The Tenth Circuit Court of Appeals issued its opinion in United States v. Nazar on Tuesday, June 21, 2011.

The Tenth Circuit reversed the district court’s decision. Respondents declared bankruptcy and, with the permission of the bankruptcy court, sold several tracts of farm land. This sale created income tax liabilities. Respondents submitted a bankruptcy reorganization plan in which they proposed to treat their newly incurred tax liabilities as general unsecured claims; “as unsecured claims, the taxes would be entitled to no priority, paid only to the extent funds might be available after priority claims were satisfied, and any remaining unpaid portion would be eligible for discharge.” The IRS challenged this proposal and now brings this appeal.

Respondents claim that a special provision of Chapter 12 that makes their situation special. Under § 1222(a)(2)(A), certain claims that are otherwise entitled to priority payment status under § 507, but that happen to be owed to the government as a result of the sale of farm assets, are downgraded, treated as mere unsecured claims, and made eligible for discharge. Neither party disputes that the taxes at issue are owed to the government and are owed as a result of the sale of farm assets. However, there is a question as to whether the taxes are entitled to priority under § 507. Ultimately, the Court agreed with the IRS and found that “post-petition income taxes incurred during Chapter 12 proceedings are liabilities of the individual debtor and not the bankruptcy estate.” As such, they are not within the purview of the bankruptcy proceedings, are not eligible for treatment as unsecured claims, and are not to be included in the reorganization plan; the “taxes are due from the debtor personally, and the IRS’s recourse remains exclusively with the individual debtor, separate and apart from the Chapter 12 estate and unaffected by the bankruptcy discharge.”