Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-08-17267/USCOURTS-ca9-08-17267-0/pdf.json

Parties Involved:
Brenda Hall
Appellee
Lynwood D. Hall
Appellee
United States of America
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, 

No. 08-17267 Appellant,

D.C. No.

v.  4:07-cv-00679-DCB

BRENDA HALL; LYNWOOD D. HALL,

OPINION Appellees. 

Appeal from the United States District Court

for the District of Arizona

David C. Bury, District Judge, Presiding

Argued and Submitted

February 10, 2010—San Francisco, California

Filed August 16, 2010

Before: Diarmuid F. O’Scannlain, Stephen S. Trott and

Richard A. Paez, Circuit Judges.

Opinion by Judge O’Scannlain;

Dissent by Judge Paez

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COUNSEL

Patrick J. Urda, Tax Division, Department of Justice, filed the

briefs and argued the cause for the appellant. John A.

DiCicco, Acting Assistant Attorney General, and Bruce R.

Ellisen, Tax Division, Department of Justice, were on the

briefs. Diane J. Humetewa, United States Attorney, served as

Of Counsel.

Clifford B. Altfeld, Altfeld Battaile & Goldman, P.C., Tuscon, Arizona, filed the brief and argued the cause for the

appellees. Eugene Vamos, Altfeld Battaile & Goldman, P.C.,

Tuscon, Arizona, was on the brief.

OPINION

O’SCANNLAIN, Circuit Judge:

We must decide whether and to what extent debtors must

pay federal income tax on the gain from the sale of their farm

during bankruptcy proceedings.

I

A

Lynwood and Brenda Hall filed a petition under chapter 12

of the Bankruptcy Code, which governs family farmer bank11820 UNITED STATES v. HALL

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ruptcies, in August 2005. Shortly thereafter, the Halls moved

to sell their farm for $960,000, which the bankruptcy court

approved. 

In December 2005, the Halls proposed a plan of reorganization, under which they sought to pay off their outstanding liabilities using the proceeds from the sale. The Internal

Revenue Service (“IRS”) objected to the proposed plan,

asserting a federal income tax of $29,000 on the capital gain

from the sale. The Halls then amended their proposed plan to

treat the $29,000 tax as an unsecured claim to be paid “to the

extent funds are available,” with “the balance discharged.”

The IRS again objected.

B

The bankruptcy court sustained the IRS’s objection. In re

Hall, 376 B.R. 741 (Bankr. D. Ariz. 2007). The district court

reversed. Hall v. United States (In re Hall), 393 B.R. 857 (D.

Ariz. 2008). The United States timely appealed.

II

The United States contends that the district court erred by

reversing the bankruptcy court’s decision to sustain the IRS’s

objection, asserting that the tax on the gain from the sale of

a farm during bankruptcy is not dischargeable. 

A

[1] We begin, as always, with the text of the applicable

statute. Chapter 12 of the Bankruptcy Code, 11 U.S.C.

§§ 1201-31, allows family farmers and fishermen to reorganize their business affairs while keeping creditors at bay. But

the benefits of this arrangement come with responsibilities. In

chapter 12 bankruptcy cases, the debtor must file a plan of

reorganization, id. § 1221, and the contents of that plan are

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prescribed in section 1222(a)(1)-(4). In particular, section

1222(a)(2)(A) states:

The plan shall . . . 

(2) provide for the full payment, in deferred cash

payments, of all claims entitled to priority under section 507 unless 

(A) the claim is a claim owed to a governmental

unit that arises as a result of the sale, transfer,

exchange, or other disposition of any farm asset used

in the debtor’s farming operation, in which case the

claim shall be treated as an unsecured claim that is

not entitled to priority under section 507, but the

debt shall be treated in such manner only if the

debtor receives a discharge . . . .

Thus debtors may well treat certain claims owed to a governmental unit arising from the sale of farm realty as payable in

less than full, and dischargeable.

