- Case Type:
- Case Status:
- 20-6011 (8th Circuit, Nov 25,2020) Published
- As to whether § 1232 allows a Chapter 12 plan to compel a taxing authority to disgorge pre-petition withholdings, the Bankruptcy Appellate Panel for the Eighth Circuit (BAP) held that this section's plain language barred such a result. More specifically, because the Debtors did not owe the amount that the state taxing authority had collected pre-petition through withholdings, that amount was not part of that entity's claim. Thus, based on its plain language, § 1232 could not "magically reverse" the application of the pre-petition withheld funds when calculating the taxing agency's claim.
- Procedural context:
- The BAP had jurisdiction over this appeal from the final order of the bankruptcy court pursuant to 28 U.S.C. § 158(b). The United States Bankruptcy Court for the Northern District of Iowa (Bankruptcy Court) had approved the Debtors’ Chapter 12 plan (Plan) over the objections of two taxing authorities—the Iowa Department of Revenue (IDR) and the United States Internal Revenue Service (IRS)—to provisions that compelled them to refund alleged overpayments. The Bankruptcy Court had found ambiguity in the relationship between § 1232(a) and § 553(a); turning to legislative history, it held that the former entitled family farmers to require taxing entities to issue refunds of withheld income taxes under certain circumstances. The IDR pursued its contrary position by appealing the confirmation order. At oral argument before the BAP, it made clear its opposition to the Debtors’ plan did not rely upon the setoff provisions of § 553. The appeal thus solely concerned the Plan’s requirement of disgorgement of the pre-petition withholdings under § 1232.
- Relevant Statutory Language: Section 553(a) provides, subject to certain exceptions, that the Code “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.” Notably this section does not create setoff rights. Instead, it merely preserves certain setoff rights that otherwise would exist under contract or applicable non-bankruptcy law. Dealing with a claim by a governmental unit based on the disposition of property used in a farming operation, § 1232 classifies “[a]ny unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation” as “an unsecured claim arising before the date on which the petition is filed,” denies it priority under 507, and requires that it be provided for under a Chapter 12 plan and be discharged in accordance with § 1228. Case Facts: In 2017, Charles and Angie Marie DeVries (Debtors or DeVries) sold farmland and farming machinery, thereby adding a substantial amount of capital gains to their taxable income and resulting in the Debtors owing a significant amount of unpaid income taxes. The Debtors’ calendar year 2017 tax liability to the IDR and IRS was reduced by withholdings from Angie DeVries’s earnings that paid $2,006 to the IDR and $4,584 to the IRS. In February 2019, at the same time when they owed significant income taxes, the Debtors filed a joint petition for relief under Chapter 12. In addition to their 2017 tax returns for all income, the Debtors filed “pro forma” tax returns showing that no income tax liability would have been owed for that year without the farmland and equipment sales. The Debtors’ Chapter 12 plan was confirmed. Among its provisions, several stated that each taxing authority should “refund the overpayment of 2017 income taxes . . . to the Debtors” by payment to the Chapter 12 trustee for allocation to attorneys’ fees. The alleged overpayments to the IDR and the IRS were in the amount of the withholdings, $2,006 for the IDR and $4,584 for the IRS. When the IDR and IRS objected, the United States Bankruptcy Court for the Northern District of Iowa (Bankruptcy Court) overruled their objection. In so doing, it considered the interaction between § 1232(a) and § 553(a). Finding an ambiguity as to the full effects of § 1232(a) under the statute, the court reviewed and relied on the legislative history to hold that under § 1232(a) family farmers with pre-petition capital gains tax debt could “require taxing entities to issue a refund of withheld income taxes to the bankruptcy estate.”
- Barry S. Schermer (Author); Charles L. Nail, Jr.; and Dennis R. Dow
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