148 B.R. 332 (Bkrtcy.D.Utah 1992), 90B-6721, In re CF & I Fabricators of Utah, Inc.
|Docket Nº:||Bankruptcy Nos. 90B-6721 to 90B-6730.|
|Citation:||148 B.R. 332|
|Party Name:||16 Employee Benefits Cas. 1161 In re CF & I FABRICATORS OF UTAH, INC. et al., Debtors. (CF & I Fabricators of Utah, Inc.); (Colorado & Utah Land Co.); (Kansas Metals Company); (Albuquerque Metals Company); (Pueblo Metals Company); (Denver Metals Company); (Pueblo Railroad Service Co.); (CF & I Fabricators of Colorado, Inc.); (CF & I Steel Corporati|
|Case Date:||November 25, 1992|
|Court:||United States Bankruptcy Courts, Tenth Circuit|
[Copyrighted Material Omitted]
Steven J. McCardell, Stephen M. Tumblin, LeBoeuf, Lamb, Leiby & MacRae, Salt Lake City, UT and Frank Cummings, Eunice L. Bumgardner, LeBoeuf, Lamb, Leiby & MacRae, Washington, D.C., for debtors.
Michael W. Coriden, CF & I Steel Corp., Pueblo, CO, for CFI.
Weston L. Harris, Steven T. Waterman, Ray, Quinney & Nebeker, Salt Lake City, UT, and Joseph E. O'Leary, Scott A. Faust, Choate, Hall & Stewart, Boston, MA, for unsecured creditors committee.
David J. Jordan, U.S. Atty., Salt Lake City, UT, and Kirk C. Lusty, U.S. Dept. of Justice, Washington, D.C.
MEMORANDUM DECISION AND ORDER RELATING TO DEBTORS' OBJECTIONS, DATED 10/02/92, FOR DISALLOWANCE AND DETERMINATION OF PRIORITY OF CLAIMS OF THE INTERNAL REVENUE SERVICE
JUDITH A. BOULDEN, Bankruptcy Judge.
On November 7, 1990, these related steel production companies (Debtors) filed petitions under chapter 11, primarily in an attempt to reorganize in light of their inability to fund two defined benefit pension plans. The United States of America, Department of the Treasury, Internal Revenue
Service (IRS), filed proofs of claim 1 against each of the Debtors jointly and severally asserting priority tax claims under § 507(a)(7)(E) and (G) of the United States Bankruptcy Code or alternatively as administrative claims for "excise taxes" pursuant to 26 U.S.C. § 4971(a) and (b) (section 4971). The claims are based on the Debtors' failure to pay certain amounts due under their pension plans. Both the Debtors and the Official Unsecured Creditors Committee (Committee) 2 objected to the proofs of claim. The legal issues were presented to the court in a claims objection hearing on November 13, 1992. 3 Speedy resolution of the legal issues is critical. The Debtors' hopes for reorganization center upon the sale of portions of the Debtors' assets implemented through a proposed plan of reorganization. The prospective purchaser has established a schedule that requires resolution of these and other issues or its participation in the Debtors' reorganization will be withdrawn. If the court allows the status asserted by the IRS for its claims, it is unlikely that the Debtors will have sufficient funding to propose a feasible plan of reorganization. Because of the critical nature of the resolution of these core issues, the court issued a bench ruling at the hearing, but indicated that it would supplement the bench ruling with a written decision.
At the time of filing, the Debtors were sponsors of two pension plans that provided pension and pension-related benefits for employees and retirees. CF & I Steel Corporation (CF & I) was the administrator of those plans. These two pension plans were the Pension Plan of CF & I Steel Corporation and Certain Subsidiaries (the Master Plan) and the Non-Contributory Pension Plan of CF & I Steel Corporation as Amended and Restated Effective January 1, 1989, (the Non-Contributory Plan). Under these pension plans, CF & I promised to provide fixed pension benefits calculated with reference to each employee's pay and years of service. CF & I was obligated to provide annual plan funding contributions based on the actuarial valuation of the benefits earned by its employees.
The Pension Benefit Guaranty Corporation (PBGC) is a wholly-owned United States government corporation established under § 4002 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1302, to administer the pension plan termination provision of Title IV of ERISA, 29 U.S.C. §§ 1302-1461. The PBGC is required to guarantee payment of non-forfeitable or vested benefits under terminated pension plans, subject to certain limitations. If the PBGC pays pension benefits pursuant to its guaranty under the terminated pension plans, the funds do not come from the United States treasury, but from insurance premiums paid by sponsors of ERISA qualified plans.
