HALL v. UNITED STATES
Lynwood and Brenda Hall filed for Chapter 12 bankruptcy and were forced to sell their family farm for $960,000 to settle their bankruptcy debts. That sale brought about capital gains taxes of $29,000. The Halls wanted the taxes treated as part of the bankruptcy, paying part of the debt and having the court discharge the rest. They argued that the taxes were dischargeable as a debt “incurred by the estate”. The IRS objected to that plan, saying all of the taxes must be paid. The U.S. Court of Appeals for the Ninth Circuit agreed, ruling that the Halls had to pay federal income tax on the gain from the sale of their farm during bankruptcy proceedings.
Does 11 U.S.C. 1222(a)(2)(A) authorize the bankruptcy court to treat a federal tax debt arising out of the debtor's post-petition sale of a farm asset as a dischargeable debt “incurred by the estate”?
Legal provision: 11 U.S.C. 1222(a)(2)(A
No. Justice Sonia Sotomayor, writing for a 5-4 majority, affirmed the court of appeals. The Supreme Court held that there is no separately taxable estate in Chapter 12 bankruptcies, so the taxes in question were not “incurred by the estate”. The debtor remains liable for these taxes independent of the bankruptcy proceedings. The Court noted that the Hall’s position is sympathetic, but the plain language of the statute does not allow a ruling in their favor. Congress is free to amend the statute if they are unhappy with this result.
Justice Stephen G. Breyer dissented, arguing that the majority’s decision goes against the purpose of Chapter 12, which is to allow family farmers to reorganize debts without losing their farms. Justice Breyer read the statute’s language more broadly to fit this purpose and allow discharge of the tax debt. Justices Anthony M. Kennedy, Ruth Bader Ginsburg, and Elena Kagan joined in the dissent.
NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
LYNWOOD D. HALL, et ux., PETITIONERS v. UNITED STATES
on writ of certiorari to the united states court of appeals for the ninth circuit
[May 14, 2012]
Justice Sotomayor delivered the opinion of the Court.
Under Chapter 12 of the Bankruptcy Code, farmer debtors may treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities. 11 U. S. C. §1222(a) (2)(A). One such claim is for “any tax . . . incurred by the estate.” §503(b)(B)(i). The question presented is whether a federal income tax liability resulting from individual debtors’ sale of a farm during the pendency of a Chapter 12 bankruptcy is “incurred by the estate” and thus dischargeable. We hold that it is not.I A
In 1986, Congress enacted Chapter 12 of the Bankruptcy Code, §1201 et seq., to allow farmer debtors with regular annual income to adjust their debts. Chapter 12 was modeled on Chapter 13, §1301 et seq., which permits individual debtors with regular annual income to preserve existing assets subject to a “court-approved plan under which they pay creditors out of their future income.” Hamilton v. Lanning, 560 U. S. ___, ___ (2010) (slip op., at 1). Chapter 12 debtors similarly file a plan of reorganization. §1221. To be confirmed, the plan must provide for the full payment of priority claims. §1222(a)(2).
In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), §1003, 119Stat. 186, Congress created an exception to that requirement:
“Contents of plan
“(a) The plan shall—
. . . . .
“(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507, unless—
“(A) the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under section 507, but the debt shall be treated in such manner only if the debtor receives a discharge.” 11 U. S. C. §1222.
Under §1222(a)(2)(A), certain governmental claims resulting from the disposition of farm assets are downgraded to general, unsecured claims that are dischargeable after less than full payment. See §1228(a). The claims are stripped of their priority status.
That exception, however, applies only to claims in the plan that are “entitled to priority under section 507” in the first place. Section 507 lists 10 categories of such claims. Two pertain to taxes: One category, §507(a)(8), covers prepetition taxes, and is inapplicable in this case. The other, §507(a)(2), covers “administrative expenses allowed under section 503(b),” which in turn includes “any tax . . . incurred by the estate.” §503(b)(B)(i). Thus, for postpetition taxes to be entitled to priority under §507 and eligible for the §1222(a)(2)(A) exception, the taxes must be “incurred by the estate.”B
Petitioners Lynwood and Brenda Hall petitioned for bankruptcy under Chapter 12 and sold their farm shortly thereafter. Petitioners initially proposed a plan of reorganization under which they would pay off outstanding liabilities with proceeds from the sale. The Internal Revenue Service (IRS) objected, asserting a federal income tax of $29,000 on the capital gains from the farm sale.
Petitioners 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. Again the IRS objected. Taxes on income from a postpetition farm sale, the IRS argued, remain the debtors’ independent responsibility because they are neither collectible nor dischargeable in bankruptcy.
The Bankruptcy Court sustained the objection. The court reasoned that because a Chapter 12 estate is not a separate taxable entity under the Internal Revenue Code (IRC), see 26 U. S. C. §§1398, 1399, it cannot “incur” taxes for purposes of 11 U. S. C. §503(b).
The District Court reversed, expressing doubt that IRC provisions are relevant to interpreting §503(b). Based on its reading of legislative history, the District Court determined that Congress intended §1222(a)(2)(A) to extend to petitioners’ postpetition taxes.
The Court of Appeals for the Ninth Circuit reversed. 617 F. 3d 1161 (2010). The Court of Appeals held that the Chapter 12 estate does not “incur” the postpetition federal income taxes for purposes of §503(b) because it is not a separate taxable entity under the IRC, and noted that Congress repeatedly has indicated the relevance of the IRC’s taxable entity provisions to the Bankruptcy Code. Although “sympathetic” to the view that the postpetition tax liabilities should be dischargeable, the Court of Appeals held that “the operative language simply failed to make its way into the statute.” Id., at 1167. The Court of Appeals concluded that because the taxes do not qualify under §503(b), they are not priority claims in the plan eligible for the §1222(a)(2)(A) exception.
Judge Paez dissented, siding with a sister Circuit that had concluded that Congress intended §1222(a)(2)(A) to extend to such postpetition federal income taxes. We granted certiorari to resolve the split of authority. 1 564 U. S. ___ (2011).II A
Our resolution of this case turns on the meaning of a phrase in §503(b) of the Bankruptcy Code: “incurred by the estate.” The parties agree that §1222(a)(2)(A) applies only to priority claims collectible in the bankruptcy plan and that postpetition federal income taxes so qualify only if they constitute a “tax . . . incurred by the estate.” §503(b)(B)(i).
The phrase “incurred by the estate” bears a plain and natural reading. See FCC v. AT&T Inc., 562 U. S. ___, ___ (2011) (slip op., at 5) (“When a statute does not define a term, we typically ‘give the phrase its ordinary meaning’ ”). To “incur,” one must “suffer or bring on oneself (a liability or expense).” Black’s Law Dictionary 836 (9th ed. 2009); see also Webster’s Third New International Dictionary 1146 (1976) (“to . . . become liable or subject to: bring down upon oneself”); Random House Dictionary 722 (1966) (“to become liable or subject to through one’s own action; bring upon oneself”). A tax “incurred by the estate” is a tax for which the estate itself is liable.
As the IRC makes clear, only certain estates are liable for federal income taxes. Title 26 U. S. C. §§1398 and 1399 address taxation in bankruptcy and define the division of responsibilities for the payment of taxes between the estate and the debtor on a chapter-by-chapter basis. Section 1398 provides that when an individual debtor files for Chapter 7 or 11 bankruptcy, the estate shall be liable for taxes. In such cases, the trustee files a separate return on the estate’s behalf and “[t]he tax” on “the taxable income of the estate . . . shall be paid by the trustee.” §1398(c)(1); see also §6012(b)(4) (“Returns of . . . an estate of an individual under chapter 7 or 11 . . . shall be made by the fiduciary thereof”). Section 1399 provides that “[e]xcept in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a [bankruptcy] case.” In Chapter 12 and 13 cases, then, there is no separately taxable estate. The debtor—not the trustee—is generally liable for taxes and files the only tax return. See In re Lindsey, 142 B. R. 447, 448 (Bkrtcy. Ct. WD Okla. 1992) (“It is clear that, pursuant to 26 U. S. C. §1398 and 1399, the standing Chapter 12 trustee neither files a return nor pays federal income tax”); cf. infra, at 15 (discussing special trustee duties in corporate-debtor cases).
These provisions suffice to resolve this case: Chapter 12 estates are not taxable entities. Petitioners, not the estate itself, are required to file the tax return and are liable for the taxes resulting from their postpetition farm sale. The postpetition federal income tax liability is not “incurred by the estate” and thus is neither collectible nor dischargeable in the Chapter 12 plan. 2B
Our reading of “incurred by the estate” as informed by the IRC’s separate taxable entity rules draws support from a related provision of the Bankruptcy Code, 11 U. S. C. §346, and its longstanding interplay with 26 U. S. C. §§1398 and 1399. That relationship illustrates that from the inception of the current Bankruptcy Code, Congress has specified on a chapter-by-chapter basis which estates are separately taxable and therefore liable for taxes. That relationship also refutes the dissent’s suggestion that applying such rules is an incongruous importation of “tax law” unconnected to “bankruptcy principles (as Congress understood them).” Post, at 8–9 (opinion of Breyer, J.). And it reinforces the reasonableness of our view that whether an estate “incurs” taxes under §503(b) turns on such chapter-by-chapter distinctions.
In the original Bankruptcy Code, Congress included a provision, §346, that set out a chapter-specific division of tax liabilities between the estate and the debtor. Bankruptcy Reform Act of 1978, 92Stat. 2565. Section 346(b)(1) provided that in an individual-debtor Chapter 7 or 11 bankruptcy, “any income of the estate may be taxed under a State or local law imposing a tax . . . only to the estate, and may not be taxed to such individual.” 92Stat. 2565 (emphasis added); see also 11 Collier on Bankruptcy ¶TX12.03[b][i], p. TX12–21 (16th ed. 2011) (hereinafter Collier) (§346(b) “provided that in a case under chapter 7 [or] 11 . . . the estate of an individual is a taxable entity”). Section 346(d) provided, meanwhile, that in a Chapter 13 bankruptcy, “any income of the estate or the debtor may be taxed under a State or local law imposing a tax . . . only to the debtor, and may not be taxed to the estate.” 92Stat. 2566 (emphasis added). Congress thus established that the estate in an individual-debtor Chapter 7 or 11 bankruptcy is a separate taxable entity; the estate in a Chapter 13 bankruptcy is not. 3
Although §346 concerned state or local taxes, 4 Congress applied its framework to federal taxes two years later. In the Bankruptcy Tax Act of 1980, 94Stat. 3397, Congress enacted 26 U. S. C. §§1398 and 1399. Section 1398 of the IRC, much like §346(b) in the Bankruptcy Code, established that the estate is separately taxable in individual-debtor Chapter 7 or 11 cases. Section 1399 of the IRC, much like §346(d) in the Bankruptcy Code, clarified that the estate is not separately taxable in Chapter 13 (and now Chapter 12) cases.
In 2005, Congress in BAPCPA amended §346 and crystallized the connection between the Bankruptcy Code and the IRC. Section 346 now expressly aligns its assignment of state or local taxes with the rules for federal taxes, providing in relevant part:
“(a) Whenever the Internal Revenue Code of 1986 provides that a separate taxable estate or entity is created in a case concerning a debtor under this title, and the income . . . of such estate shall be taxed to or claimed by the estate, a separate taxable estate is also created for purposes of any State and local law imposing a tax on or measured by income and such income . . . shall be taxed to or claimed by the estate and may not be taxed to or claimed by the debtor.
“(b) Whenever the Internal Revenue Code of 1986 provides that no separate taxable estate shall be created in a case concerning a debtor under this title, and the income . . . of an estate shall be taxed to or claimed by the debtor, such income . . . shall be taxed to or claimed by the debtor under a State or local law imposing a tax on or measured by income and may not be taxed to or claimed by the estate.” (Emphasis added.)
Thus, whenever the estate is separately taxable under federal income tax law, that “is also” the case under state or local income tax law, §346(a), and vice versa, §346(b). And given that the Bankruptcy Code instructs that the assignment of state or local tax liabilities shall turn on the IRC’s separate taxable entity rules, there is parity in turning to such rules in assigning federal tax liabilities.
In the same Act, Congress added §1222(a)(2)(A). Section 1222(a)(2)(A) carves out an exception to the ordinary priority classification scheme. But §1222(a)(2)(A) did not purport to redefine which claims are otherwise entitled to priority, much less alter the underlying division of tax liability between the estate and the debtor in Chapter 12 cases. “We assume that Congress is aware of existing law when it passes legislation,” Miles v. Apex Marine Corp., 498 U. S. 19, 32 (1990) , and the existing law at the enactment of §1222(a)(2)(A) indicated that an estate’s liability for taxes turned on chapter-by-chapter separate taxable entity rules.C
The statutory structure further reinforces our holding that petitioners’ postpetition income taxes are not “incurred by the estate.” As a leading bankruptcy treatise and lower courts recognize, “[b]ecause chapter 12 was modeled on chapter 13, and because so many of the provisions are identical, chapter 13 cases construing provisions corresponding to chapter 12 provisions may be relied on as authority in chapter 12 cases.” 8 Collier ¶1200.01, at 1200–10; In re Lopez, 372 B. R. 40, 45, n. 13 (Bkrtcy. App. Panel CA9 2007); Justice v. Valley Nat. Bank, 849 F. 2d 1078, 1083 (CA8 1988). We agree. Section 1322(a)(2), like §1222(a)(2), requires full payment of “all claims entitled to priority under section 507” under the plan. Both provisions cross-reference the same section of the Code, §507, and in turn, the same subsection, §503(b). Both are treated alike by IRC §§1398 and 1399. Whether postpetition taxes qualify under §503(b) in Chapter 13 thus sheds light on whether they so qualify in petitioners’ Chapter 12 case.
