Alvin Brown & Associates is a tax law firm specializing in IRS issues and problems in 50 states and abroad. 888-712-7690 Fax: (888) 832 8828
575 Madison Ave., 8th Floor
New York, NY 10022
Wednesday, May 23, 2012
effect of fraudulent conveyance
The Supreme Court has declined to review a decision of the Tenth Circuit that capital gains tax In re Dawes, (CA 10 6/23/2011), 107 AFTR 2d 2011-267`\1. cert denited 5/21/2012.
Background. Under Chapter 12 of the Bankruptcy Code (11 U.S.C. §§1201-31), family farmers and fishermen are allowed to reorganize their business affairs while keeping creditors at bay. In such bankruptcy cases, the debtor must file a plan of reorganization, which provides for full deferred payments of all claims entitled to priority under §507 of the Bankruptcy Code unless the claim is one 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 is treated as an unsecured claim that isn't entitled to priority under §507. (§1222(a)(2)(A)) Among the claims entitled to priority under §507 are (1) various taxes incurred on or before the date of the filing of the petition, i.e., pre-petition income tax; (§507(a)(8)(A)) and (2) administrative expenses allowed under §503(b), including any tax incurred by the estate. (§507(a)(2))
Facts. Decades ago, Donald and Phyllis Dawes (the Daweses) pleaded guilty for failing to file income tax returns in '81 through '83. They also failed to pay all their taxes for still more years, including '86–'88 and '90. IRS ultimately obtained a judgment declaring that the Daweses had fraudulently conveyed certain assets in an effort to avoid their creditors and that those unlawful conveyances were null and void. This result was previously affirmed by the Tenth Circuit, after which the government proceeded to execute its judgment, notifying the Daweses that it intended to take possession of various pieces of their property. But before it could do so, they declared bankruptcy, seeking the protections of Chapter 12.
After declaring bankruptcy, the Daweses, with the permission of the bankruptcy court, sold several tracts of farm land. This sale created income tax liabilities. The Daweses proceeded to submit a bankruptcy reorganization plan in which they proposed to treat their newly incurred tax liabilities as general unsecured claims. As unsecured claims, the taxes would be entitled to no priority, paid only to the extent funds might be available after priority claims were satisfied, and any remaining unpaid portion would be eligible for discharge. IRS opposed the plan, but lost before the bankruptcy court and then on appeal before the district court. It then appealed to the Tenth Circuit.
The Tenth Circuit reversed the district court, holding that the Daweses' post-petition income tax liabilities were not eligible for treatment as unsecured claims under §1222(a)(2)(A) as proposed in their reorganization plan. The Court rejected the Daweses' argument that the subject taxes were “incurred by the estate” as a result of the farm asset sale and were thus eligible for treatment as general unsecured claims. The Tenth Circuit noted that one who has incurred an expense is liable for it; however, in Chapter 12 bankruptcies, the debtor, and not the estate, is liable for the payment of post-petition taxes. Accordingly, these taxes aren't part of the bankruptcy estate, but rather were the personal obligation of the Daweses.
The Hall case. On May 14, 2012, the Supreme Court, in a 5-4 decision, affirmed a factually similar Ninth Circuit decision that the capital gains tax arising from the post-petition sale of farm assets wasn't dischargeable under §1222(a)(2)(A). In so holding, the Court found that the tax wasn't “incurred” by the bankruptcy estate and thus wasn't eligible for treatment as a nonpriority claim.
Decision now final. The Supreme Court has now declined to review the Dawes case. Accordingly, the Tenth Circuit's decision is final.