Knudsen v. Internal Revenue Service

KNUDSEN, doing H. business Anders Farms; Cynthia Knudsen

as A & C Knudsen, Appellees,

J.

v. SERVICE,

INTERNAL REVENUE

Appellant, Dunbar, Trustee, F.

Carol Trustee, Trustee.

U.S. U.S. Schilke, Debtor, Daniel re James America, Appellant,

United States Schilke; Holly Schilke, D.

James Daniel Holly Schilde;

also known as Denise Schilke; Larry Schilke;

Diane State Nebraska, Department Revenue,

Appellees. 08-2820,

Nos. 08-3627. Appeals,

United States Court of

Eighth Circuit. May

Submitted: 2009. Sept.

Filed: ” appeals,

507.... In these consolidated government challenges applicabili- ty of income taxes out of arising debtors, An- sales H. Cynthia ders Knudsen and J. Knudsen (No. 08-2820) and James Daniel Schilke (No. 08-3627). In Nos. 08-2820 and OS- asserts inapplicable the debt- of farm postpetition ors’ sale assets. 08-2820, No. the contends (1) prepetition the Knudsens’ sale slaughter hogs their does not constitute sale of a “farm asset used in the debtor’s 1222(a)(2)(A) farming under operation” (2) proper allocating and the method for the 2004 tax liability Knudsens’ between tax arising the out of transactions the scope within and Urda, D.O.J., Division, Tax Patrick J. from those arising transactions outside DC, Patrick argued, Washington, J. Urda “proration of its scope is the method” as D.O.J., Ellisen, Washington, Bruce R. and opposed “marginal to the method.” USA, DC, Dummermuth, M. Matt North- below, For the reasons we discussed Iowa, Stecher, ern District of and Joe W. (1) Chapter may hold: treat debtor USA, Nebraska, brief, District of on the postpetition income taxes imposed on the appellants. for pen- debtor’s income earned during the Peiffer, A. Joseph argued, Rap- Cedar dency of the case as administrative ex- IA, Peiffer, ids, Joseph Rapids, A. Cedar (2) 503; penses under U.S.C. Platte, IA, NE, Nisley, R. North on James slaugh- sale of prepetition Knudsens’ their brief, for appellees. hogs ter in 2004 of a constitutes the sale SMITH, RILEY, Before “farm used in the asset debtor’s COLLOTON, Judges. Circuit (3) 1222(a)(2)(A); operation” under “marginal method” is the correct SMITH, Judge. Circuit method tax- to determine allocation of pro- U.S.C. priority es non-priority between vides that a debtor’s must for the of all provide payment priority full we affirm Accordingly, judgment claims under 11 ... “unless bankruptcy court1 No. 08-3627. governmen- the claim is claim owed to a 08-2820, part No. we affirm in tal unit that a result of arises as the sale part judgment reverse in the bank- ... asset used First, ruptcy part court. we reverse the farming operation, in which case the claim bankruptcy holding court’s decision be treated an unsecured claim that shall their prepetition is not entitled to section Knudsens’ sale of Saladino, 1. The Honorable L. United Nebraska. Thomas Bankruptcy Judge States for District of slaughter hogs in 2004 is not their farming operation. entitled to In December 1222(a)(2)(A). Second, the benefit of the Knudsens entered into two ten- part reverse the court’s year hogs Squealers contracts to raise for holding decision “proration meth- (SPI). Pork, Inc. Under the contract’s od” is the correct method to determine the terms, baby SPI provide pigs to the allocation of taxes between priority and Knudsens, and the Knudsens would raise claims, non-priority opposed pigs weight. to market Because of its “marginal Finally, method.” we affirm the disease, fears of swine required SPI part court’s decision completely dispose Knudsens to of their holding that a may debtor they own swine raising hogs before started postpetition treat imposed taxes Knudsens, Consequently, SPI. the debtor’s income earned during 2004, sold the last of their breeding sows pendency of the case as administrative ex- and all of their hogs. They used penses under 503. We remand to the hog proceeds sale payment to make a bankruptcy court with instructions to con- on a loan from Ansgar, St. which was firm the Knudsens’ Fifth Amended and secured hogs. Additionally, be- Plan Reorganization Substituted in ac- change hog cause of the in their operation, opinion. cordance with this Knudsens sold livestock trailer and their farrowing interest some equip- Background

I. ment. The Knudsens also ended their A. Knudsens grain farming operation and leased their Knudsens, The owners aof 160-acre $20,000 160 acres for cash per year. rent farm, Iowa voluntary filed a bankruptcy joint In their 2004 federal income tax petition under 12 of the Bank- return, reported Knudsens farm in- ruptcy Code. The Knudsens’ farming en- $525,384 “livestock, come of for sales of terprise raising hogs. includes In the ear- produce, grains, products.” and other 1990s, ly enlarged the Knudsens hog their figure This included the sale of slaugh- operation, increasing their sow herd to (1) hogs. ter reported The Knudsens net They 250. also built a farrowing house $65,336 (2) 2004, income of for selling and started pigs. Although feeder breeding sale their capital sows as a initially the Knudsens hired others to fat- (3) $34,077, gain of proceeds of the ten hogs, they eventually their built two sale of the farrowing equipment and the barns, finishing the first in 1995 and the livestock trailer an ordinary gain 1996, By second the Knudsens $21,659. As shown on their initial 2004 were operating a hog op- farrow-to-finish return, the Knudsens’ total tax for 2004 eration and selling were their own hogs as $19,550. was their main source of income. Thereafter, the Knudsens filed an 1999, two swine disease outbreaks return, amended 2004 federal income tax stifled the growth profitability of the showing their 2004 federal tax to be hog operation. Knudsens’ Between 2000 $55,839. The Knudsens’ taxes increased lender, the Knudsens and their they (“St. because revoked an election to treat Ansgar St. State Bank Ansgar”), be- hog certain building remodeling came concerned about the costs as financial future expenses rather than to depreciate Knudsens’ farm. Ansgar St. be- came costs willing money less to lend over time. This finance amendment de- result, Knudsens’ farm business. creased farm expenses As for thus in- the Knudsens considered reorganizing creasing the Knudsens’ income. The treatment qualified for shortly af- filed for Knudsens which sets forth 2004 tax re- 11 U.S.C. amended submitting their ter expenses entitled to certain claims and turn. did postpetition and that the taxes priority, Knud- plan, the reorganization In their §of 507’s enumerated qualify for relating tax that income sens contended categories. hogs quali- slaughter sale of the 2004 unsecured claim as an for treatment fied court denied confirma- 1222(a)(2)(A). As to 11 U.S.C. pursuant First, plan. Knudsens’ tion of the result, the Knudsens asserted beneficial bankruptcy court held liability of $43,248 2004 total tax of their for farms treatment an unse- $55,839 be classified as should did not to the Knud- proposed further cured claim. slaughter sale of the prepetition sens’ by selling cer- reorganization funding the court, phrase hogs. According to the equipment, as well as machinery and tain farming operation” in “used in the debtor’s farm. As with of the 160-acre 120 acres be accorded the should hogs, the Knud- the sale of and treatment as the meaning same arising from that the taxes sens asserted used in the trade or busi- phrase “property qualify sales postpetition these 1231(b)(3) In- in 26 ness” claim under as an unsecured treatment (IRC). re ternal Revenue Code In Knud- (Bankr.N.D.Iowa sen, 356 B.R. 485-86 (IRS) omitted). ob- 2006) (internal Revenue Service The Internal quotations Sec- proposed plan, to the Knudsens’ jected 1231(b)(3)“provides capital gain tion treat- things, other the challenging, among from the sale of arising ment for taxes treatment of federal proposed Knudsens’ Id. at 485. The court breeding livestock.” the to the 2004 sale of attributable taxes 1222(a)(2)(A), § § like concluded that the sale of hogs postpetition and slaughter capital to assets. Id. at 486. is limited the According land. to machinery and the taxes, Second, the allocation of as to 1222(a)(2)(A) IRS, apply to taxes § did applied “pro- the IRS’s bankruptcy court slaugh- the 2004 sale of the arising out of amount to determine the ration method” hogs did not slaughter hogs ter because for beneficial treatment qualifies tax that used in the debt- qualify as a “farm asset 1222(a)(2)(A) Knud- § instead of the under con- The IRS farming operation.” or’s The court found “marginal method.” sens’ hogs were not an that the tended the better method is proration that the but rath- farming operation in a asset used determining amount of method for what produced by the product the end er were treatment un- qualifies tax for beneficial 11 U.S.C. operation. See 1222(a)(2)(A) § does not. and what der opposed also The IRS income, deductions, all ex- recognizes It method for allo- proposed the Knudsens’ a tax arriving and credits in at emptions, liability between 2004 tax cating their according percent- to the and allocates claims, con- tax priority unsecured and It divides type of each of income. age took Knudsens’ method tending that to which regard tax without the actual advantage unwarranted “an incorrect and of income. produced the last dollar sales Finally, the IRS tax rates.” of lower at Id. 487. 1222(a)(2)(A) ap- did not maintained that Third, applicability of as to the postpetition sale of the Knudsens’ ply to 1222(a)(2)(A) transac- postpetition land, machinery arguing and 1222(a)(2)(A) tions, bankruptcy court held its benefits restricted estate, priority non-priority taxes may pay through the between Knudsens method, expenses, income as administrative taxes claims. To during the by pendency incurred them calculate a Knudsens should return case, they may a por- income, treat “pro all a second then forma” nonpriority tion unse- of such taxes removing all qualifying tax return sales plan pursuant cured claims income, non-qualifying so that income 1222(a)(2)(A) nonpriori- such at marginal would be taxed lower ty postpetition incurred unsecured taxes rates, shown on “pro and the taxes may discharged prepetition represent forma” return por- would completion after unsecured debts tion of the tax claim entitled plan. status, while the difference between the at 492. Id. taxes shown on the return for all income “pro taxes shown on the forma” Ultimately, bankruptcy reject- court return represent the unsecured proposed ed confirmation Knudsens’ portion bankrupt- of the tax claim. The plan “rulings against certain because its cy erred, law, positions plan make the as matter of [the Knudsens’] proposed unconfirmable.” choosing “proration method” in- stead. parties appealed

