The Farmer and the Tax Man: The Scope of the Tax Forgiveness Provision in Chapter 12 Bankruptcy

By Martin, David A. | Missouri Law Review, Winter 2013 | Go to article overview

The Farmer and the Tax Man: The Scope of the Tax Forgiveness Provision in Chapter 12 Bankruptcy


Martin, David A., Missouri Law Review


Hall v. United States, 132 S. Ct. 1882 (2012)

I. INTRODUCTION

Jason and Jodi LeGassick were a young couple in their early thirties who lived with their five children on land that had been in their family for generations. (1) Since they were teenagers, the LeGassicks made their living together by dairy farming. (2) Despite their innovation and experience, the farm became unprofitable. (3) Debts accumulated, banks threatened foreclosure, and the couple filed for bankruptcy under Chapter 12. (4) After filing, the couple proposed the sale of their land to facilitate payment of their debts. (5) The sale produced approximately $81,000 in tax obligations. (6) By contrast, the couple's income totaled $107,000 annually. (7) The LeGassicks filed their plan with the court, but because of the burdensome tax obligations, the court refused to confirm their reorganization plan and dismissed the couple from Chapter 12 proceedings. (8) As a result, the couple lost their land, their home, and the only livelihood they had ever known.

Without the benefit of tax forgiveness afforded by Bankruptcy Code (Code) section 1222(a)(2)(A), this unfortunate tale would have been the fate of the LeGassicks. (9) Section 1222(a)(2)(A) allows a debtor to discharge certain tax obligations in Chapter 12 bankruptcies upon the completion of his reorganization plan. (10) In reality, section 1222(a)(2)(A) allowed the bankruptcy court to confirm the LeGassicks' payment plan and the couple did not lose their farm. (11) If the LeGassicks complete their plan, the tax obligations from the sale of their farm will be discharged in full. (12)

Unfortunately, the benefits of section 1222(a)(2)(A) enjoyed by the LeGassicks are not available to all farmers. While the LeGassicks enjoyed the Eighth Circuit's broad interpretation of the provision, the Ninth and Tenth Circuits severely restrict the reach of section 1222(a)(2)(A) and thereby allow the Internal Revenue Service (IRS) a veto over the bankruptcies of farmers hoping to sell assets to preserve their livelihood. (13) The IRS, a primary proponent and beneficiary of this line of decisions, convinced federal circuit courts to adopt a restrictive interpretation of section 1222(a)(2)(A) in spite of convincing legislative intent to the contrary. (14) Much of the IRS's success is attributable to the noticeable lack of statutory clarity, combined with the complexity of the Code. (15)

In Hall v. United States, the Supreme Court of the United States granted certiorari upon the petition of debtors from the Ninth Circuit and resolved the circuit split in favor of the IRS. (16) Faced with the familiar task of statutory interpretation, the opinion of the Supreme Court will inevitably affect economically distressed farmers nationwide. A primary concern of the Court was that an incorrect statutory interpretation would leave the Code in shambles because of the interdependency of its provisions. (17)

Because Hall primarily addresses issues of statutory interpretation, Part II of this Comment will outline the statutory background of the two statutes primarily at issue in the circuit split. (18) Next, Part III of this Comment will survey the diverging circuit decisions concerning the interpretation and scope of section 1222(a)(2)(A). (19) Then, Part IV will examine and, to the extent possible, resolve the arguments of the parties. (20) Part V will outline the Supreme Court decision. (21) Finally, Part VI will consider proposed amendments to increase clarity and prevent future statutory interpretation disputes. (22)

II. STATUTORY BACKGROUND

The laws of bankruptcy and taxation are primarily statutory. A principal canon of statutory construction requires courts to attempt to discern the legislature's intent when enacting the statute. (23) To accomplish this task, courts first look to the plain meaning of existing statutory text, but unfortunately, ambiguity is inherent in the English language, and commonly, one can find multiple "plain meanings. …

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