(a)(1) Except as provided in paragraph (2) of this subsection, the 
court may determine the amount or legality of any tax, any fine or 
penalty relating to a tax, or any addition to tax, whether or not 
previously assessed, whether or not paid, and whether or not contested 
before and adjudicated by a judicial or administrative tribunal of 
competent jurisdiction.
    (2) The court may not so determine--
        (A) the amount or legality of a tax, fine, penalty, or addition 
    to tax if such amount or legality was contested before and 
    adjudicated by a judicial or administrative tribunal of competent 
    jurisdiction before the commencement of the case under this title; 
    or
        (B) any right of the estate to a tax refund, before the earlier 
    of--
            (i) 120 days after the trustee properly requests such refund 
        from the governmental unit from which such refund is claimed; or
            (ii) a determination by such governmental unit of such 
        request.

    (b) A trustee may request a determination of any unpaid liability of 
the estate for any tax incurred during the administration of the case by 
submitting a tax return for such tax and a request for such a 
determination to the governmental unit charged with responsibility for 
collection or determination of such tax. Unless such return is 
fraudulent, or contains a material misrepresentation, the trustee, the 
debtor, and any successor to the debtor are discharged from any 
liability for such tax--
        (1) upon payment of the tax shown on such return, if--
            (A) such governmental unit does not notify the trustee, 
        within 60 days after such request, that such return has been 
        selected for examination; or
            (B) such governmental unit does not complete such an 
        examination and notify the trustee of any tax due, within 180 
        days after such request or within such additional time as the 
        court, for cause, permits;

        (2) upon payment of the tax determined by the court, after 
    notice and a hearing, after completion by such governmental unit of 
    such examination; or
        (3) upon payment of the tax determined by such governmental unit 
    to be due.

    (c) Notwithstanding section 362 of this title, after determination 
by the court of a tax under this section, the governmental unit charged 
with responsibility for collection of such tax may assess such tax 
against the estate, the debtor, or a successor to the debtor, as the 
case may be, subject to any otherwise applicable law.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2582; Pub. L. 98-353, title III, 
Sec. 447, July 10, 1984, 98 Stat. 374.)