CF & I failed to make the minimum funding payment of $12,400,000 on the Master Plan for the year ending December 31, 1989. The payment should have accompanied CF & I's form 5330 annual report that the parties agree was due on September 15, 1990. On November 7, 1990, the Debtors filed petitions for reorganization under chapter 11 of the Bankruptcy Code. Since the date of filing, the Debtors have not made any continuing minimum funding payments to the pension plans attributable to services rendered by employees before the date of filing. The annual reports and minimum funding payments for the year ending December 31, 1990, of approximately $12,100,000, were due September 15, 1991. The Debtors assert the pension plans are pre-petition obligations, therefore,
the Debtors did not make the minimum funding payments for 1990. 4
The Debtors attempted to persuade the PBGC into terminating the Master Plan both before and after filing the chapter 11 petitions. It was not until March 19, 1992, that the PBGC instituted proceedings to terminate the Master Plan. The Non-Contributory Pension Plan has not been terminated. CF & I, on behalf of the Master Plan, consented to the termination and entered into a trusteeship agreement with the PBGC effective March 19, 1992, and the PBGC became the successor trustee of the Master Plan. The PBGC became liable for guaranteed benefits to plan participants.
Under section 4971(a), the IRS imposes an immediate 10% "first tier" tax based on the accumulated funding deficiency if the employer fails to make the minimum funding contribution by the date when the employer's annual report is due (in this case reports for both plans were due on September 15, 1990). If the sponsoring employer does not thereafter correct the accumulated funding deficiency by making the required contribution to the applicable pension plan during the taxable period as defined in section 4971(c)(3), then section 4971(b) imposes an additional "second tier" tax on the employer equal to 100% of the amount of the accumulated funding deficiency.
On March 13, 1991, the IRS timely filed various proofs of claim asserting tax liability based on excise taxes pursuant to section 4971. The proofs of claim alternatively asserted secured or priority status for section 4971(a) liability for the 1989 plan year assessed January 21, 1991. They also included a claim indicating "examination liability unassessed" for the second tier excise tax for the 1989 plan year. The IRS audited the second tier tax for the plan year 1989, and issued a post-petition notice of deficiency to the Debtors for the 1989 second tier liability. The original proofs of claim made no reference to section 4971 liability for 1990, despite an assertion in the IRS memorandum to the contrary. The IRS audited the 1990 plan year and issued the appropriate notice letters to the Debtors on September 3, 1992. The proofs of claim indicate that the 1989 second tier and the 1990 first and second tier excise taxes remain unassessed.
The original proofs of claim filed by the IRS also included amounts for income taxes for 1983 and income taxes under audit for 1984 and 1985. The only amount indicated on the original proofs of claim regarding income tax liability for 1987, 1988, and 1989, was an amount owing of $.00 with an asterisk referring to an explanation in which the IRS asserted a "protective" claim. 5
The IRS amended each of its proofs of claim on September 24, 1992, three weeks prior to the filing of the Debtors' disclosure statement, and after the claims bar date.
The amended proofs of claim declare that the 1989 tax claimed pursuant to section 4971(a) is a pre-petition priority tax liability and asserts that the Debtors must pay, in addition to the claims of the PBGC for the underlying funding payment of $12,400,000, the following amounts: 6
The amended proofs of claims state that the 1989 section 4971(b) and the 1990 section 4971(a) and (b) claims are post-petition tax liabilities entitled to administrative expense priority pursuant to 11 U.S.C. § 503(b)(1)(B)(i) in the following amounts:
Plan Number 1990 10% first tier section 4971(a)
010 $ 2,508,154.70
008 $ 54,258.80
Plan number 1989 100% second tier section 4971(b)
008 $ 308,966.00
Plan number 1990 100% second tier section 4971(b)
008 $ 542,588.10
Alternatively, if the court does not accord the claims post-petition administrative status, the IRS asserts the claims represent pre-petition priority taxes under 11 U.S.C. § 507(a)(7)(E) and (G). The amended IRS proofs of claim also seek income taxes and interest to the date of the petition of $265,910.62 due for the years 1987, 1988, and 1988 pursuant to an audit completed after the IRS filed the original proofs of claim.
On October 2, 1992, the Debtors filed objections to the IRS proofs of claim. The Debtors object to all the section 4971 excise tax claims asserted pursuant to 11 U.S.C. § 507(a)(7)(E) and argue that the claims are, in fact, penalties and must be disallowed. They also contend that the section 4971 excise tax claims are not pecuniary loss penalties related to a governmental claim under 11 U.S.C. § 507(a)...
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