[Congressional Record (Bound Edition), Volume 157 (2011), Part 15]
[Senate]
[Pages 21109-21110]
[From the U.S. Government Publishing Office, www.gpo.gov]




                        CHAPTER 12 BANKRUPTCIES

  Mr. GRASSLEY. Mr. President, I wish to take a few minutes to discuss 
a case that was argued a few weeks ago before the Supreme Court, Hall 
v. the United States. This case involves a specific provision that I 
authored which is contained in the 2005 bankruptcy reform law. 
Throughout the litigation in this case, my statements supporting the 
provision--in other words, the statements that were said here on the 
floor of the Senate and in committee report were discussed in these 
cases at length.
  I want to take a few minutes and walk through the history and intent 
of this provision so people hear it straight from this author's mouth, 
meaning from this Senator.
  At its core, the case Hall v. the United States is about statutory 
interpretation. The statute at issue is 11 U.S.C. (a)(2)(A), which was 
a farm bankruptcy provision added to the Bankruptcy Code in 2005.
  Before I get into the discussion about the case, I wish to explain 
what this particular provision does and why it needed to be added to 
the Bankruptcy Code. Congress enacted Chapter 12 of the Bankruptcy Code 
in 1986, which was subsequently made permanent in 2005. Chapter 12 
allows family farmers to use a bankruptcy process to reorganize their 
finances and operations. It is a proven success as a leverage tool for 
farmers and their lenders. It helps a farmer and the banker sit down 
and work out alternatives for debt repayment. Not long after it became 
law in 1986, we began to hear about what worked and what did not work 
for farmers who were reorganizing in bankruptcy.
  One problem we learned arose when a debtor farmer needed to sell 
assets in order to generate cash for reorganization. A farmer may need 
to sell portions of the farm to raise cash to fund a plan and pay off 
his creditors. However, in this situation, we are usually dealing with 
land that has been in the family's hands for a long time. This means 
the cost basis is probably very low. So once a farmer filed bankruptcy 
and then tried to sell a portion or all of the land, he would be hit 
with a substantial capital gains tax. This creates problems, because as 
originally drafted, Chapter 12 required full payment of all priority 
claims under Section 507 of the Bankruptcy Code. The only way to avoid 
this requirement was if the holder of the claim agreed that its claim 
could be treated differently.
  Thus, when a farmer sold his land which resulted in large capital 
gains, the IRS would have a priority claim against the bankruptcy 
estate. I wish to take a moment to explain the concept of bankrupt 
estates, which may be a bit confusing. When an individual or 
corporation files for bankruptcy, an estate is created. The estate 
consists of property that is liquidated for the purpose of paying 
creditors. So in the case of farmers filing a bankruptcy petition under 
Chapter 12, the farm assets are the property of the estate.
  According to section 541(a)(6) of the Bankruptcy Code, the proceeds 
of the sales of those assets are also property of the estate. So the 
situation farmers faced was that the IRS held a large priority claim 
against the bankruptcy estate.
  Let me take a minute to talk about claims against the estate to 
understand how we got to where we are today. In this situation, we are 
dealing with a claim that is based on taxes owed. The Bankruptcy Code 
says that taxes incurred by the estate are administrative expenses. An 
administrative expense essentially receives top priority when 
determining who gets paid what. Thus, the effect this had was that the 
IRS with its priority claim could object to any reorganization plan 
that did not provide for full payment of its tax claim. The IRS 
essentially held veto authority over a family farmer's plan 
confirmation. In some instances then, a farmer who sought to sell a 
portion of his farm to reorganize, pay

[[Page 21110]]

creditors, and become profitable again was prohibited completely from 
doing so.
  After learning of this problem, I started working on a way to fix it. 
Simply put, I wanted to make sure that family farmers in a Chapter 12 
case could, in fact, sell portions of their farm to effectively 
reorganize without the capital gains taxes jeopardizing the 
reorganization. The very purpose of Chapter 12 and bankruptcy in 
general is to allow for a fresh start. Unfortunately, this was not 
happening because of the IRS priority.
  In 1999, I introduced the Safeguarding America's Farms Entering the 
Year 2000 Act. This bill, among other things, sought to fix the capital 
gains tax issue. When I introduced the bill, I said it would ``help 
farmers to reorganize by keeping tax collectors at bay.'' I also 
explained:

       Under current law, farmers often face a crushing tax 
     liability if they need to sell livestock or land in order to 
     reorganize their business affairs . . . High taxes have 
     caused farmers to lose their farms. Under the Bankruptcy 
     Code, the IRS must be paid in full for any tax liabilities 
     generated during a bankruptcy reorganization. If the farmer 
     can't pay the IRS in full, then he can't keep his farm. This 
     is not sound policy. Why should the IRS be allowed to veto a 
     farmer's reorganization plan?