Bankruptcy courts and commentators have reasoned that postpetition income taxes are not “incurred by the estate” under §503(b) because “a tax on postpetition income of the debtor or of the chapter 13 estate is not a liability of the chapter 13 estate; it is a liability of the debtor alone.” 8 Collier ¶1305.02, at 1305–5 and 1305–6. 5 For over a decade, the Government has likewise hewed to the position that “since post-petition tax liabilities are, in Chapter 13 cases, incurred by the debtor, rather than the bankruptcy estate, characterizing such liabilities as administrative expenses is inconsistent with section 503.” IRS Chief Counsel Advice No. 200113027, p. 6 (Mar. 30, 2001), 2001 WL 307746, *4; see also Internal Revenue Manual §184.108.40.206.2(3) (2006) (hereinafter IRM); IRS Litigation Guideline Memorandum GL–26, p. 9 (Dec. 16, 1996), 1996 WL 33107107, *6. We see no reason to depart from those established understandings. To “ ‘hold the Chapter 13 estate liable for [a] tax when it does not exist as a taxable entity defies common sense as well as Congress’ intent.’ ” In re Whall, 391 B. R. 1, 4 (Bkrtcy. Ct. Mass. 2008). The same holds true for a Chapter 12 estate.
A provision in Chapter 13 confirms that postpetition income taxes fall outside §503(b). Section 1305(a)(1) provides that “[a] proof of claim may be filed by any entity that holds a claim against the debtor . . . for taxes that become payable to a governmental unit while the case is pending.” (Emphasis added.) That provision gives holders of postpetition claims the option of collecting postpetition taxes within the bankruptcy case—an option that the Government would never need to invoke if postpetition tax liabilities were already collectible inside the bankruptcy. Accordingly, lest we render §1305 “ ‘inoperative or superfluous,’ ” Hibbs v. Winn, 542 U. S. 88, 101 (2004) , it is clear that postpetition income taxes are not automatically collectible in a Chapter 13 plan and, a fortiori, are not administrative expenses under §503(b).
It follows that postpetition income taxes are not automatically collectible in petitioners’ Chapter 12 plan. 6 Because both chapters cross-reference §503(b) in an identical manner, see §§1222(a)(2), 1322(a)(2), we are cognizant that any conflicting reading of §503(b) here could disrupt settled Chapter 13 practices. See Cohen v. de la Cruz, 523 U. S. 213, 221 (1998) (the Court “ ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure’ ”). Chapter 13 filings outnumber Chapter 12 filings six-hundred-fold. See U. S. Bankruptcy Courts—Cases Commenced During the 12-Month Period Ending September 30, 2011 (Table F–2), http://www.uscourts.gov/ Statistics/BankruptcyStatistics.aspx (estimating 676 and 417,503 annual Chapter 12 and 13 filings, respectively) (as visited May 14, 2012, and available in Clerk of Court’s case file). Yet adopting petitioners’ reading of §503(b) would mean that, in every Chapter 13 case, the Government could ignore §1305 and expect priority payment of postpetition income taxes in every plan.
At bottom, “identical words and phrases within the same statute should normally be given the same meaning.” Powerex Corp. v. Reliant Energy Services, Inc., 551 U. S. 224, 232 (2007) . Absent any indication that Congress intended a conflict between two closely related chapters, we decline to create one. 7III
Petitioners and the dissent advance several arguments for why the postpetition income taxes at issue should be considered “incurred by the estate,” notwithstanding the IRC’s separate taxable entity rules. But none provides sufficient reason to overcome the statute’s plain language, context, and structure.
Petitioners primarily argue that “incurred by the estate” has a temporal meaning. Petitioners emphasize that the estate only comes into existence after a bankruptcy petition is filed. Thus, they reason, taxes “incurred by the estate” refers to all taxes “incurred postpetition,” regardless of whether the estate is liable for the tax and regardless of the chapter under which a case is filed. Although all taxes “incurred by the estate” are necessarily incurred postpetition, not all taxes incurred postpetition are “incurred by the estate.” That an estate cannot incur liability until it exists does not mean that every liability that arises after that point automatically becomes the estate’s liability. And there is no textual basis to focus on when the liability is incurred, as opposed to whether the liability is incurred “by the estate.”
Alternately, petitioners contend that a tax should be considered “incurred by the estate” so long as it is payable out of estate assets. Income from postpetition sales of farm assets is considered property of the estate. See §1207(a). Petitioners argue that even if the debtor—and not the estate—is liable for a tax, the tax is still “incurred by the estate” because the funds the debtor uses to pay the tax are property of the estate. But that too strains the text beyond what it can bear. To concede that someone other than the estate is liable for filing the return and paying the tax, and yet maintain that the estate is the one that has “incurred” the tax, defies the ordinary meaning of “incur” as bringing a liability upon oneself.
The dissent, echoing both of these points, urges that we “simply . . . consider the debtor and estate as merged.” Post, at 11. “The English language,” the dissent reasons, “permits this reading” and “do[es] not require” our reading. Post, at 8–9. But any reading of “tax . . . incurred by the estate” that is contingent on merging the debtor and estate—despite Congress’ longstanding efforts to distinguish between when tax liabilities are borne by the debtor or borne by the estate—is not a natural construction of the statute as written.
Moreover, these alternative readings create a conflict between §503(b) and §346(b). Petitioners consider postpetition state or local income taxes, like federal income taxes, to be “incurred by the estate” under §503(b). See Tr. of Oral Arg. 4–5. But §346(b) requires that such taxes be borne by the Chapter 12 debtor, not the estate. It is implausible to maintain that taxes are “incurred by the estate” when §346(b) specifically prohibits such taxes from being “taxed to or claimed by the estate.”
To buttress their counterintuitive readings of the text, petitioners and the dissent suggest that there is a long history of treating postpetition taxes as administrative expenses entitled to priority. Both point to two legislative Reports accompanying the 1978 enactment of §503. But neither snippet from which they quote is inconsistent with today’s holding, 8 and we have cautioned against “allowing ambiguous legislative history to muddy clear statutory language.” Milner v. Department of Navy, 562 U. S. ___, ___ (2011) (slip op., at 9).
Petitioners also point to cases suggesting that postpetition taxes were treated as administrative expenses. E.g., United States v. Noland, 517 U. S. 535, 543 (1996) (corporate Chapter 11 debtor); Nicholas v. United States, 384 U. S. 678 –688 (1966) (corporate Chapter XI case under predecessor Bankruptcy Act). But those cases involve corporate debtors and are therefore inapposite. Among estates that are not separately taxable, those involving corporate debtors have long been singled out by Congress for special responsibilities. 9 See H. R. Rep., at 277 (even “[i]f the estate is not a separate taxable entity,” administrative responsibility can “var[y] according to the nature of the debtor”). Although estates of corporate debtors are not separate taxable entities under 26 U. S. C. §§1398 and 1399, the IRC requires a trustee that “has possession of or holds title to all or substantially all the property or business of a corporation” to “make the return of income for such corporation.” §6012(b)(3). In effect, Congress provided that the trustee in a corporate-debtor case may shoulder responsibility that parallels that borne by the trustee of a separate taxable entity. In any event, petitioners do not deny that neither the separate taxable entity provisions nor the special provisions for corporate debtors apply to them.
Finally, petitioners and the dissent contend that the purpose of 11 U. S. C. §1222(a)(2)(A) was to provide debtors with robust relief from tax debts, relying on statements by a single Senator on unenacted bills introduced in years preceding the enactment. See Brief for Petitioners 23–36. They argue that deeming §1222(a)(2)(A) inapplicable to their postpetition income taxes would undermine that purpose and confine the exception to prepetition taxes. But we need not resolve here what other claims, if any, are covered by §1222(a)(2)(A). 10 Whatever the 2005 Congress’ intent with respect to §1222(a)(2)(A), that provision merely carved out an exception to the pre-existing priority classification scheme. The exception could only apply to claims “entitled to priority under section 507” in the first place. That pre-existing scheme was in turn premised on antecedent, decades-old understandings about the scope of §503(b) and the division of tax liabilities between estates and debtors. See Dewsnup v. Timm, 502 U. S. 410, 419 (1992) (“When Congress amends the bankruptcy laws, it does not write ‘on a clean slate’ ”). If Congress wished to alter these background norms, it needed to enact a provision to enable postpetition income taxes to be collected in the Chapter 12 plan in the first place.
The dissent concludes otherwise by an inverted analysis. Rather than demonstrate that such claims were treated as §507 priority claims in the first place, the dissent begins with the single Senator’s stated purpose for the exception to that priority scheme. Post, at 7. It then reasons backwards from there, and in the process upsets background norms in both Chapters 12 and 13.
Certainly, there may be compelling policy reasons for treating postpetition income tax liabilities as dischargeable. But if Congress intended that result, it did not so provide in the statute. Given the statute’s plain language, context, and structure, it is not for us to rewrite the statute, particularly in this complex terrain of interconnected provisions and exceptions enacted over nearly three decades. Petitioners’ position threatens ripple effects beyond this individual case for debtors in Chapter 13 and the broader bankruptcy scheme that we need not invite. As the Court of Appeals noted, “Congress is entirely free to change the law by amending the text.” 617 F. 3d, at 1167.* * *
We hold that the federal income tax liability resulting from petitioners’ postpetition farm sale is not “incurred by the estate” under §503(b) and thus is neither collectible nor dischargeable in the Chapter 12 plan. We therefore affirm the judgment of the Court of Appeals for the Ninth Circuit.
It is so ordered.
1 Compare In re Dawes, 652 F. 3d 1236 (CA10 2011), and 617 F. 3d 1161 (CA9 2010) (case below), with Knudsen v. IRS, 581 F. 3d 696 (CA8 2009) (postpetition federal taxes are eligible for the §1222(a)(2)(A) exception and thus dischargeable).
2 Because we hold that the postpetition federal income taxes at issue are not collectible in the plan because they are not “incurred by the estate,” we need not address the Government’s broader alternative argument that Chapter 12 plans are exclusively limited to prepetition claims.
3 For those of us for whom it is relevant, the legislative historyconfirms that Congress viewed §346 as defining which estates were separate taxable entities. See H. R. Rep. No. 95–595, p. 275 (1977) (here-inafter H. R. Rep.) (“A threshold issue to be considered when a debtor files a petition under title 11 is whether the estate created . . . should be treated as a separate taxable entity”); id., at 334 (“Subsection (d) indicates that the estate in a chapter 13 case is not a separate taxable entity”); accord, S. Rep. No. 95–989, p. 45 (1978) (hereinafter S. Rep.); H. R. Rep., at 335 (noting “the creation of the estate of an individual under chapters 7 or 11 of title 11 as a separate taxable entity”); accord, S. Rep., at 46. The Reports also tie separate taxable entity status to the responsibility to file returns and pay taxes. See H. R. Rep., at 277 (“If the estateis a separate taxable entity, then the representative of the estate is responsible for filing any income tax returns and paying any taxes due by the estate”); id., at 278 (“When the estate is not a separate taxable entity, then taxation of the debtor should be conducted on the same basis as if no petition were filed”).
4 A dispute over Committee jurisdiction led to the insertion of “State or local” before each mention of “law imposing a tax.” Compare H. R. 8200, 95th Cong., 1st Sess., §346 (1977), with §346, 92Stat. 2565. Nonetheless, the House Report underscored that the policy behind §346 applied equally to federal taxes: “[T]here is a strong bankruptcy policy that these provisions apply equally to Federal, State, and local taxes. However, in order to avoid any possible jurisdictional conflict with the Ways and Means Committee over the applicability of these provisions to Federal taxes, H. R. 8200 has been amended to make the sections inapplicable to Federal taxes. The amendment . . . will obviate the need for a sequential referral of the bill to Ways and Means, which will be considering these provisions and other bankruptcy-related tax law later in this Congress.” H. R. Rep., at 275.
5 See, e.g., In re Maxfield, No. 04–60355, 2009 WL 2105953, *5–*6 (Bkrtcy. Ct. ND Ind. 2009); In re Jagours, 236 B. R. 616, 620 (Bkrtcy. Ct. ED Tex. 1999); In re Whall, 391 B. R. 1, 5–6 (Bkrtcy. Ct. Mass. 2008); In re Brown, No. 05–41071, 2006 WL 3370867, *3 (Bkrtcy. Ct. Mass. 2006); In re Gyulafia, 65 B. R. 913, 916 (Bkrtcy. Ct. Kan. 1986).
6 The dissent suggests that Chapter 12 can be distinguished from Chapter 13 because Chapter 12 bankruptcies tend to be longer, such that the treatment of taxes is more “important.” Post, at 13. Asa practical matter, it is not clear that Chapter 12 bankruptcies are substantially longer. Compare Brief for Neil E. Harl. et al. as Amici Curiae 33 (median Chapter 12 case duration is under 8 months) with Tr. of Oral Arg. 49 (“on average we’re talking about 4 months in a chapter 13 case”). In any event, there is no indication that Congress intended any difference in duration—if it anticipated a difference at all—to flip the characterization of postpetition income taxes from one chapter to the other. Nor does the absence of a §1305 equivalent in Chapter 12 justify shoehorning postpetition taxes into §503(b), as the dissent argues. That Chapter 12 lacks a provision allowing such taxes to be brought inside the plan only clarifies that such taxes fall outside of the plan. The dissent alternatively suggests that it “do[es] not see the serious harm in treating the relevant taxes as ‘administrative expenses’ in both Chapter 12 and Chapter 13 cases.” Post, at 13–14. The “harm” is to settled understandings in Chapter 13 to the contrary. The “harm” is also to §1305; to avoid rendering §1305 a nullity, the dissent recasts the provision as applicable not to all “taxes that become payable . . . while the case is pending,” but only those payable “after the Chapter 13 Plan is confirmed.” Post, at 14. The dissent does not claim, however, that this was Congress’ intent for §1305, as Congress’ choice of words would be exceedingly overbroad if it were. And the dissent’s novel reading contravenes ample Chapter 13 authority recognizing no such limitation on §1305’s scope. E.g., 8 Collier ¶1305.02 (citing cases).
