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Supreme Court rules on Chapter 12 bankruptcy tax issue

The US Supreme Court [official website] ruled 5-4 [opinion, PDF] Monday in Hall v. United States [SCOTUSblog backgrounder] that family farmers filing bankruptcy under Chapter 12 of the bankruptcy code [text] cannot discharge a capital gains tax incurred by a post-petition sale of a farm, as the profit of that sale is not considered part of the estate. The majority, in an opinion authored by Justice Sonia Sotomayor, declared that taxes incurred by a post-petition sale of the farm to aid the estate are incurred by the individuals who sold the farm, not the estate itself:

Chapter 12 estates are not taxable entities. Petitioners, not the estate itself, are required to file the tax return and are liable for the taxes resulting from their postpetition farm sale. The postpetition federal income tax liability is not "incurred by the estate" and thus is neither collectible nor dischargeable in the Chapter 12 plan.
Justice Stephen Breyer filed a dissent, arguing that a recent amending of the code [11 USC §§ 1222(a)(2)(A)] to Chapter 12 allows for the downgrade of capital gains taxes to unsecured creditors within the plan. The majority suggested that if this was the congressional intent, they are welcome to amend the code further to allow for that.

The court affirmed the ruling [opinion text] of the US Court of Appeals for the Fourth Circuit. The Supreme Court granted certiorari in the case in June and heard oral arguments [JURIST reports] in November.

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