Both to the district argued court. Id. at the court Finally, The Knudsens 669. “affirmfed] (1) bankruptcy excluding court erred court’s conclusion that their prepetition slaughter hogs sale may post-petition 12 debtor treat provided by 2004 from the benefit imposed taxes the debtor’s in- (2) applying the IRS’s during pendency come earned “proration method” determine expenses case as administrative amount qualifies of tax that for beneficial may propose 503 and that the pay- treatment under instead of ment expenses of such estate.” Id. “marginal their method.” The IRS chal- court, According such taxes lenged the court’s ruling on were the estate” “incurred within the applicability § the post- of to 503(b)(l)(B)(i), meaning § despite the petition sales of assets. fact that a 12 Chapter estate is not

The district in part entity, court affirmed and separate taxable because “incurred court, part bankruptcy reversed in the re- by liability the to estate” refers when tax bankruptcy manding to the court with in- is incurred rather than to the existence structions to the plan. confirm Knudsens’ separate an estate as a taxable entity. Id. Knudsen, In re B.R. 682 at 680-82. (N.D.Iowa 2008). First, the district court B. Schilke hogs

held that the that the voluntary Schilke filed a bankruptcy pe- Knudsens sold in order to convert their tition Chapter Bankruptcy under hog operation farrow-to-finish into a reor- Thereafter, Code. he submitted ganized hog-raising operation Chap- custom his qual- ter 12 plan bankruptcy ified as “farm used in the court. The assets” Knud- alia, “farming operation” proposed sens’ plan provided, under inter 1222(a)(2)(A). (internal at 664-65 Schilke sell certain farm would assets— omitted). Second, quotations it deter- breeding real estate and livestock. mined that Schilke estimated that his taxable income year

the for tax from the “marginal method” is the correct sale of these $175,000 method to determine the assets and allocation of would be that his esti- 14). (Fil.# The taxes at granted was capital taxes gains mated $33,108. by property treated the proposed The issue are created sale capital taxes as follows: Debtor. I do not be gains by of the estate 503(b)(1)(B) REVENUE lieve that V: INTERNAL

CLASS DEPART- by the regarding SERVICE and NEBRASKA tax “incurred es Any OF REVENUE: only MENT to intended to those tate” was real resulting from the sale of estate tax where the estate itself is a situations in this Plan provided livestock as or fact, entity. In “in separate taxable any amendments or modifications shall curred the estate” has been inter debt without be treated an unsecured post- to mean incurred preted simply provid- priority under 11 USC 507 as petition. Dep’t [Mo. v.] Revenue L.J. (a) ](2)(A). § 1222[ in 11 ed USC Co., [1146,] O’Neill Shoe 64 F.3d (8th Cir.1995) objected provi- (stating bank government [ ] “[t]he The plan, asserting proposed sion court and the district court both ruptcy liabilities, “post-petition Schilke’s tax corporate held while entire pre-confirmation post-confir- whether (i.e. was the estate’ ‘incurred —in be, mation, not, are and cannot administra- ”). Here, post-petition).... curred there estate, bankruptcy tive expenses of estate, an clearly is tax is the result Plan, not be included in Debtor’s should estate, of a sale of In its discharged.” sup- and cannot be happens Debtor to be liable for that tax. brief, argued porting Schilke, (Bankr. B.R. re only applied the benefits D.Neb.2007). claims under 11 U.S.C. priority government appealed to the district case, that, in taxes Schilke’s could court, challenging bankruptcy court’s if only receive under that section plan. confirmation Schilke’s expenses they administrative constituted The district court affirmed the bankruptcy 503(b); pursuant to 11 U.S.C. arising court’s determination that taxes 503(b)(l)(B)(i), a tax must be “incurred postpetition sale of real from estate estate” to be an administrative ex- may livestock be attributed pense. According government, debtor, meaning and not estate this require- taxes issue did meet resulting is an claim unsecured claim ment because a separate entity. estate is not a taxable gov- court overruled II. Discussion objection, that holding ernment’s 08-3627, and the gov- In Nos. 08-2820 though Chapter a 12 bankruptcy even 1222(a)(2)(A) § that in- ernment asserts separate entity, is not a taxable estate applicable to the Knudsens’ and both the estate does exist nonetheless. The postpetition sale Schilke’s of assets. all of property estate consists of the 08-2820, Additionally, govern- in No. the of all filing, debtor on the date (1) the Knudsens’ pre- ment contends that acquires the after com that debtor hogs petition sale of their does case, earnings the all mencement of and a asset not constitute a sale of “farm used the performed by from services debtor operation” under after of the case. commencement (2) 1222(a)(2)(A) § 1207(a). proper method § filed a Debtor motion U.S.C allocating for the Knudsens’ 2004 liabil- personal property real to sell estate (Fil.# 12), ity arising the tax out of the free and clear of liens between within to scope plan may government. transactions which a bind the 1222(a)(2)(A) § arising and the tax from According government, pursuant to the to those its scope transactions outside of 106(a)(1), § it has sovereign waived its im- “proration method.” to, munity regard alia, § with inter has agreed paid therefore to be on its a “When court’s prepetition pursuant to a confirmed judgment appealed court, to the district Chapter plan. government But appellate the district court acts as an 106(a)(1) § contends that does not contain the bankruptcy legal reviews court’s a sovereign waiver of immunity as to findings determinations de novo and of fact § 1222, except to the provi- extent that its for clear error.” Fix v. First State Bank regarding sions (8th plan contents a can Roscoe, Cir.2009) F.3d (internal government bind the as a “creditor” omitted). under quotations and citations 1227(a). § Therefore, government In our position as “the second court of that, review, appellate express an concludes indepen conduct without an waiver dent review of the of sovereign immunity court’s purposes judgment applying claims, the same standards postpetition Chapter (internal review district as the court.” Id. provides postpetition for treatment of a omitted). quotations and citation government claim of the cannot bind the government. A. Applicability 11 U.S.C. Third, government asserts that even 1222(a)(2)(A) § Postpeti- to statutory if the prohibit framework did not tion Transactions 1222(a)(2)(A) application § post- asserts, appeal, On claims, petition arising income tax claims respect Schilke, both Knudsens and from postpetition asset sales would not § apply does not constitute an expense” “administrative un- postpetition First, sale of farm assets. 508(b)(l)(B)(i). § der 11 U.S.C. gov- government argues 12’s ernment 1. Whether Chapter the Framework 12 of postpetition they claims because are not Dictates that 11 U.S.C. “creditors,” i.e., they are not holders of 1222(a)(2)(A) § Apply Cannot to prepetition claims. Postpetition Claims Second, government argues Bankruptcy sovereign Code’s waiver of im- We will government’s first consider the munity § in 11 limits U.S.C. 106 argument the extent that the statutory framework of

