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Increased Tax Relief for Family Farmers in Chapter 12

While most of the US media is focused on various bills that have been hung up in congress over the last year, a bill providing additional tax relief to family farmers through Chapter 12 bankruptcy, has not received much attention. On October 26, 2017, President Trump signed the Family Farmer Bankruptcy Clarification Act of 2017 (H.R. 2266) into law. This new law expands the tax relief granted to family farmers in 2005, and legislatively overturns the narrow interpretation of the Supreme Court of that 2005 act.

The legislation in 2005 was intended to give tax relief to family farmers in Section 1222(a)(2)(A) of the Bankruptcy Code, which provided for treatment of claims "owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor's farming operation" as a general unsecured claim in the Chapter 12 Plan. As such, capital gains taxes arising from the sale of farm assets were to be discharged in a Chapter 12 bankruptcy case. Absent this provision, capital gains taxes arising from the liquidation of farm assets, including farming land, which may have been heavily depreciated, are generally elevated to priority or administrative status and must be paid in full and, to the extent unpaid, remain a debt of the farmer after bankruptcy.

The Supreme Court decision in Hall v. U.S., 566 U.S. 506 (2012), based upon its reading of Section 1222 of the bankruptcy code, determined that the tax benefit provided by Section 1222 related only to sales of farm assets that occurred before the filing of a Chapter 12 bankruptcy case. As such, liquidations of farm assets during a Chapter 12 case were still provided administrative status and not subject to the bankruptcy discharge. Without the protections of the bankruptcy system, family farmers are not necessarily able to liquidate their farming assets prior to the filing of a Chapter 12 bankruptcy case. As such, the Hall v. U.S. decision dealt a devastating blow to family farmers and their ability to benefit from Chapter 12 where they intended to liquidate assets.

The new Act replaces Section 1222(a)(2)(A) and replaces it with new Section 1232 of the bankrupt code. The new language specifies for the treatment of capital gains taxes resulting from the sale of assets used in the farming operation "that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228" to be treated as general unsecured claims that are discharged in the Chapter 12 bankruptcy case. The Act is effective immediately and applies to existing cases where the Chapter 12 Plan has not yet been confirmed, in which the discharge has not been entered, and in any Chapter 12 case filed after the date of enactment. As such, family farmers will not have any delay in obtaining the additional relief granted by the Act.

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