[2] But, by its terms, subsection (2)(A) applies only to

“claims entitled to priority under section 507 [of the Bankruptcy Code].” Section 507, in turn, lists numerous categories

of claims that receive special treatment in bankruptcy. Id.

§ 507(a)(1)-(10). Two of the categories include taxes. The

first such category, section 507(a)(8), includes various taxes

incurred “on or before the date of the filing of the petition,”

i.e., “prepetition.” E.g., id. § 507(a)(8)(A) (involving prepetition income taxes).1

 Indeed, there is no dispute that section

1The other types of taxes enumerated in section 507(a)(8) also clearly

are taxes incurred prepetition, id. § 507(a)(8)(B) (“property tax incurred

before the commencement of the case”); id. § 507(a)(8)(D) (“employment

tax on a wage . . . earned from the debtor before the date of the filing of

the petition”); id. § 507(a)(8)(E)(i)-(ii) (“excise tax on . . . a transaction

occurring before the date of the filing of the petition”); id.

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1222(a)(2)(A) allows chapter 12 debtors to treat taxes

incurred by selling farm assets before the filing of a bankruptcy petition as payable in less than full and dischargeable:

a tax incurred prepetition is a claim “entitled to priority under

section 507” by way of section 507(a)(8). Here, by contrast,

the tax was incurred after the filing of the petition, i.e., “postpetition.” 

[3] The second category that includes taxes, section

507(a)(2), consists of “administrative expenses allowed under

section 503(b).” Id. § 507(a)(2). This provision arguably

includes the tax on the gain from the sale of the farm because

section 503(b), which is cross-referenced by section

507(a)(2), allows for “administrative expenses . . . including

. . . any tax . . . incurred by the estate.” Id. § 503(b)(1)(B)(i)

(emphasis added). 

[4] Which, of course, raises the question whether the postpetition tax on the sale of the farm at issue in this case was

“incurred by the estate.” We are satisfied that the answer is

§ 507(a)(8)(F)(i)-(iii) (“customs duty arising out of the importation of

merchandise . . . before the date of the filing of the petition”); id.

§ 507(a)(8)(G) (“a penalty . . . for actual pecuniary loss” related to claims

in (A) through (F)), with the exception of § 507(a)(8)(C)—involving socalled “trust fund taxes,” i.e., taxes withheld from employees—which does

not include clear language limiting its reach to prepetition taxes. That

absence has been interpreted, however, as indicating that “trust fund

taxes” receive priority regardless of the amount of time that they predate

the petition, unlike the other types of taxes listed in § 507(a)(8), e.g.,

Shank v. Wash. State Dep’t of Revenue (In re Shank), 792 F.2d 829, 831

(9th Cir. 1986); In re Official Comm. of Unsecured Creditors of White

Farm Equip. Co., 943 F.2d 752, 756 (7th Cir. 1991), and not as indicating

that § 507(a)(8)(C) applies to postpetition taxes. Collier on Bankruptcy

¶ 507.11[1] (15th ed. 2009) (“An eighth priority is granted under section

507(a)(8) to . . . certain kinds of prepetition taxes [including] trust fund

taxes.”); id. ¶ 507.11[4] (“[I]n contrast to all of the other portions of section 507(a)(8), there is no time limit applicable to trust fund taxes.”). In

any event, this case does not involve “trust fund taxes.” 

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no. The Internal Revenue Code provides that a chapter 12

estate cannot incur taxes. Title 26 U.S.C. § 1399 states that

“no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code”—the

bankruptcy title—“[e]xcept in any case to which section 1398

applies.” Section 1398 applies only to “any case under chapter

7 (relating to liquidations) or chapter 11 (relation to reorganizations) of title 11 of the United States Code in which the

debtor is an individual.” 26 U.S.C. § 1398. It follows that a

chapter 12 estate is not a taxable entity. 

[5] Since the chapter 12 estate is not a taxable entity, the

chapter 12 estate cannot “incur” a tax. We agree with those

courts that have reached the same conclusion for the same

reason with respect to chapter 13 estates, which are treated

identically to chapter 12 estates by sections 1398 and 1399.

