Pub. 12 2017-2018 Issue 4

WWW.NEBANKERS.ORG 24 2005. An amendment that year to Chapter 12 of the Bankruptcy Code added the following tax benefit for farmers (§ 1222(a)(2) (A)): A tax “claim” arising from “the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation” will be treated as a general unsecured claim and can be discharged under a Chapter 12 plan. This amendment, at the very least, allowed a farmer (who’s eligible for Chapter 12) to sell out and move on to another oc- cupation without being saddled with unaffordable amounts of tax liability. It also provided an opportunity for farmers and their lenders to work cooperatively toward common goals. Such an opportu- nity would have solved many problems had it existed during the 1980s’ farm crisis. Battling the IRS In subsequent years, the IRS sought help from federal courts to limit the impact and effect of this farmer-friendly provision— with varying levels of success. For example: • A win for farmers: In Kudsen v. IRS, 581 F.3d 696 (8th Cir. 2009), the Eighth Circuit Court of Appeals ruled in favor of farmers and against the IRS on two issues: (i) the § 1222(a)(2)(A) phrase “any farmasset” includes both breeding and slaughter stock, and (ii) the correct method for allocating taxes between income from sales of farm assets and income from other sources is the method that’s best for farmers—not the one best for the IRS. • A win for the IRS: In Hall v. U.S., 566 U.S. 506 (2012), the U.S. Supreme Court ruled in favor of the IRS by narrowly construing the § 1222(a)(2)(A) tax benefit and limiting its effect to sales made prior to bankruptcy fil- ing; so, taxes arising from sales made during the Chapter 12 case would hold the same administrative and non- dischargeable status as before. The IRS’ Supreme Court victory in Hall v. U.S. became a big loss for farmers. Here are a couple reasons why: • A financially stressed debtor is often unable to sell real estate or other assets outside of bankruptcy because junior lienholders, who are out of the money, won’t release their lienswithout apremiumpayment thedebtor cannot afford. • One of the things bankruptcy is good at doing (there aren’t many such things) is this: selling assets at top dollar. So, it would make sense for a farmer, wanting to liquidate in part or in full, to sell assets within a Chapter 12 case. But the technical ruling in Hall v. U.S. eliminates the Chapter 12 tax benefit, if the debtor attempts to do so. The New Law Congressmen from farm states have been working for years to legislatively overturn the Hall v. U.S. ruling that limits the Chapter 12 tax benefit. They finally achieved success on Octo- ber 26, 2017, when President Trump signed the Family Farmer Bankruptcy Clarification Act of 2017 (H.R. 2266)—view the bill at http://bit.ly/HR2266 —into law. This act, sponsored by Sen- ate Judiciary Committee Chairman Charles E. Grassley (R-IA) and Sen. Al Franken (D-MN), passed the Senate on October 24, 2017, by a vote of 82 to 17—all of which proves, once again, that bankruptcy issues tend to be apolitical and nonpartisan. This new act eliminates the old § 1222(a)(2)(A) referenced above that the U.S. Supreme Court construed narrowly, replacing it with a new section at the end of Chapter 12, titled: “§ 1232. Claim by a governmental unit based on the disposition of property used in a farming operation.” Here are the essential terms of this new section (statutory language is in italics, and bold face is added for emphasis): “Any unsecured claim of a governmental unit . . . that arise before the filing of the petition, or that arises after the filing of the petition and before the debtor’s discharge . . . , as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor’s farming operation— –shall be treated as an unsecured claim arising before the date on which the petition is filed; –shall not be entitled to priority under section 507; –shall be provided for under a plan; and –shall be discharged in accordance with section 1228.” When a Chapter 12 debtor wants to take advantage of this tax benefit, “the debtor shall serve notice of the claimon the governmental unit,” after which “the governmental unit may file a proof of claimnot later than 180 days after the date onwhich such notice was served.” This new law will benefit farmers who want to partially or fully liquidate. It will also benefit their lenders, who always prefer voluntary liquidation over foreclosure. And it will allow farm- ers and their lenders to work cooperatively toward a common goal, rather than allowing tax problems to force them into an adversarial posture. Conclusion In today’s environment of financial stress for farming communities, this new bankruptcy law is a welcome addition to the options available for financially strapped farmers and their lenders.  For more information, contact Donald L. Swanson at Koley Jessen PC LLO at (402) 343-3726 or don.swanson@koleyjessen.com . Swanson is a shareholder of the firm and has been practicing business bankruptcy law for more than three decades, representing all types of bankruptcy constituencies, including debtors, creditors, committees, trustees, and § 363 purchasers. He has extensive mediation experience in both bankruptcy and non-bankruptcy courts. Moreover, he has a decades- long background in resolving multi-party disputes while representing committees and trustees. Family Farmer — continued from page 23