                      Historical and Revision Notes

                         legislative statements

    Section 505 of the House amendment adopts a compromise position with 
respect to the determination of tax liability from the position taken in 
H.R. 8200 as passed by the House and in the Senate amendment.
    Determinations of tax liability: Authority of bankruptcy court to 
rule on merits of tax claims.--The House amendment authorizes the 
bankruptcy court to rule on the merits of any tax claim involving an 
unpaid tax, fine, or penalty relating to a tax, or any addition to a 
tax, of the debtor or the estate. This authority applies, in general, 
whether or not the tax, penalty, fine, or addition to tax had been 
previously assessed or paid. However, the bankruptcy court will not have 
jurisdiction to rule on the merits of any tax claim which has been 
previously adjudicated, in a contested proceeding, before a court of 
competent jurisdiction. For this purpose, a proceeding in the U.S. Tax 
Court is to be considered ``contested'' if the debtor filed a petition 
in the Tax Court by the commencement of the case and the Internal 
Revenue Service had filed an answer to the petition. Therefore, if a 
petition and answer were filed in the Tax Court before the title II 
petition was filed, and if the debtor later defaults in the Tax Court, 
then, under res judicata principles, the bankruptcy court could not then 
rule on the debtor's or the estate's liability for the same taxes.
    The House amendment adopts the rule of the Senate bill that the 
bankruptcy court can, under certain conditions, determine the amount of 
tax refund claim by the trustee. Under the House amendment, if the 
refund results from an offset or counterclaim to a claim or request for 
payment by the Internal Revenue Service, or other tax authority, the 
trustee would not first have to file an administrative claim for refund 
with the tax authority.
    However, if the trustee requests a refund in other situations, he 
would first have to submit an administrative claim for the refund. Under 
the House amendment, if the Internal Revenue Service, or other tax 
authority does not rule on the refund claim within 120 days, then the 
bankruptcy court may rule on the merits of the refund claim.
    Under the Internal Revenue Code [title 26], a suit for refund of 
Federal taxes cannot be filed until 6 months after a claim for refund is 
filed with the Internal Revenue Service (sec. 6532(a) [title 26]). 
Because of the bankruptcy aim to close the estate as expeditiously as 
possible, the House amendment shortens to 120 days the period for the 
Internal Revenue Service to decide the refund claim.
    The House amendment also adopts the substance of the Senate bill 
rule permitting the bankruptcy court to determine the amount of any 
penalty, whether punitive or pecuniary in nature, relating to taxes over 
which it has jurisdiction.
    Jurisdiction of the tax court in bankruptcy cases: The Senate 
amendment provided a detailed series of rules concerning the 
jurisdiction of the U.S. Tax Court, or similar State or local 
administrative tribunal to determine personal tax liabilities of an 
individual debtor. The House amendment deletes these specific rules and 
relies on procedures to be derived from broad general powers of the 
bankruptcy court.
    Under the House amendment, as under present law, a corporation 
seeking reorganization under chapter 11 is considered to be personally 
before the bankruptcy court for purposes of giving that court 
jurisdiction over the debtor's personal liability for a nondischargeable 
tax.
    The rules are more complex where the debtor is an individual under 
chapter 7, 11, or 13. An individual debtor or the tax authority can, as 
under section 17c of the present Bankruptcy Act [section 35(c) of former 
title 11], file a request that the bankruptcy court determine the 
debtor's personal liability for the balance of any nondischargeable tax 
not satisfied from assets of the estate. The House amendment intends to 
retain these procedures and also adds a rule staying commencement or 
continuation of any proceeding in the Tax Court after the bankruptcy 
petition is filed, unless and until that stay is lifted by the 
bankruptcy judge under section 362(a)(8). The House amendment also stays 
assessment as well as collection of a prepetition claim against the 
debtor (sec. 362(a)(6)). A tax authority would not, however, be stayed 
from issuing a deficiency notice during the bankruptcy case (sec. 
(b)(7)) [sec. 362(b)(8)]. The Senate amendment repealed the existing 
authority of the Internal Revenue Service to make an immediate 
assessment of taxes upon bankruptcy (sec. 6871(a) of the code [title 
26]. See section 321 of the Senate bill. As indicated, the substance of 
that provision, also affecting State and local taxes, is contained in 
section 362(a)(6) of the House amendment. The statute of limitations is 
tolled under the House amendment while the bankruptcy case is pending.
    Where no proceeding in the Tax Court is pending at the commencement 
of the bankruptcy case, the tax authority can, under the House 
amendment, file a claim against the estate for a prepetition tax 
liability and may also file a request that the bankruptcy court hear 
arguments and decide the merits of an individual debtor's personal 
liability for the balance of any nondischargeable tax liability not 
satisfied from assets of the estate. Bankruptcy terminology refers to 