In re Whall, 391 B.R. 1, 5-6 (Bankr. D. Mass. 2008); In re

Brown, 2006 WL 3370867, *3 (Bankr. D. Mass. Nov. 20,

2006); In re Gyulafia, 65 B.R. 913, 916 (Bankr. D. Kan.

1986). Because a chapter 12 estate cannot “incur” a tax, it

cannot get the benefit of section 1222(a)(2)(A), which provides that the tax on the gain from the sale of a farm during

bankruptcy is dischargeable and payable in less than full. 

[6] We recognize that our conclusion that the chapter 12

estate cannot “incur” a tax necessarily implies that the debtor

is responsible for any taxes incurred after the bankruptcy petition is filed in a chapter 12 case because the chapter 12

trustee, the only other potentially responsible party, is not liable for the tax. Section 1398 provides that in chapter 7 and

individual chapter 11 cases, where there can be “taxable

income of the estate,” any “tax . . . shall be paid by the trustee.” 26 U.S.C. § 1398(c)(1). The omission of any provision in

the U.S. Code requiring the trustee to pay taxes in cases to

which section 1398 does not apply, such as chapter 12 cases,

implies that the trustee does not pay taxes in such cases. In re

Lindsey, 142 B.R. 447, 448 (Bankr. D. Okla. 1992) (“It is

clear that, pursuant to 26 U.S.C. § 1398 and 1399, the stand11824 UNITED STATES v. HALL

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ing Chapter 12 trustee neither files a return nor pays federal

income tax . . . .”). That makes sense: since the chapter 12

estate is not a taxable entity and thus there cannot be “taxable

income of the estate,” 26 U.S.C. § 1398(c)(1), and the debtor

remains in possession in chapter 12 bankruptcy absent

extraordinary circumstances, 11 U.S.C. § 1203, the trustee is

not associated with any taxes. See Holywell Corp. v. Smith,

503 U.S. 47 (1992) (shifting tax burden to trustee in corporate

chapter 11 case because chapter 11 bankruptcy created a separate entity overseen by the trustee).2

B

The Halls primarily rely on Knudsen v. IRS, 581 F.3d 696

(8th Cir. 2009), in which chapter 12 debtors proposed a plan

to sell farmland and farm equipment to fund their reorganization. Like the case before us, the plan treated the income taxes

arising from these postpetition sales as unsecured claims

under section 1222(a)(2)(A) and thus dischargeable. Id. at

701. The IRS objected there as well. Id. But the Eighth Circuit

ruled for the debtors, holding that “§ 1222(a)(2)(A) applies to

the postpetition sale of farm assets,” so that the taxes arising

2To be clear, we do not hold that the postpetition tax here is payable in

full because of section 1222(a)(2)’s full payment rule for claims treated by

the plan. That would be inconsistent with our conclusion that the postpetition tax here does not qualify for the section 1222(a)(2)(A) exception to

the full payment rule on the ground that the tax does not fall within section

507. Rather, the tax is payable in full because it is incurred and owed by

the debtor outside of the plan, as discussed in the text accompanying this

footnote. It is of no matter that the debtors attempted to include the tax in

their plan, because the Bankruptcy Code places limits on the liabilities a

plan may address. Chapter 12 plans bind “each creditor,” 11 U.S.C.

§ 1227, and a “creditor” is defined, in relevant part, as “an entity that has

a claim against the debtor that arose at the time of or before the order for

relief concerning the debtor.” 11 U.S.C. § 101(10)(A) (emphasis added).

Because the tax in this case arose after the order for relief, i.e., the automatic stay that commences upon the filing of a bankruptcy petition, 11

U.S.C. § 301(b), the debtors cannot avoid the tax simply by listing it in

their proposed plan. 

