By a 5-4 split decision, the Supreme Court finds that capital gains
taxes incurred through the post-petition sale of assets to fund the Chapter 12
plan are not dischargeable because they are not incurred by the estate under Section
503(b) and thus are neither collectible nor dischargeable in the debtor’s Chapter
12 plan:
LYNWOOD D. HALL,
ET UX., v. UNITED STATES, 132 S. Ct. 1882; 182 L. Ed. 2d 840;
2012 U.S. LEXIS 3781; 80 U.S.L.W. 4357 (November 29, 2011, Argued ; May 14,
2012, Decided)
(Justice Sotomayor delivered the Opinion of the Court, in which Justices Roberts, Scalia, Thomas & Alito joined. Justice Breyer filed a dissenting Opinion, joined by Justices Kennedy, Ginsburg & Kagon).
(Justice Sotomayor delivered the Opinion of the Court, in which Justices Roberts, Scalia, Thomas & Alito joined. Justice Breyer filed a dissenting Opinion, joined by Justices Kennedy, Ginsburg & Kagon).
PROCEDURAL POSTURE:
Petitioner bankruptcy debtors who filed a bankruptcy petition under Chapter 12
and then sold their farm proposed a plan which provided for treatment of the
capital gains tax from the sale as an unsecured claim, and respondent United
States objected. Upon the grant of a writ
of certiorari, the debtor appealed the judgment of the U.S. Court of
Appeals for the Ninth Circuit which held that the tax was not subject to treatment
in the debtors' plan.
OVERVIEW: The debtors contended that the sale occurred post-petition for the benefit of creditors of the estate, and thus the tax was incurred by the estate within the meaning of 11 U.S.C. Section 503(b)and was stripped of priority status and downgraded to a general unsecured claim by 11 U.S.C. Section 1222(a). The U.S. Supreme Court held that the federal income tax liability resulting from the debtors' post-petition farm sale was not incurred by the estate under Section 503(b) and thus was neither collectible nor dischargeable in the debtors' Chapter 12 plan. The Internal Revenue Code recognized taxable bankruptcy estates by Chapter and provided that the Chapter 12 estate was not a separate taxable entity, and thus the tax was the individual responsibility of the debtors and was not incurred by the estate. Neither the fact that the sale occurred post-petition nor the fact that the tax would be paid by the debtors from property of the estate automatically established that the tax was incurred by the estate.
OUTCOME: The judgment holding that the tax was not subject to collection or discharge in the debtors' plan was affirmed. 5-4 Decision; 1 Dissent.
OVERVIEW: The debtors contended that the sale occurred post-petition for the benefit of creditors of the estate, and thus the tax was incurred by the estate within the meaning of 11 U.S.C. Section 503(b)and was stripped of priority status and downgraded to a general unsecured claim by 11 U.S.C. Section 1222(a). The U.S. Supreme Court held that the federal income tax liability resulting from the debtors' post-petition farm sale was not incurred by the estate under Section 503(b) and thus was neither collectible nor dischargeable in the debtors' Chapter 12 plan. The Internal Revenue Code recognized taxable bankruptcy estates by Chapter and provided that the Chapter 12 estate was not a separate taxable entity, and thus the tax was the individual responsibility of the debtors and was not incurred by the estate. Neither the fact that the sale occurred post-petition nor the fact that the tax would be paid by the debtors from property of the estate automatically established that the tax was incurred by the estate.
OUTCOME: The judgment holding that the tax was not subject to collection or discharge in the debtors' plan was affirmed. 5-4 Decision; 1 Dissent.
Discussion: 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. Section 1222(a)(2). Under Section 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. Section 507]" in the first place. As relevant here, Section 507(a)(2) covers "administrative expenses allowed under Section 503(b),"
which includes "any tax . . . incurred by the estate." Section 503(b)(1)(B)(i0.
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. Sections 1398, 1399, it does not "incur" post-petition federal income taxes. The Ninth Circuit concluded that because the tax was not "incurred by the estate" under Section 503(b), it was not a priority claim eligible for the Section 1222(a)(2)(A) exception.
Held: The federal income tax liability resulting from petitioners' post-petition farm sale is not "incurred by the estate" under Section 503(b) of the Bankruptcy Code and thus is neither collectible nor dischargeable in the Chapter 12 plan.
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. Sections 1398, 1399, it does not "incur" post-petition federal income taxes. The Ninth Circuit concluded that because the tax was not "incurred by the estate" under Section 503(b), it was not a priority claim eligible for the Section 1222(a)(2)(A) exception.
