DWIGHT H. WILLIAMS, Jr., Bankruptcy Judge.
These adversary proceedings, which seek declaratory judgments, involve a dispute between the debtors, Guy F. Medley and Michael A. Medley,
The court's jurisdiction in these matters is derived from 28 U.S.C. § 1334 and from an order of The United States District Court for this district wherein that court's jurisdiction in title 11 matters was referred to the bankruptcy court. See General Order of Reference [of] Bankruptcy Matters (M.D. Ala. April 25, 1985). Further, the parties agree that this dispute is a core proceeding under 28 U.S.C. § 157 thereby extending this court's jurisdiction to the entry of a final order or judgment.
The relevant facts are not disputed. On November 15, 2013 and December 18, 2013, involuntary petitions under chapter 7 were commenced in this court against Michael A. Medley and Guy F. Medley, respectively. On January 9, 2014 and February 19, 2014, the court adjudicated Michael A. Medley and Guy F. Medley as debtors under chapter 7 of title 11, and orders of relief entered, respectively.
As of the date of the bankruptcies, both of the debtors owned shares of stock in Citizens Southern BancShares, a holding company for Citizens State Bank. Citizens Southern BancShares, a sub-chapter S corporation, issued each of the debtors K-1's reflecting passive income attributable to them for their ownership of the stock during calendar year 2014. Said K-1's resulted in additional tax liability for each of the debtors for tax year 2014.
Also, as of the date of the bankruptcies, each of the debtors had pledged their shares of stock in Citizens Southern BancShares to AlaStar, a creditor, as security for a loan. Ultimately and for the benefit of the bankruptcy estate, the trustee sold the debtors' Citizens Southern BancShares stock.
Neither of the debtors made a timely election under 26 U.S.C. § 1398 (often referred to as the "short year election") in order to bifurcate the 2014 tax year.
The thrust of the trustee's argument is that the debtors are responsible for the 2014 taxes arising from passive income associated with their stock ownership in Citizens Southern BancShares because they failed to make elections under 26 U.S.C. § 1398(d)(2).
The trustee is correct that, under 26 U.S.C. § 1398, an individual chapter 7 debtor may elect to treat the year in which bankruptcy is commenced as two taxable short years. The first year begins on the first day of the tax period and ends on the day before the commencement of the chapter 7 case. The second short year begins on the date that the chapter 7 case is commenced and ends on the last day of the tax year.
Under the statutory scheme, the consequence of a debtor making the § 1398(d)(2) election is to allow the taxing authority to make a claim against the bankruptcy estate for any tax liability arising in the first short year. If, however, the debtor does not make the election, the tax liability for the entire tax year is considered a post-bankruptcy debt for which the taxing authority has no claim against the bankruptcy estate. In re Turboff, 93 B.R. 523, 525-26 (Bankr. S.D. Tex. 1988); In re Mirman, 98 B.R. 742, 745 (Bankr. E.D. Va. 1989); In re Moore, 132 B.R. 533, 535 (Bankr. W.D. Pa. 1991); In re Saunders, 155 B.R. 405, 417 (Bankr. W.D. Tex. 1993).
Because the debtors in the cases sub judice did not make the § 1398(d)(2) election, the trustee maintains that the liability for the entire 1994 tax year is treated as a post-petition debt for which liability cannot attach to the bankruptcy estate; only to the debtors. That contention is, upon first glance, appealing but fails on closer look.
Once the debtors were adjudicated bankrupts on January 9 and February 19, 2014, their property and property interests, with certain exceptions not applicable here, became property of their respective bankruptcy estates.
26 U.S.C. § 1398(e)(1)
For the foregoing reasons, the court finds that the trustee is responsible for the taxes arising from the income attributable to the sub-chapter S stock ownership for the 2014 tax year. A judgment consistent with this memorandum opinion will enter separately.
"(2)
(A)
26 U.S.C. § 1398(d)(2).
"(e)
(1)
26 U.S.C. § 1398(e)(1).
"
26 U.S.C. § 1366(a)(1).