Early in November, Washington passed Public Law 115-82 which significantly clarified the rights of farmers to reorganize through Chapter 12 of the Bankruptcy code without the fear of significant tax consequences.
Prior to this change, farming assets sold after filing bankruptcy but before discharge that created capital gains or other taxes would result in nondischargeable tax debt. This could be very expensive in instances where for an effective reorganization of debt significant assets need to be sold including heavy equipment, and land with low cost basis or that was fully depreciated.
During the years of $7.00 corn, many farmers were buying new equipment to replace deferred maintenance equipment, as well as create tax deductions using section 179 of the internal revenue code or otherwise placing the item in service under a standard depreciation schedule. As a result of the section 179 deductions those items of significant expense now have a zero dollar basis and treatment as ordinary income upon sale triggering significant taxes.
This tax is not normally an issue, because with the sale came the money to pay the tax. However, when the sale is mandated by a bank with security in the item there is no cash to pay the tax. Once the banks are in a recovery mindset, they are not likely to release a portion of the sales price for underwater value machinery to pay the tax. This creates a large tax event, with no cash to pay it and under the old rule no way of discharging the debt in bankruptcy if the sale occurring post-petition in furtherance of a chapter 12 reorganization.
Now however, the dischargeability of taxes has been clarified so that the sale of property used in farming whether pre-petition or post-petition results in a non-priority dischargeable unsecured claim benefitting the government. They are treated no differently than a credit card, or any other unsecured creditor. They receive whatever portion of reorganization plan is earmarked for unsecured creditors and at the completion of the plan they are discharged.
This is a huge benefit to farmers suffering a cash flow problem resulting in the bank pulling their notes. This squeeze unfortunately is more and more common now that we are seeing $3.00 corn.
For more information about this readers are invited to check out 11 U.S.C. Sec. 1232, effective 11/7/17, and of course should you have any questions about farm bankruptcy, or any other chapter of bankruptcy contact Barash & Everett, LLC.