Appeal from the United States District Court for the Western District of Wisconsin. No. 85 C 949-John C. Shabaz, Judge.
Before BAUER, Chief Judge, POSNER, Circuit Judge, and ESCHBACH, Senior Circuit Judge.
The question presented by this bankruptcy appeal-a question that appears not to have arisen before-is whether "gross income," as it appears in the section of the Bankruptcy Code which defines "farmer," is to be given the same meaning that it has in federal income tax law. The significance of the question lies in the fact that a farmer cannot be forced into bankruptcy against his will. 11 U.S.C. § 303(a). (A farmer can, of course, file voluntarily for bankruptcy. Indeed, voluntary bankruptcy for "family farmers" was liberalized recently. See Subtitle B of Title II of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, P.L. 99-554, Oct. 27, 1986.)
Prior to the 1978 overhaul of the bankruptcy law the definition of "farmer" had undergone a painful statutory evolution each stage of which had generated considerable litigation. See Oler, The Farmer and the Bankruptcy Laws, 40 Dickinson L. Rev. 122 (1936). In the last stage, the statute, still worded unclearly, had been interpreted to mean "an individual personally engaged in farming," provided that "the principal part of his income" was derived from farming. See 11 U.S.C. § 1(17) (1976 ed.); In re Beery, 680 F.2d 705, 713 (10th Cir. 1982). The substitution of an income test for the earlier tests of whether the individual was "chiefly" or "primarily" engaged in farming-tests hopelessly vague in practice, as shown by such cases as Powers v. Silberman, 3 F.2d 802 (3d Cir. 1925), and In re Macklem, 22 F.2d 426 (D. Md. 1927)-was a step toward greater precision; but the statute defined neither "principal part" nor "income," and in particular it failed to indicate whether gross or net income was intended. See In re Beery, supra, 680 F.2d at 713-17. Against this background Congress in the 1978 Code made a fresh start by defining "farmer" as one who "received more than 80 percent of [his] gross income during "his immediately preceding "taxable year . . . from a farming operation owned or operated" by him. 11 U.S.C. § 101(17). (Section 101(18) defines "farming operation" to include "farming, tillage of the soil dairy farming," etc.) No legislative history bears on the question whether "gross income" in the new statute should be given the same meaning that it has in federal income tax law.
The facts of this case are surpisingly lurid for a bankruptcy case. William Wagner has a substantial dairy farm in Wisconsin. In 1983, in circumstances not fully explained in the record, he struck a tenant farmer in the head four times with an iron bar, killing him. Wagner was prosecuted for first-degree murder, but acquitted. The victim's widow, estate, and medical insurer brought a wrongful-death suit against Wagner and obtained a damage judgment of nearly $350,000 in 1985. Six days later Wagner gave mortgages on his farm to the law firm that had handled the tort suit, and to his brother. Later he assigned the milk income from the farm (his major source of income) to his wife, along with half the proceeds from the sale of a car wash. The mortgages plus the judgment exceeded Wagner's net worth and the income assignment dealt away his major source of income.
The judgment creditors filed a petition for bankruptcy against Wagner under Chapter 7 of the Bankruptcy Code, seeking to set aside the mortgages and assignments as preferences. Rejecting Wagner's claim that he was entitled to the farmer's exemption from involuntary bankruptcy, the bankruptcy judge ordered the mortgages set aside, voided the assignments to Wagner's wife, and held that Wagner's debt to the judgment creditors was not dischargeable, since it was the outgrowth of an intentional tort. The effect of the bankruptcy judge's rulings is that the assets of the farm will, to the extent necessary, be sold to satisfy the tort judgment. The district court affirmed, and Wagner appeals to us.
Our appellate jurisdiction in bankruptcy cases is limited to final orders by the district court. See 28 U.S.C. § 158(d). The district court's order affirming the bankruptcy judge's rulings in this case is final in the sense that nothing remains at the moment to be decided by the district judge, but not necessarily in the sense, intended by section 158(d), that the underlying proceeding has been wound up. See In re Riggsby, 745 F.2d 1153, 1155-56 (7th Cir. 1984). Technically the bankruptcy proceeding continues before the bankruptcy judge and will end only when Wagner, having satisfied (to the extent his assets allow) the debts he owes his creditors, is discharged. Nevertheless, under the somewhat relaxed standard of finality that prevails in bankruptcy cases even under the current law, see, e.g., In re Memorial Estates, Inc., 797 F.2d 516, 519 (7th Cir. 1986), the bankruptcy judge's decision (and hence the district court's order affirming it) is final for purposes of appeal if it resolves all contested issues on the merits and leaves merely the distribution of the assets of the bankrupt estate to creditors to be completed. That is the nature of the decision in this case. The bankruptcy judge has held that Wagner is subject to the bankruptcy proceeding, that his mortgages and assignments are void, and that his debt to the judgment creditors is not dischargeable. All that remains is for the trustee in bankruptcy to sell the farm and pay off the creditors (including Wagner's law firm, now demoted to the status of an unsecured creditor). What remains corresponds to the collection stage in an ordinary lawsuit, cf. In re Morse Elec. Co., 805 F.2d 262, slip op. at 4 (7th Cir. 1986)-and of course a defendant who loses a damage suit need not (indeed, may not) wait till the judgment has been paid before he can appeal. The collection proceedings are a collateral stage of the litigation. This conclusion rests on the practical considerations that the process of collection is unlikely to affect the issues on appeal and that once the defendant's assets are handed over to the plaintiff it may be impossible, or at leastly very costly, for him to get them back through supplementary proceedings should it turn out that the judgment was erroneous. The present case is thus unlike In re Goldblatt Bros., Inc., 758 F.2d 1248 (7th Cir. 1985), or Armstrong v. Corn Belt Bank, 14 Collier's Bankr. Cas. 2d 69 (C.D. Ill. 1985), in both of which substantive issues remained to be resolved by the bankruptcy judge.
