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US v. Dawes (In re Dawes)
Citation:United States Court of Appeals for the Tenth Circuit, Case No. 09-3129, US v. Dawes et al. (In re Dawes), June 21 2011.
United States Court of Appeals for the Tenth Circuit held that post-petition income taxes incurred during Chapter 12 proceedings are liabilities of the individual debtors and not the bankruptcy estate. Tenth Circuit noted a disagreement between the Eighth Circuit and Ninth Circuit and has sided with the Ninth Circuit which is on its way to be heard by the Supreme Court. United States v. Hall, 617 F.3d 1161 (9th Cr. 2010), cert. granted, 79 U.S.L.W. 3421(June 13, 2011) (No. 10-875).
The United States District Court for the District of Kansas affirmed the bankruptcy court decision that the tax liabilities arising post-petition in Chapter 12 as a result of debtor’s selling farm land were general unsecured claims pursuant to § 1222(a)(2)(A). The Tenth Circuit reversed.
Debtors with the permission of the bankruptcy court sold several tracts of farm land. The sale created income tax liabilities. Debtors proposed a plan of reorganization under Chapter 12 that treated the tax liabilities resulting from the sale of farm land post-petition as general unsecured claims. The IRS opposed the plan treatment in bankruptcy court and then on appeal before the district court. Debtors made the argument that the tax liabilities were incurred by the bankruptcy estate and thus should be treated as general unsecured claims under § 1222(a)(2)(A). The Tenth Circuit reasoned that to determine who has incurred a tax that it must determine who is liable for paying it. The Tenth Circuit reading the relevant tax authority found that in Chapter 12 cases the debtor and not the bankruptcy estate bears the sole responsibility for filing and paying post-petition federal income taxes. Therefore, the tax liability at issue are incurred by the Debtors personally and outside the bankruptcy and are not eligible for treatment as unsecured claims under § 1222(a)(2)(A).