Did Bad Debtors Influence the Tenth Circuit to Make an Unfortunate Decision? Making Reorganization More Difficult for Farmers in United States V. Dawes

I. INTRODUCTION As part of the Bankruptcy Abuse Prevention and Consumer Protection Act1 of 2005 ("BAPCPA"),2 Congress added 11 U.S.C. § 1222(a)(2)(A) to the Bankruptcy Code. At first blush, this provision appears to grant favorable treatment to Chapter 12 debtor-farmers, allowing them to "avoid some, if not all, of the tax generated from the sale of [their] assets."3 In United States v. Dawes* the Tenth Circuit addressed the implications of this code section for tax liabilities that arise during the pendency of a Chapter 12 bankruptcy.5 Relying primarily on what it considered to be the plain language and overall structure of the Bankruptcy Code, the Tenth Circuit greatly limited the application of § 1222(a)(2)(A)6 by holding that it did not apply to tax liabilities arising after the filing of the bankruptcy petition.7 As a result, the application of that section was restricted to debtor-farmers who liquidate property before filing.8 This Note argues that the Tenth Circuit's holding in Dawes was wrong because the court should have interpreted § 1222(a)(2)(A) to apply to postpetition filings. Part II reviews the relevant legal background, while Part III reviews the facts and procedural history of Dawes. Part IV summarizes the Tenth Circuit's decision, and Part V argues that the Dawes decision was flawed because (1) the court adopted a definition of "incurred" that was at odds with its use in the applicable statute; (2) the court failed to address the appropriate question at issue; and (3) the court refused to recognize relevant legislative history. Part VI briefly concludes. II. RELEVANT LEGAL BACKGROUND A. Tax Treatment in Bankruptcy In 1980, Congress passed the Bankruptcy Tax Act of 1980, which helped clarify how income taxes were to be treated in bankruptcy. The Act provided for the "creation of a new tax entity" in Chapter 7 and 11 cases filed by individuals.9 This creation of a separate tax entity or taxable estate allowed debtors' tax attributes to "pass into the bankruptcy estate."10 This resulted in the bankruptcy estate itself (rather than the debtors) becoming legally responsible for paying most of the taxes triggered in bankruptcy, including ordinary income taxes and capital-gains taxes.11 In 1986, Congress enacted Chapter 12 of the Bankruptcy Code as a response to the farm-debt crisis.12 Chapter 12 was tailored to meet the needs of financially distressed family farmers by assisting them in repaying "all or part of their debts,"13 with the ultimate goal of "allowing them to continue operating their business at the conclusion of the bankruptcy."14 However, Congress did not extend the concept of a separate bankruptcy estate to Chapter 12 filers,15 which caused serious problems for farmers.16 In many cases, farmers attempted to fund their bankruptcy plans,17 in part, by selling farm property.18 The capital-gains taxes resulting from "these sales established the [IRS] as a new creditor."19 The IRS then argued that the resulting tax was an "administrative expense" incurred by the bankruptcy estate "in furtherance of preserving the estate" pursuant to § 507(a)(2).20 As such, under the Bankruptcy Code, the resulting capital gains were a priority claim that had to "be paid in full" during the course of the debtor's plan.21 The IRS frequently "used this characterization to object to or outright veto otherwise acceptable bankruptcy plans."22 As a result, debtor-farmers often were placed in a position of being unable to formulate a viable plan.23 Congress attempted to address this problem in BAPCPA.24 However, instead of extending the concept of a separate tax estate (in which the bankruptcy estate is liable for taxes triggered in bankruptcy rather than the debtor personally) to Chapter 12 filers, Congress added 11 U.S.C. § 1222(a)(2)(A) to the Bankruptcy Code.25 Section 1222 gives the necessary requirements for a Chapter 12 plan to be confirmed.26 Before the passage of BAPCPA, § 1222 stated that "[t]he plan shall . …