705 matured, unmatured, disputed, un- gent, are claims that 12 restricts the Chapter secured, 1222(a)(2)(A) equitable, disputed, legal, or §of the benefits eligible for 101(5)(A). unsecured.[”] U.S.C. claims. prepetition to hand, IRS, govern- a In the case recently con- A court in Kansas district unit, right payment has a to for ment substantially rejected sidered —and —a gain arising taxes from the sale capital by one argument to the advanced similar It thus property. of the Debtors’ present case. See government in the a claim Section against has the debtors. (In Dawes), 08- re No. v. Nazar Dawes terms, 1222, by not limited to its (D.Kan. 1054-WEB, 2009 WL “ Moreover, the court notes “creditors.” 2009) Dawes, In Mar.12, (slip op.). appellant’s suggested construction that that asserted government with statute inconsistent Con- claims, argu- apply postpetition to does not that gress’s apparent adopting intent alia, “Chapter 12 deal ing, plans that inter “[C]ongress to section:” has chosen [sic] pre-petition only treatment recognize uncollectibility of the ma- binding upon creditors only and are claims jority of the income taxes occasioned gov- Id. at The holding such claims.” *3. the sale the farm assets used “con- that its view was ernment contended farming operation. 1226(b)(1), by reading sections firmed financially provide Amendments 1227(a) reject- together.” Id. opportunity strapped family farmers the argument ing government’s their farm- to downsize and restructure apply did not to it because necessity of ing operations without the “creditor,” the district it not was required paying the taxes full as un- stated: Norton, old Chapter der 12.” W. Chapter argues States The United (2009). Bankr.L. Prac.3d 130:6 & binding “credi- only upon are plans to statute its terms is not limited tors,” upon post-petition holders of not “creditors,” it be therefore cannot claims, says binding it “the effect only pre-petition read claims. upon no further plan can extend claims owed to Section addresses points States.” It out United unit, includes the tax “entity as an is defined “creditor” by the claim held IRS. arose against claim the debtor that has a at *5. Id. order at the time or before the govern- The court then addressed debtor; entity an concerning the relief argument that “post-petition ment’s aof against that has a claim the estate by 11 governed 12 cases are 502(f), 348(d), in section specified kind and that when read with U.S.C. 502(h) 502(i) title; or or of this 502(g), 1222(a)(2)(A), the vari- U.S.C. community claim.” entity an that has a post- confirm that holders ous sections 101(10). 11 U.S.C. claims are bound petition *4. Id. at 1226(b)(1) Id. Section states plans.” 1222(a)(2)(A) does not mention each pay- or at time of “[b]efore Section Rather, plan, there specifi- the statute under the ment creditors “creditors.” unpaid claim of the kind paid any gov- to a shall applies “claim[s] owed cally 507(a)(2) of this title.” specified in section unit ... [.”] ernment omitted). (internal quotations is de- The term “claim” 1227(a) provides that “right payment, whether as a fined provisions of a bind judgment, confirmed right [t]he is reduced to not such creditor, debtor, equity each each fixed, contin- liquidated, unliquidated, holder, reaches, general security part- and each also as discussed that infra —and debtor, expenses ordinarily ner in the or not such “are priority whether a 507(a)(2).” creditor, equity pursuant claim of secu- claim to such such section Id. holder, rity or general partner such in The court the govern- determined that is provided plan, “argument foregoing the debtor ment’s sec- creditor, necessarily preclude post-petition or not tions whether such such security holder, equity general such claims fails to take into consideration the specific 1222(a)(2)(A),” partner objected to, in the of section debtor has 1222(a)(2)(A) noting § accepted, rejected plan. has or has specifically exempts from priority status (internal omitted). quotations Id. The a claim to a governmental owed unit that 1226(b)(1) §§ court summarized any arises as a result of the farm sale 1227(a) dictating as that “the confirmed asset, in which case the claim should be plan the debtor binds and all the creditors. treated unsecured. claim as Furthermore, obligates confirmation IRS in instance a is claim owed to a trustee to all payments distribute to credi- unit, governmental it result of tors in accordance with the plan, and vests asset, a farm sale of the farming all in any the rights post- debtors property. The IRS’ reliance section Dawes, petition acquired property.” 1226 and 1227 does not overcome the WL (citing *5 Arkison v. Plata straightforward and specific language of (In Plata), (9th re F.2d Cir. § 1992)). Id. The court also discussed 1222(a)(2)(A), 507. Id. at *6. Under a findWe the rationale of the dis provide shall for the full trict court in persuasive Dawes and now

payment of claims to priority adopt reasoning. entitled un- its As the Dawes court der 507 “unless recognized, nothing the claim ‘is a claim in plain language governmental owed to a unit that arises application restricts its a any prepetition Instead, result of the sale ... provision farm sales. asset provides a operation, stripped used the debtor’s claim is of its if priority case the claim shall status claim “owed to be treated as an governmental unit that unsecured claim that arises as result entitled ’” the sale ... priority under section 507.... asset used Id. at *3. farming operation.” recognized Accordingly, conclude, as did expenses “lists the the district court in and claims that Dawes, have priority nothing bankruptcy.” provision Id. at re *6. 507(a)(8) application stricts its gives only disposi those priority status to 507(a)(2) tions that taxes, certain occur prepetition while debtor files his before “[ajdministrative gives petition, nor status to does expenses 503(b).” apply merely allowed under section “creditors” debtor, as it According court, specifically refers to 1226 “sets governmental out “owed to unit.” expenses administrative paid should be payment before to creditors 2. Whether the Has Government Waived plan.” the confirmed Id. The court Sovereign Immunity its prior noted its “post-peti- conclusion that tion taxes qualify incurred the estate In a argument, govern related expenses administrative pursuant ment sec- asserts that the Bankruptcy Code’s 503(b)” tion conclusion sovereign that this court waiver of immunity in U.S.C. —a

707 plan bind a of a confirmed plan provisions the § limits the extent which debtor, creditor, equity each According to each may government. bind 106(a)(1), holder, part- § it security general and each pursuant the government, immunity debtor, sovereign its with or not the has ner in the whether waived and, alia, to, creditor, § inter U.S.C. regard equity secu- claim of such such therefore, paid on its agreed holder, has be general partner or rity such to a confirmed pursuant prepetition plan, provided for the debtor plan. government But creditor, such such and whether or not 106(a)(1) § not contain that does contends holder, general equity security or such immunity as to 11 sovereign a of waiver to, objected partner the debtor has § to the extent that its except U.S.C. rejected plan. accepted, has has or a plan the contents of provisions regarding added.) (Emphasis government a “creditor” can as bind 101(10)(A) Section of U.S.C. defines 1227(a). Thus, government as, alia, “entity an that has “creditor” inter that, an express waiver concludes without against a the debtor that arose at claim immunity sovereign purposes of of of the time of or before order relief claims, Chapter plan a postpetition turn, In concerning debtor.” postpetition of a provides for treatment 501(a) may informs us who file a government cannot bind the claim of the section, According proof of claim. to this government. may or indenture trustee “[a] creditor an Although review of the record our of proof file a claim.” never raised government indicates that the case, present es- government In the immunity before sovereign defense argues that it is a sentially because the Knud either meaning “creditor” within case, “sovereign or sens’ case Schilke’s 101(10)(A) i.e., against its claims — jurisdictional may a immunity is issue did not arise Knudsens Schilke appeal.” be for the first time raised time of relief—it before order Ark. v. Univ. at Pine Bd. Satcher Bluff cannot be bound under (8th Trustees, 731, 735 558 F.3d Cir. of a provides gov- for the treatment Indus, Browner, 2009) (citing Harmon postpetition claim under ernment’s (8th Cir.1999)). But a 191 F.3d 1227(a) 1222(a)(2)(A), only §as waives immunity” sovereign “belated assertion as to the claim of a sovereign immunity may is a factor that be “relevant “creditor.” Dep’t of waiver.” Rose v. U.S. issue But, (In Rose), previously acknowledged, as we re 930 n. 7 Educ. F.3d “ Cir.1999). 1222(a)(2)(A) (8th Therefore, although exempts from ‘specifically government’s sovereign govern- claim to a will consider the status a owed ” in mind immunity argument, we bear supra Part II.A.1 mental unit.’ See un argument *6). such is belated and its Dawes, 641278, at (quoting 2009 WL can a factor in evaluat timeliness used Nowhere ing government has waived its whether the applica- it condition does immunity. sovereign tion of the section to situations is “creditor” debt- 106(a)(1) provides that “sover- Instead, clearly or. immunity abrogated govern- to a eign “governmental to a unequivocally applies unit to the extent set forth in this mental “govern- unit,” regardless of whether that ... 1227 ... respect [§ ] section turn, qualifies unit” “creditor” 1227 states that mental title.” 1227(a). 503(b)(1)(B)®, § § supra debtor Part thereby under See allowing the II.A.1. Chapter 12 plan expenses to treat such nonpriority unsecured Furthermore, aside the “straight- from § Thus, now address specific forward government’s final argument post- that 1222(a)(2)(A),”Dawes, § 2009 WL petition do qualify taxes not as administra- *6, at government, pursuant tive expenses U.S.C. 106(a)(1), § sovereign has waived its im- 503(b)(1)(B)® § they because are not “in- to, alia, munity regard inter 11 U.S.C. by required curred by estate” as § 503. Section states that if provision. governmen- “the claim a claim a owed to tal unit that arises as a result of the sale Section 1222 of 11 U.S.C. addresses the ... any farm asset used the debtor’s a Chapter contents of debtor’s 12 plan. farming operation,” then the claim is (a)(2)(A), Under subsection such a “treated as an unsecured claim that is not must priority entitled to under section 507.” provide payment, for the full in deferred added.) 507(a)(2) (Emphasis gives Section payments, cash of all claims entitled to priority status to expenses “administrative priority under section unless ... 503(b).” allowed (Emphasis under section the claim is a govern- claim to a owed added.) turn, 503(b)(1)(B)® In allows mental unit that arises as result of the “any by estate, ... incurred transfer, sale, exchange, or other dispo- whether or secured to be unsecured” treat- any sition of farm asset used in the ed as an administrative expense. As ex- operation, plained infra, by “incurred the estate” case the claim shall be treated as an postpetition.” means “incurred See infra claim unsecured not entitled to Part explicitly II.A.3. Section 106 states priority under section but the debt government’s “sovereign immuni- shall be treated in such manner only if ty is abrogated as a governmental unit the debtor discharge.... receives a set extent forth in this section with turn, 507 provides catego- for two respect to ... [§ ] 503 ... this title.” ries of taxes are to priority. entitled Accordingly, we govern- hold that 507(a)(8) gives priority status to sovereign ment’s immunity argument nec- taxes, 507(a)(2) certain prepetition while essarily fails. gives priority status to “administrative ex- 503(b) penses allowed under section of this Postpetition Whether Taxes Qualify title, charges fees and assessed as an Expense” “Administrative Under against chapter the estate under 123 of 503(b)(l)(B)(i) 11 U.S.C. 503(b)(1)(B)® title 28.” Section allows for key question present “any tax ... by estate, incurred cases is whether the postpetition taxes in whether secured unsecured” be treat- curred both Knudsens and Schilke ed as an expense. administrative should be considered administrative ex penses. expenses, previously As We have recognized administrative that “in taxes would have status under 11 curred the estate” means “incurred 507(a)(2) U.S.C. postpetition.”2 O’Neill, via 64 F.3d recognize 2. We 346(c) (stating O’Neill was that 11 U.S.C. and 26 U.S.C. case, But, corporate not a 12 case. "dictate[] estate cases, types both "separate there is no corporate separate debtor is not tax- O’Neill, entity.” Furthermore, taxable entity.”). 64 F.3d at 1151 n. 7 persua- able as the its appli- (“The does restrict the district bankruptcy court and corpo- prepetition that while the entire cation sales. See Cincinnati court both held (i.e.— Bluewood, Inc., estate’ rate tax was ‘incurred Ins. 560 F.3d Co. of the portion (“The postpetition), (8th Cir.2009) incurred primary rule of income was prepetition attributable to give is to effect to statutory interpretation 507(a)(7).’”). specified a in section ‘of kind the plain reflected in legislative intent as of understanding alone in our are not We statute.”) (internal quota- language of the by the estate.” meaning of “incurred omitted). tions and citation See, Tax & e.g., Dep’t W. Va. State of IRC, Second, Bankrupt- it is not (In re v. I.R.S. Columbia Gas Revenue Code, “separate taxable cy creates (3d 982, 984 37 F.3d Corp.), Transmission filing by of indi- entity” upon petitions (“The Cir.1994) ‘incurred priority taxes 11 but does Chapters under and viduals only ‘in- to taxes by the estate’ extends separate entity not taxable create Baltimore re postpetition.”); curred’ by Chapters under filed individuals cases Indust., Inc., 344 B.R. Marine Compare 13. 26 U.S.C. (“The and (Bankr.D.Md.2006) require- only Additionally, § 1399. even urith 26 U.S.C. administra- a tax be accorded ment for “separate it no taxable priority though the statute is that there is enti- tive case, es- by ty” must incurred an “estate” still in a tate, thereby be incurred necessity, exists, 1207(a), and to 11 pursuant Pub Cum- In re Dennis postpetition.”); provides: (Bankr. berland, Inc., 142 B.R. 41 n. Property the estate D.R.I.1992) (“The by language ‘incurred (a) includes, Property of the estate only to which are the estate’ relates taxes property specified to the in sec- addition i.e. after the estate post-petition, incurred title— tion 541 this Northeastern, created.”); In re Ohio Ass’n, 126 B.R. Hosp. Gen. (1) specified all of the kind (“Taxes 1991) (Bankr.N.D.Ohio incurred acquires section that the debtor such expenses are administrative by estate after commencement case but 503(b)(l)(B)(i). Be- to Section pursuant closed, dismissed, before case pre-peti- cause estate does exist chapter to a case under converted tion, priority is limited taxes treatment title, first; whichever this occurs post-petition.”); incurred Collier’s (2) earnings performed by from services ¶ rev.2008) (15th ed. Bankruptcy 503.07 after the the debtor commencement (“Only by the estate’ can taxes ‘incurred closed, case but before the case Therefore, expenses. be administrative dismissed, a case or converted to only first for tax claims extends title, 7 of this whichever occurs chapter peti- taxes because before postpetition first. estate.”). filed, no tion is there is Here, the taxes at issue result from the also our con- support Additional factors the Knudsens’ machin- postpetition sale of taxes are postpetition clusion that assets, ery land as well as Schilke’s expenses,” as such taxes “administrative sale of real estate breed- i.e., postpetition estate, incurred were incurred The sale of these assets First, ing livestock. plain postpetition. indicates, postpetition.” general means "incurred authority supra estate” cited sive understanding exists "incurred certainly product farming falls within the ambit of stead were the end 1207(a). operation. According government, plain meaning estab-

