Divided Justices Find Debtors Liable for Tax on Post-Petition Sale of Farm

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The U.S. Supreme Court issues a 5-4 decision affirming a Ninth Circuit finding that Chapter 12 bankruptcy debtors are liable for income taxes resulting from the capital gains realized through the post-petition sale of their farm because the estate cannot incur tax. The Supreme Court's ruling resolves a circuit split on whether Bankruptcy Code Section 1222(a)(2)(A) allows for the income tax on capital gains to be treated as unsecured claims against the estate when they resulted from the sale of farm assets between the time a bankruptcy petition is filed and the time the plan is confirmed. The Eighth and Tenth Circuits have found the postpetition sale of assets to be unsecured claims for which the debtors are not liable.

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