Bankruptcy Taxation: A Comprehensive Guide for Law Students

Question 1

Which of the following is NOT a transferable tax attribute in a bankruptcy reorganization?

Accepted Answer

Charitable contributions

Answer

Net operating losses (NOLs)

Answer

Capital losses

Answer

Foreign tax credits

Question 2

Regarding the tax treatment of bankruptcy-related legal fees:

Accepted Answer

Legal fees may be deductible or non-deductible depending on the nature of the expense.

Answer

Legal fees are deductible as ordinary and necessary expenses.

Answer

Legal fees are non-deductible capital expenditures.

Answer

Legal fees are always considered personal expenses and are not deductible.

Question 3

In a Chapter 13 bankruptcy, the debtor's disposable income is determined as:

Accepted Answer

Current monthly income minus necessary expenses.

Answer

Current monthly income minus discretionary expenses.

Answer

Prior year's income minus current expenses.

Answer

Current monthly income minus all expenses.

Question 4

The purpose of the "fresh start" doctrine in bankruptcy includes:

Accepted Answer

Relieving debtors of overwhelming debts.

Answer

Punishing creditors for unfair behavior.

Answer

Encouraging business risk-taking.

Answer

Promoting economic equality.

Question 5

Factors considered by the court in determining whether to grant a discharge in a Chapter 7 bankruptcy do NOT include:

Accepted Answer

Debtor's age.

Answer

Debtor's ability to repay debts.

Answer

Debtor's prior bankruptcy filings.

Answer

Debtor's intent to deceive creditors.

Question 6

A secured debt in bankruptcy is characteristically different from an unsecured debt in that it:

Accepted Answer

Is backed by collateral.

Answer

Has a lower interest rate.

Answer

Is dischargeable.

Answer

Receives no special treatment in bankruptcy.

Question 7

The primary objective of a Chapter 11 bankruptcy filing is:

Accepted Answer

Simultaneously discharging debts and reorganizing finances.

Answer

Liquidating assets and distributing proceeds to creditors.

Answer

Appointing a trustee to manage the estate.

Answer

Providing a clean slate for individuals.

Question 8

What is the tax treatment of a debtor's discharge of indebtedness income?

Accepted Answer

Taxable as ordinary income

Answer

Excluded from gross income

Answer

Partially taxable as capital gain

Answer

Deductible as a loss

Question 9

What was the primary purpose of the Bankruptcy Tax Act of 1980?

Accepted Answer

To simplify the tax treatment of bankruptcy

Answer

To increase the tax burden on debtors

Answer

To provide tax incentives for bankruptcy

Answer

To eliminate the tax consequences of bankruptcy

Question 10

Which of the following is NOT a recognized type of bankruptcy reorganization under the Bankruptcy Code?

Accepted Answer

Chapter 14

Answer

Chapter 11

Answer

Chapter 12

Answer

Chapter 13

Question 11

In a Chapter 11 bankruptcy, which claim type takes precedence over a federal income tax lien filed before the bankruptcy petition was filed?

Accepted Answer

Administrative expenses

Answer

Secured claims

Answer

Unsecured claims

Question 12

In bankruptcy proceedings, which type of income is typically not taxable?

Accepted Answer

Retirement distributions

Answer

Wages

Answer

Investment gains

Answer

Lottery winnings

Question 13

In a Chapter 7 bankruptcy, the trustee's primary objective is to:

Accepted Answer

Liquidate assets and distribute proceeds to creditors

Answer

Grant a complete discharge of all debts

Answer

Rehabilitate the debtor and assist with financial management

Answer

Dismiss the case and reinstate the debtor's debts

Question 14

In a Chapter 13 bankruptcy, the purpose of the debt repayment plan is to:

Accepted Answer

Consolidate and reorganize debts into a single payment schedule

Answer

Eliminate all debts of the debtor

Answer

Halt collection actions temporarily

Answer

Liquidate assets and distribute proceeds to creditors

Question 15

In a bankruptcy proceeding, the debtor's attorney primarily serves to:

Accepted Answer

Counsel the debtor on legal rights and options

Answer

Represent creditors and safeguard their interests

Answer

Mediate between the debtor and creditors

Answer

Oversee the distribution of assets to creditors

Question 16

Which of the following is considered a secured debt in bankruptcy?

Accepted Answer

Mortgage debt

Answer

Credit card debt

Answer

Student loan debt

Answer

Personal loans

Question 17

In a Chapter 11 bankruptcy, the debtor's primary goal is to:

Accepted Answer

Reorganize and restructure financial obligations

Answer

Secure a complete discharge of all debts

Answer

Liquidate assets and distribute proceeds to creditors

Answer

Suspend collection actions temporarily

Question 18

In a bankruptcy proceeding, the bankruptcy judge's primary role is to:

Accepted Answer

Supervise the proceedings and make legal determinations

Answer

Represent the interests of creditors

Answer

Provide financial counseling to the debtor

Answer

Manage the distribution of assets to creditors

Question 19

In bankruptcy proceedings, what are the primary ethical considerations that tax professionals must address when representing debtors or creditors?