7 IRS manuals dating back to 1998 indicate that the Government did not view postpetition federal income taxes as collectible in an individ-ual debtor’s Chapter 12 plan, even when that view was adverse to its interests. See IRM §220.127.116.11.3 (2004); id., §18.104.22.168.3(1) (2002);id., §5.9, ch. 10.8(4) (1999); id., §5.9, ch. 10.8(4) (1998). Until the en-actment of 11 U. S. C. §1222(a)(2)(A), treating such taxes as priority claims in the plan would have assured the Government of full payment before or at the time of the plan.
8 The House Report stated—after noting that, in addition to prepetition taxes, “certain other taxes are entitled to priority”—that “[t]axes arising from the operation of the estate after bankruptcy are entitled to priority as administrative expenses.” H. R. Rep., at 193. That is still true. Many taxes arising after bankruptcy, as in individual-debtor Chapter 7 or 11 cases, remain entitled to priority as administrative expenses. The Senate Report, meanwhile, stated: “In general, administrative expenses include taxes which the trustee incurs in administering the debtor’s estate, including taxes on capital gains from sales of property by the trustee and taxes on income earned by the estate during the case.” S. Rep., at 66 (emphasis added). That likewise remains true. Administrative expenses still include income taxes that “the trustee,” as opposed to the debtor, has incurred—again, as in individual-debtor Chapter 7 or 11 cases.
9 The original §346 established that the estate of a corporate debtoris not a separate taxable entity, but nonetheless provided that “the trustee shall make any [State or local] tax return otherwise required . . . to be filed by or on behalf of such . . . corporation.” §§346(c)(1)–(2), 92Stat. 2565, 2566. The current §346 similarly states, in the same provision deeming the debtor taxable when there is no separate taxable estate, that “[t]he trustee shall make such tax returns of income of corporations . . . . The estate shall be liable for any [State or local] tax imposed on such corporation.” §346(b).
10 The dissent opines that employment taxes must be administrative expenses “incurred by the estate” because, in its view, they “do notfit easily” within the category of administrative expenses under §503(b)(1)(A)(i), notwithstanding the Government’s contrary representations on both points. Post, at 12. Because employment taxes are not at issue in this case, we offer no opinion on either question.
SUPREME COURT OF THE UNITED STATES
LYNWOOD D. HALL, et ux., PETITIONERS v. UNITED STATES
on writ of certiorari to the united states court of appeals for the ninth circuit
[May 14, 2012]
Justice Breyer, with whom Justice Kennedy, Justice Ginsburg, and Justice Kagan join, dissenting.
Chapter 12 of the Bankruptcy Code helps family farmers in economic difficulty reorganize their debts without losing their farms. Consistent with the chapter’s purposes, Congress amended §1222(a) of the Code to enable the debtor to treat certain capital gains tax claims as ordinary unsecured claims. 11 U. S. C. §1222(a)(2)(A). The Court’s holding prevents the Amendment from carrying out this basic objective. I would read the statute differently, interpreting it in a way that, in my view, both is consistent with its language and allows the Amendment better to achieve its purposes.I A
Chapter 12 of the Bankruptcy Code helps indebted family farmers (and fishermen) keep their farms by making commitments to pay those debts (in part) out of future income. An eligible farmer whose debts exceed his assets may enter Chapter 12 bankruptcy, at which point he must develop a detailed Plan setting forth how he will pay his debts. That Plan must satisfy certain statutory criteria. §§1221, 1222, 1225.
A brief overview of these requirements helps to illuminate what is at stake in this case. Roughly speaking, the chapter requires that a holder of a secured claim receive the full amount of that claim up to the value of the collateral securing the loan. The claim may be paid over an extended period. If the claim exceeds the value of the collateral, the creditor is given an unsecured claim in the remainder. §§506(a), 1225(a)(5).
The holder of a §507 priority claim (a category that includes, among other things, domestic support obligations, debts for taxes incurred before filing the bankruptcy petition, and administrative expenses) must receive the full amount of the priority claim in deferred cash payments paid over the life of the Plan. §1222(a)(2).
The holder of an ordinary unsecured claim—i.e., an unsecured claim of a kind not listed in §507—may receive at least a partial payment from the amount left over after the payment of the secured and §507 priority claims. This amount may well be more than zero, for the Plan must provide that the farmer will devote all “disposable income” (as defined by §1225(b)(2)) or property of equivalent value to the repayment of his debts over the next three years (sometimes extended to five years). §§1222(c), 1225(b)(1). And that amount must prove sufficient to provide the unsecured creditor with no less than that creditor would receive in a Chapter 7 liquidation. §1225(a)(4).
Once the farmer completes his Plan payments, he will receive a discharge even if his payments did not fully satisfy all unsecured claims. The Code does not, however, permit all debts to be discharged. There are categories of nondischargeable debts (including, for example, secured claims), which creditors can pursue after bankruptcy. §1228(a).
For present purposes, it is important to understand that if the debtor owes too much money to his §507 priority creditors, he may not have sufficient assets or future income to pay all his secured creditors and his §507 priority creditors while leaving enough funds over to guarantee unsecured creditors the minimum amounts that Chapter 12 requires. If so, the farmer may not be able to proceed under Chapter 12. See §§1225(a)(1), (6) (bankruptcy court will not confirm Plan unless it satisfies statutory criteria and debtor will be able to make good on his commitments under the Plan).
It is also important to understand that the same kind of insufficient-assets-and-income problem might occur where the debtor owes the Government a large post-petition tax debt. In general, postpetition claims are not part of the bankruptcy proceedings. See 7 Norton Bankruptcy Law and Practice §135:14 (3d ed. 2011) (hereinafter Norton). Unless the Government’s debt falls within an exception to this general rule, bankruptcy law would leave the Government to collect its postpetition claim outside of bankruptcy as best it could. Again, the result will be to leave the farmer with fewer assets and income to devote to his Chapter 12 Plan—perhaps to the point where he cannot proceed under Chapter 12 at all.B
With this general summary in mind, it is easier to understand the significance of the question this case presents. The question arises out of an amendment to a Chapter 12 provision. The provision as amended says:
“Contents of plan
“(a) The plan shall—
. . . . .
“(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507, unless—
“(A) the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under section 507, but the debt shall be treated in such manner only if the debtor receives a discharge; or
“(B) the holder of a particular claim agrees to a different treatment of that claim.” §1222(a) (emphasis added).
The Amendment consists of subparagraph (A).
At first blush, the Amendment seems to relegate the capital gains tax collector to the status of an ordinary unsecured creditor. See ibid. (exception applies to claims “owed to a governmental unit that arises as a result of the sale . . . of any farm asset”). If, as petitioners claim, that is so, then it is unlikely that such a debt could stop a farmer from proceeding under Chapter 12, since its treatment as an ordinary unsecured claim means that the farmer will not necessarily have to pay the debt in full.
But if the Government and the majority are right, then the capital gains tax falls outside the category of §507 priority claims—and therefore falls outside the scope of the Amendment; in fact, it falls outside the bankruptcy proceeding altogether. And the Government then might well be able to collect the debt in full outside the bankruptcy proceeding—even if doing so would reduce the farmer’s assets and future income to the point where the farmer would not be able to proceed under Chapter 12. The question before us is whether we must interpret the Amendment in a way that could bring about this result.C 1
Congress did not intend this result. In a significant number of instances a Chapter 12 farmer, in order to have enough money to pay his creditors, might have to sell farmland or other farm assets at a price that would give rise to considerable capital gains taxes (particularly if the family has held the land or assets for many years). If the resulting tax debt were treated as a §507 priority claim, then it might well absorb much of the money raised to the point where (depending upon the size of his other debts) the farmer might be unable to proceed under Chapter 12. The Amendment accordingly seeks to place the tax authorities farther back in the creditor queue, requiring them, like ordinary unsecured creditors, to seek payment from the funds that remain after the §507 priority creditors (and secured claim holders) have been paid.
The Amendment’s chief legislative sponsor, Senator Charles Grassley, explained this well when he told the Senate:
“Under current law, farmers often face a crushing tax liability if they need to sell livestock or land in order to reorganize their business affairs. . . . [H]igh taxes have caused farmers to lose their farms. Under the bankruptcy code, the I. R. S. must be paid in full for any tax liabilities generated during a bankruptcy reorganization. If the farmer can’t pay the I. R. S. in full, then he can’t keep his farm. This isn’t sound policy. Why should the I. R. S. be allowed to veto a farmer’s reorganization plan? [The Amendment] takes this power away from the I. R. S. by reducing the priority of taxes during proceedings. This will free up capital for investment in the farm, and help farmers stay in the business of farming.” 145 Cong. Rec. 1113 (1999).
See also 14A J. Mertens, Law of Federal Income Taxation §54:61, p. 11 (Oct. 2011 Supp.) (“This provision attempts to mitigate the tax expense often incurred by farmers who have significant taxable capital gains or depreciation recapture when their low basis farm assets are foreclosed, sold, or otherwise disposed of by their creditors”).2
The majority, following the Government’s suggestion, interprets the relevant language in a way that denies the Amendment its intended effect. It holds that the only income tax claims to which §507 accords priority are claims for taxes due for years prior to the taxable year in which the farmer filed for bankruptcy. (We shall call these “prepetition tax claims.”) In the majority’s view, §507 does not cover income tax liabilities that arise during the year of filing or during the Chapter 12 proceedings. (We shall call these “postpetition tax claims.”) Ante, at 4–5; see Brief for United States 8 (the Amendment “provides farmers relief from [only] those tax claims that are otherwise entitled to priority under 11 U. S. C. 507(a)(8), namely pre-petition claims arising from the sale of farm assets”); Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, §705(1)(A), 119Stat. 126 (amending §507(a)(8) to clarify that it only covers income tax claims for taxable years that end on or before the date of the filing of the bankruptcy petition).
The majority then observes that the Amendment creates an exception only in respect to §507 priority claims. §1222(a) (“The plan shall . . . provide for the full payment . . . of all claims entitled to priority under section 507, unless . . . .” (Emphasis added.)). Ante, at 2. Thus, if (without the Amendment) §507 would not cover postpetition capital gains taxes in the first place, the Amendment (creating only a §507 exception) cannot affect postpetition tax claims. An exception from nothing amounts to nothing.
Consequently, the majority concludes that postpetition tax claims fall outside the bankruptcy proceeding entirely; the tax authorities can collect them as if they were ordinary tax debts; and the Government’s efforts to collect them can lead to the very results (blocking the use of Chapter 12) that the Amendment sought to avoid.
Therein lies the problem. These results are the very opposite of what Congress intended. Congress did not want to relegate to ordinary-unsecured-claim status only prepetition tax claims, i.e., tax claims that accrued well before the Chapter 12 proceedings began. Rather, Congress was concerned about the effect on the farmer of collecting capital gains tax debts that arose during (and were connected with) the Chapter 12 proceedings themselves. See 145 Cong. Rec. 1113 (the Amendment will have the effect of “reducing the priority of taxes during proceedings” (emphasis added) (statement of Sen. Grassley during a failed attempt to enact the Amendment)); Hearing on the Bankruptcy Reform Act of 2001 before the Senate Committee on the Judiciary, 107th Cong., 1st Sess., 121 (statement of Sen. Grassley) (“[The Amendment] also reduces the priority of capital gains tax liabilities for farm assets sold as a part of a reorganization plan” (emphasis added)). The majority does not deny the importance of Congress’ objective. Rather, it feels compelled to hold that Congress put the Amendment in the wrong place.II
Unlike the majority, I believe the relevant Bankruptcy Code language can be and is better interpreted in a way that would give full effect to the Amendment. In particular, the relevant language is better interpreted so that in the absence of the Amendment §507 would cover these postpetition tax claims. Hence the Amendment creates an exception from what otherwise would amount to a §507 priority claim. And it can take effect as written.
It is common ground that subsection (a)(2) of §507 covers, and gives §507 priority to, “administrative expenses allowed under section 503(b).” §507(a)(2) (2006 ed., Supp. IV). It is also common ground that the relevant definitional section, namely §503(b), defines allowed “administrative expenses” as “including . . . any tax . . . incurred by the estate.” §503(b)(1)(B)(i) (2006 ed.). But after this point, we part company.
The majority believes that the words any tax “incurred by the estate” cannot include postpetition taxes. It emphasizes that tax law does not treat a Chapter 12 bankruptcy estate as a “separate taxable entity,” i.e., as separate from the farmer-debtor for federal income tax purposes. 26 U. S. C. §§1398, 1399. This means that there is just one entity—the debtor—for these purposes. And §346 of the Bankruptcy Code makes clear that any state and local income tax liabilities incurred by a Chapter 12 estate must also be taxed to the debtor. The majority says that these provisions mean that only the debtor, and not the estate, can “ ‘incu[r]’ ” taxes within the meaning of 11 U. S. C. §503(b)(1)(B)(i). Ante, at 4–5.
In my view, however, these tax law circumstances do not require the majority’s narrow reading of this Bankruptcy Code provision. That is to say, the phrase tax “incurred by the [bankruptcy] estate” can include a tax incurred by the farmer while managing his estate in the midst of his bankruptcy proceedings, i.e., between the time the farmer files for Chapter 12 bankruptcy and the time the bankruptcy court confirms the farmer’s Chapter 12 Plan.
The bankruptcy estate is in existence during this time. Cf. §1227(b) (property of the estate vests in the debtor at confirmation unless the Plan provides otherwise). The bankruptcy court has jurisdiction over the farmer’s assets during this time. See §§541, 1207; 4 Norton §61:1, at 61–2 (§541’s “broad definition of estate property . . . centralizes all of the estate’s assets under the jurisdiction of the bankruptcy court”). And, as a matter of both the English language and bankruptcy principles, one can consider a tax liability that the farmer incurs during this period (such as a capital gains tax arising from a sale of a portion of his farm assets to raise funds for creditors) as a liability that, in a bankruptcy sense, the estate incurs.
