Hall Et Ux, Appellant,

v

United States, Appellee.

Supreme Court of the United States

No. 10-875

Factual Background

Appellant filed for Chapter 12 bankruptcy and then sold their farm.  They proposed a plan under which they would pay off outstanding liabilities with proceeds from the sale.  The Internal Revenue Service (IRS) objected, asserting a tax on the capital gains from the sale.  Appellant then proposed treating the tax as an unsecured claim to be paid to the extent funds were available, with the unpaid balance being discharged.  The Bankruptcy Court sustained an IRS objection, the District Court reversed, and the Ninth Circuit reversed the District Court.  The Ninth Circuit held that because a Chapter 12 estate is not a separate taxable entity under the Internal Revenue Code (IRC), 26 U. S. C. §§1398, 1399, it does not “incur” postpetition federal income taxes.  The Ninth Circuit concluded that because the tax was not “incurred by the estate” under §503(b), it was not a priority claim eligible for the §1222(a)(2)(A) exception.

Issue

The court discussed whether the federal income tax liability comes under the provision “incurred by the estate” under §503(b) and thus collectible or dischargeable in the Chapter 12 plan.

Discussion

The case arose when appellant filed for Chapter 12 bankruptcy and then sold their farm.  Under Chapter 12 of the Bankruptcy Code, farmer debtors could treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities.

Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan.  The plan must provide for full payment of priority claims. 11 U. S. C. §1222(a)(2).  Under §1222(a)(2)(A), however, certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to general, unsecured claims that are dischargeable after less than full payment.  That exception applies only to claims entitled to priority under [11 U. S. C. §507]. §507(a)(2) covers administrative expenses allowed under §503(b), which includes any tax incurred by the estate.

The court observed that the phrase “incurred by the estate” bears a plain and natural reading. A tax “incurred by the estate” is a tax for which the estate itself is liable.  Only certain estates are liable for federal income taxes.  Under the provisions of IRC, a Chapter 12 estate is not a separately taxable entity.  The debtor, not the trustee, is generally liable for taxes and files the only tax return.  Hence the postpetition income taxes are not incurred by the estate.

Conclusion

The Court affirmed the judgment of the Ninth Circuit and held that federal income tax liability resulting from petitioners’ post-petition farm sale was not “incurred by the estate” under 11 U.S.C. 503(b) of the Bankruptcy Code and thus was neither collectible nor dischargeable in the Chapter 12 plan.