In Uncategorized on 08/01/2016 at 21:32

The Answer is None

 Charles A. Sisson and Maralee M. Sisson, 2016 T.C. Memo. 143, filed 8/1/16, prove that the difference between 11 and 13, when you’re talking about chapters in the Bankruptcy Act, is none.

Charles is fighting a SNOD, but everything is dropped or stipped out, except for the SE on Charles’ earnings during the lifetime of his Ch 11.

We had this discussion in my blogpost “I Call ‘Foul!’ 7/1/16, when Judge Holmes (I’ll skip the honorifics and epithets, because I just got back from dinner here in the Berkshires) burned up 18 (count ‘em, 18) pages on Ch 13 and SE in the Chang Bullock story.

Charles claims his bankruptcy estate should have picked up the SE, but Judge Morrison says no.

Charles worked for the IMF, and got paid, but international organizations don’t withhold FICA or FUTA.

There’s still a deficiency, even though the only tax is SE and not income. “A deficiency is generally defined as the tax owed minus the tax reported. Sec. 6211(a). For this purpose, the tax includes both the tax under section 1 and the self-employment tax under section 1401. Sec. 6211(a) (providing that tax includes tax imposed by subtitle A, sections 1 to 1563, and subtitle B, sections 2001 to 2801).” 2016 T. C. Memo. 143, at p. 7.

Payment for services performed for international organizations is exempt from FICA withholding by statute. Thus, such payments are subject either to SE or nothing. OK, says Charles, but the bankruptcy estate should pay, not me.

No, says Judge Morrison. “To sort out this contention, we consult sections 1398 and 1399. These provisions were added by the Bankruptcy Tax Act of 1980, Pub. L. No. 96-589, sec. 3(a)(1), 94 Stat. at 3397.” 2016 T. C. Memo. 143, at pp. 10-11.

What Charles earned is in fact the property of the estate. It belonged to the estate and had to be administered in accordance with the Plan. Charles shouldn’t have included his earnings on his 1040. The estate had to pick up the income tax.

But SE is another story.

“Self-employment income is defined as the net earnings from self-employment derived by an individual. Sec. 1402(b). The net earnings from self-employment are defined as the gross income derived by an individual from a trade or business, less deductions. Sec. 1402(a). Thus, the self-employment tax is not a tax on taxable income. It is therefore not the tax imposed on the bankruptcy estate by section 1398(c)(1). Section 1398 includes no other provision, apart from section 1398(c)(1), imposing tax liability on a bankruptcy estate. Because section 1398(c)(1) imposes the section 1 tax on the bankruptcy estate, but not the self-employment tax, we infer that Congress did not intend a bankruptcy estate to be subject to the self-employment tax. We conclude that a bankruptcy estate is not liable for the self-employment tax.” 2016 T. C. 143, at pp. 13-14. (Footnote omitted).

Here’s the omitted footnote. “Our conclusion is consistent with the IRS’s published guidance in Notice 2006-83, sec. 4.02, 2006-2 C.B. 596, 598. However, we do not rely on the notice or give it the deference that would be due a regulation.” 2016 T.C. 143, at p. 14, footnote 8. (Citation omitted).

So Charles, pay up. And Charles, meet Chang.


  1. […] Taishoff, WHAT’S THE DIFFERENCE BETWEEN 11 AND 13?. “Charles A. Sisson and Maralee M. Sisson, 2016 T.C. Memo. 143, filed 8/1/16, prove that the […]


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