In 2005, a US couple sold their farm during bankruptcy, IRS sent them a tax bill, Supreme Court settled who pays

A US couple who sold their family farm while going through bankruptcy faced a tax dispute with the Internal Revenue Service (IRS) after the sale generated a capital gains tax bill of about $29,000. The case reached the US Supreme Court, which ruled in favour of the government in May 2012.

What exactly happened?

The case, Hall v. United States, involved Lynwood and Brenda Hall, who filed for bankruptcy under Chapter 12 of the US Bankruptcy Code in August 2005. The provision allows eligible farmers with regular annual income to reorganise their debts and repay creditors under a court-approved plan.

After filing for bankruptcy, the couple sold their farm for $960,000.


The IRS asserted that the couple owed approximately $29,000 in taxes on that gain. The Halls sought to have the amount treated as an unsecured debt, which would allow them to pay it only to the extent funds were available and have any unpaid balance discharged under their bankruptcy plan.

The IRS objected to the proposal, setting off a legal dispute over how federal tax rules applied to the sale of farm property during bankruptcy.

The Halls appealed, and the US District for the District of Arizona ruled in their favour. The dispute then went to the US Court of Appeals for the Ninth Circuit, which reversed the district court's decision.

The appeals court held that a Chapter 12 bankruptcy estate was not a separate taxable entity under the relevant federal tax law. As a result, it concluded that the tax arising from the sale was not a tax incurred by the estate.

The couple subsequently took the case to the US Supreme Court.

The case required the justices to interpret the relationship between the Bankruptcy Code and federal income tax rules.

What did the Supreme Court rule?

In May, 2012, the US Supreme Court ruled 5-4 in favour of the government and upheld the Ninth Circuit's decision.

The ruling meant that the couple could not use the provision they had relied on to treat the tax as an unsecured debt and discharge any unpaid balance through the plan.