the latter type of request as a creditor's complaint to determine the 
dischargeability of a debt. Where such a complaint is filed, the 
bankruptcy court will have personal jurisdiction over an individual 
debtor, and the debtor himself would have no access to the Tax Court, or 
to any other court, to determine his personal liability for 
nondischargeable taxes.
    If a tax authority decides not to file a claim for taxes which would 
typically occur where there are few, if any, assets in the estate, 
normally the tax authority would also not request the bankruptcy court 
to rule on the debtor's personal liability for a nondischargeable tax. 
Under the House amendment, the tax authority would then have to follow 
normal procedures in order to collect a nondischargeable tax. For 
example, in the case of nondischargeable Federal income taxes, the 
Internal Revenue Service would be required to issue a deficiency notice 
to an individual debtor, and the debtor could then file a petition in 
the Tax Court--or a refund suit in a district court--as the forum in 
which to litigate his personal liability for a nondischargeable tax.
    Under the House amendment, as under present law, an individual 
debtor can also file a complaint to determine dischargeability. 
Consequently, where the tax authority does not file a claim or a request 
that the bankruptcy court determine dischargeability of a specific tax 
liability, the debtor could file such a request on his own behalf, so 
that the bankruptcy court would then determine both the validity of the 
claim against assets in the estate and also the personal liability of 
the debtor for any nondischargeable tax.
    Where a proceeding is pending in the Tax Court at the commencement 
of the bankruptcy case, the commencement of the bankruptcy case 
automatically stays further action in the Tax Court case unless and 
until the stay is lifted by the bankruptcy court. The Senate amendment 
repealed a provision of the Internal Revenue case barring a debtor from 
filing a petition in the Tax Court after commencement of a bankruptcy 
case (sec. 6871(b) of the code [26 U.S.C. 6871(b)]). See section 321 of 
the Senate bill. As indicated earlier, the equivalent of the code 
amendment is embodied in section 362(a)(8) of the House amendment, which 
automatically stays commencement or continuation of any proceeding in 
the Tax Court until the stay is lifted or the case is terminated. The 
stay will permit sufficient time for the bankruptcy trustee to determine 
if he desires to join the Tax Court proceeding on behalf of the estate. 
Where the trustee chooses to join the Tax Court proceeding, it is 
expected that he will seek permission to intervene in the Tax Court case 
and then request that the stay on the Tax Court proceeding be lifted. In 
such a case, the merits of the tax liability will be determined by the 
Tax Court, and its decision will bind both the individual debtor as to 
any taxes which are nondischargeable and the trustee as to the tax claim 
against the estate.
    Where the trustee does not want to intervene in the Tax Court, but 
an individual debtor wants to have the Tax Court determine the amount of 
his personal liability for nondischargeable taxes, the debtor can 
request the bankruptcy court to lift the automatic stay on existing Tax 
Court proceedings. If the stay is lifted and the Tax Court reaches its 
decision before the bankruptcy court's decision on the tax claim against 
the estate, the decision of the Tax Court would bind the bankruptcy 
court under principles of res judicata because the decision of the Tax 
Court affected the personal liability of the debtor. If the trustee does 
not wish to subject the estate to the decision of the Tax Court if the 
latter court decides the issues before the bankruptcy court rules, the 
trustee could resist the lifting of the stay on the existing Tax Court 
proceeding. If the Internal Revenue Service had issued a deficiency 
notice to the debtor before the bankruptcy case began, but as of the 
filing of the bankruptcy petition the 90-day period for filing in the 
Tax Court was still running, the debtor would be automatically stayed 
from filing a petition in the Tax Court. If either the debtor or the 
Internal Revenue Service then files a complaint to determine 
dischargeability in the bankruptcy court, the decision of the bankruptcy 
court would bind both the debtor and the Internal Revenue Service.
    The bankruptcy judge could, however, lift the stay on the debtor to 
allow him to petition the Tax Court, while reserving the right to rule 
on the tax authority's claim against assets of the estate. The 
bankruptcy court could also, upon request by the trustee, authorize the 
trustee to intervene in the Tax Court for purposes of having the estate 
also governed by the decision of the Tax Court.
    In essence, under the House amendment, the bankruptcy judge will 
have authority to determine which court will determine the merits of the 
tax claim both as to claims against the estate and claims against the 
debtor concerning his personal liability for nondischargeable taxes. 
Thus, if the Internal Revenue Service, or a State or local tax 
authority, files a petition to determine dischargeability, the 
bankruptcy judge can either rule on the merits of the claim and continue 
the stay on any pending Tax Court proceeding or lift the stay on the Tax 
Court and hold the dischargeability complaint in abeyance. If he rules 
on the merits of the complaint before the decision of the Tax Court is 