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from such sale could be treated as unsecured claims and dischargeable. Id. at 710 (emphasis added). In its view, the taxes

arising from the postpetition sale met the requirement in section 1222(a)(2)(A) that they be a “claim[ ] entitled to priority

under section 507.” Id. at 708-09. Specifically, the court held

that the taxes fell under section 507(a)(2) as administrative

expenses because they satisfied the relevant definition of

administrative expenses in section 503(b)—“tax . . . incurred

by the estate”—which means merely “tax . . . incurred postpetition.” Id. at 708-09. The court expressly declined to give

weight to Internal Revenue Code sections 1398 and 1399

when interpreting the phrase “tax . . . incurred by the estate,”

and took comfort in the fact that the Bankruptcy Code did not

indicate that a chapter 12 estate could not incur taxes. Id. at

708-10.3 We are not persuaded.

1

The Halls first argue, relying on the cases collected by

Knudsen, 581 F.3d at 709, that “incurred by the estate” in section 503(b) means “incurred postpetition.” In their view, it

does not matter whether the estate can incur a tax because the

key is when the tax was incurred. 

[7] It is true that the cases the Halls and Knudsen cite state

that all taxes “incurred by the estate” are “incurred postpetition.” They must: because an estate does not exist until after

a bankruptcy petition is filed, any taxes an estate incurs are

necessarily incurred postpetition. But just because all apples

are fruits does not mean all fruits are apples. Likewise,

although all taxes “incurred by the estate” are “incurred postpetition,” not all taxes “incurred postpetition” are “incurred

by the estate.” The cases the Halls and Knudsen cite simply

do not support the Halls’ view, as a close reading of the lan3The Tenth Circuit Bankruptcy Appellate Panel recently agreed with the

Eighth Circuit’s decision in Knudsen without further analysis. IRS v.

Ficken (In re Ficken), 430 B.R. 663, 670-72 (10th Cir. B.A.P. 2010). 

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guage in the cases indicates. See, e.g., W. Va. State Dep’t of

Tax & Revenue v. IRS (In re Columbia Gas Transmission

Corp.), 37 F.3d 982, 984 (3d Cir. 1994) (“The priority for

taxes ‘incurred by the estate’ extends only to taxes ‘incurred’

postpetition.” (emphasis added)); In re Ne. Ohio Gen. Hosp.

Ass’n, 126 B.R. 513, 515 (Bankr. N.D. Ohio 1991) (“Taxes

incurred by the estate are administrative expenses pursuant to

Section 503(b)(1)(B)(i). Because the estate does not exist prepetition, priority treatment is limited to taxes incurred postpetition.” (emphasis added)).4

2

The Halls next argue, again relying on Knudsen, 581 F.3d

at 709, that the fact that a bankruptcy estate exists and can

hold property means that it can incur taxes. Although the

Halls admit that sections 1398 and 1399 of the Internal Revenue Code state a contrary view by classifying only certain

estates in certain chapters as taxable entities, they believe all

estates, regardless of the chapter under which they exist, can

incur taxes. The Halls argue that the Internal Revenue Code

should not be used to “frustrate” the Bankruptcy Code

because Congress was not aware of the relevance of the former when drafting the latter.

[8] We disagree. Neither the Halls nor Knudsen cites any

provision in chapter 12 stating that a bankruptcy estate has the

inherent ability to incur taxes. That is because there is none.

4We note that the United States is incorrect that these cases are distinguishable on the ground that they involve chapter 11, as opposed to chapter 12, because these cases involve corporate chapter 11 debtors, as

opposed to individual chapter 11 debtors. Sections 1398 and 1399 of the

Internal Revenue Code treat corporate chapter 11 debtors and chapters 12

and 13 debtors the same. 26 U.S.C. § 1398 (“apply[ing] to any case under

chapter 7 . . . or chapter 11 . . . in which the debtor is an individual”)

(emphasis added); id. § 1399 (“Except in any case to which section 1398

applies, no separate taxable entity shall result from the commencement of

a [bankruptcy] case . . . .”).