Finally, majority note that the also precise applies have lishes that it of a courts to considered issue sale result, reject have also the same reached “put bring asset action into or service ing government’s argument post- about the desired end of debtor’s petition income taxes cannot be “incurred operation.” concedes bankruptcy filing the estate” because a the Knudsens’ sows breeding 12 a sepa does not create crates, equipment, farrowing such as the entity rate taxable under 26 U.S.C. 1399 requirement. meet this But it contends See, e.g., of v. the IRC. Hall United States slaughter hogs, pro- which were (In Hall), (D.Ariz.2008) re B.R. 393 857 duced and in ordinary sold course of (appeal Circuit); pending in the Ninth In operation, Knudsens’ farrow-to-finish Dawes, (Bankr.D.Kan. re B.R. 382 509 According do government, not. to the 2008), aff'd, 08-1054-WEB, No. 2009 WL slaughter hogs product” “were the farm 2009) (D.Kan. Mar.12, op.) (ap 641278 (slip of production. instead farm assets used in Circuit); pending in peal the Tenth In re government The supports interpreta- its Gartner, BK06-40422-TLS, No. 2008 WL 1222(a)(2)(A) tion of reference to 26 (Bankr.D.Neb. 2008) Dec.29, (ap 1231 the IRC. government of to peal stayed the district court pending argues court, thus that the district in re- cases); Rickert, present outcome In re court, versing erred BK06-40253-TLS, No. 2008 WL 5401663 defining operation farming Knudsens’ (Bankr.D.Neb. 2008) Dec.29, (appeal broadly to farming operation mean their district court withdrawn and judgment of reorganization under their entered); plan. with prejudice dismissal In re Uhrenholdt, BK06-40787-TLS, No. (Bankr.D.Neb.2009) proper any

