The Supreme Court will be hearing the case of Lynwood and Brenda Hall v. United States, more specifically the IRS, to determine if the family farmers should be forced to pay in full tax debts incurred after a forced sell of property during Chapter 12 bankruptcy.
The details of the Chapter 12 bankruptcy case:
The Debtors are family farmers whose bankruptcy filing was governed by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and 11 U.S.C. § 1222(a)(2)(A). After the filing, the Bankruptcy Court granted Debtors’ motion to sell their 320-acre farm for the sum of $960,000. The sale of the farmland generated a capital gains tax of about $29,000. Debtors’ plan proposed to include that tax liability as an unsecured claim, which would be paid in full to the extent that funds were available; otherwise it would be paid pro rata with the other similarly situated claims, and the balance discharged. Relying on In re Knudsen,356 B.R. 480 (Bankr.N.D.Iowa 2006), aff’d in part and rev’d in part,389 B.R. 643 (N.D.Iowa 2008), the Debtors argued that, under § 1222(a)(2)(A), taxes generated by the sale of farming assets are treated as unsecured debt and are not entitled to priority if the debtor receives a discharge.
The IRS challenged the bankruptcy plan saying that the debtors should be forced to pay the taxes in full even if they were not financially able to do so. However, the bankruptcy court disagreed, saying that the IRS does not have the right to veto the fresh start that bankruptcy is designed to offer debtors. They also said that it was counterproductive for farmers to be forced to pay capital gains taxes in full when these taxes are incurred because they are trying to pay down debts in bankruptcy by selling property, livestock and other assets. If the IRS is able to enforce full payment of these postpetition taxes over the decision of the bankruptcy court, then the entire bankruptcy fresh start for the debtor is in jeopardy of being undermined.