WASHINGTON – Senators Chuck Grassley and Al Franken have introduced legislation that would reverse a Supreme Court ruling (Hall v. United States) that is making it harder for family farmers to reorganize their finances when they fall on hard times.
Grassley and Franken’s Family Farmer Bankruptcy Tax Clarification Act of 2013 remedies a May 2012 Supreme Court ruling that said despite Congress’s express goal of helping family farmers, the language inserted into the Bankruptcy Code in 2005 conflicted with the Tax Code.
The bill 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. It 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 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 what our intent was when we wrote the 2005 law. We simply need to ensure the plain language of the law says and does what we intended.”
“Our bill is a commonsense fix to ensure that the law is carried out as it was intended so farmers going through bankruptcy can keep their land and repay the debts they owe in their communities,” Franken said.
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.
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