FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, No. 08-17267
Appellant,
v. D.C. No.
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
11817
11820 UNITED STATES v. HALL
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., Tus-
con, 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 bank-
UNITED STATES v. HALL 11821
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 reorganiza-
tion, under which they sought to pay off their outstanding lia-
bilities 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 reorga-
nize 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
11822 UNITED STATES v. HALL
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 sec-
tion 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 govern-
mental 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 Bank-
ruptcy 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 prepeti-
tion income taxes).1 Indeed, there is no dispute that section
1
The 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.
UNITED STATES v. HALL 11823
1222(a)(2)(A) allows chapter 12 debtors to treat taxes
incurred by selling farm assets before the filing of a bank-
ruptcy 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., “post-
petition.”
[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 post-
petition 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 so-
called “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 sec-
tion 507(a)(8), there is no time limit applicable to trust fund taxes.”). In
any event, this case does not involve “trust fund taxes.”
11824 UNITED STATES v. HALL
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 commence-
ment 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 reorgani-
zations) 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 pro-
vides 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 peti-
tion is filed in a chapter 12 case because the chapter 12
trustee, the only other potentially responsible party, is not lia-
ble 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 trust-
ee.” 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 stand-
UNITED STATES v. HALL 11825
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 sepa-
rate 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 reorganiza-
tion. 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 Ҥ 1222(a)(2)(A) applies to
the postpetition sale of farm assets,” so that the taxes arising
2
To 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 postpeti-
tion 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 auto-
matic 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.
11826 UNITED STATES v. HALL
from such sale could be treated as unsecured claims and dis-
chargeable. Id. at 710 (emphasis added). In its view, the taxes
arising from the postpetition sale met the requirement in sec-
tion 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 postpe-
tition.” 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 sec-
tion 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 postpeti-
tion.” 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 post-
petition,” 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 lan-
3
The 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).
UNITED STATES v. HALL 11827
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 pre-
petition, priority treatment is limited to taxes incurred post-
petition.” (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 Reve-
nue 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 for-
mer 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.
4
We note that the United States is incorrect that these cases are distin-
guishable on the ground that they involve chapter 11, as opposed to chap-
ter 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 . . . .”).
11828 UNITED STATES v. HALL
Knudsen quotes section 1207 of the Bankruptcy Code to sup-
port 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 sugges-
tion 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 chap-
ter. In fact, the concept of the bankruptcy estate in the Bank-
ruptcy 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 “as-
sume 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
5
Compare 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).
6
Compare id. § 541 (outlining general rules for property of estate, appli-
cable to corporate chapter 11 debtors), with id. § 1115 (outlining rules for
property of estate for individual chapter 11 debtors).
UNITED STATES v. HALL 11829
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 Con-
gress 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 omis-
sion. 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 irrele-
vant 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 “adminis-
trative 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 unenac-
ted 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 dur-
11830 UNITED STATES v. HALL
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 pro-
visions 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 unnec-
essary in light of the statute’s unambiguous language.” Mila-
vetz, 2010 WL 757616, at *5 n.3.
Even if we were to consult legislative history, the state-
ments 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
UNITED STATES v. HALL 11831
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 his-
tory 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) (spec-
ulating 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 dispar-
ity 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. Con-
gress 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, Con-
gress’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.
11832 UNITED STATES v. HALL
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 cir-
cuit split.