By Nicholas A. Mirkay, Visiting Associate Professor of Law, Creighton University School of Law
The Supreme Court granted certiorari to a case at the intersection of federal bankruptcy and income tax laws. Specifically, the case will address a current circuit split on whether the income tax incurred on a post-petition capital gain constitutes a claim against a Chapter 12 estate. In United States v. Hall, 617 F.3d 1161 (2010), the Ninth Circuit held that because a Chapter 12 estate cannot “incur” a tax under the Internal Revenue Code, the estate and, thus, the debtor, cannot benefit from section 1222(a)(2)(A) of the Bankruptcy Code, which provides that taxes or administrative expenses incurred on the sale of a farm during bankruptcy are dischargeable and payable in less than full. The Ninth Circuit rested its decision on section 1399 of the Internal Revenue Code which provides that “no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code [the Bankruptcy Code], except in any case to which section 1398 applies.” Section 1398 of the Internal Revenue Code applies only to cases under Chapters 7 and 11 of the Bankruptcy Code. Therefore, because a Chapter 12 estate is not a taxable entity, the estate cannot “incur” a tax entitled to priority under section 507 of the Bankruptcy Code, thereby resulting in post-petition taxes being non-dischargeable.
The Supreme Court will compare the Ninth Circuit’s reasoning with that of the Eighth Circuit in Knudsen v. IRS, 581 F.3d 697 (2009). As in Hall, the plan of reorganization filed in Knudsen treated the income taxes owed from the post-petition sales of farmland and farm equipment as unsecured, and thus dischargeable, claims under section 1222(a)(2)(A) of the Bankruptcy Code. Dismissing Internal Revenue Service claims to the contrary, the Eighth Circuit found in favor of the debtors, holding that “§1222(a)(2)(A) applies to the postpetition sale of farm assets,” thereby treating the taxes arising from such sale as unsecured, and thus dischargeable, claims. The circuit court interpreted the Bankruptcy Code as not expressly prohibiting a chapter 12 estate from incurring taxes as administrative expenses within the meaning of section 507(a)(2). Accordingly, the Eighth Circuit expressly disregarded the applicability of Internal Revenue Code sections 1398 and 1399, stating that “even though there is no ‘separate taxable entity’ in a Chapter 12 case, an ‘estate’ still exists, pursuant to 11 U.S.C. §1207(a). . . .”
In a subsequent decision, the Tenth Circuit Bankruptcy Appellate Panel concurred with, and adopted, the Eighth Circuit’s reasoning in Knudsen. See In re Ficken, 430 B.R. 663 (2010).
Hall v. United States is set for argument before the Supreme Court on Tuesday, November 29, 2011.
Professor Nicholas A. Mirkay is currently a Visiting Associate Professor of Law at the Creighton University School of Law, after teaching at Widener University School of Law for the past 8 years. Professor Mirkay graduated with his B.S. in Business Administration, magna cum laude, from Saint Louis University, his Juris Doctor degree from the University of Missouri, and his LL.M. in Taxation, with distinction, from the Georgetown University Law Center. Prior to joining the academy, Professor Mirkay was a tax and business lawyer for over eleven years. In addition to private practice, he served as an Attorney Advisor to the Honorable Carolyn Miller Parr on the United States Tax Court and as an attorney in the Office of IRS Chief Counsel. Professor Mirkay teaches courses on federal income tax, state & local taxation, nonprofits and tax-exempt entities, business associations, and wills & trusts. He serves as a contributing editor to the Nonprofit Law Prof Blog, viewed at http://lawprofessors.typepad.com/nonprofit/. His research and scholarship, which focus primarily on nonprofit organizations, may be viewed at SSRN Author page: http://ssrn.com/author=438292.