– Senate Judiciary Committee Chairman Chuck Grassley of Iowa and Senator Al
Franken of Minnesota have reintroduced legislation
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
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 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.”
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.
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.
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.
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
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.
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.
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.
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
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).
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.
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.
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.