Held: The federal income tax liability resulting from petitioners' post-petition farm sale is not "incurred by the estate" under Section 503(b) of the Bankruptcy Code and thus is neither collectible nor dischargeable in the Chapter 12 plan.
(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 Sections 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 post-petition
income taxes are thus not "incurred by the estate."
(b) Section 346 of the Bankruptcy Code and its longstanding interplay with IRC Sections 1398 and 1399 reinforce that whether an estate "incurs" taxes turns on Congress' chapter-specific guidance on which estates are separately taxable. The original Section 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 Section 346 to federal taxes two years later: IRC Section 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 Section 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 Section 1222(a)(2)(A) indicated that an estate's liability for taxes turned on separate taxable entity rules.
(c) Chapter 13, on which Chapter 12 was modeled, further bolsters this Court's holding. Established understandings hold that post-petition income taxes are not "incurred by the [Chapter 13] estate" under Section 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 post-petition claims the option of collecting post-petition taxes within the bankruptcy case, would be superfluous if post-petition tax liabilities were automatically collectible inside the bankruptcy. It is thus clear that post-petition income taxes are not automatically collectible in a Chapter 13 plan and are not administrative expenses under Section 503(b). To hold otherwise in Chapter 12 would disrupt settled practices in Chapter 13 cases.
(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 post-petition." 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. 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 Section 1222(a)(2)(A) was to provide debtors with robust relief from tax debts. There may be compelling policy reasons for treating post-petition income tax liabilities as dischargeable. But if Congress intended petitioners' result, it did not so provide in the statute.
(b) Section 346 of the Bankruptcy Code and its longstanding interplay with IRC Sections 1398 and 1399 reinforce that whether an estate "incurs" taxes turns on Congress' chapter-specific guidance on which estates are separately taxable. The original Section 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 Section 346 to federal taxes two years later: IRC Section 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 Section 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 Section 1222(a)(2)(A) indicated that an estate's liability for taxes turned on separate taxable entity rules.
(c) Chapter 13, on which Chapter 12 was modeled, further bolsters this Court's holding. Established understandings hold that post-petition income taxes are not "incurred by the [Chapter 13] estate" under Section 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 post-petition claims the option of collecting post-petition taxes within the bankruptcy case, would be superfluous if post-petition tax liabilities were automatically collectible inside the bankruptcy. It is thus clear that post-petition income taxes are not automatically collectible in a Chapter 13 plan and are not administrative expenses under Section 503(b). To hold otherwise in Chapter 12 would disrupt settled practices in Chapter 13 cases.
(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 post-petition." 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. 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 Section 1222(a)(2)(A) was to provide debtors with robust relief from tax debts. There may be compelling policy reasons for treating post-petition income tax liabilities as dischargeable. But if Congress intended petitioners' result, it did not so provide in the statute.
DISSENT: Chapter 12 of the Bankruptcy Code helps family farmers in economic difficulty reorganize their debts without losing their farms. Consistent with the chapter's purposes, Congress amended Section 1222(a) of the Code to enable the debtor to treat certain capital gains tax claims as ordinary unsecured claims. 11 U.S.C. Section 1222(a)(2)(A). The Court's holding prevents the Amendment from carrying out this basic objective. I would read the statute differently, interpreting it in a way that, in my view, both is consistent with its language and allows the Amendment better to achieve its purposes.
Supreme Court holds 8-0 that the Secured Creditor is entitled to credit bid its lien at an 11 U.S.C. Section 363(b) sale under Chapter 11 "cram down" plan:
RADLAX GATEWAY
HOTEL, LLC, ET AL., PETITIONERS v. AMALGAMATED BANK, 2012 U.S. LEXIS 3944
(April 23, 2012,
Argued, May 29, 2012, Decided)(Justice Scalia delivered the opinion of the Court,
in which all other Members joined, except Kennedy, who took no part in the
decision of the case).
PROCEDURAL POSTURE: A bankruptcy court denied
petitioner debtors' request to confirm a "cramdown" bankruptcy plan
over respondent lien holder bank's objection, finding that a proposed auction
to sell the encumbered asset free and clear of a lien without permitting the
bank to credit-bid did not comply with 11 U.S.C. Section 1129(b)(2)(A)'s requirements for cram down plans. The U.S. Court of
Appeals for the Seventh Circuit affirmed. Certiorari was granted.
