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a. Fundamental Principles Relating to a Partner in
Bankruptcy and the Partner’s Bankruptcy Estate
We begin our discussion with a review of some fundamental
principles relating to the bankruptcy of an individual debtor.
When an individual files a chapter 7 petition in bankruptcy, a
bankruptcy estate is created as a separate entity for purposes of
both bankruptcy law and tax law. See 11 U.S.C. sec. 541(a)
(1994); sec. 1398.6 The estate succeeds to all legal and
equitable interests of the debtor in property, as well as certain
tax attributes of the debtor. See 11 U.S.C. sec. 541(a)(1); sec.
1398(g). The estate computes its tax liability in the same
manner as a married individual filing a separate return, see sec.
1398(c), and the chapter 7 trustee is responsible for filing tax
returns throughout the duration of the bankruptcy proceeding,
see sec. 6012(b)(4); see also 11 U.S.C. sec. 704(8) (1994).
b. Allocation Inquiry as Framed by Petitioners
Petitioners contend that the manner in which the prepetition
partnership losses are allocated “among the partners” constitutes
a partnership item under the TEFRA procedures. We agree with
petitioners as to the merit of this proposition. As provided in
section 6226(f), the manner in which partnership items are
6 Sec. 1398 was enacted as part of the Bankruptcy Tax Act
of 1980, Pub. L. 96-589, sec. 3, 94 Stat. 3397. Sec. 1398 does
not apply to all types of bankruptcy proceedings but rather only
to proceedings under ch. 7 (relating to liquidations) or ch. 11
(relating to reorganizations) of the U.S. Bankruptcy Code in
which the debtor is an individual. See sec. 1398(a).
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