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Knudsen quotes section 1207 of the Bankruptcy Code to support its view indirectly. 481 F.3d at 710. But that section

merely includes as property of the estate whatever the debtor

acquires postpetition. It does not contain the slightest suggestion that the ability to retain property implies the ability to

incur taxes. Nor do the Halls or Knudsen cite any authority for

the proposition that the Bankruptcy Code as a whole indicates

that all estates, regardless of chapter, have the inherent ability

to incur taxes. That is because the code does not institute a

singular concept of the bankruptcy estate regardless of chapter. In fact, the concept of the bankruptcy estate in the Bankruptcy Code is so amorphous that even such basic details as

the contents of the estate vary within the code depending on

the chapter,5 and within chapters depending on the nature of

the debtor.6

[9] In any event, we must read the United States Code as

a whole. Title 26 U.S.C. §§ 1398 and 1399 indicate that a

chapter 12 bankruptcy estate cannot incur taxes. It does not

matter that these sections appear in the Internal Revenue Code

as distinguished from the Bankruptcy Code. We are to “assume that Congress is aware of existing law when it passes

legislation.” Miles v. Apex Marine Corp., 498 U.S. 19, 32

(1990). In fact, we need not even risk the error of such

assumption in this case because Congress has indicated

repeatedly that it is aware that the taxable entity provisions in

the Internal Revenue Code are relevant to the Bankruptcy

Code. At the same time Congress enacted Bankruptcy Code

section 503(b), it also enacted section 346, which deals with

the relationship between the Internal Revenue Code’s taxable

5Compare 11 U.S.C. § 541 (outlining general rules for property of

estate), id. §§ 721-28 (outlining specific rules for chapter 7), id. § 1115

(same for chapter 11), and id. § 1207 (same for chapter 12), with id.

§ 1306 (same for chapter 13). 

6Compare id. § 541 (outlining general rules for property of estate, applicable to corporate chapter 11 debtors), with id. § 1115 (outlining rules for

property of estate for individual chapter 11 debtors). 

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entity provisions and state and local taxes. See Pub. L. No.

95-598, § 346, 92 Stat. 2549 (1978) (enacting § 346); id.

§ 503 (enacting § 503(b)). Similarly, at the same time Congress enacted Bankruptcy Code section 1222(a)(2)(A), it also

amended section 346. See Pub. L. No. 109-8, § 1003(a), 119

Stat. 23 (amending § 1222(a)(2)(A)); id. § 719 (amending

§ 346). We are thus justified in relying on Internal Revenue

Code sections 1398 and 1399, which specifically deal with

taxation in bankruptcy.

3

The Halls last rely on Knudsen for an argument by omission. They argue that the fact that section 1222(a)(2)(A) does

not restrict itself to prepetition taxes by its express terms is

significant. See Knudsen, 581 F.3d at 709. But that is irrelevant because the cross-references in section 1222(a)(2)(A)

itself clearly lead us to the provisions that restrict their reach.

Knudsen fails to persuade us of the Halls’ view and we

decline to follow it.

C

The Halls also appeal to legislative history. They first note

that the Senate Report on section 503(b) states that “administrative expenses include taxes which the trustee incurs in

administering the debtor’s estate, including taxes on capital

gains from sales of property by the trustee and taxes on

income earned by the estate during the case.” S. Rep. No. 95-

989, at 66 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5852

(emphasis added). This language, they press, implies that the

tax in this case was “incurred by the estate.” The Halls also

cite the statement of a senator speaking in favor of an unenacted provision similar to section 1222(a)(2)(A), proposed six

years before that section’s enactment. That senator stated that

the unenacted provision was aimed at situations in which “the

I.R.S. must be paid in full for any tax liabilities generated durUNITED STATES v. HALL 11829

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ing a bankruptcy reorganization.” 145 Cong. Rec. S7520-02,

1999 WL 20426 (Jan. 20, 1999) (statement of Sen. Grassley).

[10] But we cannot ignore clear statutory text because of

legislative floor statements. Hartford Underwriters Ins. Co. v.

