Chapter 12 Farm Bankruptcy Case is Before the Supreme Court

28 Dec Chapter 12 Farm Bankruptcy Case is Before the Supreme Court

Chapter 12 farm bankruptcy helps family farmers to keep their farms. It allows family farmers to reorganize their finances and operations.Chapter 12 was originally enacted by Congress in 1986, and was made permanent in 2005. It helps the farmer and the banker to sit down and work out alternatives for debt repayment.

But according to Senator Charles Grassley, recent IRS actions are threatening family farmers’ ability to properly reorganize in Chapter 12. Grassley authored a provision which is supposed to allow farmers in Chapter 12 to sell some of their property without having to pay capital gains taxes to the IRS in full. The provision, enacted in 2005 as 11 USC 1222(a)(2)(A) was intended to make capital gains taxes into unsecured claims (often paid at only a percentage of the total) rather than priority claims (required to be paid in full).

The US Supreme Court heard arguments on November 29th in the case of Hall v. United States. The IRS argued that capital gains taxes created by the sale of property during a farm bankruptcy proceeding are payable in full as an administrativeexpense under the Chapter 12 reorganization plan. Although the 8th Circuit in Knudsen v. IRS, 581 F.3d 697 (2009) rejected the IRS position and said there was an exception preventing the IRS having a priority claim on post petition claims, the 9th Circuit agreed with the IRS position in deciding the Hall case (617 F.3d 1161 (2010)).

Grassley recently went onto the floor of the Senate to create a record of what the Congressional intent was in enacting section 122(a)(2)(a). Grassley said the IRS position meant that a farmer couldn’t sell a portion of his farm to reorganize, pay creditors and become profitable again.“Why should the IRS be allowed to veto a farmer’s reorganization plan?” Grassley asked.

“High taxes have caused farmers to lose their farms”. said Grassley, who believes that family farms are very important to the economic viability of rural America.

The policy reasons for this section of the farm bankruptcy law were that the farmers didn’t have enough money to pay everyone. It would be better to allow them to sell some assets, which would generate cash and help them reorganize, keep farming and pay their creditors. Congress, Grassley says, realized that someone would have to make a sacrifice and they decided to give farmers a break from government taxes in a very narrow set of circumstances. The creditors thatthe IRS are trying to get ahead of are small businesses, suppliers and small local banks that extend credit and supplies to farmers according to Grassley.

Grassley’s efforts on behalf of family farmers has made Chapter 12 the most debtor friendly chapter in theBankruptcy Code.



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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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