– Senate Judiciary Committee Chairman Chuck Grassley of Iowa and Senator Al Franken of Minnesota have reintroduced
that corrects a Supreme Court ruling (
Hall v. United States
) that made it harder for family farmers to reorganize their finances when they fall on hard times.
Grassley and Franken’s
Family Farmer Bankruptcy Clarification Act of 2017 remedies a May 2012 Supreme Court ruling that said amendments made to the Bankruptcy Code in 2005, which restricted the Internal Revenues Service’s veto power over a family farmer’s ability to reorganize in bankruptcy in certain situations, unfortunately failed to achieve Congress’s express goal of helping family farmers.
“Family farmers are at a unique disadvantage when it comes to reorganizing debts because much of their capital is in land. The Supreme Court in 2012 failed to recognize that Congress already took action to change this. Our bill will finally and permanently fix this problem so family farmers have a chance to quickly get back on their feet and continue to feed the world,” Grassley said. “The bottom line is that the farmer and the small business creditors should come first, not the IRS.”
“Our bipartisan bill is a commonsense fix to ensure family farmers in Minnesota and across the country are protected when they go through bankruptcy,” said Sen. Franken. “The measure will help make it easier for Minnesota farmers to reorganize their debts, giving more farming families a chance to make it through tough times.”
Family Farmer Bankruptcy Clarification Act 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 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.
The bill is expected to be referred to the Senate Judiciary Committee, which has jurisdiction over bankruptcy laws.
Full text of Grassley’s prepared statement on the legislation follows.
Prepared Statement by Senator Chuck Grassley of Iowa
Chairman, Senate Judiciary Committee
Introduction of the Family Farmer Bankruptcy Clarification Act of 2017
May 25, 2017
Mr. President, I rise today to introduce, along with Senator Franken, the Family Farmer Bankruptcy Clarification Act of 2017. I thank Senator FRANKEN for supporting and working with me, since the 112th Congress, on this important bill to help our Nation’s family farmers.
This bipartisan bill addresses the 2012 United States Supreme Court case Hall v. United States. In a 5-4 decision, the Supreme Court ruled a provision that I authored in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act did not accomplish what we in Congress intended. The Family Farmer Bankruptcy Clarification Act of 2017 corrects this unfortunate result and restores Congress’s original intent. The bill clarifies that bankrupt family farmers reorganizing their debts, under chapter 12 of the bankruptcy code, may treat capital gains taxes owed to the government, arising from the sale of farm assets during the bankruptcy, as general unsecured claims. This bill will give family farmers a chance to reorganize successfully and remove the Internal Revenue Service’s veto power over a plan’s confirmation.
Congress created chapter 12 in 1986 as a temporary measure to provide a specialized bankruptcy process for family farmers. In 2005, Congress made chapter 12 a permanent part of the bankruptcy code. Between 1986 and 2005, we learned what worked and did not work for family farmers reorganizing under chapter 12. In particular, family farmers faced serious problems when they needed to sell land to fund their reorganization plan. For example, a family farmer might sell portions of the farm in order to generate cash and pay creditors. Unfortunately, in most of these cases, the family farmer is selling land with a low cost basis, because it has likely been held in the family for a very long time. As a result, the family farmer gets hit with a substantial capital gains tax, which is owed to the Internal Revenue Service.
Under the bankruptcy code’s priorities structure for claims, taxes owed to the IRS must be paid in full, unless the IRS agrees otherwise. This creates problems for the family farmer who needs cash to pay creditors and reorganize. Since the IRS has the ability to require full payment, it essentially holds veto power over the confirmation of a family farmer’s chapter 12 plan. In many instances, the effect is that a family farmer will not be able to have a plan confirmed. This is a harsh result and does not make sense if the goal is to give family farmers a fresh start. Recognizing this problem, Congress amended the bankruptcy code in 2005 to provide that in these limited and particular situations, the taxes owed to the IRS would be stripped of their priority and treated as general unsecured debt. This removed the government’s veto power over plan confirmation and paved the way for family farmers to reorganize under chapter 12.
Unfortunately, in Hall v. United States, the Supreme Court ruled that despite Congress’s express goal of helping family farmers, the language we used failed to accomplish the intended result. To be clear, the Hall case was about statutory interpretation. There is no question about what Congress was trying to do; rather, the question is, “Did Congress use the correct language?” My goal, along with others at the time, was to relieve family farmers from having their reorganization plans fail because of certain tax liabilities owed to the government. Justice Breyer noted this point in his dissent: “Congress was concerned about the effect on the farmer of collecting capital gains tax debts that arose during (and were connected with) the Chapter 12 proceedings themselves. . . . The majority does not deny the importance of Congress’ objective. Rather, it feels compelled to hold that Congress put the Amendment in the wrong place.” Hall v. United States, 132 S.Ct. 1882, 1897 (2012) (Breyer, J., dissenting) (internal citations and quotations omitted).
As a result of the Hall case, family farmers facing bankruptcy now find themselves caught between a rock and a hard place. The rules have changed and must be corrected in order to provide certainty and clarity in the law. The Family Farmer Bankruptcy Clarification Act of 2017 does this and provides the help needed for family farmers.
This bill adds a new section 1232 to the bankruptcy code. This new section, along with other conforming changes, gives guidance and certainty to debtors, practitioners, and courts as to how these claims are to be treated during bankruptcy. I’m pleased that the bill we’re introducing today will help family farmers who are facing hard times.
In the wake of the Hall decision, this bill ensures that what Congress sought to do in 2005 actually occurs. The Family Farmer Bankruptcy Clarification Act of 2017 provides the help that may one day be needed for the hard working family farmers across our great Nation.