The farmer and the tax man: the scope of the tax forgiveness provision in Chapter 12 bankruptcy.

• Author: Martin, David A.
• Position: IV. The Arguments of the Parties through VII. Conclusion, with footnotes, p. 269-298

4. THE ARGUMENTS OF THE PARTIES

   While the members of the Supreme Court of the United States likely share some of the individual concerns of the parties, the Halls' case presents issues unique to the judicial branch. During oral arguments, the Court announced its concern that adopting the Halls' position might have an undesired and unexpected impact on the Code's inner workings due to the complexity and interdependency of the Code provisions. (252) Another concern of the Court was that adoption of the IRS's interpretation could frustrate the will of the legislature, because the interpretation leaves the provision with perplexingly minimal "practical value." (253) Although the Court ultimately sided with the IRS, it can be reasonably assumed that the Court first searched for a solution that would have both given effect to legislative intent and avoided wreaking havoc on other statutory law.

   To find such a solution, the Court needed to find sufficient evidence of legislative intent, while also contemplating potential irreconcilable conflicts between statutory provisions. In the absence of compatible solutions, the Court would have been left with little choice but to adopt the limiting interpretation of the IRS. An analysis of the substance and validity of the arguments presented by the parties to the Court reveals that such a solution would have been possible. This Part will provide an overview and analysis of the arguments presented to the Supreme Court of the United States by the Halls and the IRS, respectively.

   1. The Debtors

      The Halls' primarily argued that the legislature, in enacting section 1222(a)(2)(A), intended to transform the tax consequences arising from postpetition dispositions of farm assets into unsecured claims. To support the argument, the Halls relied on the plain language of the statute, the legislative history of the provision, and the practical effect of the interpretation of the provision proffered by the IRS.

      1. Plain Language

         The Halls' found support in the plain language of section 1222(a)(2)(a). (254) The provision refers to "claims," (255) defined by the Code as "right[s] to payment." (256) By contrast, the related definition of "creditor" is defined as an entity holding a pre-petition claim. (254)7 If Congress intended for "claims" to be limited to pre-petition debts, then most of the definition for "creditor" would be superfluous. It is axiomatic that the judiciary generally disfavors interpretations rendering statutory language superfluous. (258) Accordingly, where provisions of the Code use "claims," it is more likely that the Court will construe the drafters' intended application for such provisions to include both pre-petition and post-petition debts.

         The language of section 503, particularly the phrase "incurred by the estate," also supported the Halls' position. (259) While the Code does not define the term "estate", (260) several Code provisions use "estate" in a way that clearly refers to bankruptcy estates. (261) The fact that there is no shortage of provisions using "estate" to refer to bankruptcy estates stands in sharp contrast to the single provision identified by the IRS that uses "estates" to refer to separate taxable entities. (262)

         Notably, the phrase "incurred by the estate" found in section 503 arose from judicial construction of prior bankruptcy acts. First, in Nicholas v. United States, the Supreme Court found that taxes incurred during the postpetition, pre-confirmation period were administrative expenses and were afforded first priority under a predecessor of section 503(b). (263) A few years later, Congress codified the sentiment expressed in Nicholas during the passage of the Bankruptcy Act of 1978. (264) Subsequently, in United States v. Noland, the Court's position remained constant when it reiterated that under section 503, a post-petition tax "should receive the priority of an administrative expense." (265) Noland is particularly significant for two reasons. First, Noland was decided well after the rise of the Bankruptcy Tax Act; (266) second, the debtors in Noland were corporate debtors and thus outside the purview of the Bankruptcy Tax Act and section 1398. (267) Thus, Noland implies that postpetition taxes can be administrative expenses in the absence of a separate taxable entity. (268) Upon the enactment of BAPCPA, the wording of section 503 remained substantially similar to that of the 1978 act. (269)

         The IRS retorted that Nicholas and Noland dealt with corporate debtors rather than individual debtors. (270) It found the distinction significant in light of the fact that the estate of a corporate debtor can be liable for post-petition taxes despite exclusion under sections 1398 and 1399 and the fact that the Halls were individual debtors. (271) It argued that corporate debtors can incur taxes under section 6012(b)(3), which requires a bankruptcy trustee to file federal income tax returns for such debtors. (272) In short, the IRS argued that the taxes in Nicholas and Noland were incurred by the estate by way of section 6012, and thus, the Halls' reliance on the cases was misplaced. (273)

