IN RE FICKEN

• Decision Date: 30 July 2009
• Docket Number: Adversary No. 08-01687-HRT.,Bankruptcy No. 05-52940-HRT.
• Citation: 430 B.R. 648
• Parties: In re Kent Edwin FICKEN and Roberta Pauline Ficken, Debtors. Kent Edwin Ficken and Roberta Pauline Ficken, Plaintiffs, v. Internal Revenue Service, Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

430 B.R. 648

In re Kent Edwin FICKEN and Roberta Pauline Ficken, Debtors Kent Edwin Ficken and Roberta Pauline Ficken, Plaintiffs, v. Internal Revenue Service, Defendant.

Bankruptcy No. 05-52940-HRT. Adversary No. 08-01687-HRT.

United States Bankruptcy Court, D. Colorado.

July 30, 2009.

COPYRIGHT MATERIAL OMITTED

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Judith A. Shively, Erie, CO, for Plaintiffs.

Richard A. Schwartz, U.S. Dept. of Justice, Karen L. Pound, Washington, DC, Tamara Kotzker, Denver, CO, for Defendant.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

HOWARD R. TALLMAN, Chief Judge.

This case comes before the Court on Plaintiffs' Motion for Summary Judgment (Docket # 20) filed on May 1, 2009; Defendant's Motion for Summary Judgment filed May 1, 2009 (Docket # 22); the Defendant's response filed May 18, 2009 (Docket # 24); and the Plaintiffs response filed June 8, 2009 (Docket #25). The Court is prepared to rule and hereby rules as follows.

Background

The parties have stipulated to the applicable facts. The Debtors/Plaintiffs, Kent and Roberta Ficken ("Fickens"), own a cattle farm in Eastern Colorado. Fickens filed a petition on December 2, 2005, for relief under Chapter 12, an Amended Plan was filed on January 18, 2006, and the plan was confirmed on February 13, 2006. Section 4.2.7 of the Amended Plan states, inter alia, that "Fickens will sell all of the cattle owned by Fickens no later than December 31, 2005 and pay the net proceeds to Vectra Bank...."¹

In 2006, Fickens sold their entire herd of cattle for $139,522, comprised of $62,429 from the sale of 88 calves ("calves" or "calf inventory") and $77,093 from the sale of 73 cows and 2 bulls ("breeding livestock"). The parties agree that the breeding livestock were "used in the debtor's farming operation" as stated in 11 U.S.C. § 1222(a)(2)(A) and were also "property used in the trade or business" under I.R.C. § 1231(b)(3).

After the sale was completed, Fickens treated the post-petition tax as a beneficial (unsecured) debt pursuant to 11 U.S.C. § 1222(a)(2)(A) for the sale of both the breeding livestock and the calf inventory. Fickens used the marginal tax allocation method described in In re Knudsen, 389 B.R. 643, 665 (N.D.Iowa 2008), when they determined their tax liability. On October 1, 2008, the Fickens brought this adversary action against the Internal Revenue Service ("IRS") after IRS indicated that § 1222(a)(2)(A) did not apply and that Fickens owed additional tax.

Cross-Motions for Summary Judgment

The parties have filed cross-motions for summary judgment. Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c), incorporated herein by Fed. R. Bankr.P. 7056. A genuine issue of material fact exists when a non-movant presents facts upon which a reasonable jury could find in his or her favor. Lawmaster v. Ward, 125 F.3d 1341, 1347 (10th Cir.1997). Summary judgment is appropriate in this case as there are no disputed issues of material fact.

Discussion

The parties' motions require the Court to interpret 11 U.S.C. § 1222(a)(2)(A). Section 1222(a) provides in relevant part:

The plan shall—

...

(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507, unless—

(A) the claim is a claim owed to a government 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 a manner only if the debtor receives a discharge;

11 U.S.C. § 1222(a). The parties dispute whether § 1222(a)(2)(A) applies to the Fickens' post-petition tax liability. Their arguments are discussed below.

I. 11 U.S.C. § 1222(a)(2)(A) applies to post-petition asset sales

Fickens first allege that 11 U.S.C. § 1222(a)(2)(A) applies to post-petition asset sales, relying primarily on In re Hall, 393 B.R. 857 (D.Ariz.2008); In re Knudsen, 389 B.R. 643 (N.D.Iowa 2008); In re Dawes, 382 B.R. 509 (Bankr.D.Kan.2008); and In re Schilke, 379 B.R. 899 (Bankr. D.Neb.2007). Fickens claim these cases find that Chapter 12 debtors may treat a post-petition tax liability as an administrative expense and the resultant taxes as an unsecured claim not entitled to priority pursuant to § 1222(a)(2)(A). Fickens further assert that § 507(a)(2) provides for priority status for administrative expenses, and that § 1222(a)(2)(A) strips that priority.

