Hall v. United States

566 U.S. 506

132 S.Ct. 1882

182 L.Ed.2d 840

Lynwood D. HALL, et ux., Petitioners

v.UNITED STATES.

No. 10–875.

Supreme Court of the United States

Argued Nov. 29, 2011.

Decided May 14, 2012.

Susan M. Freeman, Phoenix, AZ, for Petitioners.

Pratik A. Shah, for Respondent.

Susan M. Freeman, Counsel of Record, Lawrence A. Kasten, Justin J. Henderson, Lewis and Roca LLP, Phoenix, AZ, Clifford B. Altfeld, Altfeld & Battaile P.C., Tucson, AZ, for Petitioners.

Donald B. Verrilli, Jr., Solicitor General, Counsel of Record, John A. DiCicco, Principal Deputy Assistant, Attorney General, Malcolm L. Stewart, Deputy Solicitor General, Pratik A. Shah, Assistant to the Solicitor General, Bruce R. Ellisen, Patrick J. Urda, Attorneys, Department of Justice, Washington, DC, for the United States.

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)(1)(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. ––––, ––––, 130 S.Ct. 2464, 2469, 177 L.Ed.2d 23 (2010). 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, 119 Stat. 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)(1)(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. ––––, 131 S.Ct. 2989, 180 L.Ed.2d 820 (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)(1)(B)(i).

The phrase "incurred by the estate" bears a plain and natural reading. See FCC v. AT & T Inc., 562 U.S. ––––, ––––, 131 S.Ct. 1177, 1182, 179 L.Ed.2d 132 (2011) ("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.W.D.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 1892 – 1893 (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.²

B

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 1897 – 1898 (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, 92 Stat. 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...