The English language permits this reading of the phrase tax “incurred by the estate.” When the farmer, in the midst of Chapter 12 proceedings, sells a portion of his farm to raise money to help pay his creditors, one can say, as a matter of English, that the bankruptcy estate has “incurred” the associated tax, even if it is ultimately taxed to the farmer, just as one can say that an employee who makes purchases using a company credit card “incurs costs” for which his employer is liable.
As a matter of general bankruptcy principles (as Congress understood them), the history of the 1978 Bankruptcy Code revision is replete with statements to the effect that “[t]axes arising from the operation of the estate after bankruptcy are entitled to priority as administrative expenses.” H. R. Rep. No. 95–595, p. 193 (1977) (emphasis added). See S. Rep. No. 95–1106, p. 13 (1978) (administrative expenses include “[t]axes incurred during the administration of the estate” (emphasis added)); S. Rep. No. 95–989, p. 66 (1978) (“In general, administrative expenses include taxes which the trustee incurs in administering the debtor’s estate, including taxes on capital gains from sales of property by the trustee and taxes on income earned by the estate during the case” (emphasis added)); 124 Cong. Rec. 32415 (1978) (“The amendment generally follows the Senate amendment in providing expressly that taxes incurred during the administration of the estate share the first priority given to administrative expenses generally” (emphasis added)); id., at 34014 (Senate version of the joint floor statement saying exactly the same).
And importantly, as the majority concedes, ante, at 14–15, bankruptcy law treats taxes incurred by corporate debtors while they are in bankruptcy proceedings as “tax[es] incurred by the estate,” even though the Tax Code does not treat the bankruptcy estate of a corporate debtor as a “separate taxable entity.” See, e.g., United States v. Noland, 517 U. S. 535, 543 (1996) (treating Chapter 11 corporate debtor’s postpetition taxes as administrative expenses); In re Pacific-Atlantic Trading Co., 64 F. 3d 1292, 1298 (CA9 1995) (same); In re L. J. O’Neil Shoe Co., 64 F. 3d 1146, 1151–1152 (CA8 1995) (same); In re Hillsborough Holdings Corp., 156 B. R. 318, 320 (Bkrtcy. Ct. MD Fla. 1993) (“[A]dministrative expenses should include taxes which the trustee, and, in Chapter 11 cases, the Debtor-in-Possession, incurs in administering the estate, including taxes based on capital gains from sales of property and taxes on income earned by the estate during the case post-petition”).
Even though, as the majority says, corporate bankruptcies have some special features (in particular, a trustee in a corporate bankruptcy is required to file the estate’s income tax return), it is unclear why these features should have any bearing on the definition of administrative expenses. See ante, at 15 (discussing 26 U. S. C. §6012(b)(3)). Indeed, in many corporate Chapter 11 bankruptcies, there is no trustee, in which case the debtor-in-possession, just like an individual Chapter 12 debtor, must file the tax return. See 11 U. S. C. §§1104, 1107 (2006 ed. and Supp. IV); 5 Norton §§91:3, 93:1 (typically, no trustee is appointed in a Chapter 11 bankruptcy, and the debtor-in-possession assumes most of the duties and powers of a trustee, continuing in possession and managing the business until the court determines, upon request of a party in interest, that grounds exist for the appointment of a trustee); Holywell Corp. v. Smith, 503 U. S. 47, 54 (1992) (“As the assignee of ‘all’ or ‘substantially all’ of the property of the corporate debtors, the trustee must file the returns that the corporate debtors would have filed had the plan not assigned their property to the trustee” (emphasis added)).
Consequently, I can find no strong bankruptcy law reason for treating taxes incurred by a corporate debtor differently from those incurred by an individual Chapter 12 debtor. To the contrary, since corporations can file for bankruptcy under Chapter 12, the majority’s argument implies that the treatment of postpetition taxes in Chapter 12 proceedings turns on whether the debtor happens to be a corporation. See §101(18)(B) (2006 ed.) (defining “family farmer” to include certain corporations); §109(f) (“Only a family farmer or family fisherman with regular annual income may be a debtor under chapter 12”); Brief for United States 26, n. 9 (“[T]he estate of a corporate (as opposed to individual) Chapter 12 debtor . . . could be viewed as incurring post-petition income taxes . . . collectible as administrative expenses . . . rather than outside the bankruptcy case as required for an individual Chapter 12 debtor”).
The majority does not point to any adverse consequences that might arise were bankruptcy law to treat taxes incurred in administering the bankruptcy estate (i.e., taxes incurred after filing and before Plan confirmation) as administrative expenses. The effect of doing so would simply be to consider the debtor and estate as merged for purposes of determining which taxes fall within the Bankruptcy’s Code’s definition of “administrative expenses,” i.e., determining for that purpose that the estate may “incur” tax liabilities on behalf of the whole (with the ultimate liability assigned to the debtor), much like a married couple filing jointly, 26 U. S. C. §6013(a), or an affiliated group of corporations filing a consolidated tax return, §1501. Cf. In re Lumara Foods of America, Inc., 50 B. R. 809, 815 (Bkrtcy. Ct. ND Ohio 1985) (describing the history of §503(b)(1)(B)(i) and concluding that “the elevation [of a tax] to an administrative priority is dependent upon when the tax accrued”). In fact, the very tax provisions that separate the estate from the individual debtor in Chapter 7 and Chapter 11 proceedings, §§1398 and 1399, say that the Chapter 12 estate is not separate from the debtor for tax purposes—a concept consistent, not at odds, with merging the two for this bankruptcy purpose.
Nor is the majority’s reading free of conceptual problems. If we read the phrase tax “incurred by the estate” as excluding tax liabilities incurred while the farmer is in Chapter 12 bankruptcy, we must read it as excluding not only capital gains taxes but also other kinds of taxes, such as an employer’s share of Social Security taxes, Medicare taxes, or other employee taxes. But no one claims that all of these taxes fall outside the scope of the term “administrative expenses.” See In re Ryan, 228 B. R. 746 (Bkrtcy. Ct. Ore. 1999) (treating postpetition employment taxes as administrative expenses in a Chapter 12 proceeding); IRS Chief Counsel Advice No. 200518002 (May 6, 2005), 2005 WL 1060956 (assuming that some postpetition federal taxes can be treated as administrative expenses in a Chapter 12 bankruptcy).
In fact, the Government, realizing it cannot go this far, concedes that many of these other (e.g., employer) taxes are “administrative expenses,” but only, it suggests, because they fall within a different part of the “administrative expenses” definition, namely 11 U. S. C. §503(b)(1)(A), which says that “administrative expenses” include “the actual, necessary costs and expenses of preserving the estate including . . . wages, salaries, and commissions for services rendered after the commencement of the case.” (Emphasis added.) See Brief for United States 27–28, n. 11. Employment taxes, however, do not fit easily within the rubric “wages, salaries, and commissions.” They may well be “necessary costs and expenses of preserving the estate.” But then so are the capital gains taxes at issue here.
Finally, the majority makes what I believe to be its strongest argument. Ante, at 9–12. Chapter 13, it points out, allows individuals (typically those who are not farmers or fishermen) to reorganize their debts in much the same way as does Chapter 12. And there is authority holding that taxes on income earned between the time the Chapter 13 debtor files for bankruptcy and the time the bankruptcy Plan is confirmed are not “tax[es] incurred by the estate.” See In re Whall, 391 B. R. 1, 5–6 (Bkrtcy. Ct. Mass. 2008); In re Brown, No. 05–41071, 2006 WL 3370867, *3 (Bkrtcy. Ct. Mass. 2006); In re Jagours, 236 B. R. 616, 620, n. 4 (Bkrtcy. Ct. ED Tex. 1999); In re Gyulafia, 65 B. R. 913, 916 (Bkrtcy. Ct. Kan. 1986). Why, asks the majority, should the law treat Chapter 12 taxes differently?
For one thing, the issue is less important in a Chapter 13 case, for the relevant time period—between filing and Plan confirmation—is typically very short. Compare H. R. Rep. No. 95–595, at 276 (“most chapter 13 estates will only remain open for 1 or 2 months until confirmation of the plan”), with Brief for Neil E. Harl et al. as Amici Curiae 32–33 (survey of Chapter 12 bankruptcies found the average time from filing to confirmation in a district ranged from nearly five months to over three years). See also 7 Norton §122:14, at 122–27 (“In Chapter 13, the plan must be filed within 15 days after the filing of the petition, unless the time is extended for cause. A Chapter 12 Plan must be filed no later than 90 days after the order for relief, unless the court finds that an extension is substantially justified” (footnote omitted)).
For another, the issue arises differently in a Chapter 13 case. That chapter, unlike Chapter 12, contains a special provision that permits the Government to seek §507 priority treatment of all taxes incurred while the bankruptcy case is pending. §1305 (Government can file proof of claim to have postpetition taxes treated as if they had arisen before the petition was filed).
Finally, if uniformity of interpretation between these two chapters is critical, I do not see the serious harm in treating the relevant taxes as “administrative expenses” in both Chapter 12 and Chapter 13 cases rather than in neither. The majority apparently believes that this would render §1305 (the provision permitting the Government to seek §507 priority treatment) superfluous. Ante, at 10–12. But that is not so. This interpretation would simply limit the scope of operation of §1305 to the period of time after the Chapter 13 Plan is confirmed but while the Chapter 13 case is still pending. And that is likely to be a significant period of time relative to the preconfirmation period. See H. R. Rep. No. 95–595, at 276 (“[M]ost chapter 13 estates will only remain open for 1 or 2 months until confirmation of the plan”); §§1325(b)(1), (4) (debtor must commit all his projected disposable income over a 3-year period (sometimes extended to five) to the Plan, unless all unsecured claims can be paid off over a shorter period). The greatest Chapter 13 harm this interpretation could cause is to require the Government to pursue those tax liabilities as §507 priority administrative expense claims (rather than allow it to choose between §507 priority treatment and pursuing those claims outside bankruptcy) during the relatively brief period of time between the filing of a petition and the Plan’s confirmation.
In sum, I would treat a postpetition/preconfirmation tax liability as a tax “incurred by the estate,” hence as an “administrative expense,” hence as a “clai[m] entitled to priority under section 507, unless . . . ,” hence as a claim falling within the scope of the Amendment. Doing so would allow the Amendment to take effect as Congress intended.III
The Government argues that, even if tax liabilities arising during the bankruptcy proceedings are “administrative expenses,” they still do not fall within the Amendment’s scope. It says that neither the Amendment nor anything else in §1222(a) provides for the payment of administrative expenses. Rather, that section and its Amendment provide only for the payment of “claims.” §1222(a)(2) (“The plan shall . . . provide for the full payment . . . of all claims entitled to priority under section 507, unless . . .” (emphasis added)). And administrative expenses, the Government says, like all debts that are incurred postpetition, are not “claims.”
The Government finds support for its view in the fact that that §1222 deals with the contents of a “plan,” while a later section, §1227(a), says that the provisions of a “confirmed plan bind the debtor, each creditor, [and certain others of no relevance here].” (Emphasis added.) This is because the Code defines “creditor” to include only holders of pre-petition claims, thus excluding holders of post-petition claims, such as administrative expenses. §101(10).
The Government points out that a different Code section, namely §1226(b)(1), provides for the payment of administrative expenses. That section says that “[b]efore or at the time of each payment to creditors under the plan, there shall be paid . . . any unpaid claim of the kind specified in section 507(a)(2),” namely “administrative expenses.” And Congress did not amend §1226(b)(1); it amended the earlier section, §1222(a).
In short, the Government says, the Plan only covers those §507 priority “expenses and claims” that are described as “claims” and can be held by “creditors.” Section 1226(b)(1), not §1222, deals with administrative expenses. The bottom line of the Government’s chain of logic is, once again, that Congress put the Amendment in the wrong place.
I concede that there is some text and legislative history that supports the Government’s view that the word “claim” in §1222(a) does not include “administrative expenses.” See, e.g., §507(a) (referring to “expenses and claims” as if they are separate categories); S. Rep. No. 95–1106, at 20 (“The committee amendments contain several changes designed to clarify the distinction between a ‘claim’ (which generally relates to a debt incurred before the bankruptcy petition is filed) and an administrative expense (which is an expense incurred by the trustee after the filing of the petition)”).
But the language does not demand the Government’s reading. For the Code also uses the word “claim” to cover both prepetition and postpetition claims (such as administrative expenses). E.g., §101(5)(A) (defining a claim as a “right to payment”); §726(b) (2006 ed., Supp. IV) (referring to “claims” that include administrative expenses). Indeed, the very section that the Government says permits separate collection of administrative expenses, namely §1226(b)(1), refers to “any unpaid claim” for administrative expenses. (Emphasis added.) And one can easily read that section as setting forth when, not whether, administrative expenses will be paid under the Plan (i.e., as specifying that the Plan must provide for the payment of administrative expenses before payments to other creditors are made). Thus, reading §1222(a)(2)’s reference to “claims” as including administrative expenses need not render §1226(b)(1) surplusage.
What about §1227(a), which refers only to “creditor[s]”? One must read it in conjunction with §1228(a), which provides that once the debtor has completed all payments under the Plan, “the court shall grant the debtor a discharge of  all debts provided for by the plan[,]  allowed under section 503 of this title [which describes ‘administrative expenses’] or  disallowed under section 502 of this title . . . .” (Emphasis added.) (The first few words of §1227(a)—“[e]xcept as provided in section 1228(a)”—explain why I say “must”; the comma comes from 7 Norton §137:2, at 137–3, n. 1, which says that its omission was a typographical error). Thus, by here referring to “administrative expenses” (through its reference to §503), Chapter 12 makes clear that at least some postpetition claims are to be discharged once the debtor has completed his payments under the Plan. That fact, in turn, suggests that the Plan may provide for their payment and that the holders of such claims may be bound by the terms of a confirmed Plan.
