IRS Loses Key Farm Bankruptcy Case

The Federal District Court for the Northern District of Iowa has rendered its opinion in a critical Chapter 12 bankruptcy case involving the construction and application of 11 U.S.C. §1222(a)(2)(A) - the provision in the 2005 Bankruptcy Act that reduces "governmental claims" to non-priority claim status in the debtor's bankruptcy estate. The bankruptcy court had held that the income tax triggered by the debtor's pre-petition sale of slaughter hogs did not come within the scope of the provision, but the District Court reversed on that point. Also, the District Court accepted the debtors' method of allocating taxes between priority and non-priority claims - again reversing the bankruptcy court. The District Court also upheld the bankruptcy court's holding that the debtors' could treat post-petition income taxes imposed on income earned during the pendency of the bankruptcy case as administrative expenses to be paid by the bankruptcy estate.

A more complete analysis of the court's opinion will be posted soon. In re Knudsen, No. C07-3011-MWB (N.D. Iowa Jun. 12, 2008).