Section 4. APPLICATION OF THE

SELF-EMPLOYMENT TAX

.01 Section 1401 of the Internal Revenue Code imposes a tax upon the self-employment income of every individual. The term “self-employment income” means the net earnings from self-employment derived by an individual. I.R.C. § 1402(b). The term “net earnings from self-employment” means, in relevant part, the gross income derived by an individual from any trade or business carried on by such individual less deductions allowed attributable to such trade or business. I.R.C. § 1402(a).

.02 Under section 1115 of the Bankruptcy Code, the earnings from a Chapter 11 debtor’s post-petition services, including the debtor’s self-employment income, constitute property of the estate under section 1115. As property of the estate, the income from post-petition services is includible in the income of the bankruptcy estate, rather than the income of the debtor. I.R.C. § 1398(e)(1). However, neither section 1115 of the Bankruptcy Code nor section 1398 of the Internal Revenue Code addresses the application of the self-employment tax to the earnings from the individual debtor’s continuing services. Because the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report on Schedule

2006–40 I.R.B. 598 October 2, 2006

must be in accordance with all the rules stated in sections 2.09, 2.10, 2.11, 2.12, and 2.13 of this notice.

.03 The debtor must attach a statement to his or her income tax return stating that he or she filed a Chapter 11 bankruptcy case. The statement must reflect the foregoing allocations of income and withheld income tax and must describe the method used to allocate income and withheld tax between the debtor and the estate. The statement should list the filing date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, and the bankruptcy estate’s EIN. The debtor in possession or trustee must attach a similar statement to the income tax return of the estate.

.04 The following model statement may be used by debtors, debtors in possession and trustees in complying with the requirements of section 6 of this notice:

if one is appointed, must allocate in a reasonable manner wages, salary, or other compensation reported in box 1 and the withheld income tax reported in box 2 of Form W–2 between the debtor and the estate. The allocations must be in accordance with all the rules stated in sections 2.09, 2.10, 2.11, 2.12, and 2.13 of this notice. If reasonable, the debtor and trustee may use a simple percentage method for allocating income and withheld income tax between the debtor and the estate. The same method used to allocate income must be used to allocate withheld income tax. For example, if one-sixth of the wages reported on Form W–2 for the calendar year ending December 31, 2005, was earned after the commencement of the case and must therefore be included in the estate’s gross income, one-sixth of the withheld income tax reported on Form W–2 must be claimed as a credit on the estate’s income tax return and five-sixths of the withheld income tax must be claimed as a credit on

the debtor’s income tax return. See I.R.C. § 31(a).

.02 In some cases, persons filing information returns may report to the debtor gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate using Forms 1099–INT, 1099–DIV, 1099–MISC, Schedule K–1 or other information returns. This may occur, for instance, if the debtor in possession fails to notify the payor of the bankruptcy in accordance with section 3.03. In these cases, the debtor in possession, or the trustee, must allocate the improperly reported income in a reasonable manner between the debtor and the estate. In general, the allocation must ensure that any income (and any income tax withheld) attributable to the post-petition period is reported on the estate’s return, and any income (and income tax withheld) attributable to the pre-petition period is reported on the debtor’s return. The allocations, however,

Notice 2006–83 Statement

Pending Bankruptcy Case

The taxpayer, , filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on in the Bankruptcy Court for the District of . The bankruptcy court case number is . Gross income, and withheld federal income tax, reported on Form W–2, Forms 1099, K–1, Schedule K–1, and other information returns received under the taxpayer’s name and social security number (or other taxpayer identification number) are allocated between the taxpayer and the bankruptcy estate (EIN - ) as follows, using [ describe allocation method ]:

Year Taxpayer Estate

1. Form W–2 from Co. $ $

Withheld income tax shown on Form W–2 $ $

2. Form 1099–INT from

Bank $ $

Withheld income tax (if any) shown on Form 1099–INT $ $

3. Form 1099–DIV from Co. $ $

Withheld income tax (if any) shown on Form 1099–DIV $ $

4. Form 1099–MISC from Co. $ $

Withheld income tax (if any) shown on Form 1099–MISC $ $

October 2, 2006 599 2006–40 I.R.B.