The upshot is that the Government’s second argument presents a plausible, but not the only plausible, interpretation of the Code’s language. And the Government’s second argument, like the majority’s argument, has a problem, namely that it reduces Congress’ Amendment to rubble. For that reason I believe it does not offer the better interpretation of the relevant language.IV
In sum the phrase tax “incurred by the estate” in §503(b) (the “administrative expense” section) and the word “claim” in §1222(a) are open to different interpretations. Each of the narrower interpretations advanced by the Government or adopted by the Court would either exclude postpetition taxes from the phrase taxes “incurred by the estate” or exclude all postpetition debts, including administrative expenses, from the word “claim.” In these ways, these interpretations would, as I have said, prevent the Amendment from accomplishing its basic purpose.
A broader interpretation of the word “claim” may allow the Plan to include certain postpetition debts. This, taken together with a broader interpretation of the phrase tax “incurred by the estate,” prevents the Government from collecting postpetition/preconfirmation tax debts outside of Chapter 12, requiring it to assume a place in the creditor queue. Together these broader interpretations permit the Amendment to take effect as intended.
I find this last-mentioned consideration determinative. It seems to me unlikely that Congress, having worked on revisions of the Code for many years with the help of Bankruptcy experts, and having considered the Amendment several times over a period of years, would have made the drafting mistake that the Government and the majority necessarily imply that it made. Moreover, I believe it important that courts interpreting statutes make significant efforts to allow the provisions of congressional statutes to function in the ways that that the elected branch of Government likely intended and for which it can be held democratically accountable.
For these reasons, with respect, I dissent.
ORAL ARGUMENT OF SUSAN M. FREEMAN ON BEHALF OF THE PETITIONERS
Chief Justice John G. Roberts: We will hear argument first this morning in Case 10-875, Hall v. United States.
Ms Freeman: Mr. Chief Justice, and may it please the Court:
Bankruptcy estates incur taxes when they generate income.
The government's attempt to limit the effect of the farm sale statute, section 1222(a)(2)(A), alters that fundamental principle in corporate Chapter 11 cases and in all bankruptcy cases, as it requires this Court to construe the administrative section and the priority section of the Bankruptcy Code that do apply in all of those cases.
In a Chapter 12 case, the bankruptcy estate consists of more than just the assets that existed as of the date of filing.
They also consist of all of the income that is earned thereafter, wages -- Mrs. Hall's wages as a convenience store clerk are part of the bankruptcy estate -- the proceeds from selling crops--
Justice Anthony Kennedy: Does it include debts incurred after the filing?
Ms Freeman: --From the period -- from the petition filing date until the confirmation of the plan, yes, it does.
Those debts are incurred in the operation of the estate--
Justice Anthony Kennedy: Debts -- debts that were incurred after that date?
Ms Freeman: --Yes, Your Honor.
So that, for example, in operating an estate, you would incur a light bill as well as incurring taxes.
All of the operating expenses are incurred by the bankruptcy estate, and are payable from the income and from the estate assets during that period from the petition filing date until the confirmation of the plan.
That's the administrative period.
Justice Ruth Bader Ginsburg: Is that true of State -- you said taxes.
Is it true of State taxes?
Ms Freeman: Yes, Your Honor, it is true of State taxes as well as Federal taxes.
County taxes, for example.
Justice Ruth Bader Ginsburg: We're dealing -- in this -- we're dealing with a capital gains tax on the sale of the farm.
Suppose a State had a similar tax; it also taxed the gain on the sale.
Ms Freeman: --Correct, Your Honor, and it did in this particular case.
So there would be State taxes on the capital gains, and those would also be administrative expense priorities, except for the farm sale provision here, which demotes that priority if the debtor is able to earn a discharge.
And if so, then those farm sale taxes are demoted in priority and may be discharged under a plan of reorganization.
They would share pro rata with the other prepetition claims of the bankruptcy estate.
Justice Samuel Alito: Who would file the State tax return?
Would it be filed by the estate or would it be filed by the debtor?
Ms Freeman: The debtor and the estate are one in a -- in a reorganization case.
And so the taxpayers, Lynwood and Brenda Hall, would file the tax return.
The way that it would actually be administered, Your Honor, is shown by the Knudsen case.
And basically, there would be a tax return that includes all of the income, the wages, the crop sale proceeds and so forth.
And then it would compute it with the capital gains tax, and there would be a separate pro forma return that does not include the capital gains tax.
Those would be sent to the Special Procedures Unit of the IRS, so that somebody there would know how to deal with it and would be able to count the difference.
Justice Sonia Sotomayor: Counsel, how do you deal with section 346?
Ms Freeman: Section 346, Your Honor, basically makes the State taxes consistent with the Federal taxes.
When you have--
Justice Sonia Sotomayor: I read 346(b) to say that, unless the estate is a separate tax entity under the code, that the debtor, not the estate, pays State and local taxes.
This is totally contrary to what you're saying, but the language of 346(b) basically answers the question against you with respect to State and local taxes.
Ms Freeman: --Justice Sotomayor, I do not think it does, in the sense -- in this sense.
The bankruptcy -- section 346(b) made the State and local taxes consistent with Federal taxes, and when you have a bankruptcy estate that consists only of assets on the petition filing date, then you have a separate taxable entity with a separate tax I.D. number that is set up.
But under the Federal bankruptcy -- under the Federal tax code, under section 1399, whenever the bankruptcy estate had income during the course of the estate, during the administration period, as well as the assets on the petition filing date, then it's a single taxable entity.
And so that single taxpayer would pay it.
Section 346 doesn't say what assets are used to pay the tax.
That's a matter of bankruptcy law.
The debtor, the individual taxpayer, is going to file the tax return under State and local and Federal law, but he's going to use the estate assets because that's all there is.
He doesn't have any other assets.
Justice Sonia Sotomayor: So the debtor is going to pay, and so when this--
Ms Freeman: The debtor pays--
Justice Sonia Sotomayor: --says -- whenever the Internal Revenue Code of 1986 provides that no separate taxable estate shall be created in a case concerning a debtor under this title--
Ms Freeman: --Right.
Justice Sonia Sotomayor: --Chapter 12 doesn't create a separate taxable estate.
Ms Freeman: Correct.
Justice Sonia Sotomayor: And that the income, et cetera, shall be taxed to or claimed by the debtor under State or local law.
Ms Freeman: That's correct, Your Honor.
It's going to be on the debtor's tax return.
The debtor's the one who will have the deductions and the deductions would include administrative expenses of the bankruptcy estate.
Justice Sonia Sotomayor: This -- this is hard for me to understand, given the last line.
"The estate shall be liable for any tax imposed on such corporation or partnership, but not for any tax imposed on partners or members. "
By the logic of that last sentence, it seems to me that the preceding section is not looking to the estate, but to the debtor, to pay the taxes.
Ms Freeman: The debtor pays the taxes, but with estate assets, because those are the only assets that exist.
Justice Sonia Sotomayor: So why -- why would the last sentence be necessary?
Ms Freeman: The last sentence, I believe, Your Honor, deals with the partnership, and in a partnership case, just as outside a bankruptcy the partnership files the tax return and the partners individually are the ones who pay the taxes.
But they pay the taxes -- if a partner is in its own bankruptcy estate with the only assets that exist, all of his income, all of his wages, all of those are property of the bankruptcy estate, and he would use it to pay the taxes.
He's not individually liable any more than if a trustee were individually liable.
The trustee in a bankruptcy case uses estate assets to pay taxes.
And so with--
Justice Anthony Kennedy: But it says the estate -- the estate's not liable for the tax imposed on the partners.
So if it's not liable, how can it ask for a discharge?
Ms Freeman: --The -- the debtor ultimately is the one who receives a discharge.
Discharge provisions are separate than the -- than the tax payment issues.
Tax payment deals with what monies are used to make the payments of taxes during the course of administration of a bankruptcy case.
The debtor receives a discharge in a Chapter 12 case if it complies -- if he complies with all of the provisions of his plan of reorganization and then receives a discharge.
There are exceptions to the discharge.
Certain prepetition taxes are excepted from a discharge and would carry through during the -- postpetition.
But the farm sale statute provides that these particular administrative expenses would be subject to a discharge if he complies with the rest of the provisions of the -- of his plan of reorganization.
Justice Stephen G. Breyer: What happens in a 12 or 13 case, just your typical case -- and this must arise fairly often -- in year 1, on January 1 the farm or the ship or whatever is the subject goes into Chapter 12 or 13.
They have a lot of pre-1 debt.
Then in year 2 and year 3, the proceedings are going on, but the farm is operating, so is the ship, or whatever.
And they earn -- they run up debts during that time.
People give them fertilizer -- you know, all kinds of things.
So they have a lot of debts that they've run up in that time.
Now, it draws to a close at the end of year 3.
Now, what about those debts that have been run up during that time?
There isn't a separate bankruptcy estate for tax purposes, I understand.
But if Joe Smith has loaned his farm some money during that time, and it comes time to look at the future income to subtract the prepetition debts, does his debt get wound up and get some priority in that process, or is he just at the end of the queue?
Ms Freeman: He does get priority in that process, Your Honor.
Justice Stephen G. Breyer: All right.
Well, if he gets priority, then why in heaven's name shouldn't a tax get priority?
That's your point.
Ms Freeman: Your Honor, it does have that priority.
Justice Stephen G. Breyer: And if it does, then, of course, the exception that Senator Grassley put in applies to that.
So that's a question I should ask them, given your answer.
Ms Freeman: Yes, Your Honor.
And in fact, those taxes, along with the light bill and any other administrative expenses, would be paid when due over that 2 or 3-year period.
And that's certainly what happens in the large Chapter 11 bankruptcy case, like a Delphi bankruptcy case or a General Motors--
Chief Justice John G. Roberts: Well, but I mean, your -- it is a question for you, because these things don't go for 2 or 3 years, do they?
I thought typically they were wrapped up very quickly, and that's to the advantage of the debtor.
And your position with respect to postpetition taxes has the potential of extending them beyond the kind of quick turnaround that helps everybody.
Ms Freeman: --Respectfully, Mr. Chief Justice, in Chapter 12 cases often the bankruptcy estate will drag on for 2 or 3 years, and certainly for longer than 1 year, and much longer than a Chapter 13 case, because you do have sales of assets.
You have debts that need to be restructured.
You have leases that end up getting rejected.
You have a -- new crop subsidies that are applied for and received.
The chapter -- the amicus curiae brief of the professors has a study, and shows how long Chapter 12 cases generally last--
Chief Justice John G. Roberts: How long was this -- this one?
Ms Freeman: --This case, Your Honor, because of this appeal has lasted from 2005 through today, so a considerable period of time.
And all of the taxes during that period of time and all of the operating expenses during that period of time are administrative expenses and are payable in the ordinary course.
There is an administrative expense claim if in fact they haven't been paid.
And if -- if one of the creditors has not received payment or if a taxing authority has not received payment, it can move for payment as an administrative priority.
It can ask that it be paid now, and it can ask that the case be dismissed if it hasn't been paid.
So you -- you do have that highest priority, and this is consistent with the Court's Nicholas case, 1966, which preceded the Bankruptcy Code and which the Bankruptcy Code really incorporated and continued with.
In the Nicholas case the Court said that all taxes incurred by a debtor-in-possession and incurred during the administration period have administrative expense priority, and they are payable by the debtor-in-possession as an officer of the court, as the administrator of the estate under 28 U.S.C. section 960, which is still in effect today, and which requires that the person in control of the bankruptcy estate, whether it's a trustee or a debtor in possession, pay those taxes, but not pay them with his own money.
As the Court said in the Nicholas case, you pay them with the assets of the estate.
The individual trustee is not responsible; the individual debtor in possession is not responsible.
The responsibility of the debtor-in-possession really is a matter of the discharge provisions, whether he's going to be separately discharged or if he has responsible person liability because he's -- he's -- you're dealing with trust fund taxes, with wages from some other person.
Justice Anthony Kennedy: The -- what you say to me makes a great deal of sense, but I think one of their stronger arguments is, it may make sense, but unfortunately, even if Senator Grassley and the others wanted it, they didn't do it right technically.
They didn't amend the right provision of the code, and whoever's fault that is, is beside the point.
So there is no way to get the words to get to the result that you want.
I'll tell you the best I could do, and I see a problem with it.
If you say that -- you go to 1226(b)(1) and it says that any unpaid claim of the kind specified in 507(a)(2) -- and 507(a)(2) talks about administrative expenses and refers you to 503; and 503 includes taxes and administrative expenses -- and then you say it's, at 1220 whatever it is, what did I just say?
Ms Freeman: 1226?
Justice Anthony Kennedy: 1226.
Ms Freeman: Uh-huh.
Justice Anthony Kennedy: It's like an Abbott and Costello movie.
The -- the -- you get to 1226(b)(1) and it says that that that's -- shall be paid any unpaid payments of that kind, including administrative expenses, and -- and so then you have 1222(a), which refers to that and then the amendment applies to that.
But what I did was I sloughed over by talking too quickly -- it talked about 507(a)(2).
And when you look to 507(a)(2), it talks about claims and expenses; and then in (2) there it refers to administrative expenses.
And so I think the government says they left out what was key to you, the word "expense".
Now, I don't know what I'm doing when I start tinkering with this Bankruptcy Code.
And is that just true, what they say?
It does leave out the word "expenses".
Will -- will we cause untold harm if we were to read the word "claims" there to include expenses?
Ms Freeman: Your Honor, respectfully, you would cause untold harm because this provision applies in corporate Chapter 11's and in all bankruptcy cases.
They all have the administrative expense provision, 503, and they all have section 507.
So you would stop taxes from being payable in a big Delphi--
Justice Anthony Kennedy: No, but I was thinking, so if I do it by reading the word "claims"--
Ms Freeman: --Right.
