U.S. v. Reorganiezed C F & I Fabricators Utah

• Decision Date: 20 June 1996
• Docket Number: 95325
• Citation: 518 U.S. 213,166 S.Ct. 2106,135 L.Ed.2d 506
• Parties: UNITED STATES, Petitioner, v. REORGANIZED CF & I FABRICATORS OF UTAH, INC., et al
• Court: U.S. Supreme Court

518 U.S. 213

116 S.Ct. 2106

135 L.Ed.2d 506

UNITED STATES, Petitioner,

v REORGANIZED CF & I FABRICATORS OF UTAH, INC., et al.

No. 95-325.

Supreme Court of the United States

Argued March 25, 1996.

Decided June 20, 1996.

Syllabus ^*

The Employee Retirement Income Security Act of 1974 obligated CF & I Steel Corporation and its subsidiaries (CF & I) to make certain annual funding contributions to pension plans they sponsored. The required contribution for the 1989 plan year totaled some $12.4 million, but CF & I failed to make the payment and petitioned the Bankruptcy Court for Chapter 11 reorganization. The Government filed, inter alia, a proof of claim for tax liability arising under § 4971(a) of the Internal Revenue Code, 26 U.S.C. § 4971(a), which imposes a 10 percent ''tax'' (of $1.24 million here) on any ''accumulated funding deficiency'' of plans such as CF & I's. The court allowed the claim but rejected the Government's argument that the claim was entitled to seventh priority as an ''excise tax'' under § 507(a)(7)(E) of the Bankruptcy Code, 11 U.S.C. § 507(a)(7)(E), finding instead that § 4971 created a penalty that was not in compensation for pecuniary loss. The Bankruptcy Court also subordinated the § 4971 claim to those of all other general unsecured creditors, on the supposed authority of the Bankruptcy Code's provision for equitable subordination, 11 U.S.C. § 510(c), and later approved a reorganization plan for CF & I giving lowest priority (and no money) to claims for noncompensatory penalties. The District Court and the Tenth Circuit affirmed.

Held:

1. The ''tax'' under § 4971(a) was not entitled to seventh priority as an ''excise tax'' under § 507(a)(7)(E), but instead is, for bankruptcy purposes, a penalty to be dealt with as an ordinary, unsecured claim. Pp. ___-___.

(a) Here and there in the Bankruptcy Code Congress has referred to the Internal Revenue Code or other federal statutes to define or explain particular terms. It is significant that Congress included no such reference in § 507(a)(7)(E), even though the Bankruptcy Code provides no definition of ''excise,'' ''tax,'' or ''excise tax.'' This absence of any explicit connection between § 507(a)(7)(E) and § 4971 is all the more revealing in light of this Court's history of interpretive practice in determining whether a ''tax'' so called in the statute creating it is also a ''tax'' for the purposes of the bankruptcy laws. Pp. ___-___.

(b) That history reveals that characterizations in the Internal Revenue Code are not dispositive in the bankruptcy context. In every case in which the Court considered whether a particular exaction called a ''tax'' in the statute creating it was a tax for bankruptcy purposes, the Court looked behind the label and rested its answer directly on the operation of the provision. See, e.g., United States v. New York, 315 U.S. 510, 514-517, 62 S.Ct. 712, 714-716, 86 L.Ed. 998. Congress has given no statutory indication that it intended a different interpretive method for reading terms used in the Bankruptcy Act of 1978, see Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 501, 106 S.Ct. 755, 759-760, 88 L.Ed.2d 859, and the Bankruptcy Code's specific references to the Internal Revenue Code indicates that no general cross-identity was intended. The Government suggests that the plain texts of § 4971 and § 507(a)(7)(E) resolve this case, but this approach is inconsistent with this Court's cases, which refused to rely on statutory terminology, and is unavailing on its own terms, because the Government disavows any suggestion that the use of the words ''Excise Taxes'' in the title of the chapter covering § 4971 or the word ''tax'' in § 4971(a) is dispositive as to whether § 4971(a) is a tax for purposes of § 507(a)(7)(E). The Government also seeks to rely on a statement from the legislative history that all taxes ''generally considered or expressly treated as excises are covered by'' § 507(a)(7)(E), but § 4971 does not call its exaction an excise tax, and the suggestion that taxes treated as excises are ''excise tax[es]'' begs the question whether the exaction is a tax to begin with. There is no basis, therefore, for avoiding the functional examination that the Court ordinarily employs. Pp. ___-___.

(c) The Court's cases in this area look to whether the purpose of an exaction is support of the government or punishment for an unlawful act. If the concept of a penalty means anything, it means punishment for an unlawful act or omission, and that is what this exaction is. The § 4971 exaction is imposed for violating a separate federal statute requiring the funding of pension plans, and thus has an obviously penal character. Pp. ___-___.

