Post-Bankruptcy Profits Case Goes to Washington
(CN) - The Supreme Court on Monday agreed to review a case that asks whether a California couple must pay tax after declaring bankruptcy and making a profit on the sale of their farm.
Brenda and Lynwood Hall filed for bankruptcy in 2005. Selling their 320-acre farm for $960,000, however, produced a capital-gains tax liability of $29,000. Agreeing with the U.S. government, the bankruptcy court refused to treat the tax debt as a dischargeable unsecured liability.
The 9th Circuit ultimately took the same position, reversing the opinion of a federal judge. In its brief to the Supreme Court, the government calls for the justices to affirm and resolve conflicting findings among the circuit courts.
"In Chapter 12 (and Chapter 13) bankruptcy proceedings, the general rule is that liabilities incurred after the petition is filed are not dischargeable in bankruptcy," the Justice Department claims. "The provision of law on which petitioners rely, 11 U.S.C. 1222(a)(2)(A), does not establish an exception to that general rule, but rather applies only to claims that arise before the bankruptcy petition is filed.
While the 8th Circuit took the opposite view, there are two similar cases pending in the 10th Circuit, according to the government.
"The recent proliferation of these cases reflects the upward trend in Chapter 12 bankruptcy filings," according to the government's brief. "In terms of its impact on the United States Treasury, the amount of tax liability at issue in any particular case of this nature is typically modest. There is, however, a significant governmental and public interest in the uniform administration of federal tax and bankruptcy laws."