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US Supreme Court rules farm sale income tax not dischargeable in bankruptcy

The federal income tax liability resulting from the sale of a farm after a Chapter 12 bankruptcy filing is not “incurred by the estate” under §503(b) of the Bankruptcy Code and thus is neither collectible nor dischargeable in the bankruptcy plan, the U.S. Supreme Court has ruled.

The case involved a family who owned a farm and filed for bankruptcy under Chapter 12, which allows family farmers and fisherman to petition for relief from debts.

The family then sold its farm for $960,000, and the profit resulted in a capital gains tax assessment of $29,000.

The Internal Revenue Service contended that the family must pay the tax because it was incurred by them, not the bankruptcy estate.

The family claimed that the tax was dischargeable as an “administrative expense” incurred by the bankruptcy estate.

The bankruptcy court agreed with the IRS, holding that filing for bankruptcy does not form a “separate taxable entity.”

A U.S. District Court reversed, finding for the family. But the 9th Circuit reversed again, ruling in the IRS’s favor.

The Supreme Court agreed to hear the case, and in a 5-4 ruling affirmed the 9th Circuit. Writing for the majority, Justice Sonia Sotomayor said the language of the Bankruptcy Code did not permit the tax liability to be dischargeable.

“[T]here may be compelling policy reasons for treating post-petition income tax liabilities as dischargeable. But if Congress intended that result, it did not so provide in the statute,” Sotomayor wrote. “Given the statute’s plain language, context, and structure, it is not for us to rewrite the statute, particularly in this complex terrain of interconnected provisions and exceptions enacted over nearly three decades.”

Justice Stephen Breyer wrote a dissent that was joined by Justices Anthony M. Kennedy, Ruth Bader Ginsburg and Elena Kagan.

U.S. Supreme Court. Hall v. U.S., No. 10-875.


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