WL 198966 “The (appeal to construction of stayed statute, the district court pending bank Bankruptcy included, Code be ruptcy court’s approval parties’ pro gins with the the statute it settlement). Hall, posed But see re 376 self.” Underwriters Ins. Co. v. Hartford (Bankr.D.Ariz.2007), rev’d, B.R. 741 Bank, (In Magna N.A. re Hen House (D.Ariz.2008); Whall, B.R. 857 In re 391 Interstate, Inc.), (8th 719, 177 F.3d (Bankr.D.Mass.2008). B.R. 1 Cir.1999). long plain “The established lan Accordingly, affirm guage rule of statutory construction re 1222(a)(2)(A) judgment courts’ ap- quires examining the text the statute as plies to the postpetition sale farm as- context, considering object, whole its sets. Bolden, policy.” United v. States (8th Cir.2008) 609, (internal F.3d quo B. Treatment Taxes on the Sale omitted). tations and citation examine We Slaughter Knudsens’ Hogs “express the statute’s language and overall asserts that 11 U.S.C. purpose” when interpreting a statute. does not (In Cox, Martin), Martin re 140 F.3d Knudsens’ 2004 sale of their (8th Cir.1998). hogs Chapter in their gov- 12 case. The discussed, previously As we have ernment bases this assertion on its view hogs provides were not “farm used asset[s] farming operation” debtor’s but in- 12 plan must is postpetition income included in deferred payment, the full provide for usually entitled to of the estate is used all claims ambit payments, cash fund, with along unless— other financial under section priority sources, farming opera- (A) a gov- claim claim is a owed plan. It is this tions a result of unit that arises as ernmental subject to administration sale, transfer, or other estate exchange, Bankruptcy used Code and used farm asset disposition in which operation, satisfy, among things, other allowed be treated an the claim shall with the case accordance claim that is not entitled unsecured rules in bankruptcy. and distributional the debt priority under section but Williams, McQueen supra. & if only in such manner treated shall be §§ “property,” The term as used discharge.... the debtor receives interchangeable term 1222(a)(2)(A) is, doubt, without 522(2). 101(18) “asset,” §§ used of legal terms complex replete and 101(18) § (noting that See id. “uses of terms would analysis art. A full those a farming opera- term ‘assets related provisions of over require examination family eligibility” farmer tion’ to determine C. Richard Bankruptcy Code. See of the 522(a), that, § “the and individual Williams, Aspects ” McQueen Tax & Jack F. must file a ‘Schedule of Assets’ so debtor § and Practice 14:9 Bankruptcy Law of parties that in interest can “determine (3d ed.2009). Fortunately, only phrase property and value of of the extent “any farm case is present at issue estate”). “An is as ‘1. An ‘asset’ defined opera- farming in the debtor’s asset used is and value. 2. The item that owned has 1222(a)(2)(A). § To tion.” 11 U.S.C. a showing balance sheet entries will phrase, con- properly construe owned, cash, including property items of phrase of in plain sider the estate, inventory, real accounts equipment, (2) (1) asset,” “any farm parts: three receivable, goodwill. proper- and 3. All the (3) in,” farming “the “used and ty person paying a available for of operation.” ” (In Luna), re Navarre v. Luna debts.’ Cir.2005) (10th (quot- 406 F.3d Any Farm Assets (7th Dictionary ing Black’s Law § nor [11] Neither ed.1999)) added). result, (emphasis As a Chapter 12 defines the other provision 1222(a)(2)(A)’s ‘any “§ term use But 11 phrase “farm assets.” U.S.C. assets,’ § use of term like 522’s 1207, 101, §§ and 522 are instructive 541(a) §§ use and and 1207’s ‘assets’ McQueen & defining “farm assets.” See encompassing all and ‘property,’ term is 541(a)(1) Williams, pro- supra. Section Williams, McQueen & broadly defined.” of the estate” “property vides that supra. equitable interests legal of “all or consists (21) (20), Furthermore, 101(18), § and of the com- property debtor in as phrase specific meaning to the give a 1207(a), § Under mencement the case.” assets,” used in “farm as includes, in estate addi- “[property 101(18) “family provides that Section specified in section property tion to the farming oper- in a “engaged farmer” is one specified kind 541 ... all 101(20) a “farmer” defines acquires ation.” Section debtor such section ” than received more “person as a of the case.... after the commencement during the gross income Therefore, percent [his] immediately ... year preceding employment taxable application [t]he or year the taxable ... the case ... esp., something; long-continued pos- farming operation was from a commenced session of a employment thing for (Em- operated person.” owned or such purpose adapted, which it is added.) phasis “Farming operation” is de- distinguished possession from a and em- including tillage fined as “farming, ployment merely temporary or soil, dairy farming, production ranching, or neighbors complained occasional <the livestock, raising crops, poultry, or city about the owner’s use of the production poultry products or livestock budding aas dance club>. in an unmanufactured state.” (7th ed.1999). Black’s Dictionary Law 101(21). Thus, “farm assets” would in- Thus, phrase appears to” “related “any clude farming opera- asset related to have a meaning broader than the phrase tions, actually or whether used in in”; result, “used appear “it would McQueen operations.” & more restrictive Williams, supra. “Farm assets” would 101(18), (20), (21).” than McQueen therefore include “capital assets under Williams, & supra. I.R.C. other property may “The term ‘used’ encountered receive favorable tax treatment under throughout the Bankruptcy may Code but inventory I.R.C. items that found most generate prominently 363.” ordinary otherwise Id. “use, 61.” sale, I.R.C. 363 concerns the lease of property” of the estate both “in Here, slaughter “assets,” the hogs were ordinary the course of business” and “oth- they were the of “property” the Knud- er than in ordinary the course of busi- sens. slaughter The hogs were also 363(b)(1) ness.” Section provides when “farm” they assets because a part were of use, “may lease, the trustee or the sell other farming Knudsens’ operation, which production included than in ordinary business, livestock. course of Thus, hogs constitute property estate,” 363(c)(1) § “farm while assets.” provides that [i]f business of the debtor is author- 2. Used in operated ized to be under section ... 1222(a)(2)(A) only applies 1203 of this title and unless the court if the debtor’s farm assets are actually otherwise, orders may trustee enter in” “used farming operation. The transactions, into including the sale or phrase “used in” can be contrasted with estate, lease of property of the in the phrase “related to opera business, ordinary course without no- tion,” 101(18). §in as found phrase “The may tice or a hearing, and use property ‘relating to’ carries a ‘ordinary ‘broad’ ordinary the estate in the course i.e.,” meaning,’ relation; “to stand in some business without or a notice hearing. bearing concern; have or pertain; added.) (Emphasis refer;” bring into association with or 363(c)(1) § The prop- —“use Weis, connection with.... United States erty of ordinary the estate in the course of (8th Cir.2007) 1148, 487 F.3d (quoting comparable business”—is to Airlines, Inc., Morales v. Trans World 1222(a)(2)(A) § claim claim is a U.S. S.Ct. L.Ed.2d —“the (1992) owed to a governmental unit that (quoting arises Black’s Law Dictio (5th ed.1979))). nary a contrast, any result of the sale ... of farm asset “use” is as: defined farming operations.” used in the debtor’s added.) draft, taxpayer breeding, held The notable difference (Emphasis 1222(a)(2)(A) specific, “farming § is dairy, sporting purposes, is that or and held is, of business that the course him for 12 or more from the months date Chapter 12 case where the to in a refers Thus, under acquisition.” benefits debtor seeks themselves, i.e., prod- the “end products 1222(a)(2)(A) opera- generally farming is ucts,” not of the business are “used Williams, supra. & McQueen Un- tions.” or business.” trade law “[l]ong-standing der analogy §to 1231 in government’s debtor-in-possession practice,” trustee or a down interpreting breaks to, 363(c)(1), “use in- entitled First, if primary for three reasons. inventory, from ventory proceeds or the government’s interpreta- were i.e., ordinary accounts receivable” then, 363(c)(1), in,” “used a tion of Williams, McQueen & of business. course debtor-in-possession or could never trustee Bankruptcy Collier’s supra; cf. inventory because it “use” “a (“[T]he ¶ (15th rev.2008) ed. 363.03[3][a] capital or deemed defined asset.” inventory or collect ac- may sell trustee Williams, & McQueen supra. Additional- of business ordinary course counts ly, provides § 1206 notice and “[a]fter are not approval, since these without collateral, hearing ... the trustee proceeds [in but the cash will cash collateral,’ if acquired ‘cash even may property under section sell case] after the commencement 363(b) (c) trustee free and clear of inter- case, proceeds because the cash property entity est in such of an other receivables, the court inventory unless than the estate if the is farmland 552(b).”). otherwise under section orders equipment....” (Emphasis add- [or] farm similarity between Given substantial ed.) wording of this section indicates 363(c), we see no identify Congress “when wants in” in phrase “used why reason rights powers deemed or § should not be afforded the capital only, defined assets such as farm “use meaning phrase same as the similar equipment, specifi- or farm it does so land ordinary in the estate the property of Williams, McQueen cally.” supra. & 363(c)(1). § of in As a course business” 1222(a)(2)(a) Second, § is not a federal result, hogs, inventory, the like in Bank- provision tax found in” farming “used would considered instead, Code; a ruptcy priority-strip- it is operation. provision applies that tax ping Here, supports argu- its state, Therefore, federal, local. or claim— slaughter hogs are not “used ment § we 1231 of the decline to IRC farming operation reference to in” the in bankruptcy rely context instead According of IRC. § 1231 the U.S.C. provisions Bankruptcy on the Code 1222(a)(2)(a), § government, like 1222(a)(2)(A). See, interpreting itself in in a employs the word “used” e.g., Reorganized v. CF & I United States certain re- phrase designate Utah, Inc., 213, Fabricators U.S. of ceiving beneficial treatment context (1996) 224, 116 S.Ct. 135 L.Ed.2d 506 1231(a)pro- gains Section capital of taxes. (“In sum, we conclude capital treatment gains beneficial vides [Bankruptcy] congressional Act reveals no “property from the sale gain certain of reject generally interpretive intent in trade or business.” used in the In- principle characterizations 1(b)(3)(B) in- provides that “livestock” livestock, dispositive not in regardless of ternal Revenue Code are age, cludes “other context, specific and no of meaning To understand the “farming relieve us from mak- to 11 provision operation,” look U.S.C. 101(21). ing ‘farming operation’ a functional examination of “The term 4971(a).”). soil, farming, tillage dairy includes raising or farming, ranching, production Third, understanding a commonsense crops, livestock, poultry, production or phrase supports “used in” the Knud- poultry products or in un livestock an slaughter hogs argument sens’ 101(21). manufactured state.” U.S.C. farming operation. in” were “used their all-inclusive,” list as it “[T]he above supra, apply” As noted “to “use” means employs the term “includes.” Watford employ” something. “to See Black’s Law (In Fed. Bank Land Columbia re Wat (7th ed.1999). Here, Dictionary Cir.1990). (11th ford), 898 F.2d certainly “employed” Knudsens or “made liberally “This definition is to be construed of’ slaughter hogs use for their pur- Congresses] order to further purpose 1990s, In poses. operat- the Knudsens helping family farmers to continue farm hog operation ed farrow-to-finish ing.” Id. they hogs would sell the as their And, prior main source income. Here, engaged Knudsens bankruptcy filing, the Knudsens “used” a “farming operation,” they have slaughter hogs in their opera- hog operated early since the 1990s. by selling tion them in order to reorganize First, operation” “farming consisted farming operation their accordance with production hog farrow-to-finish in which their contact with SPI. selling the Knudsens were their hogs own Then, their main source income. Fanning Operation Debtor’s operation” the Knudsens “farm changed from a hog opera farrow-to-finish dispute There is no that the Knudsens to raising pigs tion under a contract qualify as “debtors” under SPI.3 101(13) §§ and 109. “The term ‘debtor’ person means or municipality concerning summary, find because we that Knud- which a case under this title has slaughter hogs been sens’ sale of their qualifies 101(13). commenced.” 11 U.S.C. Un- plain for treatment under the “[o]nly 1222(a)(2)(A), family der farmer or fami- we reverse the ly regular fisherman with annual judgment income court’s that the hogs may be a chapter debtor under 12 of this “farm were not a asset used in the debtor’s title.” family The Knudsens are farmers. farming operation” interpreting meaning 3. In farming operation of "the "the reorganiza- debtor's under the farming operation,” the district court stated: plan, farming operation tion not the as it farming operation” "[T]he debtor’s attempt reorga- is broad existed before farmer’s to enough encompass to both a farrow-to-fin- nize.” Id. But we find that the reference to operation, hog ish original the Knudsens’ plan provide” only "the shall to meant operation prior in and to and a cus- explain provide pay what the debtors must to hog-feeding operation, tom the Knudsens’ creditors; priority back their the debtors' reorganized operation, as both constitute plan fully pay priority must all "raising ...of livestock.” 1222(a)(2)(A) applicable. claims unless Knudsen, 389 B.R. at 659. But the district Nowhere further, finding court went that the use of the application only it does limit its to the "reor- phrase provide” "the shall ganized” operation. "farming operation” indicated that meant not on income tax is based employment Entitled Tax Claims Allocation C. capital Knud- from the sale of assets. Treatment to Beneficial is that ^[16] The government’s “proration method”-—as final argument op- sens’ (exhibits 1 and 2004 tax returns show 64). this to be so any credits ac- would next subtract IRS preferred “margin- the Knudsens’ posed to the sources cording to their relation to method for appropriate al method”—is example case its liability. tax of income. the Knudsens’ 2004 allocating allocating used for two to applied must be for it credits Some method (tax liability tax between the Knudsens’ tax calculation with- non-qualifying arising credit). of the transactions out the tax fuels IRS arrives at a held and 1222(a)(2)(A)and the scope within the treatment and then net tax due each outside from those transactions arising tax the tax at- percentage calculates 1222(a)(2)(A) portion scope. of its The to qualifying non-qualify- and tributable the re- an claim but would be unsecured A, ing of income. In exhibit sources its status. would retain mainder “priority per claim” is 82 cent of the points out The tax, “general and the unsecured total proper to the is silent per cent. would then claim” is IRS liability, thereby requiring tax allocation for 2004 in any payments taxes apply history legislative us consult to percentage with the relation- accordance Chapter 12 to deter- statutory purposes of for qualifying net tax due ship of Ac- allocation method. proper mine the income, yielding tax non-qualifying its allocation cording government, for each. IRS calls this method balance method, propor- the taxes which divides proration method. proportional claims, two tionately types between the marginal for a argue Knudsens rate intent to balance gives Congress’s effect They a tax method. would calculate re- creditors of debtors and interests income, second, all and then a turn for quali- removing tax all pro forma return sum- adequately fying sales income. Knudsens con- competing positions as parties’ marized is a better method be- tend follows: non-qualifying it taxes the income cause argues appropriate way IRS This tax rates. re- marginal lower a tax prepare allocate taxes in a tax for income enti- sults lower total recognizes which return likely treatment and to beneficial tled exemptions and all deductions feasible, fur- reorganization more makes on all income tax based calculates the thering the intent of the amendment. then calcu- taxable income. IRS would any and all would also Knudsens income at- percentage total late non-qualifying payments on taxes qualifying capital sales tributable tax, not be dis- of total in- percentage and the assets No paid. payments charged unless non-qualifying come attributable portion applied to the for 2004 would be would be di- The income tax sources. tax that would receive beneficial according percentages. to these vided as unsecured debt under treatment A this method (applying IRS exhibit See amended return for to Knudsens’ 1040X 2004). total add the self- IRS would marginal objects to the otherwise non-quali- IRS to the tax for

