Eric English on the Supreme Court Opinion and Dissent in Hall v. United States, 2012 U.S. LEXIS 3781 (May 14, 2012)

Eric English on the Supreme Court Opinion and Dissent in Hall v. United States, 2012 U.S. LEXIS 3781 (May 14, 2012)

In this Emerging Issues Analysis, Collier on Bankruptcy Taxation author Eric English analyzes the Supreme Court majority opinion and dissent in Hall v United States, 182 L. Ed. 2d 840, 2012 U.S. LEXIS 3781 (May 14, 2012), in which the Court held that Chapter 12 debtors are liable to pay post-petition capital gains taxes and can not cannot discharge post-petition tax liabilities in bankruptcy.

Excerpt (note-links to statutes below are accessible by lexis.com subscribers):

The Lesson to Be Learned. Even when the apparent intent of Congress was to provide family farmers and fishermen with the ability to discharge post-petition tax claims by treating them as unsecured, the Supreme Court will interpret and enforce the plain language of the Bankruptcy Code and other federal statutes that compel the opposite result. In Hall v. United States, a majority of the Court held that Chapter 12 debtors are liable to pay post-petition capital gains taxes and cannot avail themselves of the protections of Bankruptcy Code Section 1222(a)(2)(A), which provides that certain priority tax claims may be treated as unsecured.

Legal Background. As examined below, understanding the decision in Hall requires the parsing of several layers of interrelated statutory provisions. However, once the statutory complexity is stripped away, the result is simple: Chapter 12 debtors cannot discharge post-petition tax liabilities in bankruptcy.

Chapter 12 debtors, like Chapter 13 debtors, file plans of reorganization providing for the payment of creditors over time. Generally, such a plan must provide for "the full payment, in deferred cash payments" of priority claims. 11 U.S.C. § 1222(a)(2). Priority claims in bankruptcy are those listed in Bankruptcy Code Section 507, which includes both pre-petition taxes and, by reference to another Bankruptcy Code section, "any tax incurred by the estate." See 11 U.S.C. § 507(a)(2) (entitling to priority "administrative expenses allowed under section 503(b)"); see also 11 U.S.C. § 503(b)(1)(B)(i) (including "any tax incurred by the estate" as an administrative expense). Accordingly, by operation of Bankruptcy Code Sections 1222(a)(2), 507(a)(2), and 503(b)(1)(B)(i), taxes incurred by a bankruptcy estate generally are entitled to priority and must be paid in full.

An exception to this general rule exists, however, and that exception is central to the holding in Hall. Pursuant to Bankruptcy Code Section 1222(a)(2)(A), absent an agreement to the contrary, the full payment of priority claims is required unless:

the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor's farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under section 507, but the debt shall be treated in such manner only if the debtor receives a discharge.

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