May 14, 2012
Supreme Court Action Today: Tax Liability Under Chapter 12 of the Bankruptcy Code
The Supreme Court issued one decision this morning, Hall v. United States (10-875), which covers the intersection of bankruptcy and tax law in the context of farms. Lynwood Hall owned a farm and filed for bankruptcy under Chapter 12. He sold the farm while the bankruptcy was pending. One part of the Chapter 12 allowed the farmer debtor to treat certain claims owed to a governmental unit as dischargeable unsecured liabilities including those for “any tax … incurred by the estate.” Hall proposed a reorganization plan where liabilities would be paid off from the proceeds of the sale. The IRS objected and demanded payment for taxes on the capital gains from the farm sale.
The case came to the Supreme Court with the Ninth Circuit upholding the IRS position, basing its reading of the IRS Code where language states that a Chapter 12 estate is not a separate taxable entity. As such, the “estate” cannot incur taxes for purposes of the Bankruptcy Code. The Supreme Court held that the plain meaning of the statutory language “incurred by the estate” means the estate is liable for the tax rather than by the individual debtor. Some chapters of the Bankruptcy Code allow for estate returns, but not Chapter 12:
These provisions suffice to resolve this case: Chapter 12 estates are not taxable entities. Petitioners, not the estate itself, are required to file the tax return and are liable for the taxes resulting from their postpetition farm sale. The postpetition federal income tax liability is not “incurred by the estate” and thus is neither collectible nor dischargeable in the Chapter 12 plan.
The Court examined how Congress had revised parts of the Bankruptcy Code in conjunction with relevant parts of the IRS Code to reach its conclusion. The amendment history supported the Court’s reading in that at one point Congress clarified the tax liability under state and federal tax schemes for individuals and estates. Other legislative action showed that Chapter 12 was modeled after Chapter 13 where estates did not file taxes. The decision was 5-4 with Justice Sotomayor writing for the majority. She was joined by Chief Justice Roberts and Justices Scalia, Thomas, and Alito. Justice Breyer filed a dissenting opinion joined by Justices Kennedy, Ginsburg, and Kagan. [MG]