Supreme Court To Decide Tax Spat Between Circuit Courts

Published on: 08:51AM Jun 16, 2011

The Supreme Court has decided to hear a case involving a dispute between the Ninth Circuit on one side and the Eighth and Tenth Circuit on the other side concerning the issue of who owes the tax on the capital gains arising from a Chapter 12 farm bankruptcy.

In most normal bankruptcies, the capital gain from selling the estate's assets is generally treated like an unsecured claim and if there are assets available, they are used to pay the income taxes in the same pro-rata basis as all other unsecured claims.  So, in most cases, the IRS will only get pennies on the dollar from the sale of these assets.

However, the rules concerning family farm bankruptcies under Chapter 12 of the bankruptcy Code are a little more unsettled and the Ninth Court feels that these income taxes should be treated as an administrative expense and thus have priority over almost all other claims.  This means that if there is not enough assets in the estate, the claim will usually pass through to the farmer after bankruptcy.  This results in an extra liability to the farmer that they are not expecting.

Therefore, since these three Courts disagree, the Supreme Court has decided to hear this case and make a ruling.  I would expect this ruling in the next few months.  I would expect the ruling to go in the favor of the farmers, but who really knows.