006)
Conversions

  1. Conversion Only for Fraud. Unlike Chapters 11 and 13, Chapter 12 does not permit creditor motions for conversion to Chapter 7 unless the debtor has committed fraud in connection with the case (11 USC § 1208(d)). Referrals in a Chapter 12 proceeding, therefore, will usually request motions for dismissal rather than for conversion.


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