In the Matter of Rickert, Case No. BK06-40253-TLS (Bankr.Neb. 1/9/2009), Case No. BK06-40253-TLS.

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IN THE MATTER OF: MARK D. RICKERT and JOAN RICKERT, Chapter 12, Debtors.

Case No. BK06-40253-TLS.

United States Bankruptcy Court, D. Nebraska.

January 9, 2009.

MEMORANDUM

THOMAS L. SALADINO, Chief Judge.

This matter was presented to the Court on Debtors' Motion for Permanent Treatment of Claim Under 11 U.S.C. § 1222 (Fil. #77), and an Amended Objection by the United States of America/Internal Revenue Service (Fil. #79). Joe M. Hawbaker appeared for Debtors, and Henry N. Carriger, Special Assistant United States Attorney, appeared on behalf of the United States/IRS ("IRS"). A Stipulation of the parties as to material facts was introduced and made a part of the record (Fil. #85). As a result of a Joint Motion to Reconsider (Fil. #90), this Court has vacated its prior Order entered herein (Fil. #88), and now enters this Memorandum, which contains findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(B) and (O).

There are two issues presented:

1. Whether 11 U.S.C. § 1222(a)(2)(A) authorizes Debtors to treat the federal income tax resulting from the sale of equipment and breeding livestock in 2006 as a general unsecured claim without priority under their Chapter 12 plan; and

2. If the answer to issue No. 1 above is "yes," should the "marginal method" or the "proportional method" as discussed in In re Knudsen, 389 B.R. 643 (N.D. Iowa 2008) (appeal pending) be used?

Debtors commenced this proceeding on March 13, 2006. Also in 2006, but prior to filing, Debtors sold breeding livestock and equipment used in their farming operation, resulting in a taxable gain of $88,511.00. Even though the sale took place pre-petition, the parties agree that the tax resulting from the sale is a post-petition tax liability since the tax came due at the end of the 2006 tax year. As part of their motion to reconsider, the parties have stipulated that: (i) the amount of Debtors' post-petition liability for tax year 2006 at issue is $7,797.00 plus accruing interest and penalties; (ii) if the marginal method of allocation is used, the amount of Debtors' federal tax liability that is subject to treatment under 11 U.S.C. § 1222(a)(2)(A)is $7,797.00; and (iii) if the proportional method of allocation is used, the amount of Debtors' federal tax liability that is subject to treatment under 11 U.S.C. § 1222(a)(2)(A) is $7,128.00.

Debtors' Chapter 12 plan contained a provision to the effect that any claim currently owing or that becomes due and owing to the IRS arising out of the sale of assets used in Debtors' farming operation would be treated under 11 U.S.C. § 1222 as a general unsecured claim not entitled to priority provided Debtors receive a discharge. The IRS objected to that plan, and the parties entered into a Stipulated Order Confirming the Chapter 12 Plan (Fil. #54), under the terms of which Debtors removed the foregoing treatment for the IRS and replaced it with a clause reserving the right to later file a motion for modification of the plan to pursue treatment under 11 U.S.C. § 1222. The parties agreed to that language in order to allow time for the post-petition tax liabilities to be determined and to allow other cases dealing with this issue to work their way through the courts.

On April 21, 2008, Debtors filed their Motion for Permanent Treatment of Claim (Fil. #77). In essence, the motion is a motion to modify the Chapter 12 plan to include a provision that the post-petition capital gains taxes resulting from the pre-petition sale of livestock and equipment be treated as a general unsecured claim and be discharged provided Debtors receive a discharge.

The parties agree that the livestock and equipment sold by Debtors was "used in the debtor's farming operation" as stated in 11 U.S.C. § 1222(a)(2)(A) and that the taxes arising upon the sale in tax year 2006 are post-petition capital gains taxes. At the hearing, the attorney for the IRS agreed that this Court has already addressed the very issue involved in this case. See In re Schilke, 379 B.R. 899 (Bankr. D. Neb. 2007). In that opinion, this Court found that the post-petition taxes at issue (arising from the sale of farm assets used in debtor's farming operation) are the type of taxes subject to treatment under 11 U.S.C. § 1222(a)(2)(A) as unsecured claims not entitled to priority. The United States District Court for the District of Nebraska affirmed that decision upon appeal by the IRS. United States v. Schilke (In re Schilke), Case No. 4:07CV3283, 2008 WL 4224279 (D. Neb. Sep. 9, 2008).¹ The Schilke decision is consistent with decisions by District Courts in Iowa and Arizona. In re Knudsen, 389 B.R. 643 (N.D. Iowa 2008); Hall v. United States (In re Hall), 393 B.R. 857 (D. Ariz. 2008). There is no contrary authority at this time. Accordingly, since the IRS acknowledges that the specific issue presented has already been decided by this Court and affirmed by the United States District Court in the Schilke case, I will follow that precedent.

The parties also assert that this case presents the further issue of whether the method to allocate taxes should be the "proportional" method or the "marginal" method, both of which were discussed by the United States District Court for...