Oral argument: Nov. 29, 2011
Appealed from: United States Court of Appeals for the Ninth Circuit (Aug. 16, 2010)
Petitioners Lynwood and Brenda Hall filed for Chapter 12 bankruptcy and subsequently sold their family farm, which resulted in a postpetition tax liability of approximately $29,000. The Halls proposed to treat this tax liability as an unsecured dischargeable claim. The IRS objected to the debtors’ plan based on Internal Revenue Code requirements. At trial, the Bankruptcy Court agreed with the IRS that the tax liability was not considered an administrative expense under Bankruptcy Code Section 507(a)(2), covered by Section 1222(a)(2)(A), or entitled to treatment as unsecured dischargeable debt, and therefore that the $29,000 was required to be paid in full outside of the bankruptcy context. On appeal, the Halls argue that their postpetition tax liability should be treated as an unsecured dischargeable debt under Section 1222(a)(2)(A) because, contrary to the Bankruptcy Court’s finding, the tax liability is an administrative expense under Section 507(a)(2). Furthermore, the Halls contend that a Chapter 12 estate can incur a tax liability. Respondent United States argues that postpetition debts are not included in Chapter 12 plans, and that, even if postpetition debts were included, a Chapter 12 estate cannot incur a tax liability because it is not a separate taxable entity. In this case, the Supreme Court will determine the proper application of Section 1222(a)(2)(A) to postpetition tax liabilities.