Hall v. United States
566 U.S. ___ (2012)

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Justia Opinion Summary
This case arose when petitioners filed for Chapter 12 bankruptcy and then sold their farm. Under Chapter 12 of the Bankruptcy Code, farmer debtors could treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities. 11 U.S.C. 1222(a). The Court held that federal income tax liability resulting from petitioners' post-petition farm sale was not "incurred by the estate" under 11 U.S.C. 503(b) of the Bankruptcy Code and thus was neither collectible nor dischargeable in the Chapter 12 plan. Therefore, the Court affirmed the judgment of the Ninth Circuit.

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321 .

SUPREME COURT OF THE UNITED STATES

Syllabus

HALL et ux. v. UNITED STATES

certiorari to the united states court of appeals for the ninth circuit

No. 10–875. Argued November 29, 2011—Decided May 14, 2012

Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan. The plan must provide for full payment of priority claims. 11 U. S. C. §1222(a)(2). Under §1222(a)(2)(A), however, certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to general, unsecured claims that are dischargeable after less than full payment. That exception applies only to claims “entitled to priority under [ 11 U. S. C. §507]” in the first place. As relevant here, §507(a)(2) covers “administrative expenses allowed under §503(b),” which includes “any tax . . . incurred by the estate.” §503(b)(B)(i).

          Petitioners filed for Chapter 12 bankruptcy and then sold their farm. They proposed a plan under which they would pay off outstanding liabilities with proceeds from the sale. The Internal Revenue Service (IRS) objected, asserting a tax on the capital gains from the sale. Petitioners then proposed treating the tax as an unsecured claim to be paid to the extent funds were available, with the unpaid balance being discharged. The Bankruptcy Court sustained an IRS objection, the District Court reversed, and the Ninth Circuit reversed the District Court. The Ninth Circuit held that because a Chapter 12 estate is not a separate taxable entity under the Internal Revenue Code (IRC), 26 U. S. C. §§1398, 1399, it does not “incur” postpetition federal income taxes. The Ninth Circuit concluded that because the tax was not “incurred by the estate” under §503(b), it was not a priority claim eligible for the §1222(a)(2)(A) exception.

Held: The federal income tax liability resulting from petitioners’ postpetition farm sale is not “incurred by the estate” under §503(b) of the Bankruptcy Code and thus is neither collectible nor dischargeable in the Chapter 12 plan. Pp. 4−17.

     (a) The phrase “incurred by the estate” bears a plain and natural reading. A tax “incurred by the estate” is a tax for which the estate itself is liable. Only certain estates are liable for federal income taxes. IRC §§1398 and 1399 define the division of responsibilities for the payment of taxes between the estate and the debtor on a chapter-by-chapter basis. Under those provisions, a Chapter 12 estate is not a separately taxable entity. The debtor—not the trustee—is generally liable for taxes and files the only tax return. The postpetition income taxes are thus not “incurred by the estate.” Pp. 4−5.

     (b) Section 346 of the Bankruptcy Code and its longstanding interplay with IRC §§1398 and 1399 reinforce that whether an estate “incurs” taxes turns on Congress’ chapter-specific guidance on which estates are separately taxable. The original §346 established that state or local income taxes could be imposed only on the estate in an individual-debtor Chapter 7 or 11 bankruptcy, and only on the debtor in a Chapter 13 bankruptcy. Congress applied the framework of §346 to federal taxes two years later: IRC §1398 and 1399 established that the estate is separately taxable in individual-debtor Chapter 7 or 11 cases, and not separately taxable in Chapter 13 (and now Chapter 12) cases. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 subsequently amended §346, expressly aligning its assignment of state or local taxes with the IRC separate taxable entity rules for federal taxes. This Court assumes that Congress is aware of existing law when it passes legislation, and the existing law at the enactment of §1222(a)(2)(A) indicated that an estate’s liability for taxes turned on separate taxable entity rules. Pp. 6−9.

     (c) Chapter 13, on which Chapter 12 was modeled, further bolsters this Court’s holding. Established understandings hold that postpetition income taxes are not “incurred by the [Chapter 13] estate” under §503(b) because they are the liability of the Chapter 13 debtor alone. The Government has also long hewed to this position. Section 1305(a)(1), which gives holders of postpetition claims the option of collecting postpetition taxes within the bankruptcy case, would be superfluous if postpetition tax liabilities were automatically collectible inside the bankruptcy. It is thus clear that postpetition income taxes are not automatically collectible in a Chapter 13 plan and are not administrative expenses under §503(b). To hold otherwise in Chapter 12 would disrupt settled practices in Chapter 13 cases. Pp. 9−12.

     (d) None of the contrary arguments by petitioners and the dissent overcomes the statute’s plain language, context, and structure. There is no textual basis for giving “incurred by the estate” a temporal meaning, such that it refers to all taxes “incurred postpetition.” Nor does the text support deeming a tax “incurred by the estate” whenever it is paid by the debtor out of property of the estate. Section 503’s legislative history is not inconsistent with this Court’s holding, and the Court has cautioned against allowing ambiguous legislative history to muddy clear statutory language. See Milner v. Department of Navy, 562 U. S. ___, ___. Meanwhile, any cases suggesting that postpetition taxes were treated as administrative expenses are inapposite because they involve corporate debtors, which Congress has singled out for responsibilities paralleling those borne by a separate taxable entity’s trustee. Finally, petitioners contend that the purpose of §1222(a)(2)(A) was to provide debtors with robust relief from tax debts. There may be compelling policy reasons for treating postpetition income tax liabilities as dischargeable. But if Congress intended petitioners’ result, it did not so provide in the statute. Pp. 12−17.

617 F. 3d 1161, affirmed.

     Sotomayor, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Thomas, and Alito, JJ., joined. Breyer, J., filed a dissenting opinion, in which Kennedy, Ginsburg, and Kagan, JJ., joined.

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