Rancher Exempt from Involuntary Bankruptcy

January 22, 2007 | Roger McEowen

 

The vast majority of bankruptcies are filed voluntarily by the debtor. But, U.S. bankruptcy law provides also for involuntary bankruptcy by action of the creditors unless the debtor is a farmer. For this purpose, a “farmer” is defined as a person who, during the year immediately preceding the tax year in which the bankruptcy petition is filed, received more than 80 percent of their gross income from a farming operation that the person owned or operated. A “farming operation” includes “farming, tillage of soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state.”  In this case, the debtor owned and leased almost 2,000 acres of land. On the property, the debtor maintained pens for 3,200 of cattle and acreage for wheat and forage crops. The debtor purchased young cattle, kept them on his property for 30 to 45 days, and then transferred them to feed lots for eventual sales. A creditor filed an involuntary Chapter 7 bankruptcy petition against the debtor, claiming that the debtor did not derive more than 80 percent of his income from farming. The debtor claimed that he did meet the test and produced a tax return showing that more than 80 percent of his income was from farming. The Bankruptcy Court held a hearing and granted the debtor’s motion to dismiss the involuntary petition based, at least in part, on the debtor’s tax return which showed that virtually all of the debtor’s income derived from farming. On appeal, the case was affirmed on the basis that the debtor’s tax return showed that more than 80 percent of the debtor’s income came from farming, and the evidence of the debtor’s business dealing demonstrated that the debtor was in the business of farming.  The appellate court noted that the bankruptcy court considered both the tax code test and the totality of the circumstances test when making its conclusions. Consequently, the decision does provide some support for using both the tax test and the totality of the circumstances test in determining eligibility for the exemption from involuntary bankruptcy by a farmer. In re Sharp, BAP No. WO-06-013, 2007 Bankr. LEXIS 81 (10th Cir. BAP, Jan. 22, 2007).