Justice Anthony Kennedy: --in 5 -- in 1226, when it says "any unpaid claim"--
Ms Freeman: Right.
Justice Anthony Kennedy: --Which is what you want to have include taxes--
Ms Freeman: And claim--
Justice Anthony Kennedy: --to read that word as including both the 507(a) claims, which are in (1)(a), (1)(b), and -- also administrative expenses in (2).
Can I do that?
Ms Freeman: --You can, Your Honor, because 101 of the code as right to payment.
"Creditor" is defined as someone who has a claim that arose prepetition, which necessarily means claim is broader and not just one that arose prepetition.
There are numerous provisions of the Bankruptcy Code that refer to administrative expenses as claims, including 1226.
And so the Court can see that those are interpreted consistently.
This Court in the Hartford Underwriters case referred to administrative claims, calling them claims as well as administrative.
And really what the government's argument here is that administrative expenses are outside of bankruptcy altogether, that they are not part of what get paid in a bankruptcy case.
And that's simply untrue.
If the Court looks at the provisions with respect to requirements of a plan, including 1222(a), which apart from the exception, it says that administrative expenses are required to be paid.
Section 1228 says that a plan discharges all debts including debts provided for, allowed under section 503.
Debt is a liability on a claim.
Justice Stephen G. Breyer: But that's -- that's my first question.
What actually happens?
I mean, this isn't the first year of Chapter 12 and 13.
Ms Freeman: Right.
Justice Stephen G. Breyer: And there must be instances where the -- where the debts run up postpetition are pretty big--
Ms Freeman: And--
Justice Stephen G. Breyer: --and there isn't enough money to go around and they are going to have to be paid out of future income along with the prepetition debts; and it can be done, but there is a question of priorities; and the government is saying there is no priority -- I think they are saying that -- for a postpetition debt, and -- and you're saying: Oh, but of course there is.
So what actually happens?
There have been perhaps thousands and thousands of cases, haven't there?
Ms Freeman: --And administrative expenses do get paid in the ordinary course.
Justice Stephen G. Breyer: Get paid, if necessary, by assigning priorities?
Ms Freeman: --Yes.
They have administrative priority and they do get paid.
Justice Stephen G. Breyer: And so to look to a Hornbook on -- on bankruptcy law which just tells me what you've just said, I would look where?
Ms Freeman: We -- we've cited a number of hornbooks that have exactly that provision.
What is particular interesting with respect to the government's position here is that, at the government's urging section 507(a)(8) of the Bankruptcy Code, that provided for prepetition priority, eighth priority, for prepetition taxes within a short period before the Bankruptcy Code, was amended; so that all of those eighth priority taxes during the year of the filing, the straddle year -- here the Halls filed their bankruptcy case in August, so during the entire period from January 1 through August when they filed -- are treated as administrative expenses.
And yet now they say administrative expenses mean nothing and they don't get any payment as administrative expenses.
Why urge the change?
Why make all of those year of filing taxes into administrative expenses and then say the administrative expenses have no meaning?
Justice Sonia Sotomayor: I'm going to ask the government this, but are you aware of any circuit split or any cases below that have accepted the government's arguments that Chapter 12 involves prepetition debts only and that don't pay administrative expenses postbankruptcy?
Ms Freeman: There are several cases that have interpreted section 1222(a)(2)(A).
None of them have addressed the change in 507 or what that means.
Justice Sonia Sotomayor: That's a different question.
Ms Freeman: Okay.
Justice Sonia Sotomayor: The government's now saying that Chapter 12 involves only prepetition claims.
Ms Freeman: Right.
Justice Sonia Sotomayor: And it's basically by that argument saying it doesn't involve and can't involve administrative expenses.
Ms Freeman: I think that's--
Justice Sonia Sotomayor: And so I'm asking is -- That's how I read are there any courts that you are aware of below who have been presented with this argument outside of the tax situation who have accepted it?
Ms Freeman: --I--
Justice Sonia Sotomayor: Who have failed to give priority to administrative expenses?
Ms Freeman: --None outside of this tax situation.
And Your Honor, I don't believe that any of the cases that have followed the government's interpretation of this farm sale statute, 1222(a)(2)(A), have addressed the impact on other administrative expenses and other tax claims.
The wages -- the taxes on wages that are incurred, the lottery winnings that an individual farmer may have, and the fact that those have administrative priority and that those would need to be paid off the top as administrative expenses -- none of the cases address those.
Justice Sonia Sotomayor: I'm not asking you to defend their position.
Ms Freeman: Okay.
Justice Sonia Sotomayor: It's just such a broad position that I'm trying to understand if there is a split out there that we are unaware of.
Ms Freeman: And the problem, Your Honor, is that it does have these broad impacts and none of the courts have really addressed it, and I don't believe that certainly the--
Justice Sonia Sotomayor: So can we go back to the issue that gives me trouble?
Ms Freeman: --Yes, Your Honor.
Justice Sonia Sotomayor: How to read "incurred by the estate".
If the estate doesn't pay taxes--
Ms Freeman: To incur--
Justice Sonia Sotomayor: --how could it be incurred by the estate when Congress, if it intended what you're saying it intended, could have said "incurred during bankruptcy"?
Ms Freeman: --Incurred -- to incur is to take on liability.
So at the point in time that income is generated during a bankruptcy case, then liabilities are taken on at the same time, the operating expenses, the taxes.
Here you had a clear estate asset, the Hall farm.
It was sold.
That generates an income tax liability, a capital gains liability, and so that is -- it -- it's tied to the income which is here property of the estate.
The -- the--
Justice Antonin Scalia: The -- the problem is that, with an exception that -- that is not applicable here, section 1399 of the Internal Revenue Code provides that no separate taxable entity shall result from the commencement of a case under Title XI of the United States Code.
How can you incur a tax when you are not a separate taxable entity?
Ms Freeman: --Your Honor, because you are a single taxable entity instead of a separate taxable entity.
The whole reason for the separate taxable entity section was when you had a bankruptcy estate that consisted only of the assets on the petition filing date, and the debtor earns income independently, so the debtor would independently have tax liability, and that would be separate from the estate.
But when you have a reorganization case, a corporate Chapter 11 or a Chapter 12, then the estate and the debtor are a single taxable entity and the debtor is the one that files the tax returns or the debtor-in-possession or the trustee, if there is a trustee in control--
Justice Antonin Scalia: But if that exception were intended, the provision I read contains an exception.
"except in any case to which section 1398 applies. "
1398 applies to Chapter 7 and Chapter 11 where the debtor is an individual.
Ms Freeman: --That's--
Justice Antonin Scalia: Now, if there is an additional exception for Chapter 12 of the sort that you allege, why wasn't that put in there?
Ms Freeman: --There is no exception and there shouldn't be an exception, Your Honor.
They are within section 1399, just like corporate Chapter 11 debtors.
The debtor is the one that files the tax return.
The debtor and estate are one.
All of that corporate earnings, all of the wages, the lottery winnings, the farm sale proceeds, all of those are part of the estate.
Justice Antonin Scalia: What does it mean, then, to say that no taxable --
"no separate taxable entity shall result? "
What does it mean, unless it means that it is not the estate which occurs the tax?
Ms Freeman: --Your Honor, respectfully, there is a difference between taxable entity and estate.
The estate is a collection of property, that is the collection of property that is operated by the debtor-in-possession or trustee in a reorganization case.
Justice Antonin Scalia: Well, but they -- but they would not have needed the exceptions for Chapter 7 and Chapter 11 where the debtor is an individual if what you say is true, if indeed a bankrupt estate is, as you say, not an entity at all.
Ms Freeman: You need that exception, Your Honor, in a Chapter 7 case for an individual because the individual earns income that is wholly independent from the estate, that is not part of the estate.
So that the bankruptcy estate consists of the assets that the individual owns on the petition filing date.
The trustee administers those, sells the assets, may incur some liability for selling the assets for taxes, pays those and deals with those, while the individual continues to earn income postpetition that's his own income.
And so you need to have a separate taxable estate in those instances.
But when the income that's earned during this whole period of administration, from the petition filing date to the confirmation date of the plan, is all property of the estate, then the debtor, the corporate Chapter 11 debtor or the corporate Chapter 12 debtor or the individual Chapter 12 debtor is incurring that income as part of the estate.
estate in a Chapter 12 case.
It's all property of the Section 1207 says that.
And so the debtor is the one that files the tax returns and the debtor uses the estate assets to make the payments of the taxes and to make the payments on the light bill, and to make the payments on all of the other expenses of administration during this period of administration.
That's what this Court held in Nicholas and that continues on in effect today.
Justice Elena Kagan: But, Ms. Freeman, wouldn't it be fair to say then that the taxes are incurred by the debtor and payable out of the estate.
Why does it say "incurred by the estate"?
Ms Freeman: It uses the term "incurred by the estate" I think based upon the same kind of language that this Court used in Nicholas, as incurred by, incurred during the administration period, incurred by the debtor-in-possession.
It's really a broad sense of all of the kinds of bankruptcy estates in a Chapter 7 case.
This refers to all bankruptcy cases.
And so in a Chapter 7 case it's going to be just the assets that exist there on the petition filing date.
If it's a corporate case it's going to be all of the assets that are generating the income during the course of the administration of the Chapter 12 or the Chapter 11 case or even the Chapter 13 case.
In Chapter 13 cases you have a specific additional provision, section 1305, that deals with taxes payable postpetition, and it also includes postconfirmation, so it gives the government a broader kind of right so that--
Justice Ruth Bader Ginsburg: The argument is made against your position that 1305 is one of the provisions that was featured I think both in the Ninth Circuit and the Tenth Circuit, and their position seems to be that 1305 gives the government an election.
Ms Freeman: --It does, Your Honor, provide for an election for the government.
What's important is that in a 13 case, unlike a 12 or an 11, you have a very short period of administration.
They have to file their plan within 15 days.
It's confirmed within a month or 2.
And it's very unlikely that April 15th is going to fall within that short period of time and that's when the government says that your taxes are incurred.
So you're going to have a -- it's unlikely you're going to have an administrative expense claim for your income taxes during the period of administration of a Chapter 13.
It's a very short period.
So the government has the option not only during the administration period, but also during the whole period of the plan, to elect to say: All right, there have been some big commissions earned here and I want to go ahead and collect from the estate rather than just wait and see what the debtor earns afterwards.
And so it then can go ahead and file a claim and ask to have that claim paid out of the bankruptcy estate, and it really gives the government much broader rights than it does in a normal Chapter 11 or a Chapter 12 case or a 7.
If I may reserve the remainder of my time for rebuttal.
Chief Justice John G. Roberts: Thank you, Ms. Freeman.
Ms Freeman: Thank you.
Chief Justice John G. Roberts: Mr. Shah.
ORAL ARGUMENT OF PRATIK A. SHAH ON BEHALF OF THE RESPONDENT
Mr. Shah: Mr. Chief Justice, and may it please the Court:
The postpetition income tax liability at issue in this case is not subject to section 1222(a)(2) and thus cannot be treated as a dischargeable nonpriority debt for two reasons.
First, consistent with the structure of Chapter 12, a Chapter 12 plan is limited to prepetition debts and does not cover postpetition debts, including administrative expenses.
Rather, postpetition administrative expenses are paid separately through section 1226(b)(1), which contains no farm sale exception.
Because section 1222(a)(2)(A) strips priority only from a subset of claims covered by a Chapter 12 plan and does not alter which debts fall within that plan, it cannot apply to the postpetition tax liability at issue.
Justice Ruth Bader Ginsburg: So what -- what farm sales would be included?
What farm sales would get this benefit that Senator Grassley obviously wanted them to have?
Mr. Shah: Your Honor, it would be prepetition sales.
That is, any capital gains tax incurred from a prepetition sale, those would be priority expenses covered under a Chapter 12 plan under section 1222(a)(2), because they fall under -- they are an -- they are a priority claim under section 507(a).
Chief Justice John G. Roberts: Does that make sense, though, in terms of if you are talking about farmers and fishermen and you are talking about the treatment of their central asset, whether it's the farm or typically the boat, and they either want to try -- they want to try to save the farm or the boat, and they go into bankruptcy and the big issue is how that asset's going to be treated and your position is it's not in the bankruptcy at all, it's outside of it.
That seems to me to be at least counterintuitive.
Mr. Shah: Well, Your Honor, two points.
One, as a practical matter Chapter 12 is a reorganization provision.
It's not a provision just designed to allow farmers to get out of the business of farming.
So often what will happen is that the farmers will try to reorganize some of their farm sale assets, sell some of their livestock, change their farming operation, to see if they can save it outside of bankruptcy first.
All of those sales -- an example of that is the Knudsen case.
Knudsen is the only circuit case to go Petitioner's way.
In Knudsen it not only involved the postpetition tax liability of the type at issue in this case.
It also had a significant prepetition tax liability component in that case based upon just what I was explaining, the farmer trying to reorganize, trying to change the farming operation to save the farm without having to go into bankruptcy.
Chief Justice John G. Roberts: Yes, but also I gather it's a fairly typical situation where you have farmers that might want to sell part of the farm.
You know, they have dairy and corn operations or something, and they sell one to try to preserve the other.
And that's -- that's exactly the sort of thing that should be considered in the bankruptcy context, and yet your position says we're going to treat it outside the bankruptcy.
Mr. Shah: Well, Your Honor, it certainly happens within the bankruptcy, and I'm not disputing your point that that may -- that may arise in a bankruptcy case just like it arises in this case.
And it will be dealt through the bankruptcy.
That is, the sale will happen and it will be approved by the Bankruptcy Court.
The question is how do you treat the capital gains tax arising--
Chief Justice John G. Roberts: But that's a big deal if you're deciding how the plan's going to work.
What the amount was here was big for the farmer and the idea of well, we are going to pretend that's not at issue here seems to me to be -- again, not to make a lot of sense.
