Senators Chuck Grassley and Al Franken have introduced legislation that would reverse a Supreme Court ruling (Hall v. United States) that is leaving family farmers in Chapter 12 bankruptcy proceedings vulnerable to the IRS.
In May 2012 the Supreme Court ruled that despite Congress's express goal of helping family farmers, the language inserted into the Bankruptcy Code in 2005 conflicted with the Tax Code.
Grassley and Franken's Family Farmer Bankruptcy Tax Clarification Act of 2012 remedies this conflict and clarifies that 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. This bill removes the Internal Revenue Service's veto power over a bankruptcy reorganization plan's confirmation, giving the family farmer a chance to reorganize successfully.
"Chapter 12 is a proven success for farmers and their lenders. It helps the farmer and the banker sit down and work out alternatives for debt repayment so a farmer can keep his land," Grassley said. "There's no question as to congressional intent in the 2005 law. We simply need to ensure the plain language of the law says and does what we intended."
"The federal government should be doing everything it can to help family farmers keep their land, and that's what Congress meant to do in 2005," said Franken. "This legislation would fix the 2005 law and help more farmers pay their creditors, keep their land, and stay in business."
Grassley and Franken said that while they understand the legislative agenda is very full between now and the end of the year, they would like the bill to be considered yet this year, but they will press for full consideration in the new Congress should the bill not be taken up.
Chapter 12 recognizes the unique situation that family farmers face when reorganizing through bankruptcy proceedings. It was made permanent in 2005 after nearly 10 years of congressional debate to fine-tune the bankruptcy laws. Chapter 12 allows family farmers to sell portions of their farms to reorganize without capital gains taxes jeopardizing the reorganization. Before 2005, the IRS was able to collect any tax liabilities generated during a family farmer bankruptcy reorganization. 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. So, the farmer had to sell the rest of his land and still lost the family farm.
Congress' intent in the 2005 bankruptcy reform law was to create a narrow exception through Chapter 12 that if a family farmer sold land that resulted in a capital gains liability, then the IRS's claim would not receive priority status.
Specifically, the Family Farmer Bankruptcy Tax Clarification Act of 2012:
* strikes the current unworkable language in the Bankruptcy Code 11 U.S.C. § 1222(a)(2)(A) and inserts a new 11 U.S.C. § 1222(a)(5);
* transforms all government claims arising as a result of the sale or transfer of post-petition farm assets into unsecured, non-priority claims, notwithstanding any language in the Internal Revenue Code to the contrary;
* provides new sections for treatment of these claims during the bankruptcy process;
* recognizes that some asset sales may occur post-confirmation;
* provides a mechanism for plan modification as a result of these sales, if used for the specified purpose of reorganization, to assist in reorganization;
* makes a technical change to 11 U.S.C. § 1228(a), which practitioners and commentators have long argued is needed.
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