Summary of a Recent
Judicial Development in
Bankruptcy

Post-Petition Tax Treated as Unsecured Claim Pursuant to 11 U.S.C. § 1222

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Uhrenholdt, No. BK06-40787, 2009 WL 198966 (Bankr. D. Neb. Jan. 26, 2009), the United States Bankruptcy Court for the District of Nebraska held that a debtor's post-petition self-employment taxes, which arose from the sale of corn he had grown in his previous farming business, were to be treated as a general unsecured claim pursuant to 11 U.S.C. § 1222 because the corn was bought and used by the debtor's new business, a cattle feedlot, and had thus changed from a farm product to a "farm asset" subject to § 1222(a)(2)(A) treatment.

Background

The Internal Revenue Service (IRS) filed a motion to compel payment of post-petition self-employment tax. Id. at *1. The taxes were incurred in 2006 by the sale of the debtor's 2005 corn crop. Id. The debtor's confirmed Chapter 12 plan stated that any government claim which "arises out of the sale of assets used in the debtor's farming operation (which sale occurred or occurs pre-petition or post-petition during the pendency of this case) shall be treated under 11 U.S.C. § 1222 as a general unsecured claim." Id. The parties disputed whether the corn was a "product" or a "farm asset" as described by § 1222(a)(2)(A). Id.

Arguments

The IRS argued that the corn was the "product" of the debtor's farming operation rather than an "asset" because it was raised for the purpose of being sold, and therefore its claim should not be treated as an unsecured claim pursuant to § 1222(a)(2)(A). Id. at *1-2.

The debtor argued that the corn was an "asset" of his reorganized farming business because he switched from raising crops to managing a cattle feedlot in 2006, and he caused the feedlot to buy and use the 2005 corn crop as feed for that operation. Id.

Analysis and Holdings

Section 1222(a)(2)(A) provides that claims owed to a governmental unit that "arise as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor's farming operation" are to be treated as unsecured. Id. at *1. The issue before the court was whether the sale of corn was a sale "of any farm asset used in the debtor's farming operation." Id. at *2. The court noted that this situation was somewhat unique because the debtor "was clearly using the 2005 corn in his reorganized 2006 farming operation," and by doing so, he had effectively changed his operations such that the corn changed from a product to an asset used in his new business. Id. Therefore, the court held that the tax arising from the sale of the corn should be treated as a general unsecured claim pursuant to 11 U.S .C. § 1222(a)(2)(A), and denied the IRS's motion to compel payment. Id. at *2-3.

The case was decided on January 26, 2009.