September 20, 2012
This week, Senators Chuck Grassley (R-IA) and Al Franken (D-MN) introduced the Family Farmer Bankruptcy Tax Clarification Act of 2012 (S.3545). The Act is intended to overturn the ruling in the U.S. Supreme Court case Hall v. United States, a case that addressed the status of government claims for taxes in a Chapter 12 bankruptcy proceeding.
Chapter 12 is a section of the Bankruptcy Code that provides special provisions for family farmers and fishermen who run into financial trouble and file for bankruptcy. Chapter 12 was enacted in 1986 and amended in 2005 with the overall goal of allowing family farmers to use the bankruptcy process to reorganize their finances and operations in order to pay off some debt over a period of time and avoid paying other debt approved as dischargeable debt by the Bankruptcy Court.
A major issue for many farmers in bankruptcy is that if they have held the farm for a number of years, the value of the farm has increased. The sale of the farm assets, especially farmland, may result in a large capital gains tax liability.
In the Hall case, the farm family filed a petition for bankruptcy and then sold the farm to provide the funding to pay debts under the farm’s reorganization plan. The sale resulted in a large capital gain and the federal government contended that the federal taxes on the capital gain could not be discharged in bankruptcy. But if the federal debt were added to the Hall’s reorganization plan, the result would be an overall debt that too high to ensure that the debt could be paid in the time allowed under the plan. With that outcome, a Bankruptcy Court would not approve the reorganization plan and the farmer could lose everything.
The bankruptcy court ruled in favor of the federal Internal Revenue Service and found that under Chapter 12 the federal tax debt could not loss its priority for payment and be deemed an unsecured debt eligible for payments only to the extent funds are available, with the remainder of debt dischargeable in bankruptcy. The decision was appealed through the federal courts to the U.S. Supreme Court.
In May 2012, a 5-4 majority of the Court ruled in Hall that the language of Chapter 12, whatever the congressional intent, did not provide that federal tax liabilities could be subject to discharge in a Chapter 12 bankruptcy proceeding. The ruling makes it much more difficult for family farmers going through bankruptcy to successfully reorganize their family operations and save at least a portion of their farms.
The Farmer Bankruptcy Tax Clarification Act of 2012 includes strongly worded, clear language. It provides that any unsecured claim owed to a “governmental unit” by the farmer debtor or the bankruptcy estate that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation qualifies as an unsecured claim under Chapter 12 that may be discharged in a Chapter 12 bankruptcy. This provision applies without regard to whether the disposition of the farm assets occurred before or after the farmer filed a petition for bankruptcy. The Act also specifies a process for governmental units to a file a post petition claim for taxes and other governmental claims under Chapter 12.
Senators Grassley and Franken are pushing for the full Senate to take up this bill in the lame duck session of Congress after the national elections and before the end of this year. Both the Senate and House face packed agendas with several pieces of legislation that are set to expire by the end of this year, including the Farm Bill set to expire on September 30. The Senators will likely seek to attach this measure to any bill that moves in Congress. So far, no similar bill to overturn the Hall decision has been introduced in the House. NSAC will be encouraging Congress to address this issue this year.
Categories: Budget and Appropriations