reached, the bankruptcy court's decision would bind the debtor as to 
nondischargeable taxes and the Tax Court would be governed by that 
decision under principles of res judicata. If the bankruptcy judge does 
not rule on the merits of the complaint before the decision of the Tax 
Court is reached, the bankruptcy court will be bound by the decision of 
the Tax Court as it affects the amount of any claim against the debtor's 
estate.
    If the Internal Revenue Service does not file a complaint to 
determine dischargeability and the automatic stay on a pending Tax Court 
proceeding is not lifted, the bankruptcy court could determine the 
merits of any tax claim against the estate. That decision will not bind 
the debtor personally because he would not have been personally before 
the bankruptcy court unless the debtor himself asks the bankruptcy court 
to rule on his personal liability. In any such situation where no party 
filed a dischargeability petition, the debtor would have access to the 
Tax Court to determine his personal liability for a nondischargeable tax 
debt. While the Tax Court in such a situation could take into account 
the ruling of the bankruptcy court on claims against the estate in 
deciding the debtor's personal liability, the bankruptcy court's ruling 
would not bind the Tax Court under principles of res judicata, because 
the debtor, in that situation, would not have been personally before the 
bankruptcy court.
    If neither the debtor nor the Internal Revenue Service files a claim 
against the estate or a request to rule on the debtor's personal 
liability, any pending tax court proceeding would be stayed until the 
closing of the bankruptcy case, at which time the stay on the tax court 
would cease and the tax court case could continue for purposes of 
deciding the merits of the debtor's personal liability for 
nondischargeable taxes.
    Audit of trustee's returns: Under both bills, the bankruptcy court 
could determine the amount of any administrative period taxes. The 
Senate amendment, however, provided for an expedited audit procedure, 
which was mandatory in some cases. The House amendment (sec. 505(b)), 
adopts the provision of the House bill allowing the trustee discretion 
in all cases whether to ask the Internal Revenue Service, or State or 
local tax authority for a prompt audit of his returns on behalf of the 
estate. The House amendment, however, adopts the provision of the Senate 
bill permitting a prompt audit only on the basis of tax returns filed by 
the trustee for completed taxable periods. Procedures for a prompt audit 
set forth in the Senate bill are also adopted in modified form.
    Under the procedure, before the case can be closed, the trustee may 
request a tax audit by the local, State or Federal tax authority of all 
tax returns filed by the trustee. The taxing authority would have to 
notify the trustee and the bankruptcy court within 60 days whether it 
accepts returns or desires to audit the returns more fully. If an audit 
is conducted, the taxing authority would have to notify the trustee of 
tax deficiency within 180 days after the original request, subject to 
extensions of time if the bankruptcy court approves. If the trustee does 
not agree with the results of the audit, the trustee could ask the 
bankruptcy court to resolve the dispute. Once the trustee's tax 
liability for administration period taxes has thus been determined, the 
legal effect in a case under chapter 7 or 11 would be to discharge the 
trustee and any predecessor of the trustee, and also the debtor, from 
any further liability for these taxes.
    The prompt audit procedure would not be available with respect to 
any tax liability as to which any return required to be filed on behalf 
of the estate is not filed with the proper tax authority. The House 
amendment also specifies that a discharge of the trustee or the debtor 
which would otherwise occur will not be granted, or will be void if the 
return filed on behalf of the estate reflects fraud or material 
misrepresentation of facts.
    For purposes of the above prompt audit procedures, it is intended 
that the tax authority with which the request for audit is to be filed 
is, as the Federal taxes, the office of the District Director in the 
district where the bankruptcy case is pending.
    Under the House amendment, if the trustee does not request a prompt 
audit, the debtor would not be discharged from possible transferee 
liability if any assets are returned to the debtor.
    Assessment after decision: As indicated above, the commencement of a 
bankruptcy case automatically stays assessment of any tax (sec. 
362(a)(6)). However, the House amendment provides (sec. 505(c)) that if 
the bankruptcy court renders a final judgment with regard to any tax 
(under the rules discussed above), the tax authority may then make an 
assessment (if permitted to do so under otherwise applicable tax law) 
without waiting for termination of the case or confirmation of a 
reorganization plan.
    Trustee's authority to appeal tax cases: The equivalent provision in 
the House bill (sec. 505(b)) and in the Senate bill (sec. 362(h)) 
authorizing the trustee to prosecute an appeal or review of a tax case 
are deleted as unnecessary. Section 541(a) of the House amendment 
provides that property of the estate is to include all legal or 
equitable interests of the debtor. These interests include the debtor's 
causes of action, so that the specific provisions of the House and 
Senate bills are not needed.


