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Knudsen v. Internal Revenue Service

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Submitted: May 13, 2009

Before RILEY, SMITH, and COLLOTON, Circuit Judges.

Section 1222(a)(2)(A) of 11 U.S.C. provides that a debtor’s Chapter 12 plan must provide for the full payment of all priority claims under 11 U.S.C. § 507 “unless . . . the claim is a claim owed to a governmental unit that arises as a result of the sale . . . 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 . . . .” In these consolidated appeals, the government challenges the applicability of § 1222 to income taxes arising out of sales of the property of the debtors, Anders H. Knudsen and Cynthia J. Knudsen (No. 08-2820) and James Daniel Schilke (No. 08-3627). In Nos. 08-2820 and 08-3627, the government asserts that § 1222(a)(2)(A) is inapplicable to the debtors’ post-petition sale of farm assets. In No. 08-2820, the government contends that (1) the Knudsens’ prepetition sale of their slaughter hogs does not constitute a sale of a “farm asset used in the debtor’s farming operation” under § 1222(a)(2)(A) and (2) the proper method for allocating the Knudsens’ 2004 tax liability between the tax arising out of the transactions within the scope of § 1222(a)(2)(A) and the tax arising from those transactions outside of its scope is the “proration method” as opposed to the “marginal method.”

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