Mr. Shah: --Your Honor, we are not asking, to be clear, to pretend that that's not there.
How the tax liability would be dealt with under the government's view is at the time the debtor moves to sell the farm asset during the case.
Like in this case, that sale of the farm asset generated $960,000.
That was the sale price.
The capital gain tax liability in this case is $29,000.
If they would have set aside from that $960,000 sale price $29,000 to pay the capital gains tax debt, that would resolve the issue.
We are not saying that you ignore it.
Justice Elena Kagan: But there's every reason to think, Mr. Shah, that what Congress was worried about here was cases in which the bankruptcy plan would not be approved at all because there were very high capital gains taxes that would result from a sale; and that that was the problem that everybody was focused on, was making sure that farmers could take advantage of section 12.
So it's a little bit odd -- it's actually more than a little bit odd.
It's a lot odd to read the statutes to apply not in that context, but only as to people who have somehow managed to sell their property, you know, 18 months before going into bankruptcy.
Mr. Shah: Sure.
Your Honor, when you say that everybody was focused on this problem, we have the evidence of exactly one person as to what one legislator thought that this bill would do.
That's Senator Grassley.
Now, admittedly, Senator Grassley's statements do indicate an intent on his part to reach postpetition taxes.
But the preexisting statutory framework does not permit that result.
What section 1222(a)(2)(A) does is it allows the debtor to strip priority from a certain subset of governmental claims, such as prepetition taxes, and there is no doubt that Senator Grassley correctly understood that's how section 1222(a)(2)--
Justice Samuel Alito: It's not just Senator Grassley.
You're interpretation makes this provision, 1222(a)(2)(A), of very, very little practical value.
You think that's what Congress intended?
Not only would it -- would it mean that postpetition capital gains on the sale of part of the farm or the entire farm would be outside of the bankruptcy, outside of the bankruptcy, but all of the prepetition capital gains would be outside of it too, unless they occurred in a previous taxable year.
Mr. Shah: --A couple of responses, Your Honor.
First of all, I don't think it's sort of a null set or a vanishingly small set.
There is the Knudsen case which qualifies.
In the professors' amicus brief, on page 10a of their amicus brief, they provide a chart of representative cases involving postpetition tax liabilities.
They cite eight cases in their chart on page 10a.
Three of those eight cases involve significant prepetition tax liabilities, even under the narrower definition of "prepetition".
But -- but to get to your larger point, even to the extent it might be narrower than what Congress intended, Congress certainly knew how section 1222 operated in the sense that it would strip priority from certain claims that are already entitled to priority under a Chapter 12 plan, such as prepetition taxes.
And both sides agree that that's how section 1220(a)(2)(A) works.
There is no dispute about that.
The dispute is about whether this postpetition tax liability comes within the Chapter 12 plan in the first place.
That dispute turns on preexisting code provisions, part of the 1978 Act, part of the 1980 Act and the 1986 Act.
Whatever deference Senator Grassley is owed as to the operation of section 1220(a)(2)(A) itself, he is owed no deference whatsoever as to the proper interpretation of those preexisting code provisions.
It's our position that these preexisting -- preexisting code provisions, section 503(b), section 9 -- 346 and section 1398 and 1399, all lead to the result that postpetition tax liabilities are not an administrative expense within the meaning of the code.
Justice Ruth Bader Ginsburg: How about employment tax?
Mr. Shah: Your Honor, employment taxes Now, as a matter arguably could be treated differently.
of discretion IRS has chosen not to treat them differently.
That is, they don't try to seek those as I think there would be an administrative expenses.
argument and we set forth the argument in a footnote of our brief.
What the potential argument would be is that they could be deemed an administrative expense not because they are incurred by the estate, but under the other part of the definition of an administrative expense under 503(b)(1)(A).
Justice Stephen G. Breyer: Just following up on that--
Mr. Shah: Yes.
Justice Stephen G. Breyer: --I'm looking for what I call past practice, where there must be a lot--
Mr. Shah: Yes.
Justice Stephen G. Breyer: --that would shed some light on this.
So, I see -- your point that we cannot call these taxes administrative expenses is because when that's defined in 503 for the entire code.
Mr. Shah: Yes.
Justice Stephen G. Breyer: It talks about administrative expenses incurred by the estate.
Mr. Shah: Yes, Your Honor.
Justice Stephen G. Breyer: So you are saying here are three people who incurred their own taxes.
One is Section 12, one is Section 13 and one is individuals in Section 11.
Is that right?
Mr. Shah: Ah--
Justice Stephen G. Breyer: At least that's my--
Mr. Shah: --Yes.
Yes, Your Honor.
Justice Stephen G. Breyer: --So we have three categories of people that -- where the taxes literally taken, they incur postpetition taxes.
Now the bite would come up if it turned out when they were getting around to settle these things that there isn't enough money to pay fully the postpetition or let's -- no, to pay fully the domestic support obligations, wages, and also Federal taxes.
Isn't that -- that's where it's going to show up, because the question will be, do you have to shave the Federal taxes because they are coming in to be paid as an administrative expense priority which is only -- there as number 2, I think, in light of number 1.
Or do you not shave them at all.
If they were liable personally, there isn't any reduction in the amount of the Federal government, if they are allowed because it's one of the estate's expenses basically; using the estate very, very loosely then they would have to take a reduction, too.
Am I right?
Are you following it?
Mr. Shah: I think so.
Let me try to say what I think what you're saying.
Under Chapter 12 and 13, if it is in fact a priority claim, whether it's a priority claim or an administrative expense, those have to be paid in full.
There isn't an ability for the Court t0 shave those--
Justice Stephen G. Breyer: No.
The administrative expenses don't have to be paid in full if there isn't enough money for them to in unsecured claims for domestic support obligations, because the administrative expenses is the second priority, it isn't the first.
Mr. Shah: --Okay.
Well, Your Honor, there is a misunderstanding I think in what you are saying.
That is, in a Chapter 12 plan, the priorities matter more in terms of the relative priority between Category 1, 2, 3, 4, 5, 6, 7 and 8.
They matter more in a chapter 7 liquidation where there is a finite set of assets being liquidated and those will be paid out in the priority that you are talking about.
In a Chapter 12 or 13 case, there is going to be a plan proposed and that plan will be confirmed.
Now under 1222(a)(2) any of those priority claims, whether it's first priority or eighth priority, has to be set out and to be paid in full in order for the plan to be confirmed.
Justice Stephen G. Breyer: Okay.
Mr. Shah: So the plan won't be confirmed at all.
There isn't a matter of ordering the priorities in a Chapter 12 or 13 case.
Now if I could turn back to Justice Sotomayor's question.
Justice Sonia Sotomayor: Could you turn back to -- before you answer my other question, could you finish your thought about what you are doing with wages?
Are they given priority or aren't they?
If you are saying they are not, if we accept your reading of this employee wage taxes are not administrative expenses.
Mr. Shah: Right.
Well, Your Honor, they are certainly not administrative expenses under the definition of incurred by the estate.
That would be the relevant issue in this case.
They may come under the other definition of administrative expense, that is the costs -- necessary costs of preserving the estate, like wages.
If you consider the employment payroll tax that is paid simultaneously as the wage, that's part and parcel of the wages, you could get at it that way.
But again that doesn't have anything to do with the "incurred by the estate" language.
The incurred by the estate language, as you properly point out, is relevant -- the most relevant provision as to whether a tax is incurred by the estate are Sections 346b and 1398 and 1399.
Justice Elena Kagan: How does that work, Mr. Shah, because this is the part of your argument that I have to say sort of tripped me up.
Mr. Shah: Okay.
Justice Elena Kagan: Because you define 2 years and 4 years after the phrase that you are trying to define.
Mr. Shah: Sure.
Justice Elena Kagan: So it must have been a very pressured Congress.
Mr. Shah: Well, Your Honor it was a pressured Congress, because in the legislative history that we site, they say -- and it's not true that all of the accurate -- separate tax entity, these rules weren't implemented until afterwards.
There -- Section 346 which dealt admittedly only with state and local taxes, they set up rules, the same separate taxable entity rules that Congress later enacted 2 years later to apply to state and local entities.
And that's the provision 346 that is reprinted in our appendix at page 2.
What Congress said when they passed 346 is, 1978 Act to also apply to Federal taxes, but it decided to pull them out of the act so as not to step on the shoes of the jurisdiction of the Ways and Means Committee.
That's the explanation that Congress provided and then 2 years--
Justice Elena Kagan: But you are saying that as of 1978 there was kind of an idea in people's heads about this separate tax entity or at least in some people's heads, but that idea had never been converted into any statutory language.
And you are suggesting that we should take this phrase "incurred by the estate" and read it as if they were referring to something real that was in a statute.
Mr. Shah: --It's not simply taking out of their head, Your Honor, its Section 346 rules which are parallel and apply to state and local taxes, those didn't come out of nowhere.
Those came out of prior IRS rulings as to when there is a separate taxable entity in a bankruptcy case.
There were preexisting -- before the 1978 act, in particular, there was a 1972 IRS revenue ruling which set forth the rules about when there is a separate taxable entity, whether the act should -- whether the tax should be taxed to the estate or to the debtor.
Section 346 in the 1978 act codified those rules for State and local income taxes.
In the intervening 2 years between 1978 and 1980 when Congress consummated the step and extended those to Federal taxes, the IRS was still applying its preexisting practice based on its revenue ruling, so there wasn't a gap where there was no guidance as to whether -- how to determine whether these were incurred by the estate or not.
Courts may -- courts readily would have looked, I presume, to the 1972 Treasury ruling and the parallel 346 rulings in that gap time until the legislative guidance came along, and then codified that result with respect to federal taxes.
Now, I think to--
Justice Elena Kagan: Can I ask another question--
Mr. Shah: --Sure.
Justice Elena Kagan: --while we are on this, because the 1398, 1399 would suggest that we are looking to this separate taxable entity.
But if I understand correctly, in the corporate context the IRS actually does not look to that.
It looks to just the question of whose filing the tax return.
So if that's the case, aren't you, in that very large bankruptcy context, losing your textual anchor entirely?
Mr. Shah: No, Your Honor.
There are two ways that a bankruptcy estate can incur a tax.
One is if it's a separate taxable entity, then it -- then it's responsible for the taxes, all the taxes are taxed to the estate and it has to file the return and pay it.
The other way is if it has the duty to file the return.
That's a different provision of the Internal Revenue Code, section 6012(b)(3).
6012(b)(3) also appears in the government's -- in the appendix to the government's brief.
What 6012(b)(3) on page 14a says is that in a bankruptcy case the trustee of a corporate bankruptcy estate shall make the return for income in a corporation.
What this Court held in Holywell, which both sides cite and both sides agree, is that when a corporate trustee has a duty to file a return under 6012(b)(3), it also has a duty to pay the tax.
That is, it incurs, it's liable for or incurs the tax.
So there are two ways to incur the tax: One is separate taxable entity; the other way is if the code imposes an obligation on the bankruptcy estate to -- to file and pay the tax return.
That's the other way to interpret it, and that's why all the Chapter 7 and 11 corporate cases that are cited by Petitioners are inapt.
In those cases the postpetition tax liabilities are, in fact, incurred by the estate.
What is remarkable is that Petitioners do not cite a single Chapter 12 case in which a postpetition tax liability has been treated as an administrative expense.
Chapter 12 has been around since 1986, and yet there is not -- if this was such a big problem that Congress was trying to get at it through this way, you would have expected at least a single case in which a postpetition tax liability had been treated as an administrative expense.
Justice Stephen G. Breyer: How would it show up?
I mean, what -- what -- what difference -- suppose -- suppose -- in 11 individual, 12, or 13, what's the difference whether you treated it as an administrative expense or not, as long as they all have to be paid anyway, you say?
Mr. Shah: Sure.
So the difference is in Chapter 12 and 13 they are treated outside of the bankruptcy plan itself, but they do need to be paid up front.
And in fact, they receive a special--
Justice Stephen G. Breyer: No.
How would we know?
How would we know--
Mr. Shah: --Oh, That they're treated differently?
Justice Stephen G. Breyer: --Yes.
Mr. Shah: Through the code.
In Chapters 12 and 13, 1226(b)(1) and 1326(b)(1), the parallel provision in Chapter 13, they pull out administrative expenses.
They pull them out--
Justice Stephen G. Breyer: Let's imagine you are absolutely right.
They mean to treat them differently?
Mr. Shah: --Yes.
Justice Stephen G. Breyer: They mean to treat the postpetition tax obligation to the Federal Government not as an administrative expense.
But this is an instance where the business will continue, and therefore, you have said in order to continue you have to pay all your tax liability and all your administrative expenses.
Mr. Shah: Yes.
Justice Stephen G. Breyer: Therefore, what difference does it make whether you do or whether you don't treat them as administrative expenses?
What is the operational difference?
Mr. Shah: Sure.
Your Honor, it would be to the government's advantage if these were in the ordinary course -- at least before section 1222(a)(2)(A) was enacted that stripped priority, it would have been in the government's advantage to take the position that these were administrative expenses.
And the reason why it's favorable to the government is, those have to be paid up front as part of the bankruptcy.
If you don't treat them as administrative expenses -- and the government took the self-denying position here in the years leading up to 2005, consistently taking the position these were not administrative expenses, even though it was to the government's disadvantage, because the code required that interpretation.
And the disadvantage is you don't get -- the government didn't get them paid up front as administrative expenses.
They would have to collect them outside of the bankruptcy.
And when you go to collect them outside of the bankruptcy, there is much more uncertainty.
There may not be any--
Chief Justice John G. Roberts: Well, it's certainly not a self-denying position now, right?
You are arguing that these are -- that the taxes of this sort are administrative expenses when that puts you at the head of the line.
You are arguing that they are not administrative expenses, same type of taxes, when it puts you at the back of the line, even though the provision that puts you at the back of the line was designed to particularly help the fishermen and -- and farmers.