  But let me go back to a portion of what I quoted, these words, ``then 
he can't keep his farm.'' Simply put, if you are a farmer in a farming 
operation, and you can continue to farm, and reorganization is keeping 
you from farming, well, obviously you do not have a business of farming 
and you cannot farm. Family farms are very important to the economic 
viability of rural America.
  The language I proposed ultimately was enacted in the 2005 bankruptcy 
reform law. Since the Bankruptcy Code, the courts, and the IRS treated 
the tax liability as an administrative expense, the new provision 
created a very narrow exception to that administrative expense. 
Basically, only in Chapter 12 cases, if a farmer sold farmland that 
resulted in a capital gains liability, then the IRS's claim would not 
receive priority status. That is the benefit of the legislation I got 
passed to reorganization of a family farm. But it is what is in dispute 
in these particular cases I am referring to. Instead the government 
would have an unsecured claim, which means they may get paid something 
but not necessarily the entire amount. Also, the IRS would no longer be 
able to veto a plan's confirmation, thus the farmer debtor would be 
allowed to reorganize.
  From a bankruptcy point of view, this approach makes complete sense. 
As I have discussed already, filing a petition creates a bankruptcy 
estate. The bankruptcy estate then sells the lands post petition, and 
that results in capital gains that are owed to the IRS. Those taxes 
incurred by the estate post petition are administrative expenses which 
receive priority status.
  My language, enacted into law in 2005, stripped the priority claims 
owed to the government in this very specific instance and made them 
generally unsecured claims. However, since the passage of this 
legislation, the IRS has made an about-face. The government now argues, 
despite the way it treated this situation for all of these years, that 
the tax liability created is the responsibility of the individual and 
not the bankruptcy estate. Yet the entire reason we created this new 
provision was because of the way the IRS treated the tax liability.
  The IRS's new position has been argued in Federal courts and has 
received mixed results, so now there is a dispute whether my provision 
accomplishes what it was designed to do. In 2009 the Eighth Circuit 
case Knudsen v. IRS held the provision applies to post-petition sales 
of farm assets, which is what we are discussing here. Specifically, the 
Eighth Circuit rejected the IRS's position that the Internal Revenue 
Code does not recognize a separate taxable entity being created when a 
debtor files a Chapter 12 petition.
  Put another way, the IRS is claiming the individual debtor is 
responsible for tax liability that arises out of a bankruptcy estate 
action. The Eighth Circuit disagreed and said there is now an exception 
preventing the IRS from having a priority claim for capital gains.
  But in the Ninth Circuit, the court there held that there was no 
exception for post-petition capital gains. In Hall v. the United 
States, now before the Supreme Court, the Ninth Circuit said the Halls 
were responsible for the capital gains tax from selling part of their 
farm during bankruptcy. This holding means that my provision did not 
create a narrow exception even though that is what I intended.
  Unfortunately, the IRS, under the Obama administration, is taking a 
position today that is antifarmer and the exact opposite of what it 
said 6 years ago. This about-face on the part of the IRS came only 
after we made the change in the law, and it became clear that in very 
narrow circumstances the IRS would lose its priority position. I 
respect the IRS's interest in pursuing tax dollars, but it exhibited a 
heck of a lot of chutzpah in taking this position. Our policy reasons 
for this new exception were very simple. The farmers didn't have enough 
money to pay everyone. We decided it would be better to let them sell 
some assets, which would generate cash and help them to reorganize, 
keep farming, and pay their creditors.
  In making this decision, we realized someone would have to make a 
sacrifice. We decided to give farmers a break from government taxes in 
a very narrow set of circumstances. Now, though, the government is 
trying to figure out a way to jump back ahead of other creditors and 
get more money. These creditors the IRS is trying to break in front of 
are small businesses, suppliers, and small local banks that extend 
credit and supplies to farmers. This is not what we expected would 
happen when we passed the 2005 bankruptcy law.
  This is an important issue and an important case that the Supreme 
Court will decide in the coming months. The Supreme Court will decide 
whether this provision accomplishes my goal, which I have stated. I 
look forward to seeing how the case is resolved. Rest assured, I will 
work to ensure that this policy of protecting family farmers is 
followed as that was our clear intent in having this law enacted. 
Chapter 12 has proven successful as a leverage tool for farmers and 
their lenders. It helps the farmer and banker to sit down and work out 
alternatives for debt repayment. Should the Court rule that the 
Internal Revenue Code is inconsistent with the Bankruptcy Code and rule 
against my intent as the author, I will obviously have to work to 
remedy that inconsistency because what we did in 2005 is the right 
thing. I hope the Supreme Court realizes the history and intent behind 
the legislation and follows the congressional intent.
  I yield the floor and suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. BOOZMAN. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.

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