U.S. Sens. Al Franken, D-Minn., and Chuck Grassley, R-Iowa, late last week called for a reversal of the 2012 Supreme Court decision in Hall v. United States, which the Senators say is making it harder for farm families to reorganize in the event of a bankruptcy.
The Hall v. United States decision reversed Chapter 12 bankruptcy laws, clarified in 2005, that allowed farmers to use profits from the sale of farm assets first to pay off creditors and then pay their taxes on the asset profits to the Internal Revenue Service.
However, the courts ruled in a 5-4 decision that farmers must pay taxes to the IRS at the beginning of proceedings instead of after creditors are paid. According to the Senators, this has frequently left farmers without enough money to pay other creditors, requiring them to sell off their land and lose their farms.
To address the issue, Franken and Grassley have introduced a bill called the Family Farmer Bankruptcy Tax Clarification Act of 2013 to nullify the court's decision and revert back to 2005 Chapter 12 bankruptcy laws, recognizing the importance of land to the farmers' livelihood.
"There's no question what our intent was when we wrote the 2005 law. We simply need to ensure the plain language of the law says and does what we intended," Grassley said.
In the court's May, 2012, decision, dissenting justices Stephen Breyer, Anthony Kennedy, Ruth Bader Ginsburg and Elena Kagan pointed out Grassley's intention, noting that the sale of farm assets can result in a substantial tax burden.
"In a significant number of instances a Chapter 12 farmer, in order to have enough money to pay his creditors, might have to sell farmland or other farm assets at a price that would give rise to considerable capital gains taxes (particularly if the family has held the land or assets for many years)," the dissenting opinion said, arguing that the resulting tax debt has the potential to absorb the money raised "to the point where the farmer might be unable to proceed under Chapter 12."
Specifically, the bill clarifies that bankrupt family farmers reorganizing their debts are able to treat capital gains taxes 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 farmers a chance to reorganize successfully, the Senators say.
"Our bill is a commonsense fix to ensure that the law is carried out as it was intended so farmers going through bankruptcy can keep their land and repay the debts they owe in their communities," Franken said.