The intersection between the tax law and the bankruptcy law can be a dangerous place to stand. Each discipline has its own underlying concepts, complex statute, and set of judicial doctrines, and the results can be unpredictablefor a bankrupt and its owners, as well as for the Internal Revenue Service (IRS)when the two worlds collide.1
The interplay between the Internal Revenue Code (IRC) and the “Bankruptcy Code”2 was recently addressed by the U.S. Bankruptcy Court for the District of Delaware in a case involving special tax rules applicable to “S corporations” and “qualified subchapter S subsidiaries.”3 Perhaps unsurprisingly, the court’s decision favored the bankrupt corporation that was under the court’s jurisdiction, to the detriment of the corporation’s indirect shareholder and possibly of the IRS as well.4
Relevant Tax Rules
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