New law protects family farms from IRS priority in bankruptcy

A new law allows family farms to sell off part of their farmland to fund their Chapter 12 bankruptcy reorganization without having to treat the resulting capital gain as a priority claim of the IRS. President Trump signed the bipartisan Family Farmer Bankruptcy Clarification Act of 2017 (Sen 1237) on October 26.


In 2012, the U.S. Supreme Court held in Hall, 2012-1 ustc ¶50,345, that the federal income tax liability on capital gains resulting from a debtor farmers’ post-petition sale of some farmland was not “incurred by the estate” under Section 503(b) of the Bankruptcy Code. According to the Supreme Court, a Chapter 12 estate is not a separate taxable entity, unlike estates that are separately taxable in individual-debtor Chapter 7 or Chapter 11 cases. As a result, the tax on that capital gain was neither collectible nor dischargeable within a Chapter 12 plan and remained the liability of the individual farmer.

New law

In response to the Supreme Court’s decision, a bipartisan group of lawmakers introduced the Family Farmer Bankruptcy Clarification Act. The new law amends Chapter 12 to protect family farms from IRS priority in bankruptcy.

The new law states that any unsecured claim of a governmental unit against the debtor or the estate—that arises not only before the filing of the petition, but also after the filing of the petition and before the debtor’s discharge–based under the disposition of property used in a farming operation, will not be entitled to priority. These changes apply to any bankruptcy case pending on the date of enactment (October 26, 2017) or commencing on or after the date of enactment.

Family Farmer Bankruptcy Clarification Act of 2017