Accepted Answer

Tax professionals should be mindful of the ethical implications of their actions and avoid conflicts of interest.

Answer

Tax professionals have no ethical obligations to consider when representing clients in bankruptcy proceedings.

Answer

Tax professionals should prioritize their clients' interests above all else, even if it involves unethical behavior.

Question 20

Under which circumstance can the IRS file a proof of claim in a bankruptcy case?

Accepted Answer

When the debtor owes taxes that were due prior to the bankruptcy petition being filed

Answer

When the debtor has filed a fraudulent tax return

Answer

When the IRS believes that the debtor will not be able to pay all of their creditors

Answer

Only with the explicit authorization of the bankruptcy court

Question 21

What is the primary purpose of the automatic stay in bankruptcy?

Accepted Answer

To prevent creditors from collecting debts from the debtor

Answer

To provide the debtor time to file a reorganization plan

Answer

To enable the debtor to liquidate their assets and distribute the proceeds to creditors

Answer

To protect the debtor from being evicted from their residence

Question 22

What is the fundamental difference between a Chapter 7 and a Chapter 13 bankruptcy?

Accepted Answer

Chapter 7 involves liquidation, while Chapter 13 involves reorganization

Answer

Chapter 13 involves liquidation, while Chapter 7 involves reorganization

Answer

Chapter 7 is a voluntary bankruptcy, while Chapter 13 is an involuntary bankruptcy

Answer

Chapter 13 is a voluntary bankruptcy, while Chapter 7 is an involuntary bankruptcy

Question 23

How can bankruptcy proceedings affect an individual's existing estate plan?

Accepted Answer

Bankruptcy proceedings may invalidate trusts and wills if they are considered fraudulent transfers.

Answer

Bankruptcy proceedings have no impact on existing estate planning instruments.

Answer

Bankruptcy proceedings only affect estate planning instruments created after the bankruptcy petition is filed.

Answer

Bankruptcy proceedings only affect revocable estate planning instruments.

Question 24

Regarding income taxation during bankruptcy, which statement accurately reflects the general rule?

Accepted Answer

A debtor is liable for taxes on all income earned during the bankruptcy period.

Answer

A debtor is not subject to taxation on any income earned during the bankruptcy period.

Answer

A debtor is only taxed on income earned after the filing of the bankruptcy petition.

Answer

A debtor is only taxed on income earned after the closure of the bankruptcy estate.

Question 25

Which of the following deductions is specifically disallowed to a debtor-in-possession for tax purposes?

Accepted Answer

Personal expenses of the debtor

Answer

Legitimate administrative expenses incurred during the bankruptcy proceedings

Answer

Charitable contributions made by the debtor

Answer

Depreciation expenses on assets used in the debtor's business operations

Question 26

To be eligible for the Chapter 13 bankruptcy tax credit, which requirement must a debtor meet?

Accepted Answer

The debtor must have successfully completed a Chapter 13 bankruptcy plan.

Answer

The debtor must demonstrate a low income level.

Answer

The debtor must have paid all debts in full.

Answer

The debtor must have been considered insolvent at the time of filing for bankruptcy.

Question 27

Which special tax rule is applicable to debtors in Chapter 11 bankruptcy?

Accepted Answer

The debtor has the option to be treated as a pass-through entity for tax purposes.

Answer

The debtor is exempt from filing any tax returns.

Answer

The debtor can deduct all expenses related to operating the business.

Answer

The debtor is not subject to any tax laws, regardless of their actions.

Question 28

What are the tax implications of a debtor selling property during bankruptcy?

Accepted Answer

The debtor must recognize any gain or loss resulting from the sale.

Answer

The debtor is not required to recognize any gain or loss resulting from the sale.

Answer

The gain or loss from the sale is included in the debtor's bankruptcy estate.

Answer

The gain or loss from the sale is excluded from the debtor's bankruptcy estate.

Question 29

What was the primary objective of the Bankruptcy Tax Act of 1980?

Accepted Answer

To simplify and clarify the tax rules related to bankruptcy.

Answer

To increase the tax burden on debtors.

Answer

To reduce the tax burden on creditors.

Answer

To eliminate all tax consequences of bankruptcy.

Question 30

Which of the following deductions is NOT allowed to a debtor in bankruptcy who itemizes?

Accepted Answer

Standard deduction

Answer

Mortgage interest deduction

Answer

Charitable contributions deduction (subject to limitations)

Answer

Medical expenses deduction

Question 31

What is the effect of a discharge in bankruptcy on the debtor's tax liability?

Accepted Answer

The debtor's tax liability is discharged, except for certain types of taxes (e.g., unpaid income taxes for the three taxable years preceding bankruptcy)

Answer

The debtor's tax liability is discharged only for taxes that were due before the bankruptcy petition was filed

Answer

The debtor's tax liability is not discharged

Question 32

What is the purpose of the automatic stay in bankruptcy?