IRS relies primarily on the statutory construction and use of "claim" in § 1222(a)(2)(A) that shows Congress' intent to exclude § 507(a) "expenses." IRS also claims that post-petition taxes are not administrative expenses under § 503(b)(1)(B)(i) because they are not "incurred by the estate" for the tax at issue, and therefore not entitled to relief under § 1222(a)(2)(A).

Three district courts on appeal have either affirmed or reversed the bankruptcy court to hold that tax claims from postpetition asset sales are subject to § 1222(a)(2)(A). In re Hall, 393 B.R. 857, 863-64 (D.Ariz.2008) (reversing bankruptcy court); In re Knudsen, 389 B.R. 643, 677 (N.D.Iowa 2008) (affirming bankruptcy court); In re Dawes, 415 B.R. 815, 823-24 (Unpublished Memorandum and Order) (D.Kan.2009) (affirming bankruptcy court). Two Nebraska bankruptcy courts also ruled that post-petition tax claims are subject to § 1222(a)(2)(A). In re Gartner, 2008 WL 5401665, at *1, 2008 Bankr.LEIS 3525, at *4 (Unpublished Memorandum and Order) (Bankr.D.Neb. Dec. 29, 2008) (following In re Schilke, 379 B.R. 899 (Bankr.D.Neb.2007)); In re Schilke, 379 B.R. 899, 903 (Bankr.D.Neb.2007). There is currently no surviving contrary holding.

A. The "farming operation" is the farming operation under the confirmed plan

The "farming operation" raised in § 1222(a)(2)(A) may be broad enough to accept a reading of either the pre-petition farming operation, or the post-petition farming operation. But the "farming operation" is specifically raised under the requirements of "the plan" of § 1222(a). The context of "the debtor's farming operation" is more specific than the pre-filing farming operation since it is specifically raised in the context of a debtor's Chapter 12 plan. In re Knudsen, 389 B.R. at 659.

Since the "farming operation" is raised with respect to the plan, it necessary implies that a bankruptcy petition has been filed and so § 1222(a)(2)(A) applies to postpetition asset sales. Therefore, in order for the transaction to qualify under § 1222(a)(2)(A), the transaction must be for some purpose of the plan.

The determination that the "farming operation" under § 1222(a)(2)(A) is the "farming operation" under the plan is not only consistent with the structure of the statute, but also is consistent with the legislative history. In re Schilke, 379 B.R. at 902, is particularly relevant:

The Knudsen court also relied on legislative history with respect to a bill that preceded the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") which contained a proposed amendment to § 1222(a)(2) identical to the change that was ultimately made in BAPCPA. Senator Grassley, who introduced that bill, made the following comments:

"Safety 2000" the predecessor bill also helps farms to reorganize by keeping the tax collectors at bay. Under current law, farmers often face a crushing tax liability if they need to sell livestock or land in order to reorganize their business affairs ... Under the bankruptcy code, the I.R.S. must be paid in full for any tax liabilities generated during a bankruptcy reorganization. If the farmer can't pay the I.R.S. in full, then he can't keep his farm. That isn't sound policy. Why should the I.R. S. be allowed to veto a farmer's reorganization plan? "Safety 2000" takes this power away from the I.R.S. by reducing the priority of taxes during proceedings. This will free up capital for investment in the farm, and help farmers stay in the business of farming.

145 Cong. Rec. S750-02, 1999 WL 20426 (Jan. 20, 1999) (statement by Sen. Grassley on S.260); In re Hall, 393 B.R. at 863 (quoting In re Schilke, 379 B.R. at 902) (emphasis added). The Hall court found that the "legislative history ... clearly shows that the language used was intended to allow a debtor to use the amendments to § 1222(a)(2)(A) for taxes generated during the bankruptcy reorganization from the sale of assets used in a farming operation." In re Hall, 393 B.R. at 863. Furthermore, the Knudsen court noted "that Congress intended to help farmers reorganize and stay in business by lessening the burden of prepetition and postpetition taxes arising from the sale of assets used in the farmer's farming operation, assets such as equipment and land," and also noting that "Congress placed the entire burden for such intention on § 1222(a)(2)(A)." In re Knudsen, 389 B.R. at 671 (N.D.Iowa 2008) (quoting In re Knudsen, 356 B.R. at 490-91 (Bankr. N.D.Iowa 2006)).

More broadly, reorganization occurs both before and after the date of filing the bankruptcy petition, which strongly suggests that § 1222(a)(2)(A) applies to both pre-petition and post-petition transactions. In re Knudsen, 389 B.R. at 675. There is no language that restricts its applicability to only pre-petition sales. Id. To interpret § 1222(a)(2)(A) as applying to only prepetition transactions is effectively adding language to the statute that is simply not there. In re Schilke, 379 B.R. at 902-03. If the statute is construed as the IRS desires, § 1222(a)(2)(A) would apply only to farmers that had the foresight to liquidate assets before filing, and the farmer could choose to make optimal tax decisions instead of optimal business decisions. In re Knudsen, 389 B.R. at 677; In re Dawes, ...