Section 2. BACKGROUND AND

GENERAL LEGAL PRINCIPLES

.01 The commencement of a bankruptcy case creates an estate, which generally includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). Specific exclusions apply, however. See 11 U.S.C. § 541(b) (excluded property). See also 11 U.S.C. § 522 (exempt property); 11 U.S.C. § 554 (abandoned property). Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. By contrast, property excluded from the estate is never included in the estate.

.02 Confirmation of a Chapter 11 plan of reorganization generally vests all the property of the estate in the debtor, except as otherwise provided in the plan or in the court order confirming the plan. 11 U.S.C. § 1141(b). If no plan is confirmed and a bankruptcy case is dismissed, the property of the estate generally revests in the debtor, unless the court orders otherwise. 11 U.S.C. § 349(b)(3). .03 When a trustee is appointed pursuant to section 1104 of the Bankruptcy Code, the debtor generally must turn over to the trustee control over the assets of the bankruptcy estate. In most Chapter 11 cases, a trustee is not appointed and the debtor (referred to as the debtor in possession) remains in control of the property of the bankruptcy estate. Under section 1107(a) of the Bankruptcy Code, the debtor in possession must perform all the functions and duties of a trustee, except for the duties specified in Bankruptcy Code section 1106(a)(2), (3) and (4).

.04 Because the bankruptcy estate is a separate taxable entity, the trustee or debtor in possession must obtain an employer identification number (EIN) for the estate. I.R.C. § 6109. The trustee or debtor in possession uses the EIN on any tax returns filed for the estate.

.05 Section 1398(e)(1) of the Code provides that the gross income of the estate includes the gross income of the debtor to which the estate is entitled under the Bankruptcy Code. Section 1398(e)(2) provides that the gross income of the debtor does not include any item to the extent the item is included in the gross income of the bankruptcy estate.

The Service will treat elections as effective under § 355(b)(3)(C) if they are made in the form and manner as set forth in this notice. The Service will also treat elections as effective under § 355(b)(3)(C) if they are made in a different form and manner, provided that the form and manner of the election apprise the Service that an election has been made with respect to a particular transaction and by particular parties.

PROCEDURES

If a distributing corporation makes a distribution of stock or securities of a controlled corporation in a transaction described in § 355(b)(3)(C)(i), (ii), or (iii), it intends that the distribution not qualify under § 355(a), and it is making the election described in § 355(b)(3)(C) to ensure that result, the distributing corporation may make a valid election by including a statement as described below on or with its tax return filed by the due date (including extensions) for filing its original return for the taxable year in which the distribution occurs.

The statement should be titled “ELECTION PURSUANT TO NOTICE 2006–81 BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY)], A DISTRIBUTING CORPORATION.” The statement should provide the names and taxpayer identification numbers, if any, of the distributing and controlled corporations and should include a representation that the distributing corporation is eligible to make the election described in this notice and that the distributing corporation elects to have § 355(b)(3) apply to its distribution.

EFFECTIVE DATE

This notice is effective for all elections under § 355(b)(3)(C).

DRAFTING INFORMATION

The principal author of this notice is Sameera Y. Hasan of the Office of Associate Chief Counsel (Corporate). For further information regarding this notice, contact Sameera Y. Hasan at (202) 622–7770 (not a toll-free call).

Individual Chapter 11 Debtors

Notice 2006–83

This notice provides guidance for individuals who file bankruptcy cases under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 1101 et seq. ) on or after October 17, 2005. This notice also provides guidance for (1) employers of these individuals, (2) persons filing Forms and other information returns (including Schedule K–1) that report payments to these individuals, and (3) Chapter 11 trustees in bankruptcy cases filed by these individuals. Upon consideration of the comments received concerning this notice, as requested in section 7, additional guidance may be published.