Thursday, March 29, 2012
Daniel P. Fischer (J.D. 2012, Iowa), Note, Old MacDonald Files Chapter 12 Bankruptcy: How Should the IRS Tax the Reorganization?, 97 Iowa L. Rev. 589 (2012):
Before the BAPCPA amendments, many farm debtors struggled to have bankruptcy plans confirmed due to significant tax claims arising from proposed Chapter 12 reorganizations. Therefore, in 2005, Congress amended the Bankruptcy Code, purporting to make “claims owed to government units” unsecured. However, as debtors attempted to use this provision to reduce tax liabilities in bankruptcy plans, the ambiguities and shortcomings of the amendment came to light. The IRS objected to debtors’ classification of taxes arising from ordinary operations and postpetition sales as unsecured, as well as the debtors’ method of allocation between secured and unsecured claims. The legal battles over these objections have created a split of authority between the Eighth Circuit on one side, and the Ninth and Tenth Circuits on the other side. The debate of the proper interpretation is based on how the Internal Revenue Code should influence this bankruptcy provision, and how courts should use the Bankruptcy Code’s plain language and Congress’s legislative history. The Supreme Court has granted certiorari to address one of the three main issues. However, Congress should go the extra step by clarifying the Bankruptcy Code and effectuating the original legislative intent. Congress should do this by classifying taxes arising from dispositions associated with reorganization from both prepetition and postpetition sales as unsecured, while officially adopting the “proration method” in allocating secured and unsecured claims.