employment tax very Knud- for the reason rate method says it self- fying income because 716 support

sens it—it calculates the Act re- ties be resolved in [an] its favor maining priority marginal taxes at lower against and the debtor. Rather the Act argues rates. IRS for method that liberally give must be construed taxable marginal taxes all full debtor the measure the relief rates that would be applicable outside of by Congress afforded ... lest its bene- and prorates then the result. away fits be frittered narrow formal- provides any Neither party argu- other interpretations istic disregard proposal. ment for spirit letter of Act. Knudsen, B.R. at (finding 356 486-87 that Wright Co., Cent. Union Ins. 311 Life proration “the method is the better meth- 278-79, 273, 196, U.S. 61 S.Ct. 85 L.Ed. od determining what amount of tax (1940) (internal omitted). 184 citations qualifies for beneficial treatment under Additionally, once this court and what does not” be- particular concludes that a statute is am income, recognizes cause “[i]t all deduc- “ biguous, may guidance ‘seek tions, exemptions, and in arriving credits statutory structure, legislative relevant at a tax and according allocates history, congressional purposes [and] ex percentage type each of income” and ” pressed in the statute.’ United States v. “divides actual tax regard without Villanueva-Sotelo, 1234, 515 F.3d 1243 produced which sales the last dollar of (8th Cir.2008) (quoting Light Fla. Power & income”). Lorion, 729, 737, Co. v. 470 U.S. 105 S.Ct. is silent 1598, (1985)) (alteration 84 L.Ed.2d 643 liability to how a debtor’s tax should be Villanueva-Sotelo). purpose allocated between non-priority Chapter 12 provide family is “to farmers claims. This silence explaina is somewhat faster, simpler, cheaper alterna 1222(a)(2)(A)’s by § ble priority-stripping tive to 11 proce provision nature. The does not relate dures, preserving while the fair treatment solely to taxes but also to “a claim owed to chapters.” creditors under those Row governmental unit.” If a statute is si Yarnall, (8th ley v. 190, F.3d Cir. lent, then such statute ambigu is deemed 1994). designed ‘give It “was family ous. Dep’t See Clark v. Agricul U.S. facing farmers bankruptcy a fighting ture, (8th 934, Cir.2008). F.3d reorganize chance to their debts and keep “[A]mbiguities in the Code are generally while, their land ... time, at the same favor resolved in debtor.” New preventing system abuse of the and ensur Neighborhoods, Inc. v. Va.W. Workers’ ing that farm lenders a fair repay receive Fund, (4th Comp. 886 F.2d Cir. ” ment.’ (quoting H.R. Rep. Conf. No. 1989); Matter Nickerson & Nicker cf. Cong., (1986), 99th 2d Sess. 48 re son, Inc., (8th Cir.1976) F.2d printed 5227, 5249) in 1986 U.S.C.C.A.N. (“The referee reasoned that this ambiguity (alteration Rowley). Courts have rec should be debtor, resolved favor of the ognized “Chapter 12 was enacted as excluding since priority claims from the an emergency response to a then-existing fee base would result in reducing the ex farm debt crisis.” Travelers Ins. penses Co. v. incurred the debtor and thus (11th Bullington, F.2d Cir. purposes foster rehabilitative 1989). Act.”). long right] “Congress family [S]o [the pro- creditor’s intended the farmer tectedf,] the certainly provisions novel, creditor in to is no be but short-lived. position insist to or ambigui- by doubts expires statute its terms after

