Smith v. United States (In Re Smith)
447 B.R. 435
Bankr. W.D. Pa.2011Background
- Debtors Gene and Charleen Smith, dairy farmers in Union City, Pennsylvania, filed a Chapter 12 petition on June 20, 2006.
- Their Amended Plan was confirmed on interim basis December 19, 2006 and finally confirmed November 30, 2007; plan funded by milk cooperative and required title to remain with debtors.
- There was no sale of farm assets contemplated or provided for in the Plan, and the IRS was not listed as a creditor or notified.
- A postconfirmation auction of farm assets occurred on September 7, 2009, with net proceeds to the Trustee, generating a capital gains tax liability.
- Debtors moved to determine that such capital gains tax could be treated as a general unsecured claim under Section 1222(a)(2)(A), arguing postconfirmation taxation falls within that provision.
- The IRS opposed, contending Section 1222(a)(2)(A) does not apply to postconfirmation tax arising from sale of farm assets.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does 1222(a)(2)(A) apply to postconfirmation capital gains tax? | Smiths contend postconfirmation gain tax is unsecured under 1222(a)(2)(A). | IRS argues the provision does not cover postconfirmation taxes arising from farm asset sales. | No; 1222(a)(2)(A) does not govern postconfirmation capital gains tax in this context. |
| Is the capital gains tax incurred by the estate for priority purposes under 507 when the estate is not a separate taxable entity in Chapter 12? | Tax is incurred by the estate postpetition/postconfirmation and thus should receive priority. | Taxes arise postconfirmation and are not incurred by the estate as a separate taxable entity. | Taxes arising from postconfirmation sale are not entitled to priority under 507. |
| Can the plan be modified postconfirmation to include the IRS as a creditor and address the tax claim under 1222(a)(2)(A)? | Proposed 4th Amended Plan would add the IRS and apply 1222(a)(2)(A) treatment. | Postconfirmation modification cannot add omitted creditors or reconfigure tax treatment in this manner. | Modification to add the IRS as creditor and apply 1222(a)(2)(A) treatment is not permitted; plan remains unaltered. |
| Does sovereign immunity bar the court from ruling on the Tax Motion? | Debtors seek in rem relief against a governmental unit; sovereign immunity may not bar. | IRS asserts sovereign immunity limits the court's authority. | Sovereign immunity does not bar proceeding; however, on merits the relief is denied for other reasons. |
| Should postconfirmation sale proceeds be treated as property of the estate under 1207(a) to support 1222(a)(2)(A) analysis? | Proceeds may be estate property under 1207(a), supporting 1222(a)(2)(A) treatment. | Proceeds were not property of the estate; plan provides title remains with debtors. | Proceeds are not property of the estate; 1222(a)(2)(A) does not apply. |
Key Cases Cited
- Knudsen v. IRS, 581 F.3d 696 (8th Cir. 2009) (postpetition incurrence of tax; separate taxable entity in Chapter 12 not created)
- Hall v. United States, 617 F.3d 1161 (9th Cir. 2010) (plain-meaning approach; estate not incur tax; no priority under 1222(a)(2)(A))
- Ficken, 430 B.R. 663 (Bankr. D. Colo. 2010) (postpetition tax treatment under 1222(a)(2)(A) considerations)
- Dawes, 382 B.R. 509 (Bankr. D. Kan. 2008) (Chapter 12 tax treatment and estate concepts in postpetition context)
- In re Dawes, 415 B.R. 815 (D. Kan. 2009) (appeal docketed; related to postpetition tax treatment in Chapter 12)