         In essence, the IRS equated the duty of a trustee to file an income tax return for a bankrupt corporation to the estate incurring tax liability. The IRS's view would permit Chapter 12 corporate debtors to benefit more from section 1222(a)(2)(A) than individual Chapter 12 debtors. (274) However, accepting the argument as true produces a result with little rationale and an unintended incentive for Chapter 12 individual or partnership debtors to incorporate. Additionally, upon closer review of Nicholas and Noland, section 6012 may not be as relevant to section 503 as the IRS suggested. First, in Noland, no reference to section 6012 is made throughout the opinion. (275) Even more convincingly, Nicholas does discuss section 6012. (276) However, it does so in a section separate from the preceding section discussing whether post-petition taxes were administrative expenses and does so explicitly as a separate issue. (277) In effect, Nicholas shows that the Court was aware of section 6012 yet declined to find the provision relevant in establishing an administrative priority. Finally, while the Code does refer to section 1398, (278) providing some basis for the argument that section 1398 was incorporated into the Code, no such reference is made to section 6012. (279)

         The plain language of section 1222(a)(2)(A) and section 503 supports the conclusion that post-petition taxes are administrative expenses. Further, to the extent that section 503 is ambiguous, there is substantial context provided by other Code provisions and Supreme Court case law to support the position of the Halls and the conclusion that section 1222(a)(2)(A) provides relief to farmers from post-petition taxes.

      2. Legislative History

         Next, the Halls relied on the statements of the intended purpose of the provision provided by Senator Grassley, which are replete throughout the legislative history. (280) From early 1999 until the passage of BAPCPA, the record reflects his tenacious and consistent efforts to assist farmers in avoiding the plight of the Spechts. (281) During the same period, "no legislative history" concerning the provision existed to directly support the position of the IRS--"that [s]ection 1222(a)(2)(A) was intended to apply only to pre[]petition" dispositions. (282)

         The IRS responded by noting that the legislative history provided by the debtors was merely evidence "as to what one legislator thought that this [provision] would do." (283) However, the relevant legislative history is not as limited as the IRS suggests. Senator Susan Collins was also on record speaking about the issue. (284) On other occasions, other members of Congress signed and approved writings of Senator Grassley concerning the function of the provision. (285) The IRS also argued that reference to legislative history was inappropriate because "the Bankruptcy Code provisions at issue" were unambiguous "when read together with the pertinent provisions of the [IRC]" and that floor statements are unreliable. (286) Even stipulating the truth of that contention, the IRS's argument merely assumed that the Code should be read together with the IRC. It is precisely that assumption that is ambiguous and renders reference to legislative history appropriate.

         The IRS also contended that floor statements were unreliable and "views of one Congress ordinarily should not be attributed to another." (287) The consistency and repetition contained in the relevant legislative history effectively rebuts the IRS's argument based on the bare assertion that floor statements are unreliable. (288) To support the IRS's argument concerning the attribution of views from one Congress to another, it relied on two Supreme Court decisions: Massachusetts v. EPA and Doe v. Chao. (289) In Massachussetts v. EPA, the Court refused to consider post-enactment legislative statements during the interpretation of the Clean Air Act. (290) In Doe v. Chao, the Court declined to consider certain pre-enactment legislative history concerning the Privacy Act of 1974. (291) However, the Chao court consulted other legislative history to reach that decision. (292) In particular, the Court found it relevant that the omitted legislative history supported the legislative intent for a statutory mechanism that was subsequently and intentionally deleted from the final draft. (293) While the Court occasionally expresses reluctance to attribute the views of one Congress to another, such concern is misplaced in light of the fact that legislative history relied on by the Halls was not post-enactment, nor was there any contradictory legislative history.

         Finally, the IRS stated that the available legislative history did not expressly address whether post-petition taxes were administrative expenses in Chapter 12 bankruptcies. (294) Even if there was no support in BAPCPA or Chapter...