4. Chapter 12 bankruptcy taxation. In 2012, the U.S. Supreme Court decided a Chapter 12 (farm) bankruptcy case involving one aspect of the changes made to bankruptcy law in 2005. The 2005 Bankruptcy Act allows a Chapter 12 debtor to treat claims arising out of “claims owed to a governmental unit” as a result of “sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation” to be treated as an unsecured claim that is not entitled to priority under Section 507(a) of the Bankruptcy Code, provided the debtor receives a discharge. Under prior law, taxes were a priority claim and had to be paid in full.

The United States Court of Appeals for the Eighth Circuit had ruled that a debtor’s pre-petition sale of slaughter hogs came within the scope of the provision, and that the provision changed the character of the taxes from priority status to unsecured such that, upon discharge, the unpaid portion of the tax is discharged along with interest or penalties.*6 The court also held the statute applies to post-petition taxes and that those taxes can be treated as an administrative expense. Such taxes can be discharged in full if provided for in the Chapter 12 plan and the debtor receives a discharge.*7 Upon the filing of a Chapter 12, a separate taxpaying entity apart from the debtor is not created. That is an important point in the context of the 2005 amendment. The debtor remains responsible for taxes triggered in the context of Chapter 12. That’s a key point because the amendment allows non-priority treatment for claims entitled to priority under 11 U.S.C. §507(a)(2). That provision covers administrative expenses that are allowed by 11 U.S.C. §503(b)(B) which includes any tax that the bankruptcy estate incurs. Pre-petition taxes are covered by 11 U.S.C. §507(a)(8). But post-petition taxes, to be covered by the amendment, must be incurred by the bankruptcy estate, as is the case with administrative expenses. Indeed, the IRS position is that post-petition taxes are not “incurred by the estate” as is required for a tax to be characterized as an administrative expense in accordance with 11 U.S.C. §503 (b)(1)(B)(i), and that post-petition taxes constitute a liability of the debtor rather than the estate.*8 The U.S. Circuit Courts of Appeal for the Ninth and Tenth Circuits agreed with the IRS position.*9 On review of the Ninth Circuit’s opinion, the U.S. Supreme Court also agreed. So, unless additional legislation is enacted to change the statutory language, timing of asset sales to ensure that taxes are triggered before a Chapter 12 petition is filed will be necessary. Hall v. United States, 132 S. Ct. 1882 (U.S. 2012).