Accepted Answer

To prevent creditors from taking any action to collect their debts from the debtor

Answer

To allow the debtor to continue to pay off their debts

Answer

To give the debtor time to file a reorganization plan

Question 33

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Accepted Answer

Chapter 7 is a liquidation bankruptcy, while Chapter 13 is a reorganization bankruptcy

Answer

Chapter 7 is a reorganization bankruptcy, while Chapter 13 is a liquidation bankruptcy

Answer

Chapter 7 is for individuals, while Chapter 13 is for businesses

Question 34

What is the purpose of a reaffirmation agreement?

Accepted Answer

To allow the debtor to keep property that is secured by a debt that was discharged in bankruptcy

Answer

To allow the debtor to discharge a debt that was not discharged in bankruptcy

Answer

To allow the creditor to collect a debt that was discharged in bankruptcy

Question 35

Which of the following is NOT a deductible expense in a Chapter 13 bankruptcy?

Accepted Answer

Gambling losses

Answer

Credit card debt

Answer

Reasonable attorney fees

Answer

Alimony payments

Question 36

What is the tax treatment of a Chapter 11 reorganization?

Accepted Answer

The debtor's tax attributes generally carry over to the reorganized entity

Answer

The creditors recognize a loss in the amount of the reorganized debt

Answer

The debtor recognizes income in the amount of the reorganized debt

Question 37

Which of the following is a characteristic of a Chapter 13 bankruptcy?

Accepted Answer

The debtor proposes a plan to repay creditors over a period of time

Answer

The debtor's assets are liquidated and distributed to creditors

Answer

The debtor is automatically discharged from all debts after a certain period of time

Question 38

What is the basis of property acquired by a debtor in a Chapter 11 reorganization?

Accepted Answer

The debtor's basis in the property is the same as the transferor's basis

Answer

The debtor's basis in the property is zero

Answer

The debtor's basis in the property is equal to the fair market value of the property on the date of acquisition

Question 39

Under the Bankruptcy Tax Act of 1994, what is the general rule for the treatment of net operating losses (NOLs) incurred during a bankruptcy case?

Accepted Answer

NOLs can be carried back 2 years and carried forward 20 years.

Answer

NOLs can be carried back 5 years and carried forward 3 years.

Answer

NOLs can be carried back indefinitely and carried forward indefinitely.

Question 40

What is the primary responsibility of the Bankruptcy Administrator?

Accepted Answer

To manage the debtor's assets and administer the bankruptcy case.

Answer

To negotiate with creditors on behalf of the debtor.

Answer

To represent the debtor in court proceedings.

Question 41

Which type of bankruptcy allows a debtor to propose a plan to repay creditors over time while continuing to operate their business?

Accepted Answer

Chapter 11

Answer

Chapter 13

Answer

Chapter 7

Answer

Chapter 12

Question 42

What is a primary objective of the Bankruptcy Code?

Accepted Answer

To provide debtors with a fresh start and protect creditors from unfair practices.

Answer

To maximize the recovery of assets for creditors.

Answer

To punish debtors for their financial misconduct.

Question 43

Which type of debt is typically secured by collateral?

Accepted Answer

Mortgage

Answer

Medical bills

Answer

Student loans

Answer

Credit card debt

Question 44

What is a key responsibility of the U.S. Trustee in bankruptcy cases?

Accepted Answer

To oversee the administration of Chapter 11 cases and appoint Chapter 13 trustees.

Answer

To negotiate with creditors on behalf of the debtor.

Answer

To represent the debtor in bankruptcy court.

Question 45

In bankruptcy, how are a debtor's gambling losses treated for tax purposes?

Accepted Answer

Deductible only to the extent of gambling winnings.

Answer

Fully deductible.

Answer

Not deductible.

Question 46

For a Chapter 7 debtor, what is the tax treatment of mortgage debt remaining after bankruptcy?

Accepted Answer

May be deductible as personal interest expense.

Answer

Not deductible.

Answer

Deductible as capital loss.

Question 47

What tax benefits may a Chapter 13 debtor who is a farmer and suffers natural disaster losses be eligible for?

Accepted Answer

Disaster-related tax credits or deductions.

Answer

No tax benefits available to farmers.

Answer

Full loss deduction without limitation.

Question 48

After a Chapter 7 discharge, how does it affect a debtor's eligibility for the Earned Income Tax Credit (EITC)?

Accepted Answer

Eligibility remains unaffected.

Answer

Can only claim a reduced amount of EITC.

Answer

Ineligible for EITC for five years.

Question 49

How is a debtor's income from a trust that is part of their bankruptcy estate handled for tax purposes?

Accepted Answer

Taxed to the debtor, regardless of receipt.

Answer

Not taxable as part of the bankruptcy estate.

Answer

Taxed to the trust.

Question 50

In a Chapter 7 bankruptcy, how are proceeds from the liquidation of the debtor's business treated for tax purposes?

Accepted Answer

Taxed as capital gains or losses based on asset types.

Answer

Taxed as ordinary income.

Answer

Not taxable as part of the bankruptcy estate.