RESPONDENT: United States
LOCATION: The Hall's Farm
DOCKET NO.: 10-875
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Ninth Circuit
CITATION: 566 US (2012)
GRANTED: Jun 13, 2011
ARGUED: Nov 29, 2011
DECIDED: May 14, 2012
Pratik A. Shah - Assistant to the Solicitor General, Department of Justice, for the respondent
Susan M. Freeman - for the petitioners
Facts of the case
Lynwood and Brenda Hall filed for Chapter 12 bankruptcy and were forced to sell their family farm for $960,000 to settle their bankruptcy debts. That sale brought about capital gains taxes of $29,000. The Halls wanted the taxes treated as part of the bankruptcy, paying part of the debt and having the court discharge the rest. They argued that the taxes were dischargeable as a debt "incurred by the estate". The IRS objected to that plan, saying all of the taxes must be paid. The U.S. Court of Appeals for the Ninth Circuit agreed, ruling that the Halls had to pay federal income tax on the gain from the sale of their farm during bankruptcy proceedings.
Does 11 U.S.C. 1222(a)(2)(A) authorize the bankruptcy court to treat a federal tax debt arising out of the debtor's post-petition sale of a farm asset as a dischargeable debt "incurred by the estate"?
Media for Hall v. United StatesAudio Transcription for Oral Argument - November 29, 2011 in Hall v. United States
Audio Transcription for Opinion Announcement - May 14, 2012 in Hall v. United States
John G. Roberts, Jr.:
Justice Sotomayor has our opinion this morning in case 10-875, Hall versus United States, and in her absence, I will announce the opinion.
Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan.
Petitioners Lynwood and Brenda Hall filed for Chapter 12 bankruptcy and then sold their farm.
The IRS asserted a tax on the capital gains from the postpetition sale of the farm.
Now the Halls and the IRS disagreed over how to treat the tax.
Their disagreement concerns whether postpetition income taxes are eligible for priority stripping treatment under 11, United States Code, Section 1222(a)(2)(A).
Now ordinarily, a Chapter 12 plan must provide for full payment of priority claims.
Section 1222(a)(2)(A) however, carves out an exception whereby certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to dischargeable, unsecured claims.
Now the Halls argue that their postpetition income taxes are eligible for the priority stripping treatment of Section 1222(a)(2)(A).
The IRS on the other hand argues that 1222(a)(2)(A) applies only to claims entitled to priority in the first place.
The IRS contends that the Halls' postpetition income taxes do not so qualify and thus are neither collectible nor dischargeable in bankruptcy.
The bankruptcy court sided with the IRS, but the District Court reversed, but then the Ninth Circuit reversed.
The Ninth Circuit agreed with the IRS that postpetition income taxes are not a priority claim eligible for the Section 1222(a)(2)(A) exception.
We now affirm the Ninth Circuit.
The parties agree that Section 1222(a)(2)(A) applies only to priority claims and that postpetition income taxes so qualify only if they constitute, and here's a quote, “tax incurred by the estate” under Section 503(b).
So the dispositive question is whether these taxes are incurred by the estate.
For the reasons we explain in our opinion filed today, we hold that the Halls' postpetition income taxes are not incurred by the estate and are neither collectible nor dischargeable in the Chapter 12 plan.
A tax incurred by the estate is a tax for which the estate itself is liable.
Provisions of the Internal Revenue Code establish that only certain estates are liable for federal income taxes.
Based on those provisions, a Chapter 12 estate is not a separate taxable entity and only the debtor, not the estate, can incur the tax liability.
Now we note that established understandings in Chapter 13 hold that postpetition income taxes are not incurred by the estate within the meaning of Section 503(b), because the taxes are the liability of the Chapter 13 debtor alone.
We decline to adopt a conflicting position in Chapter 12 which was modeled on Chapter 13.
The judgment of the Court of Appeals for the Ninth Circuit is affirmed.
Justice Breyer has filed a dissenting opinion in which Justices Kennedy, Ginsburg, and Kagan join.