[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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