Internal Revenue Code

Hall v. United States

Issues

After declaring Chapter 12 Bankruptcy and selling their farm, must farmers pay capital gains taxes on that sale, or can this tax be treated as a dischargeable debt that must be paid only after other, higher-priority creditors are  satisfied.

 

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.

Questions as Framed for the Court by the Parties

Whether 11 U.S.C. 1222(a)(2)(A) authorizes the bankruptcy court, in a case brought under Chapter 12 of the Bankruptcy Code, to treat as a dischargeable non-priority claim a federal income tax debt arising out of the debtor’s postpetition sale of a farm asset.

Petitioners Lynwood and Brenda Hall owned a farm in Willcox, Arizona. See Brief for Petitioners, Lynwood D. Hall and Brenda A.

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PPL Corporation v. Commissioner of Internal Revenue

Between 1984 and 1996 the Government of the United Kingdom privatized 32 state-owned utility companies. The Government then instituted a one-time twenty-three percent tax, called a "windfall tax," on the privatized companies based on the difference between each company's profits and sale price. Petitioner PPL Corporation, an energy company, owned a 25 percent share of one of the utility companies that the Government of the United Kingdom privatized. After PPL Corporation paid the tax, it filed a tax claim with the Internal Revenue Service, asserting that PPL Corporation was eligible for a foreign tax credit under Internal Revenue Code § 901, but the Internal Revenue Service denied PPL Corporation's claim. PPL Corporation argues that the windfall tax targets income and therefore qualifies PPL Corporation for credit under § 901. PPL adds that the calculation of the tax involves the value of the company’s net gain. The Commissioner of Internal Revenue argues that the tax is not a tax on income per se but rather a tax on the value of a company. The Commissioner adds that the calculation of the tax measures the ability of a company to generate income. A holding for PPL threatens to undermine the consistency and uniformity of the U.S. tax code as well as curtailing the power of the Commissioner of Internal Revenue to interpret the law. However, a holding for the Commissioner may subject taxpayers in PPL’s position to double taxation.

Questions as Framed for the Court by the Parties

To avoid double taxation, section 901 of the Internal Revenue Code allows U.S. corporations a tax credit for income, war profits, or excess profits taxes paid to another country. This case involves application of section 901 to a "windfall tax" imposed by the United Kingdom. Although it is undisputed that the tax's practical effect is to impose a 51.75% tax on the "excess profits" certain companies earned in the four years after they were privatized, the Third Circuit-at the Commissioner's urging-deemed the tax non--creditable because the U.K. statute nominally taxes the difference between two numbers, one of which is driven exclusively by profitability during the four-year period, rather than nominally taxing the profits themselves. In a case arising out of the same U.K. tax, same tax court proceedings, and same evidentiary record, the Fifth Circuit reached the opposite conclusion and affirmed the Tax Court's considered view. Recognizing that it was creating a clear circuit split, the Fifth Circuit affirmed that courts must look beyond the form and labels of a foreign tax statute and consider the tax's practical operation and intended effect when determining whether it is creditable for U.S. tax purposes.

The question presented is:

Whether, in determining the creditability of a foreign tax, courts should employ a formalistic approach that looks solely at the form of the foreign tax statute and ignores how the tax actually operates, or should employ a substance based approach that considers factors such as the practical operation and intended effect of the foreign tax.

Issue

Should a U.S. company receive U.S. tax credit for paying the United Kingdom’s windfall tax?

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United States v. Clintwood Elkhorn Mining Co.

Issues

Must a taxpayer seek repayment and interest of unconstitutionally levied taxes only through IRS Tax Code administrative remedies, or may a taxpayer alternatively bring claims for damages and interest under the Tucker Act, which applies a less restrictive statute of limitations?

 

The Clintwood Elkhorn Mining Company sought to recover export tax payments after a federal court found the 1978 tax unconstitutional. Clintwood filed timely administrative refund claims under the IRS Tax Code within its three-year statute of limitations, and received repayments with interest for 1997 to 1999. However, Clintwood also filed an Export Clause damages claim for tax payments from 1994 to 1996 under the Tucker Act, which has a longer six-year statute of limitations. The government argued that the Tax Code provides the exclusive remedy for such refunds, while Clintwood argued that the Tucker Act alternative best remedies the government's unconstitutional taxation. The Court of Federal Claims found that Clintwood was entitled to receive damages, but not interest, under the Tucker Act. On appeal, the Federal Circuit awarded Clintwood both damages and interest for its 1994 to 1996 payments. The Supreme Court will determine whether Clintwood can file claims for repayment of unconstitutional taxes under the Tucker Act, and whether these alternative claims include interest awards. In addition to affecting the outcome of similar pending cases, the Court's decision will likely affect all taxpayers by determining the amount of reimbursement for taxes later found to be unconstitutional.

Questions as Framed for the Court by the Parties

Whether a taxpayer who would have been entitled to file a tax refund action in federal court to seek a refund of taxes (and interest thereon), but who failed to satisfy a statutory prerequisite to such an action (namely, the filing of a timely administrative refund claim) and is therefore barred from bringing such an action, may obtain a refund, and interest thereon, through an action directly under the Constitution pursuant to the Tucker Act, 28 U.S.C. 1491(a)?

In 1978, Congress passed a law taxing coal exports from United States mines. Clintwood Elkhorn Mining Company v. United States, 473 F.3d 1373, 1374 (Fed. Cir. 2007); 26 U.S.C.

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