Major Development in Income Taxation of Chapter 12 Bankruptcy Debtors

Abstract

<p>The Eighth Circuit Court of Appeals,<strong>1 </strong>on September 16, 2009, handed down a decision in the long-running battle between the Internal Revenue Service and Chapter 12 bankruptcy debtors over the meaning of the 2005 amendment to the Bankruptcy Code.<strong>2 </strong>That amendment was to provide relief to Chapter 12 farm and ranch debtors in light of the long-standing favorable treatment given individual debtors under Chapter 7 and Chapter 11 of the Bankruptcy Code.<strong>3 </strong>Congress had refused to extend the same treatment to individuals filing under Chapter 12 but instead enacted in 2005 a special provision for Chapter 12 filers<strong>4 </strong>that proved to be controversial as to its meaning because of the ambiguities in the language chosen by Congress.<strong>5 </strong>As it turned out, the Chapter 12 solution was more favorable to the debtor than the provisions applicable to Chapter 7 and 11 filers inasmuch as tax claims are treated as unsecured claims even if not paid in full.</p>