(d) The legislative history reflects the statute's punitive character. P. 2114.SC2S2. The subordination of the Government's § 4971 claim to those of the other general unsecured creditors pursuant to § 510(c) was error. Categorical reordering of priorities that takes place at the legislative level of consideration is beyond the scope of judicial authority to order equitable subordination under § 510(c). Pp. ___-____.

53 F.3d 1155, reversed and remanded.

SOUTER, J., delivered the opinion for a unanimous Court with respect to Part III, the opinion of the Court with respect to Parts I, II-A, II-B, and II-C, in which REHNQUIST, C.J., and STEVENS, O'CONNOR, SCALIA, KENNEDY, GINSBURG, and BREYER, JJ., joined, and the opinion of the Court with respect to Part II-D, in which REHNQUIST, C.J., and STEVENS, O'CONNOR, KENNEDY, GINSBURG, and BREYER, JJ., joined. THOMAS, J, filed an opinion concurring in part and dissenting in part.

Kent L. Jones, Washington, DC, for petitioner.

Steven Jack McCardell, Salt Lake City, UT, for respondents.

Justice SOUTER delivered the opinion of the Court.^**

This case presents two questions affecting the priority of an unsecured claim in bankruptcy to collect an exaction under 26 U.S.C. § 4971(a), requiring a payment to the Internal Revenue Service equal to 10 percent of any accumulated funding deficiency of certain pension plans: first, whether the exaction is an ''excise tax'' for purposes of 11 U.S.C. § 507(a)(7)(E) (1988 ed.), ¹ which at the time relevant here gave seventh priority to a claim for such a tax; and, second, whether principles of equitable subordination support a categorical rule placing § 4971 claims at a lower priority than unsecured claims generally. We hold that § 4971(a) does not create an excise tax within the meaning of § 507(a)(7)(E), but that categorical subordination of the Government's claim to those of other unsecured creditors was error.

I

The CF & I Steel Corporation and its nine subsidiaries (CF & I) sponsored two pension plans, with the consequence that CF & I was obligated by the Employee Retirement Income Security Act of 1974, 88 Stat. 935, 29 U.S.C. § 1001 et seq. (ERISA), to make certain annual minimum funding contributions to the plans based on the value of the benefits earned by its employees. See 29 U.S.C. § 1082; 26 U.S.C. § 412. The annual payments were due each September 15th for the preceding plan year, see 26 CFR § 11.412(c)-12(b) (1995), and on September 15, 1990, CF & I was required to pay a total of some $12.4 million for the year ending December 31, 1989. The day passed without any such payment, and on November 7, 1990, CF & I petitioned the United States Bankruptcy Court for the District of Utah for relief under Chapter 11 of the Bankruptcy Code, in an attempt at financial reorganization prompted in large part by the company's inability to fund the pension plans. In re: CF & I Fabricators of Utah, Inc., 148 B.R. 332, 334 (Bkrtcy.D.Utah 1992).

In 1991, the IRS filed several proofs of claim for tax liabilities, one of which arose under 26 U.S.C. § 4971(a), imposing a 10 percent ''tax'' (of $1.24 million here) on any ''accumulated funding deficiency'' of certain pension plans. ² The Government sought priority for the claim, either as an ''excise tax'' within the meaning of 11 U.S.C. § 507(a)(7)(E) (1988 ed.), or as a tax penalty in compensation for pecuniary loss under § 507(a)(7)(G). CF & I disputed each alternative, and by separate adversary complaint asked the Bankruptcy Court to subordinate the § 4971 claim to those of general unsecured creditors.

The Bankruptcy Court allowed the Government's claim under § 4971(a) but denied it any priority under § 507(a)(7), finding the liability neither an ''excise tax'' under § 507(a)(7)(E) nor a tax penalty in compensation for actual pecuniary loss under § 507(a)(7)(G). Instead, the court read § 4971 as creating a noncompensatory penalty, 148 B.R., at 340, and by subsequent order subordinated the claim to those of all other general unsecured creditors, on the supposed authority of the Bankruptcy Code's provision for equitable subordination, 11 U.S.C. § 510(c).

The Government appealed to the District Court for the District of Utah, pressing its excise tax theory and objecting to equitable subordination as improper in the absence of government misconduct. While that appeal was pending, CF & I presented the Bankruptcy Court with a reorganization plan that put the § 4971 claim in what the plan called Class 13, a special category giving lowest priority (and no money) to claims for nonpecuniary loss penalties; but it also provided that, if the court found subordination behind general unsecured claims to be inappropriate, the § 4971 claim would be ranked with them in what the reorganization plan called Class 12 (which would receive some funds). Appellees' Appendix in No. 94-4034 et al. (CA10), pp. 96-101, 137-141, 197-200. The United States objected, but the Bankruptcy Court affirmed the plan. The Government appealed this order as well, and the District Court affirmed both the denial of excise tax treatment and the subsequent subordination to general unsecured claims. App. to Pet. for Cert. A-11. The Tenth Circuit likewise affirmed. 53 F.3d...