Summary of a Recent
Judicial Development in
Bankruptcy

Taxes Accrued from the Sale of Farm Assets in Chapter 12
Treated as Unsecured Claims and Subject to Dismissal

Eric H. Foy
National AgLaw Center Research Associate

Summary of Decision

In In re Schilke, Nos. 4:07CV3282, 06-41813, 2008 WL 4224279 (D. Neb. Sept. 9, 2008), the United States District Court for the District of Nebraska affirmed the bankruptcy court's judgment which held that farmer-debtors are allowed to treat post-petition taxes resulting from the sale of farm assets as administrative expenses of the estate, causing those taxes to be classified as unsecured claims without priority and subject to dismissal under 11 U.S.C. § 1222(a)(2)(A).

Background

Debtor, a farmer, filed a Chapter 12 bankruptcy petition. Id. at *1. Shortly thereafter, Debtor filed a Chapter 12 plan that provided for the sale of real estate and breeding livestock (farm assets) with the capital gains to be treated as unsecured debt without priority pursuant to 11 U.S.C. § 1222(a)(2)(A). Id. The United States, on behalf of the Internal Revenue Service, objected to the plan, claiming that post-petition taxes were not administrative expenses and therefore the code provision did not apply. Id. After a hearing on the matter, the bankruptcy court overruled the government's objection and confirmed the Chapter 12 plan. Id. The United States filed a notice of appeal challenging the confirmation, and elected to have the appeal heard in district court. Id. at *2.

Arguments

Debtor relied on In re Knudson, 356 B.R. 480 (Bankr. N.D. Iowa 2006), which held that post-petition taxes resulting from the sale of farm assets could be classified as administrative expenses entitled to priority under 11 U.S.C. § 503(b)(1)(B), and as such, could be treated as unsecured claims without penalty under 11 U.S.C. § 1222(a)(2)(A). Id.

The United States relied on In re Hall, 376 B.R. 741 (Bankr. D. Ariz. 2007), in which the bankruptcy court held that post-petition taxes were not administrative expenses because no taxable estate was created in a Chapter 12 bankruptcy. Id. Without the creation of a taxable estate, 11 U.S.C. § 1222(a)(2)(A) did not apply to capital gains from the sale of farm assets. Id. Additionally, the United States argued the absence of specific language in the Bankruptcy Code to include post-petition tax claims among the list of priority claims indicated Congress's intent to exclude them from priority treatment. Id. at *4.

Analysis and Holdings

According to the court, the issue on appeal was whether the bankruptcy court erred in attributing the taxes from the post-petition sale to the estate and not to the debtor, and treating the United States' resulting claim as unsecured pursuant to 11 U.S.C. § 1222(a)(2)(A). Id. at *2. In answering this question, the court found persuasive case law supporting the conclusion that farmer-debtors should be allowed to treat post-petition taxes from the sale of farm assets as administrative expenses and classify those taxes as unsecured claims without priority and subject to dismissal under 11 U.S.C. § 1222(a)(2)(A). Id. at *4. The court believed that such an interpretation of the bankruptcy code was more consistent with Congress's intent to provide meaningful relief to family farmers. Id.

The case was decided on September 9, 2008.