High court says farmers must pay bankruptcy tax

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WASHINGTON, May 14 (UPI) -- The U.S. Supreme Court ruled 5-4 Monday to make it tougher for bankrupt farmers to get out from under U.S. taxes.

Writing for the majority, Justice Sonia Sotomayor said federal income tax liability arising from a post-bankruptcy petition farm sale is not "incurred by the estate" under the Bankruptcy Code and is not "dischargeable."

A "discharged" debt is not collectible under the code.

The ruling came in the case of Arizona farmers Lynwood and Brenda Hall, who petitioned for bankruptcy under Chapter 12 and sold their farm shortly thereafter.

The Halls initially proposed a plan of reorganization under which they would pay off outstanding liabilities with proceeds from the sale. But the Internal Revenue Service objected, saying the Halls owed a federal capital gains tax of $29,000.

The Halls then amended their proposal to treat the income tax as a general, unsecured claim to be paid to the extent funds were available, with the unpaid balance discharged. The IRS objected, saying taxes arising from from a post-petition farm sale remain the debtors' independent responsibility, not the estate.

A federal appeals court and the Supreme Court agreed.

Sotomayor's fellow liberal Justices Stephen Breyer, Ruth Bader Ginsburg and Elena Kagan, dissented, joined by conservative Justice Anthony Kennedy.

"Chapter 12 of the Bankruptcy Code helps family farmers in economic difficulty reorganize their debts without losing their farms ...," Breyer said in the dissenting opinion. "Congress amended ... the code to enable the debtor to treat certain capital gains tax claims as ordinary unsecured claims. ... The [Supreme] Court's [majority] holding prevents the amendment from carrying out this basic objective."