In a letter delivered yesterday, the Clinton administration's Justice Department stated its opposition to this measure, which is included in Grassley's bill to overhaul the bankruptcy system. The president's lawyers said "it would be undesirable to begin creating exceptions for special interest groups."
Grassley today vowed to fight the administration's "absurd" position on this issue. "Despite historically low commodity prices and a drought forecast, the administration wants to force family farmers facing very difficult economic times to send the cash they needed to stay in operation to the IRS instead," Grassley said.
The provision in dispute is one of several initiatives included in Grassley's plan to make permanent and expand the chapter of the federal bankruptcy code designed especially for farmers.
The first provision, and the one opposed by the Clinton/Gore administration, deals with the treatment of capital gains under Chapter 12. Right now, federal taxes must be paid first when a farmer sells assets. Grassley wants to make the government last on the list of creditors. "A farmer might need to sell machinery or other property to meet his obligations in Chapter 12. But when he's hit with the capital gains tax, it eats up all the flexibility that the sale of assets was meant to give in the first place," Grassley said. "It's almost pointless to sell the property if much of the proceeds are handed over to the federal government."
Grassley has advanced his Chapter 12 proposal along with his comprehensive bankruptcy reform bill, but it was first introduced by him in a bipartisan effort with Senate Minority Leader Tom Daschle.
"It's offensive to have the administration dismiss family farmers in bankruptcy as nothing more than a ?special interest group.' A dose of common sense is in order. We all have a good reason to protect the family farm. Americans pay less of their income for food than consumers anywhere else in the world," Grassley said.
In addition to the part of Grassley's Chapter 12 initiative dealing with tax treatment, his plan would make Chapter 12 a permanent part of the code. Grassley first sponsored the bill to create Chapter 12 during the agricultural depression of the 1980s. Since then, Chapter 12 has been a proven success as a leverage tool for farmers and their lenders. It helps get the borrower and the banker to sit down and work out alternatives for debt repayment.
Grassley's second provision to expand Chapter 12 would update the definition of family farmer. Under current law, farmers can file under Chapter 12 if they receive more than half of their prior year's income from ag sources, have total debts under $1.5 million, and at least 80 percent of their debt is farm-related. Grassley's proposal would extend the protections to farmers who receive more than half their income from the farm in any one of the last three years, who have total debts up to $3 million, and whose debts are at least 50 percent from farming operations.
Unlike Chapter 11 of the bankruptcy code which governs corporate reorganizations, Chapter 12 does not require a financially-distressed farmer to obtain the consent of creditors prior to reorganization. The ability of lenders and other secured creditors to veto a farmer's reorganization plan often led to farm families being forced off their land and out of the business of farming. Unlike Chapter 7 of the bankruptcy code, which is a form of liquidation, a financially-distressed farm doesn't have to surrender the farm to creditors. Chapter 12 prohibits lenders from foreclosing on property if the farmer is able to make rental payments.
The U.S. Senate has approved Grassley's comprehensive bankruptcy reform bill containing the Chapter 12 provisions. The legislation is now being reconciled with the version of bankruptcy reform passed by the House of Representatives.