The U.S. Supreme Court Settles (for Now) One of the Chapter 12 Bankruptcy Tax Issues

On May 14, 2012, just over seven years after enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (popularly referred to as BAPCPA),1 the United States Supreme Court resolved the conflict in the Circuit Courts of Appeal2 over the taxation of income and capital gains in a Chapter 12 Bankruptcy case under BAPCPA. The holding of the high court denies Chapter 12 debtors the opportunity to have the income tax liability arising post-petition discharged in bankruptcy. In context, the term post-petition includes income generated prior to the date of filing bankruptcy and yet occurring during the tax year of filing. The court reached that conclusion by finding that post-petition sales of farm and ranch property are not “incurred by the estate” under Section 503(b) of the Bankruptcy Code and, therefore, are not collectible from the estate and are not eligible for discharge under the Chapter 12 plan.