Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-94

1973-1 C.B. 322

Sec. 641

IRS Headnote

A fiduciary for an insolvent taxpayer's estate should file returns to report liquidation proceeds and expenses and otherwise assume responsibilities applicable to a trustee in bankruptcy.

Full Text

Rev. Rul. 73-94

Advice has been requested concerning the Federal income tax consequences resulting from the situation described below.

An individual, who reports his income using the cash receipts and disbursements method of accounting, became insolvent and made a general assignment of all of his nonexempt property to a trustee approved by the local court for the benefit of his creditors in accordance with the provisions of the insolvency law of the state in which he resided. At the time of assignment he owned no property and had no liabilities outside of the state.

Under the insolvency law of the state where the taxpayer resided, the general assignment for the benefit of creditors vested the trustee with the title to all the property that was not exempt from execution and that belonged to the debtor at the time of making the assignment. The trustee liquidated the property and, after payment of expenses, divided the remaining proceeds among the taxpayer's creditors in proportion to the amount of their respective claims. Upon completion of the insolvency proceedings, the taxpayer was discharged from any further obligations to his creditors.

Section 641(a) of the Internal Revenue Code of 1954 provides, in part, that the taxes imposed by chapter 1 of the Code, relating to income taxes on individuals, shall apply to the taxable income of estates or of any kind of property held in trust.

In the instant case, the consequences of the insolvency proceedings under state law were equivalent to those which would have resulted under a Federal bankruptcy proceeding. Therefore, an estate to which the provisions of section 641(a) of the Code apply was created and became subject to substantially the same rules that are applicable to a trustee in bankruptcy.

Revenue Ruling 68-48, 1968-1 C.B. 301, sets forth the position of the Service on the procedural obligations and substantive rules applicable to a trustee in bankruptcy or a bankrupt partnership.

Accordingly, the fiduciary of the insolvent taxpayer's estate should file Federal income tax returns for the estate on Form 1041, report the proceeds from the sale or other liquidating disposition of the property assigned to him, deduct payment of the expenses incurred in the administration of the estate, and otherwise comply with the procedural and substantive responsibilities applicable to trustees in bankruptcy as set forth in Revenue Ruling 68-48.