United States v. Hall

617 F.3d 1161 (9th Cir. 2010)



26 U.S.C.S. §§ 1398 and 1399 indicate that a Chapter 12 bankruptcy estate cannot incur taxes. It does not matter that those sections appear in the Internal Revenue Code as distinguished from the Bankruptcy Code. A court is to assume that Congress is aware of existing law when it passes legislation. In fact, Congress has indicated repeatedly that it is aware that the taxable entity provisions in the Internal Revenue Code are relevant to the Bankruptcy Code.


The debtors filed a motion to sell their farm, which the bankruptcy court approved. The debtors proposed a plan of reorganization, under which they sought to pay off their outstanding liabilities using the proceeds from the sale. The IRS objected to the proposed plan, asserting a federal income tax on the capital gain from the sale. The debtors then amended their proposed plan to treat the tax as an unsecured claim to be paid to the extent funds are available, with the balance discharged. The IRS again objected. The bankruptcy court sustained the objection, but the district court reversed.


Is a Chapter 12 estate a taxable entity, that could "incur a tax" within the meaning of 11 U.S.C.S. § 503(b)(1)(B)(i)?




In reversing the district court's decision, the court noted that 11 U.S.C.S. § 1222(a)(2)(A) allowed Chapter 12 debtors to treat taxes incurred by selling farm assets before the filing of a bankruptcy petition as payable in less than full and dischargeable. The court held that a postpetition tax did not qualify for the § 1222(a)(2)(A) exception to the full payment rule. The court also held that, because the Chapter 12 estate was not a taxable entity, it could not "incur a tax" within the meaning of 11 U.S.C.S. § 503(b)(1)(B)(i), and the full tax was owed by the debtors outside of the plan.

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