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Bankrupt family owes tax on sale of farm

WASHINGTON — The Supreme Court says a farming family has to pay tax on the bankruptcy sale of their farm.

The high court on Monday voted 5-4 for the IRS in its fight with Lynwood and Brenda Hall over their bankruptcy sale of their 320-acre farm in Willcox, Ariz.

The Halls were forced to sell their family farm for $960,000 to settle their bankruptcy debts. That sale brought about capital gains taxes of more than $25,000.The Halls wanted the taxes treated as part of the bankruptcy, paying part of it and having the court discharge the rest.

The IRS objected to that plan, saying all of the taxes must be paid. The 9th U.S. Circuit Court of Appeals in San Francisco agreed with the tax agency.

The high court affirmed on Monday.

The tax liability resulting from the sale of a farm after a Chapter 12 bankruptcy filing is not “incurred by the estate” under §503(b) of the Bankruptcy Code and thus is neither collectible nor dischargeable in the bankruptcy plan, the Supreme Court ruled.

Chapter 12 allows family farmers and fisherman to petition for relief from debts.

The family claimed that the tax was dischargeable as an “administrative expense” incurred by the bankruptcy estate.

The bankruptcy court agreed with the IRS, holding that filing for bankruptcy does not form a “separate taxable entity.”

A U.S. District Court reversed, finding for the family. But the 9th U.S. Circuit Court of Appeals reversed again, ruling in the IRS’s favor.

The Supreme Court agreed to hear the case, and affirmed the 9th Circuit.

Writing for the majority, Justice Sonia M. Sotomayor said the language of the Bankruptcy Code did not permit the tax liability to be dischargeable.

“[T]here may be compelling policy reasons for treating post-petition income tax liabilities as dischargeable. But if Congress intended that result, it did not so provide in the statute,” Sotomayor wrote. “Given the statute’s plain language, context, and structure, it is not for us to rewrite the statute, particularly in this complex terrain of interconnected provisions and exceptions enacted over nearly three decades.”

Justice Stephen G. Breyer wrote a dissent that was joined by Justices Anthony M. Kennedy, Ruth Bader Ginsburg and Elena Kagan.

The case is Hall v. U.S., No. 10-875.

The Associated Press contributed to this article.