By Molly Hunter
Twelve years later, a correction to a strangely worded 2005 law will have a big effect on family farmers filing for bankruptcy.
Two weeks ago, the U.S. Senate unanimously approved the Family Farmer Bankruptcy Clarification Act, sponsored by Sens. Chuck Grassley, R-Iowa, and Al Franken, D-Minn.
The bill would allow family farms selling farm assets as part of a Chapter 12 bankruptcy to do so without incurring capital-gains taxes on the money made off the sales.
Chapter 12 bankruptcies are a reorganization of finances, and they typically require selling farm assets to pay creditors. After federal income taxes on those sales, however, the farmers are often left without enough money to settle their debts.
A provision in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was designed to make sales resulting from a Chapter 12 bankruptcy exempt from capital-gains taxes.
But Kristine Tidgren, assistant director for the Center for Agricultural Law and Taxation at Iowa State University, said the law created a situation in which farmers who sold their assets after filing for bankruptcy, or some time in same year they filed, were faced with capital-gains taxes.
Joe Peiffer of Peiffer Law in Hiawatha, Iowa, specializes in farm bankruptcies, and he began working with Grassley on the 2005 law in 1999.
“I had given them language back in 1999,” Peiffer said. “They chose some other language, and I told them I didn’t believe it would work for a sale that would occur either the year the case was filed or after the case was filed.”
Peiffer was right. Following a May 2012 Supreme Court decision, Hall v. U.S., the only time the provision was usable was if the sales occurred in the tax year before filing, Peiffer said.
The new bill is designed to clarify congressional intent.
“It goes back to rewrite the law to be what [it was intended],” Tidgren said.
Charles Brown, a farm -management specialist in Oskaloosa, Iowa, said the
interpretation of the law didn’t affect many, but for those for whom it did matter, the effect was significant.
“If a farmer has to sell farmland, in today’s world they may have purchased that farm several years ago at a lot lower price than today,” Brown said. “Farmland prices are fairly high today; if they sell that farm, they can be struck with a lot of federal and state capital-gains taxes.”
As a result, Brown said, the taxes can be a huge problem.
“If the farmer sells the farmland to satisfy the bank and gives the bank all the money, then all of sudden he’s sitting there with no money to pay the taxes,” Brown said.
Peiffer said emotion tends to cloud family farmers’ judgment when it comes to dealing with debt.
“If things aren’t working well, the family farmer many times will look at it and say, ‘Well, what can I do; how can I suck it up,’ ” Peiffer said. “They may not make the business decisions that need to be made, so then when they finally succumb, it may seem more dramatic. Part of that is they didn’t start making the decisions that should have been made earlier.”
Peiffer said the bill will not retroactively affect those with bankruptcy plans confirmed before the bill is signed into law.
“So if I had a plan in place, and I’m ready to ask the judge to confirm it, I might want to delay that,” Peiffer said.
The law has passed in the Senate and must now be approved in the House before it can be sent to the president for his signature.
“It’s looking good, but I don’t want to count my chickens before the eggs hatch,” Peiffer said.