Grassley, Franken Seek Relief in Family Farm Bankruptcies

Press Release

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 hard times.

Grassley 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.

"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."

"Our 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."

The 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.

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.

Congress' 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.

The bill is expected to be referred to the Senate Judiciary Committee, which has jurisdiction over bankruptcy laws.

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