May 24, 2012
By: John Clark
A recent Supreme Court ruling that required two Arizona farmers to pay full capital gains taxes on land they sold after entering bankruptcy seemed to weaken Chapter 12 bankruptcy, leading to calls for reform from one key senator, according to a report from Agriculture.com.
In response to the recent ruling, Senator Chuck Grassley, a Republican from Iowa, promised to introduce legislation that would "clarify the law," which does not specifically address whether farmers must pay taxes on land they sell in bankruptcy.
Grassley, who represents a state that contains a significant portion of America’s most fertile farmland, believes that farmers who file for bankruptcy should not have to suffer tax consequences for land they sell in order to pay their debts.
To describe the plight of debt-ridden farmers who are forced to pay taxes on such sales during bankruptcy, Grassley told his colleagues in Congress that "you can’t get blood out of a turnip."
Chapter 12 is a unique feature of bankruptcy law that serves as a "farm-friendly alternative to other bankruptcy plans," according to Gary Maydew, a retired professor of accounting at Iowa State University.
The recent Supreme Court decision, though, reduces the ability of farmers to construct a viable Chapter 12 plan. In Maydew’s view, a farmer’s land is often the best asset to sell in bankruptcy, but if the IRS levies a capital gains tax on that land, it may “hinder the ability of farmers to successfully implement a reorganization.”
Bankruptcy law is always evolving, and the efforts by politicians like Grassley to restructure legislation to help certain interest groups are relatively common.
The most far-reaching amendment to U.S. bankruptcy laws in recent history occurred in 2005, when Congress took active measures to try to limit the amount of people who would be able to file for certain chapters of bankruptcy.
Most notably, the 2005 amendments made it more difficult for people to discharge student loans in bankruptcy. As student loans become a trillion-dollar industry, cries for reform have started to reach the halls of Congress.
So, Senator Grassley’s efforts to reform bankruptcy laws to make them more farmer-friendly may not be the only bankruptcy action on Capitol Hill in the coming months.
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