717 in resulting them the birth of note. crossbred 28 581 only years. seven U.S.C. 12.”).4 Chapter 12 suited The short lifetime both to ‘evaluate Congress’ Moreover, always desire IRS does not the “the pur- v. chapter serving proportional its method.” Ficken apply whether (In Ficken), re continuing Internal Revenue Serv. there is a and whether pose 05-52940-HRT, Adversary No. No. Case family chapter for the special for need (Bankr. 08-01687-HRT, at slip opn. 14 48, atR. USCCAN farmer.’ H.R. Conf. 2009) 30, (unpublished). “Al- July D.Colo. Con- suggests 5249. sense at Common the observation IRS does though [the] exist- of the farmer’ gress was mindful always proportional method not use year loans it set the seven ing when allocating is not the tax determina- when limitation.” tive, exceptions some it does illustrate B.R. Doering, v. 94 (quoting Dahlke Id. the IRS does not what would where (D.Minn.1989)); also In re see Sohra- 569 proportional method treat each be the (Bankr.E.D.Cal.1988) 848, B.R. koff, 85 of income the same.” Id. For dollar as farm- those (“[Cjhapter 12 was enacted for marginal utilizes example, “[t]he IRS con- keep their land and ers who want to spe- method to determine estate taxes for McCann, farm.”); re 202 B.R. tinue to use valuation cial (Bankr.N.D.N.Y.1996) 824, (“Chapter tax, estate like the “[T]he 2032A.” in 1986 and was modeled 12 was enacted tax, graduated is a tax.” Id. Pur- Congress existing chapter 13. after 2032A, may farmland passed suant problems farmers recognized the financial generation one to the next “from encountering in the 1980s as well requires were heir.’ IRS ‘qualified [The] re- report only Special in with the complying difficulties estate Use Val- their ue, Value, and not the Fair Market Chapters 11 and 13 quirements of that, particular not a remedial stat- Supreme recently held ter 11 Court has —is 11, contrary, ute in that sense. To the regard opposed to rejected Court has the notion that "Con- Chapter 12: purpose enacting gress single had a persuaded that case Nor are we in this Chapter 11.” v. 501 U.S. Toibb Radloff 1146(a) ''liberally” should construe 157, 163, 2197, 115 111 S.Ct. L.Ed.2d ostensibly purpose. its “remedial” serve (1991). Rather, Chapter 11 strikes a bal- declaration Based on the Eleventh Circuit’s reorga- a debtor’s ance between interest Bankruptcy Code a “remedial restructuring nizing and its and the debts statute,” Piccadilly the disal- would stretch maximizing value creditors’ interest in statutory beyond what text lowance well estate. Ibid. The Code Apart opinion naturally can bear. from the also accommodates interests of below, however, only authority Piccadil- regulating property States transfers " ly Court offers a 1952 decision of this 'generally [leaving] the determination of interpreting Shipping Commissioners rights bankrupt's in the assets ” Respondent Act of 1872. See Brief Casualty estate to state law.’ Travelers & 782, Isbrandtsen, (citing supra, at 72 S.Ct. Surety v. Elec. Co. America Gas & Pacific 1011, 1294). But the statu- 96 L.Ed. unlike 443, -, 1199, Co., 549 127 S.Ct. U.S. Isbrandtsen, tory was 1205, (2007). scheme inter- 167 L.Ed.2d 178 Such " 'designed case, coincide, to secure the comfort do and in this ests often hospitaliza- ship, health of aboard seamen they clearly We decline do not. therefore ” abroad,’ U.S. tion at home and care exemption granted to construe the 1011, (quot- 1146(a) 96 L.Ed. 1294 S.Ct. detriment of the State. I., ing Aguilar Dep’t Piccadilly Cafeterias, Oil Co. N. v. Standard Fla. Revenue 2326, 2338-39, Inc.,-U.S.-, L.Ed. 1107 128 S.Ct. U.S. 63 S.Ct. (2008). (1943)), Chap- Bankruptcy L.Ed.2d 203 Code—and Form 706 to tax determine the estate treatment and reinstate much of the due.” Id. power, IRS’s “veto” thereby “fritter[ing] away” the of benefits And, “requires computation the IRS of stripping from priority “gov- of “claims” (TPT) prior using on [tax transfers the ] units,” at ernmental least the to extent marginal method” under I.R.C. 2013. that such “claims” are tax claims. See (citing Id. Robert J. Stommel B. & Lester Wright, at U.S. 61 S.Ct. Law, Planning to Maximize the (J. Douglas) L.Ed. 184 (observing that (1998)). Credit, 72 Fla. Bar 66J. “the [Bankruptcy] Act liberally must be TPT is a applied “[T]he credit credit give construed to the debtor the full (and state) the federal estate tax measure of relief afforded Con- liability of equal the decedent’s estate gress, lest away its benefits be frittered amount of the federal tax estate by narrow formalistic interpretations paid property deemed transferred to which disregard spirit letter the decedent from the transferor.” Act”). approach Knudsens’ & at [Stommel Lester] tax not, however, does entirely eliminate the the amount of federal estate tax attrib- which, IRS’s power, “veto” consistent utable the transferred plain computed decedent’s estate. The tax is 1222(a)(2)(A), B & D see Land & Live- lesser of the “average” “pro or Co., (the stock F.Supp.2d at 1210 rata” method of tax allocation and the approach first statutory interpreta- “with and or “marginal” without” meth- “plain tion language” tax of the stat- od of allocation. Id. at 69. With TPT, question); ute respect to accord In re Hen contemplates IRS [the] Interstate, Inc., taxpayer House compute the tax under F.3d method, marginal (interpretation margin- provisions and if the al method results in a lower Bankruptcy tax than the begins plain Code with the “pro method, rata” proportional statute); meaning Martin, In re tax paid. is the to be (same), 140 F.3d at 807-08 remains in place to family the extent that the farm- reorganization er’s provide does not We hold that proper meth- allocation payment for the portion the priority od under priority-strip- —a claim or the family farmer still ping provision as opposed provi- to a tax fails to obtain a discharge under the the “marginal sion—is As method.” reorganization plan. See 11 U.S.C. district observed: 1222(a)(2) (subject exception to the By treating proceeds of transactions 1222(a)(2)(A), the plan provide must qualify for beneficial treatment un- payment for priority claims, and the 1222(a)(2)(A), effect, der as the subject the exception are only in,” and, therefore, “last dollars subject treated as unsecured “if the debtor re- highest marginal rate, tax ceives a discharge”). “marginal method” per- maximizes the Therefore, “marginal centage method” the taxes to which beneficial (unsecured) correct method to determine the alloca- treatment will apply, reduc- tion ing power, the IRS’s taxes between priority “veto” non- making method, the debtors’ To reorganization claims. plan more and, hence, feasible more confirmable. Knudsens should a return calculate method, contrast, The IRS’s income, all “pro then a second for- minimize the taxes entitled to beneficial ma” return removing qualifying all COLLOTON, income, Judge, concurring in- Circuit non-qualifying so sales judgment in part dissenting in the marginal taxed lower be at come would part. rates, on the and the taxes shown tax the represent return would

“pro forma” questions appeals complex These raise prior- tax claim entitled to portion of the concerning the application U.S.C. status, the between ity difference 1222(a)(2)(A). while My analysis of the three all on the return for taxes shown respects the issues in some principal differs “pro taxes on the majority and the shown opinion. income from the unse- represent the forma” return I. the claim. portion of cured principal The first issue is whether Knudsen, 389 B.R. 668-69. 1222(a)(2)(A)applies to transactions oc- curring filing bankruptcy after the Therefore, we reverse and remand arguments There petition. plausible are judgment portion bankruptcy of the court’s but with question, on both sides one instead of “proration method” choosing agree majority’s I ra- exception, method.” “marginal its tionale and conclusion statute sale of post-petition does III. Conclusion farming opera- assets used tion. judgment of Accordingly, we affirm the exception sovereign is the issue of bankruptcy court No. 08-3627. immunity. sovereign Where a waiver of 08-2820, part we affirm In No. immunity required, “unequiv is it must be judgment of the bank- part

reverse ocally States v. Nor expressed.” United First, part of we reverse the ruptcy court. Inc., Village, dic 503 U.S. S.Ct. holding court’s decision bankruptcy (1992) (internal quo 117 L.Ed.2d 181 their prepetition sale of the Knudsens’ omitted). government’s con tation in 2004 not entitled hogs strictly sued must be “construed sent of 11 U.S.C. benefit sovereign,” and not “en in favor Second, of the bank- part we reverse beyond ... re larged what (internal omitted). holding decision ruptcy court’s quotations quires.” readings method “proration plausible method” the correct there are two Where statute, imposes monetary taxes be- one of the allocation of determine government and claims, liability on the another non-priority tween not, “unambig is no which does then there “marginal Final- opposed to the method.” immunity, sovereign waiver of and a uous” part bankruptcy ly, affirm the reading that adopt court should favors holding that a court’s decision 37, 112 sovereign. Id. at S.Ct. 1011. taxes may postpetition treat debtor income earned imposed on the debtor’s sovereign immunity If a waiver of admin- pendency the case as during the required for confirmation of expenses under U.S.C. cases, istrative I in these then doubt that plans court with majority’s We remand sufficient to es rationale is Knudsens’ to confirm the instructions clear waiver. tablish (which among Plan itself is not Fifth Amended and Substituted expressly Congress with this as to which accordance sections Reorganization sovereign immunity in waived opinion. 106), sovereign and the waiver of immu court’s discharge of a student nity respect with to administrative ex debt, 450, 1905, loan id. at 124 nor a S.Ct. (which 503(b) under 11 penses U.S.C. proceeding alleged avoid preferential immunity said to waive under by a agency, transfers debtor to a state 1222(a)(2)(A) through three-step pro Katz, 371-72, 990, U.S. at 546 126 S.Ct. 11 involving references cess implicated sovereign immunity State’s ante, 507, 708), at the sort of are not the Eleventh Amendment. The expressions unequivocal that are demand of a Chapter confirmation 12 plan, its Supreme precedent. ed Court Section attendant decisions about sta- 1222(a)(2)(A)is at plausibly “suscepti least tus of various claims in simi- bankruptcy, construction,” ble of another Nordic Vil larly proceeds bankruptcy 36, 1011, lage, at 112 503 U.S. name S.Ct. jurisdiction rem court’s in over the bank- it ly, applies only pre-petition ruptcy estate. claims, necessary and the lack statutes Hood and Katz sovereign involved state clarity to effect a sovereign valid waiver of immunity Amendment, under the Eleventh immunity.5 Supreme but the Court’s treatment in IAs read the Supreme Court’s most jurisdiction rem im- sovereign federal immunity recent discussion of in sovereign suggests munity no different result with context, however, bankruptcy no waiv- respect interests of the United immunity er of required for confirmation a bankruptcy States in proceeding. The 12 plans these cases. Court looked to admiralty has law when “Bankruptcy jurisdiction, as understood considering the relationship between today and at framing, the time of the jurisdiction rem and sovereign immunity in principally jurisdiction.” in rem Cent. Va. Hood, 441, bankruptcy. See 541 at U.S. Katz, 356, 369, Cmty. Coll. v. 546 U.S. 124 S.Ct. 1905 (“Although bankruptcy and 990, (2006). S.Ct. 163 L.Ed.2d 945 law, are admiralty specialized areas of the jurisdiction court’s typically “is no why there is reason the exercise of estate, premised on the debtor and his federal bankruptcy jurisdic- courts’ rem not on the creditors.” Tenn. As- Student tion is threatening more sover- state Hood, Corp. 440, 447, sistance v. 541 U.S. eignty than the exercise of in rem their 1905, (2004). 124 S.Ct. L.Ed.2d admiralty jurisdiction.”). discussing When jurisdiction “permits The court’s in rem it jurisdiction actions, rem over anyone, admiralty to determine all claims that not, whether named in Court has acknowledged the action or has to no distinction thing question.” immunity at between the federal and state 448, 124 S.Ct. 1905. On sovereigns. Deep this understand- See v. Sea California ing, Supreme Inc., Research, 506-07, Court held neither a 491, 523 U.S. statement, problematic (8th Cir.1988), 5. majority’s Also is tire negligence an attor- ney accomplish for the cannot based dicta in a v. footnote in Rose U.S. waiver, because "[n]o officer his action (In Rose), Department Education re jurisdiction.” can confer United v. States 926, Cir.1999), (8th F.3d 930 n. 7 Shaw, 495, 501, 659, 309 U.S. 60 S.Ct. government’s sovereign belated assertion (1940). deciding question L.Ed. 888 When immunity is a may "factor” that be "relevant sovereign immunity, we consider whether the Ante, issue to tire of waiver.” Sover- government sent,” given "specific statutory has con- immunity eign jurisdictional is a issue that 500, 659, id. at 60 S.Ct. and the answer time, may any be raised at Jones United change depending does not from case to case States, (8th Cir.2001); 255 F.3d government timely on whether counsel for the Johnson, United States v. point. 622 n. 853 F.2d asserted the (“In ... of farm asset used consider 140 L.Ed.2d 626 S.Ct. ap operation.” Amendment the Eleventh

