WASHINGTON – The Senate this week unanimously approved legislation by Judiciary Committee Chairman Chuck Grassley (R-Iowa) and Senator Al Franken (D-Minn.) clarifying Congress’ intent to allow family farmers to more easily reorganize their finances when they fall on hard times.
As a part of a 2005 bankruptcy reform bill, Congress passed a provision to address the unique financial situations of family farmers who are reorganizing their assets following bankruptcy. However, a 2012 Supreme Court ruling found that the 2005 law, as written, failed to achieve Congress’ express goal of helping family farmers. Grassley and Franken’s Family Farmer Bankruptcy Clarification Act of 2017 rectifies the Supreme Court ruling by clarifying congressional intent.
“Because much of farm assets are tied up in farmland, family farmers face unique challenges when reorganizing debt. While Congress took specific steps to address the disadvantages these family operations face, the Supreme Court failed to recognize Congress’ intent. This week, the Senate unanimously reaffirmed its previous goal of helping family farmers when they fall on hard times by passing this important bill to put the family farmer and small creditors ahead of the IRS,” Grassley said.
"Our bipartisan bill is a commonsense fix to ensure that the law functions as intended and protects family farmers in Minnesota and across the country. Getting this measure passed, which I’m glad to say we just did in the Senate, will help ensure farmers going through bankruptcy get a fair shake and are able to repay the debts they owe without sacrificing their families’ futures,” Franken said.
The Family Farmer Bankruptcy Clarification Act reiterates Congress’ earlier action to enable bankrupt family farmers reorganizing their debts to treat capital gains taxes owed to a governmental unit, arising from the sale of farm assets during a bankruptcy, as general unsecured claims. It also 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 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 the permanent law was in place, 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, alone, would not block the confirmation of a reorganization plan.