Hall vs. US

Constitutional Question: Should debtors pay federal income tax on the gain from the sale of assets (their farm) during bankruptcy proceedings and to what extent?

Facts:

• ♣ Lynwood and Brenda Hall owned a farm in Willcoz, Arizone
• ♣ 2005 they filed for bankruptcy under chapter 12
• ♣ chapter 12 is a provision in bankrupty code applying to farmers
• o eases burden on family owned farms
• ♣ discharge certain debts
• ♣ easier
• ♣ chapter 12 amended in 2005
• o discharge claims resulting from sale/trade of farm asset used in farming
• ♣ sold farm for $960,000
• ♣ made a profit because it exceeded their debt
• ♣ tried to discharge a capital gains tax
• o $29,000
• ♣ IRS objected
• o After assets are sold after bankruptcy petition taxes are not dischargable 
• ♣ Bankruptcy court said the Halls were liable because “a Chapter 12 esate is not a separate taxable entity” 
• ♣ Halls appealed to district court
• o Reversed decision 
• o Found in favor of the Halls
• o Said Chap 12 was made to help family farms stay in the family 
• ♣ Refusing the tax discharge would be inconsistent
• ♣ Gov’t appealed to US court of appeals
• o Case again reversed
• o Chap 12 estate is not a separate entity
• ♣ Capital gains tax must be assessed as a independent tax
• ♣ Halls appealed for certiorari
• o When a higher court reviews the decision of a lower court
• ♣ Supreme court granted Halls petition

Summary: The Halls owned a farm but they went bankrupt so they sold it. They made a profit but then got taxed but Chapter 12 is made so farmers can keep their farms in the family and it helps them. They applied to have the tax discharge but the IRS was like “No that’s totally taxable under chapter 12 because you filed for bankruptcy making it a separate entitity.” But the Halls didn’t want to give in so they appealed it and the gov’t said they were right because refusing the tax charge was inconsistent. But then the gov’t had it appealed and the court said the gov’t is right because capital gains tax must be assessed as a seprate tax. So the Halls filed for certiorari and went to the supreme court.

Predictions: I think the Halls will lose because since they made a profit its no longer just a matter of their bankruptcy issue. They should have to pay the tax regardless.