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
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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