Academic journal article ASBBS E - Journal

The Supreme Court Grants Certiorari to Determine Whether Post-Petition Income Taxes on the Sale of Farm Assets May Be Treated as an Unsecured Claim under Chapter 12 of the Bankruptcy Code

Academic journal article ASBBS E - Journal

The Supreme Court Grants Certiorari to Determine Whether Post-Petition Income Taxes on the Sale of Farm Assets May Be Treated as an Unsecured Claim under Chapter 12 of the Bankruptcy Code

Article excerpt

ABSTRACT

In Hall v. U.S., 131 S. Ct. 2989 (2011), the Supreme Court granted certiorari to review the Ninth Circuit's holding that post-petition income taxes due to the sale of firm assets as part of a Chapter 12 bankruptcy reorganization are not eligible to be treated as unsecured claims under Bankruptcy Code § 1222(a)(2)(A). Under Code § 1222(a)(2)(A), a Chapter 12 plan must provide for full payment of all claims entitled to priority under Code § 507 unless the claim is owed to a governmental unit arising from the sale of any farm asset used in the debtor's farming operation, in which case it will be treated as an unsecured claim Code § 507(a)(8) gives priority to certain pre-petition taxes while Code § 507(a)(2) gives priority to administrative expenses allowed under Code § 503(b). Code § 503(b)(l)(B)(i) allows for any tax "incurred by the estate" to be treated as an administrative expense. The Ninth Circuit reasoned that the taxes are not "incurred by the estate," as pursuant to I.R.C. §§ 1398 and 1399, a Chapter 12 bankruptcy estate is not a "separate taxable entity." The Supreme Court will resolve a split among the circuit courts, as the Tenth Circuit in U.S. v. Dawes, 2011 U.S. App. LEXIS 12477 (CA-10, 2011) took a position similar to the Ninth Circuit's; however, in Knudsen v. I.R.S. 581 F.3d 696 (CA-8, 2009), the Eighth Circuit held that the post-petition taxes may be treated as unsecured claims, reasoning that "incurred by the estate" means incurred post-petition.

INTRODUCTION

Current economic times are characterized by a plethora of home foreclosures and bankruptcies. In the 1970's and 80's, there was an economic downturn which severely impacted family farms. Some may remember the Farm Aid concerts. Congress also came to the aid of the family farm in 1986 by amending Title 11 of the United States Code (Bankruptcy Code or Code) and adding Chapter 12, 11 U.S.C. §§ 1201-31, as part of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. Modeled after Chapter 13, Chapter 12 allows family farmers to reorganize their business affairs while holding off creditors and continuing the farming enterprise. Pursuant to Chapter 12, a debtor remains in possession and control of the farm assets and continues to operate the farm while reorganizing their debt. As part of a Chapter 12 bankruptcy reorganization, the debtor must petition the court and file a plan of reorganization, which the court must confirm. A debtor has ninety days to file a plan of reorganization upon filing for Chapter 12 bankruptcy. The filing of the petition creates a bankruptcy estate. Among the requirements for confirmation is that each secured creditor either accepts the plan, receives payment, or retains a lien securing its claim, and the debtor would be able to make all payments under the plan and comply with the plan. Upon confirmation by the court of the Chapter 12 plan, unless the plan provides otherwise, Code § 1227(b) provides that all property of the bankruptcy estate vests in the debtor.

Chapter 12, as originally enacted, had a flaw, as when there was a sale or exchange of farm assets as part of the plan to make the farm viable and/or to raise funds to satisfy creditors, taxable gains remained a priority claim which had to be paid in full, even if paid via deferred payments, for a Chapter 12 plan to be confirmed; thus, the Internal Revenue Service (1RS) could effectively veto the Chapter 12 plan. Alternatively, the tax liability might render the debtor unable to make all payments under the plan and comply with the plan, thus preventing confirmation by the court. This would thwart Congress's intent in enacting Chapter 12 and prevent family farmers from making business decisions necessary to save the farm without being hindered by the tax consequences of the sales or exchanges of the farm assets.

In 2005, to remedy the situation, Congress amended Bankruptcy Code § 1222(a)(2)(A) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. …

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