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Not many founders of a new business consider, at the time the new business is founded, the potential U.S. federal income tax consequences to them should the new business fail. The type of business entity formed, and the treatment of that entity for U.S. federal tax purposes as either a corporation or a pass-through entity, can have a material U.S. federal income tax consequence to the owners of the entity if the business should fail and there is a cancellation of the debts of the business.
While the bankruptcy process may bring a new beginning, the Bankruptcy Code provides — and some say rightfully so — debtors with much less protection against tax claims than other types of claims for public policy and much-applauded revenue reasons. Even though there is much to say about this topic[1], this article only narrowly addresses 11 U.S.C.
