The High Court Rules that Post-Petition Income Taxes on the Sale of Farm Assets Are Not Discharged Pursuant to Chapter 12 of the Bankruptcy Code

In Hall v. U.S., 132 S. Ct. 1882 (2012), the Supreme Court ruled that federal income tax liabilities due to individual debtors’ sales of farm assets during the pendency of a Chapter 12 bankruptcy reorganization are not subject to collection or discharge in the debtors’ plan. The Court opined that the post-petition income taxes are not unsecured claims under Bankruptcy Code §1222(a)(2)(A) as they were not “incurred by the estate” under Bankruptcy Code §503(b). 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)(1)(B)(i) allows for any tax “incurred by the estate” to be treated as an administrative expense. The Court gave the phrase “incurred by the estate” its plain meaning and applied I.R.C. §§1398 and 1399, reasoning that under I.R.C. the Chapter 12 estate was not a separate taxable entity and that the debtor was individually responsible for the tax. In reaching its decision, the Court viewed the statute’s plain language, context, and structure.