                        senate report no. 95-989

    Subsections (a) and (b) are derived, with only stylistic changes, 
from section 2a(2A) of the Bankruptcy Act [section 11(a)(2A) of former 
title 11]. They permit determination by the bankruptcy court of any 
unpaid tax liability of the debtor that has not been contested before or 
adjudicated by a judicial or administrative tribunal of competent 
jurisdiction before the bankruptcy case, and the prosecution by the 
trustee of an appeal from an order of such a body if the time for review 
or appeal has not expired before the commencement of the bankruptcy 
case. As under current Bankruptcy Act Sec. 2a (2A), Arkansas Corporation 
Commissioner v. Thompson, 313 U.S. 132 (1941), remains good law to 
permit abstention where uniformity of assessment is of significant 
importance.
    Section (c) deals with procedures for obtaining a prompt audit of 
tax returns filed by the trustee in a liquidation or reorganization 
case. Under the bill as originally introduced, a trustee who is ``in 
doubt'' concerning tax liabilities of the estate incurred during a title 
11 proceeding could obtain a discharge from personal liability for 
himself and the debtor (but not for the debtor or the debtor's successor 
in a reorganization), provided that certain administrative procedures 
were followed. The trustee could request a prompt tax audit by the 
local, State, or Federal governmental unit. The taxing authority would 
have to notify the trustee and the court within sixty days whether it 
accepted the return or desired to audit the returns more fully. If an 
audit were conducted, the tax office would have to notify the trustee of 
any tax deficiency within 4 months (subject to an extension of time if 
the court approved). These procedures would apply only to tax years 
completed on or before the case was closed and for which the trustee had 
filed a tax return.
    The committee bill eliminates the ``in doubt'' rule and makes 
mandatory (rather than optional) the trustee's request for a prompt 
audit of the estate's tax returns. In many cases, the trustee could not 
be certain that his returns raised no doubt about possible tax issues. 
In addition, it is desirable not to create a situation where the taxing 
authority asserts a tax liability against the debtor (as transferee of 
surplus assets, if any, return to him) after the case is over; in any 
such situation, the debtor would be called on to defend a tax return 
which he did not prepare. Under the amendment, all disputes concerning 
these returns are to be resolved by the bankruptcy court, and both the 
trustee and the debtor himself do not then face potential post-
bankruptcy tax liabilities based on these returns. This result would 
occur as to the debtor, however, only in a liquidation case.
    In a reorganization in which the debtor or a successor to the debtor 
continues in existence, the trustee could obtain a discharge from 
personal liability through the prompt audit procedure, but the Treasury 
could still claim a deficiency against the debtor (or his successor) for 
additional taxes due on returns filed during the title 11 proceedings.


                         house report no. 95-595

    Subsection (c) is new. It codifies in part the referee's decision in 
In re Statmaster Corp., 465 F.2d 987 (5th Cir. 1972). Its purpose is to 
protect the trustee from personal liability for a tax falling on the 
estate that is not assessed until after the case is closed. If necessary 
to permit expeditious closing of the case, the court, on request of the 
trustee, must order the governmental unit charged with the 
responsibility for collection or determination of the tax to audit the 
trustee's return or be barred from attempting later collection. The 
court will be required to permit sufficient time to perform an audit, if 
the taxing authority requests it. The final order of the court and the 
payment of the tax determined in that order discharges the trustee, the 
debtor, and any successor to the debtor from any further liability for 
the tax. See Plumb, The Tax Recommendations of the Commission on the 
Bankruptcy Laws: Tax Procedures, 88 Harv. L. Rev. 1360, 1423-42 (1975).


                               Amendments

    1984--Subsec. (a)(2)(B)(i). Pub. L. 98-353 substituted ``or'' for 
``and''.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in section 106 of this title; title 26 
sections 6212, 6512, 6532, 7437; title 28 section 2201.