OVERVIEW: Reading 11 U.S.C. Section 1129(b)(2)(A)(iii) to permit precisely what Section 1129(b)(2)(A)(ii) proscribed was hyperliteral and contrary to common sense. Section 1129(b)(2)(A)(ii) was a detailed provision spelling out the requirements for selling collateral free of liens, while Section 1129(b)(2)(A)(iii) was broadly worded, saying nothing about such a sale. The general language of Section 1129(b)(2)(A)(iii) could not apply to a matter specifically dealt with in Section 1129(b)(2)(A)(ii). Section 1129(b)(2)(A)(i) was the rule for plans for a lien remaining on the property, Section 1129(b)(2)(A)(ii) was the rule for plans for sales free and clear of the lien, and Section 1129(b)(2)(A)(iii) was a residual provision covering dispositions under all other plans, where the creditor received the property as the "indubitable equivalent" of its lien. Thus, debtors could not sell property free of liens under Section 1129(b)(2)(A) without allowing lienholders to credit-bid, as required by 1129(b)(2)(A)(ii). Sales free of liens under Section 1129(b)(2)(A) had to satisfy Section 1129(b)(2)(A)(ii)'s requirements, not the requirements of both Section 1129(b)(2)(A)(ii) and (iii). The distinction between approval of bid procedures and plan confirmation was irrelevant.
OVERVIEW: Reading 11 U.S.C. Section 1129(b)(2)(A)(iii) to permit precisely what Section 1129(b)(2)(A)(ii) proscribed was hyperliteral and contrary to common sense. Section 1129(b)(2)(A)(ii) was a detailed provision spelling out the requirements for selling collateral free of liens, while Section 1129(b)(2)(A)(iii) was broadly worded, saying nothing about such a sale. The general language of Section 1129(b)(2)(A)(iii) could not apply to a matter specifically dealt with in Section 1129(b)(2)(A)(ii). Section 1129(b)(2)(A)(i) was the rule for plans for a lien remaining on the property, Section 1129(b)(2)(A)(ii) was the rule for plans for sales free and clear of the lien, and Section 1129(b)(2)(A)(iii) was a residual provision covering dispositions under all other plans, where the creditor received the property as the "indubitable equivalent" of its lien. Thus, debtors could not sell property free of liens under Section 1129(b)(2)(A) without allowing lienholders to credit-bid, as required by 1129(b)(2)(A)(ii). Sales free of liens under Section 1129(b)(2)(A) had to satisfy Section 1129(b)(2)(A)(ii)'s requirements, not the requirements of both Section 1129(b)(2)(A)(ii) and (iii). The distinction between approval of bid procedures and plan confirmation was irrelevant.
OUTCOME: The judgment of the Seventh Circuit refusing the debtors'
proposed auction procedure was affirmed. 8-0 Decision; Justice Kennedy took no
part in the decision.
Discussion: To finance the purchase of a commercial property and associated renovation and construction costs, petitioners (debtors) obtained a secured loan from an investment fund, for which respondent (Bank) serves as trustee. The debtors ultimately became insolvent, and sought relief under Chapter 11 of the Bankruptcy Code. Pursuant to 11 U.S.C. Section 1129(b)(2)(A), the debtors sought to confirm a "cramdown" bankruptcy plan over the Bank's objection. That plan proposed selling substantially all of the debtors' property at an auction, and using the sale proceeds to repay the Bank. Under the debtors' proposed auction procedures, the Bank would not be permitted to bid for the property using the debt it is owed to offset the purchase price, a practice known as "credit-bidding." The Bankruptcy Court denied the debtors' request, concluding that the auction procedures did not comply with Section 1129(b)(2)(A)'s requirements for cramdown plans. The Seventh Circuit affirmed, holding that Section 1129(b)(2)(A) does not permit debtors to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit-bid.
Discussion: To finance the purchase of a commercial property and associated renovation and construction costs, petitioners (debtors) obtained a secured loan from an investment fund, for which respondent (Bank) serves as trustee. The debtors ultimately became insolvent, and sought relief under Chapter 11 of the Bankruptcy Code. Pursuant to 11 U.S.C. Section 1129(b)(2)(A), the debtors sought to confirm a "cramdown" bankruptcy plan over the Bank's objection. That plan proposed selling substantially all of the debtors' property at an auction, and using the sale proceeds to repay the Bank. Under the debtors' proposed auction procedures, the Bank would not be permitted to bid for the property using the debt it is owed to offset the purchase price, a practice known as "credit-bidding." The Bankruptcy Court denied the debtors' request, concluding that the auction procedures did not comply with Section 1129(b)(2)(A)'s requirements for cramdown plans. The Seventh Circuit affirmed, holding that Section 1129(b)(2)(A) does not permit debtors to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit-bid.
Held: The debtors may not obtain confirmation of a Chapter 11 cramdown
plan that provides for the sale of collateral free and clear of the Bank's
lien, but does not permit the Bank to credit-bid at the sale.