Union Planters Bank, N.A., 530 U.S. 1, 6 (2000); Conn. Nat’l

Bank v. Germain, 503 U.S. 249, 253-254 (1992). Although

we are sympathetic to the approach outlined by Senator

Grassley, the operative language simply failed to make its

way into the statute. This is confirmed when the statutory

scheme is read as a whole. Milavetz, Gallop & Milavetz, P.A.

v. United States, 130 S. Ct. 1324, 1332 n.3 (2010); United

Sav. Ass’n of Tex. v. Timers of Inwood Forest Assocs., 484

U.S. 365, 371 (1988). When we trace section 1222(a)(2)(A)’s

cross-references and consider the Internal Revenue Code provisions relevant to the cross-referenced sections, it is evident

to us that, as enacted, it does not apply to the postpetition tax

at issue in this case. Recourse to “legislative history is unnecessary in light of the statute’s unambiguous language.” Milavetz, 2010 WL 757616, at *5 n.3.

Even if we were to consult legislative history, the statements the Halls cite are not persuasive. With respect to the

Senate Report on section 503(b), the subject of the phrase the

Halls quote is “trustee.” S. Rep. No. 95-989, at 66. The

trustee, of course, is the individual who acts on behalf of the

estate. 11 U.S.C. § 323(a). When the estate acts, it is the

trustee who is acting. Thus, the Senate Report’s phrase “taxes

which the trustee incurs” has the same meaning as the phrase

“taxes which the estate incurs.” This latter phrase is merely a

rewording of the language in section 503(b) itself, that is,

taxes “incurred by the estate.” 

In any event, the Supreme Court has warned us against

attributing the views of one Congress to another Congress,

Massachusetts v. EPA, 549 U.S. 497, 529-30 (2007), and

against relying on interpretations of bills Congress rejects,

Doe v. Chao, 540 U.S. 614, 615 (2004). Here, the statement

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on which the debtors rely concerns an unenacted bill in a

Congress convened six years prior to the one that enacted the

section at issue in this case. Even if appeal to legislative history were appropriate, we are reluctant to afford it significant

weight here.

It may well be that the drafter’s intention for section

1222(a)(2)(A) differs from its text. Hall, 376 B.R. at 746; see

Collier on Bankruptcy ¶ 503.07[2][a][i] (15th ed. 2009) (speculating that the intent behind section 1222(a)(2)(A) might

diverge from its “wording”); id. ¶ 1222.02[2] (speculating

that the “intent” behind section 1222(a)(2)(A) might diverge

from the application of its text); Roger McEowen, Chapter 12

Bankruptcy Taxation: Did BAPCPA Really Change Tax

Claims to Unsecured General Creditor Status?, at 2, Sept. 16,

2009, http://www.calt.iastate.edu/bapcpa.html (noting disparity between text and intent in section 1222(a)(2)(A)). But it is

our duty to follow the text because the text is the law. Congress is entirely free to change the law by amending the text.

REVERSED.

PAEZ, Circuit Judge, dissenting:

I respectfully dissent. After careful consideration of the

majority’s analysis of the relevant bankruptcy code and IRS

code provisions, I am not persuaded that § 1222(a)(2)(A) does

not entitle the debtors to treat the capital gains taxes arising

from the post-petition sale of their farm assets as an unsecured

claim not entitled to priority under § 507. In my view, Congress’s intent was clear: it wanted to help family farmers keep

their farms by allowing them to sell farm assets to pay off

debts without being liable for the full amount of any capital

gains tax arising from the sale, regardless of whether they

sold the assets before or after filing their Chapter 12 petition.

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Rather than follow the course proposed by the majority, I

would follow the reasoning of the Eighth Circuit in Knudsen

v. IRS, 581 F.3d 696 (8th Cir. 2009), and the Tenth Circuit

Bankruptcy Appellate Panel’s recent decision in In re Ficken,

BAP No. CO-09-042, ___ B.R. ___, 2010 WL 1837659 (10th

Cir. B.A.P. 2010), to conclude that capital gains taxes arising

from the post-petition sale of farm assets are dischargeable

under the § 1222(a)(2)(A) exception. This approach would

honor Congress’s clear intent and avoid an unwarranted circuit split.

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