Post-Petition Tax Liability Not Incurred by Chapter 12 Estate

Posted by NCBRC - May 30, 2012

The Supreme Court found that debtors could not have their income tax liability resulting from the post-petition sale of their farm treated as a non-priority, dischargeable debt in their chapter 12 bankruptcy case. Hall v. United States, No. 10-875, 182 L. Ed. 2d 840,  ___ U.S. ___ (May 14, 2012). The debtor relied on section 1222(a)(2)(A) which permits certain tax liabilities, which would otherwise be priority debts under section 1222(a)(2), to be treated as non-priority, unsecured debts, if they are “incurred by the estate,” under section 503(b). Justice Sotomayor, joined by Justices Roberts, Thomas, Alito, and Scalia, found that post-petition income tax liability adheres to the debtors rather than the estate and the debtors, therefore, could not avail themselves of the benefit of section 1222(a)(2)(A).

While this case forecloses a potential avenue of relief for the chapter 12 debtor, it is likely to have little effect in the realm of chapter 13 bankruptcy. In chapter 13 taxes incurred post-petition are not incurred by the estate. 11 TX2 Collier on Bankruptcy ¶ TX2.03[2][a][ii] (16th ed.). However, under section 1305, the taxing authority in chapter 13 may file of proof of claim for post-petition tax liability if it so chooses. 

In Hall the Court reasoned that in order for section 1222(a)(2)(A) to apply, the tax liability must be “incurred by the estate” within the meaning of section 503(b). Sections 1398 and 1399 of the Internal Revenue Code (IRC) identifies the bankruptcy chapters in which estates, as opposed to individual debtors, can incur tax liability. In chapters 7 and 11, the estate incurs liability for taxes on the taxable income of the estate. In chapters 12 and 13, the debtor is responsible for those taxes. The Court found that it was historically appropriate to look to the IRC for interpretation of sections 1222(a)(2)(A) and 503(b). Section 346 of the Bankruptcy Code, as amended in BAPCPA, specifies that tax liability for bankruptcy estates harmonizes with the provisions of the IRC. The exception carved out in section 1222(a)(2)(A) did not alter the underlying requirement that tax liability be incurred by the estate. The Court drew a parallel with longstanding principals in chapter 13 which establish that post-petition tax liabilities cannot be discharged as administrative expenses because, under the section 503, they are not liabilities incurred by the estate. Section 1305(a)(1) confirms this interpretation by permitting but not requiring a tax creditor to file a claim to be paid through the plan. The permissive structure indicates that if the creditor chooses not to file through the plan, it can proceed against the debtor outside bankruptcy. Because chapter 12 is modeled after chapter 13, the same structure applies.

The Court rejected the petitioner’s argument that the phrase “incurred by the estate,” was a temporal reference indicating that it dealt with taxes incurred after the bankruptcy estate was created rather than a reference to the actual distribution of tax liability. The fact that the debt was incurred after the estate came into being, did not lead to the conclusion that the debt was incurred by the estate.

The dissent in Hall argued that the majority interpretation would have the undesired effect of precluding many farmer debtors from benefitting from chapter 12 provisions clearly designed to increase the availability of reorganization and continued operation of farms.

Hall v US SCt May 2012 ch 12 tax


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