Mr. Shah: --Your Honor, that -- that's just not true.
Dating back to 1998 -- and these are cited in the government's brief at pages 16a to 18a -- dating back to 1998, the government had consistently taken the position that postpetition tax liabilities--
Chief Justice John G. Roberts: No, I'm talking about the position you are taking now.
You argue for--
Mr. Shah: --We have maintained our--
Chief Justice John G. Roberts: --different treatment of these taxes as to whether or not they are administrative expenses -- not solely, but it leads to the result that you get the money first either way.
Mr. Shah: --Because Congress -- the government has stayed consistent in its position.
Because Congress has changed the rules, it turns out that that same interpretation--
Chief Justice John G. Roberts: Well, but then you're saying that Congress changed the rules in a way that, as Justice Alito's question suggested, really doesn't do much at all, when what they wanted to do was provide some real protection for farmers and fishermen.
Mr. Shah: --I can't speak to what Congress wanted to do.
If in fact they wanted to do that, then they did it the wrong way.
They could have--
Justice Ruth Bader Ginsburg: What would be -- what would be the right way?
Mr. Shah: --You could easily enact a separate provision within 1222 that said -- something like -- use the language something like section 1305, that said
"Any taxes that become payable after of the filing of the petition shall be treated as non-dischargeable, nonpriority debts and paid that way. "
But they didn't do that.
And I think section 1305 is critical here, and this goes to your question, Mr. Chief Justice, as well, that the government is trying to take advantage here.
The -- adopting Petitioner's position would have a significant ripple effect in Chapter 13.
This is not simply a matter of trying to get to the result that Senator Grassley intended by narrowly interpreting 1222(a)(2)(A) and it won't have any other affects in the code.
It will have a significant effect in the intended operation of Chapter 13.
And -- and the reason why that's important is, is to put this in perspective, there are about 600 to 700 total Chapter 12 filings each year.
There is somewhere in the upwards of 400,000 Chapter 13 filings each year, and here's where it would throw a wrench into Chapter 13.
If you look at section 1305 of Chapter 13, and that's reproduced on page 11a of the government's appendix.
What 1305(a)(1) does is it provides a special procedure for the government to file a claim for postpetition taxes, exactly the type of tax at issue in this case.
It says: Government, you can go file a claim to have that included within the bankruptcy plan.
If -- if you adopt Petitioner's position, there would never be a case in which the government would ever have any occasion to invoke 1305(a)(1), because they--
Justice Elena Kagan: Why would that be a problem?
You said that there would be a significant ripple effect and practical difficulties.
And I understand your argument about 13 shows that you have to do this and why would 13 be necessary if Petitioner were right, but you started out, I thought--
Mr. Shah: --It -- yes.
Justice Elena Kagan: --by trying to show us that it would be a significant practical problem.
Mr. Shah: I said it would be a significant disruption to the intended operation of Chapter 13.
In practice, it would actually mean that the government comes out better under Chapter 13 than in the government's current position, because what Petitioner's position would do, if you read--
Justice Elena Kagan: So it just does automatically for the government what is now done by -- by some kind of government filing?
Mr. Shah: --Well -- well, not even that, Your Honor, because under 13 -- the reason why 1305(a)(1) would be dead letter -- you could just rip that page out of the code and throw it away if you accept Petitioner's reading.
The reason why that's true is because under their reading it would get administrative expense priority, which are paid up front, super-priority, even before anything else; but under 1305 (a)(1) it doesn't get administrative expense priority, it may not even get any priority at all.
And so it's a significant change in the operation of how the government would be seeking postpetition tax liabilities.
Now, it would work to the detriment of the debtor in Chapter 13 cases, the upwards of 400,000 Chapter 13 cases that would occur--
Chief Justice John G. Roberts: But those are -- those are small potatoes compared to the sale of a farm and a boat, right?
Mr. Shah: --I would -- I would--
Chief Justice John G. Roberts: This particular issue of large capital gains from sale of significant assets doesn't typically arise in the Chapter 13 cases.
Mr. Shah: --Sure, the capital gains tax wouldn't, but there's all sorts of postpetition income taxes that would arise in a Chapter 13 case.
In a Chapter 13 case, those are wages that are being incurred after the filing of the petition.
All of the taxes on those wages after the petition would be the -- the type of -- would be eligible for postpetition tax treatment.
Chief Justice John G. Roberts: Well, in Chapter -- Chapter 13 cases are the ones that you -- that are typically resolved very quickly, right?
Mr. Shah: Your Honor, it is true that -- from the statistics that I have seen on average, we are talking about 4 months in a Chapter 13 case.
On average in -- in a Chapter 12 case, according to the professors' amicus brief, median time is about 8 months.
What's clear from the legislative history, the reason why Congress set up the Chapter 13 rules as to make the tax incurred by the debtor rather than by the estate is because Congress expressly said in the legislative history, which is cited in our brief, that they expected the confirmation time to be relatively quickly in a Chapter 13 case.
We know that they made the same assumption in the Chapter 12 case because 1, they enacted the same separate taxable entity rules.
And 2, they put in 90 days to actual deadlines in the code for Chapter 13: propose a plan, 45 days to confirm it.
So roughly 4 months is what Congress had extended.
Now in practice, it's been the case that bankruptcy courts have extended that time beyond the statutory deadlines.
So perhaps they are open a couple months longer than what Congress had expected.
But that wasn't the intent that Congress had enacted this with, and if Congress wants to change that, it can go back and rewrite the rules to -- to make that change.
Justice Sonia Sotomayor: Counsel, before you finish, could you answer my question of what impact your broader reading -- your Chapter 12 affects only prepetition debts -- what else is that kind of holding going to affect?
Your narrow alternative holding affects just this issue.
That broader reading -- I worry about a broader reading when I don't know its impact.
Mr. Shah: I -- I don't think it would have any adverse effects.
And the reason is this: the administrative expenses, whether they are included in the plan or not--
Justice Sonia Sotomayor: Yes?
Mr. Shah: --are still going to be paid up front.
If you take Petitioner's reading that administrative expenses are really part of the plan under 1222(a)(2) rather than 1226(b)(1), you now have a conflict between 1226(b)(1), which is on page 10A, which expressly addresses and only addresses administrative expenses, and states that -- this is on page 10A -- it says
"those will be paid before or at the time of each payment to creditors under the plan. "
If you also said that they come under 1222(a)(2), which is the only way that Petitioner's could win -- if they also came under 1222(a)(2), 1222(a)(2) says that their -- they must be provided for full payment in deferred cash payment.
So deferred interest-free payments over the life of a 3 to 5-year bankruptcy plan.
That's very different than having them get superpriority treatment under 1226(b)(1) and be paid in front -- upfront separate from the plan.
So that -- that is one significant piece of textual evidence that Congress thought that these should be paid outside of the plan.
The other piece of textual evidence is section 1227(a), which appears on page 10A as well, and what it says is that
"the confirmed plan shall be binding on each creditor. "
That is the only potentially relevant category to the government.
But section 101 defines creditor -- and this is on page 1A of our appendix -- as entity that has a claim against a debtor that arose at the time of or before the order for relief concerning the debtor.
That is a holder of a prepetition claim.
If a confirmed Chapter 12 plan is only binding on the holder of a prepetition claim, it makes no sense to include postpetition claims within a Chapter 12 plan.
I don't even know what it would mean to have a confirmed -- to have a plan included that and not have that plan binding on the government.
And so I think if you take those two pieces of textual evidence together, I think that strongly supports the interpretation of 1222(a)(2), that when it says a claim of the type specified in section 507, it means "claim", and doesn't mean "claim and administrative expense".
Now admittedly, Congress has not been perfectly clear in using that term.
It uses -- sometimes it uses of the term "claim" to mean claim and administrative expense.
Sometimes it means it to only mean claim.
But we should give effect to the distinction between claim and administrative expense in light of 1226(b)(1), which specifically already addresses administrative expenses.
Justice Sonia Sotomayor: The problem with that argument is that the two are used interchangeably by everyone.
Congress, the Court--
Mr. Shah: Yes, Your Honor.
Justice Sonia Sotomayor: --The government in many situations, given the broad definition of "claims", the only logical conclusion is that it includes a subset, a liability created by administrative expenses.
Mr. Shah: Your Honor, and if you are only construing that language in isolation, if it only said claim in 507(a)(2) and 1226(b)(1) didn't exist, I would be in full agreement with you that you would read it to being claim and administrative expenses.
Because we know that administrative expenses have to be paid in some way in a bankruptcy case.
But 1226(b)(1) does exist in this code, and we need to give that provision effect.
The last point I would make is Congress knows how to include administrative expenses within a bankruptcy plan when it wants to.
If you look at the corresponding provision in Chapter 11 as opposed to the provisions in Chapter 12 and 13 -- this is section Section 1129(a)(9)(A) -- it expressly provides for the payment of administrative expenses within the context of the Chapter 11 plan.
Chapter 12 and 13 take a different approach, and the Court should give effect to the choice that Congress made to treat administrative expenses outside of the bankruptcy plan.
If there are no further questions?
Chief Justice John G. Roberts: Thank you, Mr. Shah.
Ms. Freeman, you have two minutes remaining.
REBUTTAL ARGUMENT OF SUSAN M. FREEMAN ON BEHALF OF THE PETITIONERS
Ms Freeman: Your Honor, one of the first things that Mr. Shah said was that the debtor should have set aside $29,000 from the sale proceeds to pay the taxes.
That's $29,000 in sale proceeds of property of the estate.
And yes, those are ordinarily set aside to pay the taxes.
That's how bankruptcy cases work.
Because you have 1222(a)(2)(A), that $29,000 didn't need to be used to pay the taxes, and instead was set aside to be treated under the plan of reorganization, where that tax claim could be demoted in priority to a prepetition claim and discharged.
But the ordinary course is that the sale proceeds are used to pay the taxes, the administrative expenses.
That's how bankruptcy works.
And the government's argument here completely undercuts that.
With respect to section 1305, the language is different because it uses the word "payable".
It includes all postpetition, postconfirmation, all the way through to the end of the bankruptcy case.
Not just the short period of administration.
In Chapter 13 cases, you still have to pay administrative expenses.
It's just that it's pretty rare that you have a tax that is incurred during that short period of administration.
And so you have a separate statute that covers the whole period through the entirety of the plan of reorganization.
The Court -- Mr. Shah was asked about cases where -- and in fact an administrative expense claim was incurred for a capital gains tax in the Chapter 12 case.
We would cite the Court to the Specht case.
A copy of that is attached to the professors' amicus brief.
And that shows where a plan was defeated because of the large capital gains tax from the sale of the family farm.
And that in fact is cited in some of the -- some of the legislative -- not the legislative history, but some of the commentary about one of the reasons why Senator Grassley supported section 1222(a)(2)(A) and drafted it in the first place.
This prevents a plan from being confirmed in so many Chapter 12 cases, family farmers are not able to go through with their plans.
And that's why you have the demotion in priority.
It does have very little practical value if in fact it only applies to prepetition sales -- and not just prepetition but more than a year prepetition in most instances.
The professors' amicus brief just refers to prepetition, and this little chart doesn't say that those are not within the scope of 507(a)(8) -- and those eighth priority -- I'm sorry, Your Honor.
Chief Justice John G. Roberts: Thank you, counsel.
The case is submitted.
Ms Freeman: Thank you.
Chief Justice John G. Roberts: Justice Sotomayor has our opinion this morning in case 10-875, Hall versus United States, and in her absence, I will announce the opinion.
Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan.
Petitioners Lynwood and Brenda Hall filed for Chapter 12 bankruptcy and then sold their farm.
The IRS asserted a tax on the capital gains from the postpetition sale of the farm.
Now the Halls and the IRS disagreed over how to treat the tax.
Their disagreement concerns whether postpetition income taxes are eligible for priority stripping treatment under 11, United States Code, Section 1222(a)(2)(A).
Now ordinarily, a Chapter 12 plan must provide for full payment of priority claims.
Section 1222(a)(2)(A) however, carves out an exception whereby certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to dischargeable, unsecured claims.
Now the Halls argue that their postpetition income taxes are eligible for the priority stripping treatment of Section 1222(a)(2)(A).
The IRS on the other hand argues that 1222(a)(2)(A) applies only to claims entitled to priority in the first place.
The IRS contends that the Halls' postpetition income taxes do not so qualify and thus are neither collectible nor dischargeable in bankruptcy.
The bankruptcy court sided with the IRS, but the District Court reversed, but then the Ninth Circuit reversed.
The Ninth Circuit agreed with the IRS that postpetition income taxes are not a priority claim eligible for the Section 1222(a)(2)(A) exception.
We now affirm the Ninth Circuit.
The parties agree that Section 1222(a)(2)(A) applies only to priority claims and that postpetition income taxes so qualify only if they constitute, and here's a quote, “tax incurred by the estate” under Section 503(b).
So the dispositive question is whether these taxes are incurred by the estate.
For the reasons we explain in our opinion filed today, we hold that the Halls' postpetition income taxes are not incurred by the estate and are neither collectible nor dischargeable in the Chapter 12 plan.
A tax incurred by the estate is a tax for which the estate itself is liable.
Provisions of the Internal Revenue Code establish that only certain estates are liable for federal income taxes.
Based on those provisions, a Chapter 12 estate is not a separate taxable entity and only the debtor, not the estate, can incur the tax liability.
Now we note that established understandings in Chapter 13 hold that postpetition income taxes are not incurred by the estate within the meaning of Section 503(b), because the taxes are the liability of the Chapter 13 debtor alone.
We decline to adopt a conflicting position in Chapter 12 which was modeled on Chapter 13.
The judgment of the Court of Appeals for the Ninth Circuit is affirmed.
Justice Breyer has filed a dissenting opinion in which Justices Kennedy, Ginsburg, and Kagan join.