ing whether a claim in government’s asserts claim for the State concluded that plies where possession, in its admiralty to a res not as a result of the sale of the taxes due involving in cases decisions slaughter hogs this Court’s did fit within Knudsen’s of the Federal immunity Knudsen, sovereign see In re exception, admiralty (Bankr.N.D.Iowa actions in in rem 2006), Government B.R. 485-86 recog has this Court provide guidance, and I affirm this conclusion. sovereign im a between nized correlation “farming operation” The defines statute applicable to States and munity principles crops, poultry, or “raising to the of include Government.”); Tindal v. the Federal 101(21). As of livestock.” 204, 770, 213, 17 S.Ct. Wesley, 167 U.S. Knudsens involved in this the were (1897) (“[I]t cannot be doubted L.Ed. 137 They farming operation. raised sort of particular a suit the whether question that slaughter. and sold them for livestock state, the the within mean against is one therefore, hogs, The were assets slaughter constitution, depend upon must ing the farming operation, the not produced that determine wheth principles the same livestock-raising opera- assets in the used against the particular a suit is one er slaughter hogs tion. That the were sold to States.”). a theme similar Striking United (or, date, at a later to produce Katz, the held that an Court to Hood and the reorganization farming a facilitate admiralty in to enforce proceeding remin they not that were operation) does mean the United States does not against a lien farming operation. “used in” the The stat- long the sovereign immunity as as offend arising as a ute refers to result possession actual government’s asset was already the sale of an used process of the court. not invaded The farming operation. in the sale itself Davis, 10 Wall. 77 U.S. See respect, ma- cannot the use. With the (1869). 19-21, 19L.Ed. 875 analysis, largely jority’s adopted from authorities, I conclude Based on these bankruptcy practice, treatise on overlooks exercise of in bankruptcy court’s ante, at 714 requirement. this See textual jurisdiction approve to rem Knudsens ‘used’ the (concluding “the sovereign the plan is not an affront farming in hogs operation their the United States. There- immunity of reorganize them in order selling fore, immunity pre- does not sovereign operation” by usell[ing] their 1222(a)(2)(A) §of application clude the income”) their main source hogs the as I transactions. Because post-petition added); (emphasis McQueen Richard & C. 1222(a)(2)(A) court agree with the Williams, Aspects Bank- Jack F. Tax sales of farm post-petition does (3d § 14:9 ed. ruptcy Law Practice farming opera- in the debtor’s assets used 2009) (“In case, debtors intended tion, judgment I in in the concur ... in slaughter hogs to use sale of the case. Schilke as operations contem- debtors’ plan and ulti- plated in their business II. in their mately embodied issue is whether principal The second added). plan.”) (emphasis 1222(a)(2)(A) applies sale Beyond problem this textual with slaughter hogs by Knudsens 2004. conclusion, I no majority’s see flaw Chapter 12 that a provides The statute consideration payment of a provide for full plan need not 1222(a)(2)(A) materia pari of the sale claim that “arises a result claims, than tax capital provision adopted of 26 U.S.C. claims other gains 1231(b), marginal “ambiguous method indicates that beneficial because provisions is limited to must be resolved in favor of the capital-gain treatment bankruptcy. The Knudsens and the debtor” Id. at breeding livestock. majority acknowledge, highlight, that even majority notes that the IRS does a principal purpose of was method, always apply proportional of a to address treatment marginal and that it applies sometimes context, capital taxes. In that gains why it adopts method. But explaining analysis is better in- situation, marginal method in this closely provision formed related of court court’s reverts district view by pro- the Internal Revenue than Code Bankruptcy Code must be “lib- code, vision of the 11U.S.C. erally construed” favor of debtor. operates in a different context Ante, proposition at 718. This is traced to (or any and has relation to tax claims no Wright Douglas’s opinion Justice in v. Un- units) governmental other arising Co., ion Central Insurance 311 U.S. Life from the sale assets. 273, 196, (1940), S.Ct. L.Ed. which that [Bankruptcy] observed “the Act ground

It the breeding is common that liberally give must be construed equipment sows sold and debtor the full measure of relief afford- qualify preferential Knudsens in 2004 for by Congress, ed lest its benefits be frit- treatment under I would away by interpre- tered narrow formalistic conclusion, bankruptcy affirm the court’s spirit tations disregard and the however, ap- that does not 279, letter of the Act.” Id. at 61 S.Ct. 196 ply to the sale the Knudsens’ (internal omitted). citation hogs in 2004. bankruptcy adoption The court’s of the III. proration method did not involve a “for principal The third issue is whether the interpretation” Bankruptcy malistic “proration “marginal method” or the meth- Code, but rather an effort to an strike od” used to should be allocate the Knud- appropriate the compet balance between liability sens’ tax I for 2004. would affirm ing in on a bankruptcy interests matter

the bankruptcy court’s decision to about which the Code is silent. The more proration method. general proposition ambiguous that bank bankruptcy adopted The court pro- ruptcy provisions always must be con (1) method, ration observing that it in “recog- strued favor it debtor —if ever income, deductions, all exemptions, nizes held sway Supreme with the Court—-is and tax arriving light credits in at a and in allo- outmoded of the modern Bank according cates percentage ruptcy of each Code and the Court’s discussion in income,” (2) type of and Department “divides the actual Florida v. Revenue Picca —Inc., tax regard -, without produced dilly Cafeterias, which sales U.S. Knudsen, (2008). 2326, 171 There, the last dollar income.” 356 S.Ct. L.Ed.2d 203 B.R. at The agreed rejected 487. district court the Court the Eleventh Circuit’s points, acknowledged these Bankruptcy declaration Code is a policy, “as a of tax matter and from a “remedial tax statute” should be con perspective, ‘proration “liberally” method’ in ap- strued favor of debtors. Id. Knudsen, 643, pealing,” In re B.R. explained 2338. The Court that “the (N.D.Iowa 2008), but Bankruptcy par then reasoned that in Code—and applies ticular —is not remedial statute added). Chapter (emphasis sense.” America, UNITED STATES of be 11, example, “strikes a balance Appellee, reorganizing a debtor’s interest tween restructuring its and the credi debts v. value of maximizing interest tors’ Sidney BYAS, Appellant. This bankruptcy estate.” Id. at 2339. No. 08-3281. did not Congress has concluded that Appeals, States United Court pur from depart “general intend Eighth Circuit. creating an poses of law when reorganiza avenue for farm expeditious April Submitted: 2009. Yarnall, 12. Rowley tions” Sept. Filed: (8th Cir.1994). F.3d Rehearing Rehearing En Banc adoption court’s Denied Nov. 2009.* balance method best strikes a proration in reor- the farm interest between government’s debts

ganizing his satisfying obligations.

interest method, contrast, is a one-

marginal in favor of approach tilts

sided reducing the disproportionately

debtor of farm of tax unrelated to the sale

amount treat-

assets that entitled proration method makes That

ment. moreover, matter of policy, as a tax

sense insignificant. The Knudsens and hardly majority stress that primarily to address adopted

was capital gains taxes owed

treatment process reorganization, in the

farmers allocation adopt it is sensible an competing that accommodates

method the debtors’ resolving involved

interests liability. reasons, judg- I

For these concur 08-3627, in No. United States

ment

Schilke, affirming the of the bank- decision judgment I dissent from the

ruptcy court. 08-2820, Reve- Knudsen v. Internal No. Service, and affirm the decision

nue in that case

well.

* decision of matter. part the consider- ation or Judge Gruender took no notes applies framework plans establishes that under to “claims” otherwise entitled to priority Chapter 12 are binding only upon prepeti- turn, 507(a)(2) 507; under 11 U.S.C. creditors, tion postpetition holders of provides priority for administrative ex- true, 1222(a)(2) claims. If then does not 503(b). penses But, according to postpetition claim. According government, postpetition sales do not government, pursuant qualify as expenses” “administrative 1227(a), provisions Chapter are 503(b)(l)(B)(i) provision because this re- only binding turn, “creditors.” stricts its applicability to taxes “incurred “creditor” “entity is defined as an that has estate”; case, in Chapter a claim against the debtor that arose at the only entity debtor, taxable is the meaning time the order con- before for relief taxes cannot be “incurred the es- cerning debtor.” 11 U.S.C. tate.” 101(10)(A) added). (emphasis As a re- sult, a plan cannot bind holders

Case Details

Case Name: Knudsen v. Internal Revenue Service

Court Name: Court of Appeals for the Eighth Circuit

Date Published: Sep 16, 2009

Citation: 581 F.3d 696

Docket Number: 08-2820, 08-3627

Court Abbreviation: 8th Cir.