WASHINGTON, D.C. — U.S. Sens. Chuck Grassley (R-Iowa) and Al Franken (D-Minn.) have introduced legislation that would reverse a 2012 Supreme Court ruling they say makes it more difficult for family farmers to restructure their finances when they fall on hard times.
"Family farmers are in a unique situation where so much of their capital is in the land itself," Grassley said. "Congress made clear that it wants farmers to be able to reorganize so they can keep in the business of farming.
"Unfortunately, the Supreme Court’s 2012 ruling failed to recognize that, and we intend to fix it. The bottom line is that the farmer and the small business creditors should come first, not the IRS."
Even before it was made permanent in 2005, after nearly 10 years of Congressional debate to fine-tune the bankruptcy laws, Chapter 12 allowed family farmers to sell portions of their farms to reorganize without capital gains taxes jeopardizing the reorganization. However, it enabled the IRS to collect any tax liabilities generated during a family farmer bankruptcy reorganization.
Grassley said the Family Farmer Bankruptcy Clarification Act of 2015 revamps the May 2012 Supreme Court ruling – Hall v. the United States – that said despite Congress’ express goal of helping family farmers, the language inserted into the Bankruptcy Code in 2005 conflicted with the Tax Code.
Sharon Edmondson of the Commercial Law League of America in Wauconda, Ill., said the bill, S.194, would "amend Title 11 of the United States Code to clarify the rule allowing discharge as a non-priority claim of governmental claims arising from the disposition of farm assets under Chapter 12 bankruptcies."
Under Grassley’s and Franken’s proposed bill, bankrupt family farmers reorganizing their debts are able to treat capital gains taxes owed to a governmental unit – arising from the sale of farm assets during a bankruptcy – as general unsecured claims. In addition, Grassley said the new bill would remove the IRS’ veto power over a bankruptcy reorganization plan’s confirmation, giving the family farmer a chance to reorganize successfully.
"Too often, when the IRS took its cut through the capital gains taxes, there was no money to pay the other creditors, like the local feed store or the local bank," he said. "So, the farmer had to sell the rest of his land and still lost the family farm."
As chair of the U.S. Senate Judiciary Committee, Grassley said in a statement to it that in 1986, Congress enacted Chapter 12 of the Bankruptcy Code to provide a specialized bankruptcy process for family farmers. But between 1986 and 2005, he said "we learned what aspects worked and didn’t work for family farmers reorganizing in bankruptcy.
"One problematic area was where a family farmer needed to sell assets in order to generate cash for the reorganization," he said. "Specifically, a family farmer would have to sell portions of the farm to generate cash to fund a reorganization plan so that the creditors could receive payment.
"Unfortunately, in situations like this, the family farmer is selling land that has been owned for a very long time, with a very low cost basis. Thus, when the land is sold, the family farmer is hit with a substantial capital gains tax, which is owed to the Internal Revenue Service."
Under the current Bankruptcy Code, taxes owed to the IRS receive priority treatment and holders of priority claims must receive payment in full, unless the claim holder agrees to be treated differently. Grassley said this creates problems for the farmer, who needs the cash to pay creditors to reorganize.
"However, since the Internal Revenue Service has the ability to require full payment, they hold veto power over a plan’s confirmation, which means in many instances the plan will not be confirmed," he said.
"This does not make sense if the goal is to give the family farmer a fresh start."
As a result of Hall, Grassley said family farmers facing bankruptcy now find themselves caught in a tough spot.
"The rules have now been changed and must be corrected in order to provide certainty and clarity in the law," he said.
