Tax Relief for Farmer Bankruptcies Clears Congress

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By Daniel Gill

Bipartisan legislation aimed at helping family farmers restructure their finances in bankruptcy is headed to the president’s desk for signature.

The Senate approved the measure, 82-17, as part of a supplemental spending package Oct. 24. Our bipartisan bill is a commonsense fix to ensure that the law functions as intended and protects family farmers in Minnesota and across the country,” Sen. Al Franken (D-Minn.) said in an Oct. 24 statement.“I’m glad this bill is set to become law and will help ensure farmers going through bankruptcy get a fair shake and are able to repay the debts they owe without sacrificing their families’ futures,” he said.

Franken proposed the Family Farmer Bankruptcy Clarification Act of 2017 with Charles Grassley (R-Iowa) who said in a statement that he looks forward to President Donald Trump signing the bill.

Grassley said the proposal “would rectify a 2012 Supreme Court ruling on a previous bankruptcy reform law that ignored Congress’ express goal of helping family farmers.”

Carol F. Dunbar, a Chapter 12 trustee in Iowa, told Bloomberg Law Oct. 25 the “small fix” carried a “potentially huge impact on many lives and livelihoods.”

The new law will allow farmers to sell a portion of their land to help fund their reorganization and stay in business despite getting hit with a big capital gains bill. The law changes how those capital gains taxes are treated.

Instead of being a priority claim that would have to be satisfied in full before unsecured creditors receive payments, the capital gains will be treated as another general unsecured claim. They can be discharged at the end of the plan’s payment period.

“In many cases, those capital gains taxes would force the debtors to quit farming altogether,” Dunbar told Bloomberg Law in a June 5 email about the law in its current state.

Family Farmers and Fishermen

Chapter 12 of the Bankruptcy Code is designed to protect family farmers and family fishermen with a regular income. The debtors are afforded protection from creditors while they make payments under a plan to repay all or a portion of their debts over a three- to five-year period.

It was enacted in 1986 at a time when the nation was facing a “devastating farm crisis,” Dunbar said.

Originally a temporary measure, it became permanent in 2005. At that time, a provision was approved to change how capital gains taxes would be treated after a sale of land in a Chapter 12 farm bankruptcy.

Where certain taxes are treated as priority claims throughout most of the Bankruptcy Code (including in Chapters 7, 11 and 13), capital gains would be treated as general unsecured claims in Chapter 12.

Capital Gains as the Difference Maker

Grassley said in a statement in May that “family farmers faced serious problems” when they had to sell land to fund their reorganization. For example, he said 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,” Grassley said.

To be approved, the plan would have to pay the tax claim in full, unless the IRS agreed to accept less. Often the size of the capital gains would be too great to leave anything for other trade creditors.

The legislation passed in 2005 was supposed to change that tax treatment to allow the family farmer to sell some land during Chapter 12 as a source of reorganization plan funding. Capital gains from the sale would be paid like other general unsecured claims and could be discharged at the end of the plan.

But that’s not how the U.S. Supreme court read the language. Instead, in Hall v. United States, the Court, in a 5-4 decision, said that capital gains taxes would be treated as general unsecured claims only if the sale was in the tax year prior to the filing of the bankruptcy case, not if the sale was conducted during the bankruptcy.

The new law clarifies that debtors can sell property during the bankruptcy process and still receive the favorable treatment for capital gains.

Fourth Time’s the Charm

This is not the first time Grassley and Franken have tried to get this legislative fix passed. Bills have been introduced to the Senate three times prior to the current act—in 2012, 2013 and 2015. None reached the floor, until now.

The relatively small, specialized bar dealing with farmer bankruptcies seem pleased with the legislative fix.

“Farmers throughout the country should thank the bi-partisan efforts of all who participated in making tax treatment more family farmer friendly,” attorney Walter Kelley told Bloomberg Law in an Oct. 25 email.

Kelley has been a standing Chapter 12 trustee in Georgia and Florida since 1986 and 1990, respectively.

“It is a game changer for small farmers to discharge capital gains from the sale of farm related assets before and during Chapter 12, which was the goal of the original legislation,” Kelley said in an email in June.

“There is no way to determine how many farmers could have remained in business, but for the tax consequences arising from the sale of farm assets needed to downsize,” he said.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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