Must a Chapter 12 Plan Fully Pay Capital Gains Tax from the Sale of a Debtor's Farm During Bankruptcy?

Lynwood and Brenda Hall filed for Chapter 12 bankruptcy, which provides for debt relief plans for family farmers. During their case, they sold their farm at a profit, resulting in a taxable capital gain. The Halls contend that the tax was incurred by the "estate," that is, assets owned by them before bankruptcy but administered during the case for the benefit of creditors. If they are right, the Bankruptcy Code would permit a plan paying part of the tax and discharging the rest. However, the Internal Revenue Code provides that a Chapter 12 bankruptcy estate is not a separate taxable entity. The court below therefore held that the Halls, not the estate, that incurred the tax. On that basis, the Bankruptcy Code would not permit a plan discharging them from their tax debt. Was it the estate or the Halls that incurred the tax? [PUBLICATION ABSTRACT]