[Congressional Record Volume 158, Number 123 (Thursday, September 13, 2012)]
[Senate]
[Pages S6342-S6343]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. GRASSLEY (for himself and Mr. Franken):
S. 3545. A bill to amend title 11 of the United States Code to
clarify the rule allowing discharge as a nonpriority claim of
governmental claims arising from the disposition of farm assets under
chapter 12 bankruptcies; to the Committee on Finance.
Mr. GRASSLEY. Mr. President, I rise today to introduce, along with
Senator Franken, the Family Farmer Bankruptcy Tax Clarification Act of
2012. This bill addresses the recent United States Supreme Court case
Hall v. United States. In a 5-4 decision, the Supreme Court ruled the
provision I inserted into the 2005 Bankruptcy Abuse Prevention and
Consumer Protection Act did not accomplish what we intended. The Family
Farmer Bankruptcy Tax Clarification Act of 2012 corrects this and
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. This bill will remove the Internal Revenue Service's veto power
over a bankruptcy reorganization plan's confirmation, giving the family
farmer a chance to reorganize successfully.
In 1986 Congress enacted Chapter 12 of the Bankruptcy Code to provide
a specialized bankruptcy process for family farmers. In 2005 Chapter 12
was made permanent. Between 1986 and 2005 we learned what aspects
worked and did not work for family farmers reorganizing in bankruptcy.
One problematic area was where a family farmer needed to sell assets in
order to generate cash for the reorganization. Specifically, a family
farmer would have to sell portions of the farm to generate cash to fund
a reorganization plan so that the creditors could receive payment.
Unfortunately, in situations like this, the family farmer is selling
land that has been owned for a very long time, with a very low cost
basis. Thus, when the land is sold, the family farmer is hit with a
substantial capital gains tax, which is owed to the Internal Revenue
Service.
Under the Bankruptcy Code, taxes owed to the Internal Revenue Service
receive priority treatment. Holders of priority claims must receive
payment in full, unless the claim holder agrees to be treated
differently. This creates problems for the family farmer who needs the
cash to pay creditors to reorganize. However, since the Internal
Revenue Service has the ability to require full payment, they hold veto
power over a plan's confirmation, which means in many instances the
plan will not be confirmed. This does not make sense if the goal is to
give the family farmer a fresh start. Thus, in 2005 Congress said that
in these limited situations, the taxes owed to the Internal Revenue
Service could be treated as general, unsecured debt. This removed the
government's veto power over plan confirmation and paved the way for
family farmers to reorganize successfully.
However, in Hall v. United States, the Supreme Court ruled that
despite Congress's express goal of helping family farmers, the language
inserted into the Bankruptcy Code in 2005 conflicted with the Tax Code.
The Hall case was one of statutory interpretation. There is no question
what Congress was trying to do; rather, did Congress use the
[[Page S6343]]
correct language? My goal, along with others at the time, was to
relieve family farmers from having their reorganization plans fail
because of huge tax liabilities to the federal government. Justice
Breyer noted this in the dissent: ``Congress was concerned about the
effect on the farmer of collecting capital gains tax debts that arose
during (and were connected with) the Chapter 12 proceedings themselves.
. . . The majority does not deny the importance of Congress' objective.
Rather, it feels compelled to hold that Congress put the Amendment in
the wrong place.'' Hall v. United States, 132 S.Ct. 1882, 1897, 2012,
Breyer, J., dissenting, internal citations and quotations omitted.
As a result of the Hall case, family farmers facing bankruptcy now
find themselves caught in an unfortunate situation. The rules have
changed and must be corrected in order to provide certainty and clarity
in the law. The Family Farmer Bankruptcy Tax Clarification Act of 2012
will provide the clarity needed to help family farmers reorganize in
bankruptcy.
This bill strikes the current language in the Bankruptcy Code, which
the Supreme Court said does not work, 11 U.S.C. Sec. 1222(a)(2)(A) and
inserts a new 11 U.S.C. Sec. 1222(a)(5). The new provision transforms
all government claims arising as a result of the sale or transfer of
post-petition farm assets into unsecured, non-priority claims,
notwithstanding any language in the Internal Revenue Code to the
contrary. The bill also provides new sections for treatment of these
claims during the bankruptcy process. The bill recognizes that some
asset sales may occur post-confirmation. As a result, we also provide a
mechanism for plan modification as a result of these sales, if used for
the specified purpose of reorganization, to assist in reorganization.
