Family Farm Bankruptcy Clarification Act – 2 Important Points for Hard Times

The Family Farmer Bankruptcy Clarification Act of 2015, introduced by Senators Chuck Grassley of Iowa and Al Franken of Minnesota, would reverse a Supreme Court ruling (Hall v. U.S.) that makes it harder for family farmers to reorganize their finances when they fall on hard times.

The bill is expected to be referred to the Senate Judiciary Committee where Grassley is the Chairman.

The proposed legislation 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.

2 Important Points:

  1. The 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.
  2. The Act removes the Internal Revenue Service’s veto power over a bankruptcy reorganization plan’s confirmation, giving the family farmer a chance to reorganize successfully.

“Family farmers are in a unique situation where so much of their capital is in the land itself. Congress made clear that it wants farmers to be able to reorganize so they can keep in the business of farming. Unfortunately, the Supreme Court’s 2012 ruling failed to recognize that, and we intend to fix it,” Grassley said. “The bottom line is that the farmer and the small business creditors should come first, not the IRS.”  bankruptcy_660x400_shutterstock_161573888

“Our bipartisan bill is a commonsense fix to ensure that the law is carried out as it was intended and helps protect family farmers in Minnesota and across the country,” said Sen. Franken. “The measure, if passed, will help ensure that farmers who have to go through bankruptcy can keep their land and repay the debts they owe.”

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.

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