Since in the present case the bankruptcy judge's order was final, the district judge's order of affirmance was also final, and we can proceed to the merits.
For purposes of applying the definition of "farmer" in 11 U.S.C. § 101(17), we look to Wagner's "gross income" in calendar year 1984, his last taxable year before the filing of the bankruptcy petition (Wagner is a calendar-year taxpayer). His gross income-as it was shown, or at least should have been shown, on his 1984 federal income tax return-was $104,000 (we round off all figures to the nearest $1,000), of which $72,000 indisputably was farming income because it was proceeds from the sale of milk and cattle. Some of Wagner's other income-in particular, $8,000 from the sale of the car wash-was indisputably not farming income. In dispute is the proper characterization of $18,000 that he received as a distribution from an individual retirement account to which in previous years he had made contributions from his farming income. If the $18,000 is either treated as farming income or excluded from gross income, then more than 80 percent of Wagner's gross income came from farming operations and he is exempt from involuntary bankruptcy. Otherwise he falls below the 80 percent threshold and the district court's decision must be affirmed.
We can set to one side the suggestion that the $18,000 is includable in gross income for purposes of section 101(17) as farming income because its ultimate origin was in a farming operation. Such treatment would involve double counting of a dramatic sort. Money contributed to an IRA is treated for tax purposes as a part of gross income, but not of adjusted gross income; deducting such contributions is one of the adjustments that is made in translating gross income into adjusted gross income. See 26 U.S.C. §§ 62(10), 219(a), 408(d)(1), (e)(1). So when Wagner received the money that he contributed to the IRA it was part of his gross income, and since it was income from a farming operation it counted toward the 80 percent threshold for exemption from involuntary bankruptcy. To treat it as farming income when it is withdrawn from the IRA would be to count the same money as farming income twice. A practical consequence would be that if Wagner, who is 67 years old, retired from farming altogether-sold his farm and moved to Florida-he would still be a farmer within the meaning of the statute, and hence would be immune from being forced into bankruptcy provided that more than 80 percent of his retirement income came from his IRA. Although double counting could be prevented by excluding the initial receipt of the income that he contributed to an IRA from gross income for bankruptcy purposes, that would result in the extraordinary paradox that a farmer who contributed a large fraction of his farming income to an IRA might as a result not be classified as a farmer in the year the income was received yet be classified as a farmer years later when he left farming and started drawing from the IRA.
The hard question is not whether the $18,000 that Wagner drew from his IRA should be treated as farming income-clearly it should not be-but whether it should be excluded from gross income for bankruptcy purposes because it represents in part deferred income from Wagner's dairy farm. It is not as if Wagner in 1984 obtained less than 80 percent of his income from farming and the rest from some other type of business. He had some indisputably nonfarming income, such as the capital gain from the sale of the car wash, but he was certainly a "farmer" in the ordinary-language sense of the word rather than a person primarily engaged in some other activity who does farming on the side-a gentleman farmer or hobby farmer. The main supplement to Wagner's 1984 income from farming came from the early withdrawal from his retirement account to finance his defense of the tort suit (early withdrawal not because he couldn't retire at age 67 but because he hasn't retired). And the income that funded that account was income from farming.
But if one thing is crystal clear from section 101(17) it is that Congress was not using the word "farmer" in its ordinary-language sense. That had been essentially the approach of the previous law (call it the "mud on the boots" approach). It had led to excessive uncertainty in application and was abandoned for a mechanical approach in which "farmer" is a technical term that means someone who in the taxable year immediately preceding the suit in bankruptcy derives more than 80 percent of his gross income from farming. From the statutory references to "taxable year" and "gross income," both themselves technical terms, though of tax law rather than bankruptcy law, it is possible to infer that Congress intended to use these terms in section 101(17) in their tax sense. Certainly "taxable year" is so used; Wagner does not dispute that. Whether "gross income" was intended to be used in its tax sense is less certain. Maybe, as Wagner argues, Congress used "taxable year" merely to spare the farmer the bother of having to keep an additional set of books in order to be sure not to lose his bankruptcy exemption.
Wagner's strongest point is that his IRA distributions are, to a substantial though unquantified extent, a return of capital, rather than income. If he had put a part of his farm income into a savings account rather than an IRA and had later withdrawn it, only the interest on the deposit would be deemed income for tax purposes. Is it not arbitrary, he asks, to deem all of the distribution from the ...