New law, sponsored by Chuck Grassley, relieves a tax headache for farmers facing hard times

WASHINGTON — Longtime Iowa bankruptcy attorney Joe Peiffer has worked for decades with farmers who have fallen on hard times.

One challenge that has bedeviled many of his clients over the years is the significant tax hit they take when selling land — and the resulting veto power that gives the IRS over their reorganization plans.

“This is a very common situation that the taxes are a huge problem when a farmer downsizes,” Peiffer said. “It’s been that way my whole career.”

Congress just approved legislation sponsored by Sens. Chuck Grassley, R-Iowa, and Al Franken, D-Minn., that aims to address the problem that arises when farmers sell land in an effort to address their debt.

Selling that land triggers potentially significant capital gains taxes that turn the IRS into a major creditor — one that has the ability to demand payment ahead of others and to prevent approval of a farmer’s debt reorganization plan.

The new law sends the IRS to the back of the line as an unsecured creditor that simply gets a pro rata share of whatever’s left over.

“If that means it’s a nickel on the dollar, that’s all they get,” Peiffer said. “If that means it’s a penny on the dollar, that’s all they get.”

That’s a big boon to the struggling farmer trying to restructure debt in a way that allows him to keep farming. It also potentially leaves more for other creditors.

“The practical import of this is to put the farmer back in the driver’s seat of making the decisions of what to sell and when to sell it,” Peiffer said. “And then to have the flexibility to not have to pay the crippling tax in full.”

Peiffer has focused on these cases for years. During the 1980s farm crisis, he was a law clerk for the busiest bankruptcy judge in the country.

Congress set rules in place back then governing Chapter 12 bankruptcies that are specifically designed to help farmers, and has gone back to tweak them over the years.

But court decisions have complicated the picture by interpreting the law in a way that gave the IRS priority in the bankruptcy process.

Farm bankruptcy numbers are nowhere near the levels seen back in the ’80s, but Peiffer said he is seeing an uptick, and that statistics bear that out both in Nebraska and Iowa.

Low prices for corn and other crops are taking a serious toll on producers. The high equity values in their land have allowed farmers to borrow more to put off the day of reckoning, but that could reach a tipping point.

“The problem is the farmer’s then been rolling that snowball up the hill, and as you roll that snowball up the hill, it gets a little bigger all the time and at some point it rolls back down over you,” Peiffer said. “We’re now at the spot where those snowballs are rolling back over the farmer.”

Robert Dinterman, a researcher in agricultural economics at Ohio State University, said it’s hard to gauge the impact of the new law given that it went into effect just a month ago. But he said it will mean that the IRS can’t block a Chapter 12 bankruptcy plan — and that taxes can be potentially eliminated if the filing is successful.

“This will result in other creditors of farm debt receiving more in repayments, allowing a farmer to not have to sell off as much of their assets, and taking some amount away from governments due to a potential avoidance in taxes,” he said. “Overall, that makes the Chapter 12 option more favorable to farmers than previously.”

The Congressional Budget Office predicts little budgetary effect from the legislation. In fact, it shows a slight overall positive impact, because the bill also included an increase in some filing fees.

Grassley touted passage of the legislation as good news for farm country.

“Family farmers face obstacles that others don’t when dealing with bankruptcy,” Grassley said. “Their assets are largely tied up in farmland, which creates significant challenges for these family operations when reorganizing debt.

“Years ago, Congress took specific steps to address these disadvantages, but the Supreme Court failed to recognize Congress’ intent when evaluating the law. Thankfully, Congress has now approved a fix for this problem, and family farmers facing hard times can breathe a sigh of relief.”

For some farmers, the rules will allow them to restructure in a way that allows them to keep on tilling the land.

And for those who just can’t make it work, the new rules could ease them into retirement without the prospect of a massive tax debt.

“This also could provide an exit strategy for a farmer who needs to ride off into the sunset,” Peiffer said.

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