Burns, In re
| Decision Date | 13 November 1989 |
| Docket Number | No. 89-8127,89-8127 |
| Parties | -695, 58 USLW 2358, 89-2 USTC P 9630, 21 C.B.C. 1237, 19 Bankr.Ct.Dec. 1746, Bankr. L. Rep. P 73,134 In Re Joanne G. BURNS, Debtor. Joanne G. BURNS, Plaintiff-Appellee, v. UNITED STATES of America, Acting by and Through the INTERNAL REVENUE SERVICE, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Gary R. Allen, Chief, Appellate Section, U.S. Dept. of Justice, Tax Div., Kevin M. Brown, Gary D. Gray, Washington, D.C., for defendant-appellant.
Richard A. Childs, Columbus, Ga., for plaintiff-appellee.
Appeal from the United States District Court for the Middle District of Georgia.
Before JOHNSON, Circuit Judge, RONEY *, Senior Circuit Judge, and MELTON **, District Judge.
Burns filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Secs. 101-1103 (1982), on January 27, 1984. The IRS did not file a proof of claim in that proceeding, although penalties and interest had been assessed against Burns regarding her tax filings for years 1977 through 1979. 2 In June of 1984 the bankruptcy court entered an order of discharge.
On May 28, 1987, Burns filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. In this second proceeding, the IRS filed its proof of claim for taxes, interest and penalties for taxable years 1977 through 1981, 1983 and 1985. Approximately $7,688.82 in post-petition interest related to unpaid taxes for years 1977 through 1979 and an additional $2,999.11 represented fraud penalties, levied pursuant to 26 U.S.C. Sec. 6653(b)(1), for those same years.
Burns initiated a proceeding in the bankruptcy court to determine, inter alia, her liability for the post-petition interest and the fraud penalties. She contended that her discharge in the Chapter 7 proceeding had terminated her liability on the post-petition interest and the penalties. The IRS contested the proposition that the prior proceeding discharged her tax obligations. Section 727 of the Bankruptcy Code provides for discharge of "all debts that arose before the date of the order for relief under [Chapter 7], and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before the commencement of the case," 11 U.S.C. Sec. 727(b) (1982), excepting those types of debts enumerated in section 523(a) as nondischargeable. While the parties agreed that the underlying unpaid taxes were not discharged in the Chapter 7 proceeding, they disagree on the status of the post-petition interest and the fraud penalties.
Regarding the post-petition interest, Burns conceded that prior to the passage of the Bankruptcy Code the Supreme Court, in Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), held that post-petition interest on a nondischargeable tax debt could be recovered in a later action against the debtor personally. Burns argued, however, that the fresh start policy of the Bankruptcy Code abrogated the Bruning rule. Regarding the fraud penalties, Burns contended that the plain language of section 523(a)(7)(B) provides discharge to penalties relating to a transaction or event occurring more than three years prior to the filing of a bankruptcy petition. Since her tax returns for 1977 through 1979 are transactions or events occurring more than three years prior to her 1984 Chapter 7 filing, Burns reasoned that the penalties associated therewith are discharged.
The bankruptcy court accepted Burns' arguments. Her liabilities for the post-petition interest and penalties were ordered
discharged. On appeal, the district court affirmed the bankruptcy court's ruling. From the adverse ruling of the district court, the IRS initiated this appeal. Because the issues presented concern questions of law, review is plenary.
We must determine if the nondischargeability of Burns' tax liabilities also exempts from discharge the post-petition interest and fraud penalties assessed on those nondischargeable liabilities. These issues of statutory interpretation arise as ones of first impression in this Circuit. The issues presented are discussed individually.
The nondischargeability of interest accruing after a prior bankruptcy filing on nondischargeable tax liabilities was firmly established prior to the enactment of the Bankruptcy Code. See Bruning v. United States, 376 U.S. 358, 360, 84 S.Ct. 906, 907-08, 11 L.Ed.2d 772 (1964). Subsequent to the Code, however, courts have split over the continuing viability of Bruning. Compare, e.g., In re Hanna, 872 F.2d 829, 830-31 (8th Cir.1989), Geving v. United States, 93 B.R. 742, 743-44 (D.Wyo.1986), In re Cline, 100 B.R. 660, 662-63 (Bankr.W.D.N.Y.1989) and In re Mitchell, 93 B.R. 615, 617-18 (Bankr.W.D.Tenn.1988) () with In re Reich, 66 B.R. 554, 557-58 (Bankr.D.Colo.1986) and In re Frost, 19 B.R. 804, 810 (Bankr.D.Kan.1982) (), vacated on relevant ground as unripe, 47 B.R. 961 (D.Kan.1985).
Congress is presumed to act with full awareness of the well-established judicial interpretation on the issue of post-petition interest, see, e.g., Rodriguez v. United States, 480 U.S. 522, 525, 107 S.Ct. 1391, 1393, 94 L.Ed.2d 533 (1987) (per curiam), and, when statutory language permits interpretation, pre-Code interpretations are presumed to have survived the enactment of the Bankruptcy Code unless Congress has expressed an intention to change the interpretation of judicially created concepts in enacting the Code, see United States v. Ron Pair Enterprises, Inc., 489 U.S. ----, 109 S.Ct. 1026, 1031-33, 103 L.Ed.2d 290 (1989). In Hanna, the Eighth Circuit thoroughly analyzed congressional intent regarding the Bruning rule, concluding that Congress did not intend to change the pre-Code law. See 872 F.2d at 830-31. We concur in the Hanna analysis and, in lieu of filling the tomes that record appellate opinions with a repeat of its proofs, we adopt that analysis as our own. Inasmuch as we conclude that the post-petition interest on a nondischargeable tax debt is nondischargeable, the rulings of the courts below must be reversed.
Pre-Code law was silent on the dischargeability of liability for tax penalties. See Plumb, The Tax Recommendations of the Commission on Bankruptcy Laws--Priority and Dischargeability of Tax Claims, 59 Cornell L.Rev. 991, 1058 (1974). Courts generally took the position that the penalties survived a discharge in bankruptcy, resting either on the theory that the penalties constituted a nonprovable debt or on the theory that the penalties were to be treated in all respects as taxes because they were assessed and collected in the same manner as taxes. See id. The second of these theories linked the dischargeability of the penalty with the underlying tax liability. Id. The IRS pursued tax penalties in accord with the second theory during the ten years immediately preceding enactment of the Bankruptcy Code. See Rev.Rul. 68-574, 1968-2 C.B. 595, 597 (superceding Rev.Rul. 62-96, 1962-1 C.B. 308). The Commission on Bankruptcy Laws had the intention of clarifying and rationalizing the dischargeability status of various penalties, including tax penalties, when it proposed a predecessor to section 523(a)(7) of the Bankruptcy Code. See Plumb, supra, 59 Cornell L.Rev. at 1059; Report of the Comm'n on the Bankruptcy Laws of the United States, Part II, H.R.Doc. No. 137, Pt. II, 93d Cong., 1st Sess. 141 (1973) (Proposed
Bankruptcy Act of 1973, Note 18 to Sec. 4-506).
Section 523(a)(7), then, innovates on the matter of tax penalties. Cf. Kelly v. Robinson, 479 U.S. 36, 51, 107 S.Ct. 353, 362, 93 L.Ed.2d 216 (1987) (); id. at 50 n. 13, 107 S.Ct. at 361-62 n. 13 (). It provides, in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt--
(7) to the extent such debt is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty--
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition; ....
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