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Does S corp bankruptcy get rid of the corporation owed state income taxes?

San Clemente, CA |

If an S corp is owing state income tax for prior years, does bankrupting the s-corp get rid of this liability or is it passed through to the shareholders?

Attorney Answers 5

  1. The general rule is that you cannot discharge the income taxes in bankruptcy unless they became due more than 3 years before the filing. In other words, if tax year in question was 2007 and tax return timely filed, April 16 2011 or later filing will discharge 2007 taxes. There are exceptions and other restrictions. You should consult a bankruptcy attorney about your specific facts.

    The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the State of California. Responses are based solely on California law unless stated otherwise.

  2. Note that payroll taxes, trust fund taxes, sales taxes are not subject to discharge in bankruptcy, so first you need to determine all applicable taxes that remain outstanding. Assuming there is only income taxes, then generally speaking, state income taxes may be discharged if they are old enough and meet the following conditions:

    1. The tax is for a year for which a tax return is last due more than three years prior to the filing of the bankruptcy petition;

    2. A tax return was filed more than two years prior to the filing of the bankruptcy petition;

    3. The tax was assessed more than 240 days prior to the filing of the bankruptcy petition;

    4. The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;

    5. The tax was not assessable at the time of the filing of the bankruptcy petition; and

    6. The tax was unsecured.

    You should meet with a bankruptcy attorney with tax experience to discuss your specifics.

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    The information in this answer is for general information purposes only. Nothing on this communication should be taken as legal advice for any case or situation. Nothing herein is intended as legal advice. You should not rely upon any information as a source of legal advice, and your receipt or viewing of any such information does not create an attorney-client relationship between you and James E. Pratt.

    IRS Circular 230 Disclosure: To comply with requirements imposed by the IRS, we inform you that any U. S. federal tax advice contained herein (including any attachments), unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter herein.

  3. I agree with my other colleagues in their responses to your question.

    HOWEVER, as you indicated this is an "S" Corporation, there may be other issues requiring discussion with an Orange County Bankruptcy attorney. I would be more than happy to discuss this with you. Please feel free to call my office and as for me, Elliott Stone.

    Elliott H. Stone, Esq.

  4. You should talk with your bankruptcy attorney about this issue. There are certain requirements that must be met to discharge income taxes. This can get complicated and your individual situation needs to be reviewed carefully to see if your taxes qualify, what chapter you filed under, and that they were properly listed on your bankruptcy petition.

    Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

  5. A couple of points to add to the above:

    First point: An S Corporation does not owe income taxes. The income is passed through to the shareholders and they owe the income tax.

    Second point: When an individual goes through a chapter 7 bankruptcy, life goes on for the individual and his debts are discharged. He gets a fresh start. But when a corporation goes through a chapter 7 bankruptcy the corporation does not get a fresh start. The corporation dies - it is liquidated under the supervision of the bankruptcy court. It's debts are not discharged.

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