Finally, we make a technical change to 11 U.S.C. Sec. 1228(a), which
practitioners and commentators have long argued is needed. This
technical change is within the limited scope of this clarification
bill, as it provides greater certainty and clarity that has troubled
courts and practitioners alike.
I recognize the end of this session of Congress is near and the time
to do something is short. However, we have been fine tuning this
legislation to ensure it properly corrects the Hall case. We will seek
to do what we can during the remaining Congressional calendar to fix
the problem this year. Should we run out of time, then we will maintain
our focus on this problem into the next year. The Family Farmer
Bankruptcy Tax Clarification Act of 2012 ensures that what Congress
sought to do in 2005 actually occurs. In the wake of the Hall decision,
clarification is needed to help ensure family farmers facing bankruptcy
will have a chance to reorganize successfully.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the text of the bill was ordered to be
printed in the Record, as follows:
S. 3545
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Family Farmer Bankruptcy Tax
Clarification Act of 2012''.
SEC. 2. CLARIFICATION OF RULE ALLOWING DISCHARGE TO
GOVERNMENTAL CLAIMS ARISING FROM THE
DISPOSITION OF FARM ASSETS UNDER CHAPTER 12
BANKRUPTCIES.
(a) In General.--Section 1222(a) of title 11, United States
Code, is amended--
(1) in paragraph (2), by striking ``unless--'' and all that
follows through ``the holder'' and inserting ``unless the
holder'';
(2) in paragraph (3), by striking ``and'' at the end;
(3) in paragraph (4), by striking the period at the end and
inserting ``; and''; and
(4) by adding at the end the following:
``(5) notwithstanding the application of the rules under
subchapter V of chapter 1 of the Internal Revenue Code of
1986, and without regard to whether the claim arose before or
after the filing of the petition, provide for the treatment
and payment of any unsecured claim owed to a governmental
unit by the debtor or the estate 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 an
unsecured claim that is not entitled to priority under
section 507.''.
(b) Postpetition Claims Relating to Sale, Transfer,
Exchange, or Other Disposition of Farm Assets.--
(1) In general.--Section 1222 of title 11, United States
Code, is amended by adding at the end the following:
``(e)(1) A governmental unit may file a proof of claim for
a claim described in subsection (a)(5) that arises after the
date on which the petition is filed.
``(2)(A) Except as provided in subparagraph (B), if a
governmental unit has not filed a proof of claim under
paragraph (1) for a claim described in subsection (a)(5),
after the date that is 120 days after the date on which the
claim arises, the trustee or the debtor may file proof of
such claim.
``(B)(i) For a claim described in subsection (a)(5) that is
a tax for which a return is due, if the debtor or trustee has
provided notice as described in clause (ii) and the
governmental unit has not filed a proof of claim under
paragraph (1), after the date that is 180 days after the date
on which the debtor or trustee provides the notice, the
debtor or the trustee may file proof of such claim.
``(ii) Notice as described in this clause is notice by the
debtor or the trustee--
``(I) indicating the intent to file the applicable claim;
``(II) setting forth the amount of the claim;
``(III) that includes a copy of the filed return relating
to the claim; and
``(IV) that is delivered to the governmental unit at the
address designated for requests made under section
505(b)(1)(A).
``(3) A claim filed under paragraph (1) or (2) shall be
allowed or disallowed under section 502, but shall be
determined as of the date such claim arises, and shall be
allowed under section 502(a), (b), or (c) of this title, or
disallowed under section 502(d) or 502(e) of this title the
same as if such claim had arisen before the date of the
filing of the petition.''.
(2) Modification of plan after confirmation.--Section
1229(a) of title 11, United States Code, is amended--
(A) in paragraph (2), by striking ``or'' at the end;
(B) in paragraph (3), by striking the period at the end and
inserting ``; or''; and
(C) by adding at the end the following:
``(4) provide for the payment of a claim described in
section 1222(a)(5) that arose after the date on which the
petition is filed.''.
(c) Technical Correction.--Section 1228(a) of title 11,
United States Code, is amended in the matter preceding
paragraph (1)--
(1) by inserting a comma after ``all debts provided for by
the plan''; and
(2) by inserting a comma after ``allowed under section 503
of this title''.
(d) Effective Date.--The amendments made by this section
shall apply to any bankruptcy case that--
(1) is pending on the date of enactment of this Act and
relating to which an order of discharge under section 1228 of
title 11, United States Code, has not been entered; or
(2) commences on or after the date of enactment of this
Act.
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