In re Carter

• Decision Date: 28 February 1991
• Docket Number: Bankruptcy No. 89-20574-13.
• Citation: 125 BR 832
• Parties: In re Paul Dana CARTER, Janet Arlene Carter, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

125 B.R. 832 (1991)

In re Paul Dana CARTER, Janet Arlene Carter, Debtors.

Bankruptcy No. 89-20574-13.

United States Bankruptcy Court, D. Kansas.

February 28, 1991.

Jan Hamilton, Hamilton, Peterson, Tipton & Keeshan, Topeka, Kan., for debtors.

Charles S. Kennedy, III, Tax Div., U.S. Dept. of Justice, Washington, D.C., for U.S.

William H. Griffin, Topeka, Kan., Trustee.

MEMORANDUM GRANTING MOTION FOR SUMMARY JUDGMENT AND DETERMINING TAX LIABILITY

JAMES A. PUSATERI, Bankruptcy Judge.

This matter comes before the Court on the debtors' motion for determination of tax liability and on the United States' motion for summary judgment. Paul and Janet Carter ("Debtors") are represented by Jan Hamilton. The United States ("U.S.") is represented by Charles S. Kennedy, III, Tax Division, U.S. Department of Justice.

FINDINGS OF FACT

The U.S. has filed a Proof of Claim in the amount of $14,065.64 which consists of a priority claim of $12,770.57 and a general unsecured claim of $1,295.07. The Debtors are entitled to credits of $976.00, with respect to the 1986 income tax return of Janet Carter, and $1,350.00, with respect to their 1987 joint income tax return, and the U.S. is willing to offset these credits against its claim. The U.S. is seeking summary judgment to determine that the value of its general unsecured claim is $0.00 and that the value of its priority claim is $11,739.64. The Debtors, however, contend that the U.S. should have a priority claim of $1,916.89¹ and a general unsecured claim of $1,295.07.

The parties agree that the Debtors owe $3,522.28 as civil penalties under 26 U.S.C. § 6672² with regard to the unpaid employment taxes of J. Watsons 21, Inc. ("J. Watsons") for the first and second quarters of 1985. The Debtors dispute the contention of the U.S. that they also owe pre-petition interest of $76.76 on that amount.

The parties agree that the Debtors owe $2,341.14 as civil penalties under 26 U.S.C. § 6672 with regard to the unpaid employment taxes of Midwest Operating Co., Inc. ("Midwest") for the second, third, and fourth quarters of 1987. The Debtors dispute the contention of the U.S. that they also owe pre-petition interest of $25.92 on that amount.

The parties agree that the Debtors owe $2,201.16 as civil penalties under 26 U.S.C. § 6672 with regard to the unpaid employment taxes of Platos, Inc. ("Platos") for the fourth quarter of 1986. The Debtors dispute the contention of the U.S. that they owe pre-petition interest of $36.37 on that amount. The Debtors also dispute the contention of the U.S. that they owe $552.91 as civil penalties for the third quarter of 1985, and instead contend that they are entitled to a credit of $3,551.72 for that period. The parties agree that the Debtors paid $6,731.34 toward the liability for the third quarter of 1985, but they disagree on how it should have been applied. From documentation provided by the I.R.S., the withholding tax liability for Platos for the third quarter of 1985 was $5,033.12 (employer's portion of FICA of $1,853.50, employee's portion of FICA of $1,607.32, and employee's income tax withheld of $1,572.30), plus statutory additions of $2,251.13. The I.R.S. chose to apply the $6,731.34 payment first toward the non-trust portion (employer's portion of FICA and statutory additions), then toward the trust portion (employee's portion of FICA and employee's income tax withheld). The $552.91 the U.S. contends the Debtors owe as civil penalties for the third quarter of 1985 is equal to the employee's income tax withheld still owed for that period. The Debtors contend that the $6,731.34 payment should have been applied solely to the trust portion of $3,179.62, resulting in a credit of $3,551.72.

The parties agree that the Debtors owe $356.00, with pre-petition interest of $80.68, in federal income tax for 1986 and $3,575.00, with pre-petition interest of $2.35, in federal income tax for 1988 and that penalties on these liabilities amount to $1,295.07, which is an unsecured claim. The U.S. contends that the credits of $976.00, with respect to the 1986 income tax return of Janet Carter, and $1,350.00, with respect to the Debtors' 1987 joint income tax return, should be offset against the unsecured claim first, then against the priority claim, while the Debtors contend that the credits should be offset against the priority claim.

The Debtors claim the following refunds from their 1981-1984 individual tax liability due to loss carrybacks: $3,997.00 for 1981, $9.00 for 1982, $216.00 for 1983, and $62.00 for 1984. They contend that the refunds should be allowed to offset the I.R.S.'s claims. The U.S. contends that the Debtors are barred from claiming the refunds because the loss carrybacks were not claimed within the applicable time period.

CONCLUSIONS OF LAW

The issues presented for determination are whether pre-petition interest accrues on the civil penalties owed by the Debtors under 26 U.S.C. § 6672 with regard to the unpaid employment taxes of J. Watsons, Midwest, and Platos; whether the U.S. can apply a voluntary undesignated payment in its discretion or whether it should have been applied to the trust portion; whether the U.S. may allocate setoff of the Debtors' income tax refunds in its discretion or only against the priority claim; and whether the statute of limitations bars recovery of the refunds arising from the 1984 and 1985 net loss carrybacks to offset the I.R.S.'s claims, and if so, whether equitable recoupment is appropriate.

Pre-petition interest accrues on the civil penalties owed by the Debtors under 26 U.S.C. § 6672 with regard to the unpaid employment taxes of J. Watsons, Midwest, and Platos. The Internal Revenue Code provides that if any amount of tax imposed is not paid by the last date prescribed for payment, interest on that amount accrues at the underpayment rate until the tax is paid. 26 U.S.C. § 6601(a). Furthermore, interest is assessed, collected, and paid in the same manner as taxes, and any reference in the Internal Revenue Code to any tax imposed also refers to any interest imposed on that tax. 26 U.S.C. § 6601(e)(1). The 100% penalty imposed under 26 U.S.C. § 6672 is assessed and collected in the same manner as taxes, and except as otherwise provided, any reference in the Internal Revenue Code to any tax imposed also refers to the 100% penalty. 26 U.S.C. § 6671(a). Finally, this Court has held that priority claims under 11 U.S.C. § 507(a)(6) include any interest that accrued on the claim before the bankruptcy petition was filed. To the extent the underlying tax claim is allowed, interest that was matured as of the date the bankruptcy petition was filed is a proper part of the claim. In re Coleman American Companies, Inc., 26 B.R. 825, 831 (Bankr.D.Kan.1983). Therefore, pre-petition interest on the 100% penalty assessment is allowed as a claim against the estate.

The I.R.S. may, absent a specific request by the taxpayer to allocate the funds in a particular way, allocate the funds to the corporation's unpaid tax liabilities in whatever way it feels appropriate. Gray v. U.S., 586 F.Supp. 1127, 1132 (D.Kan.1984). See, e.g., Liddon v. U.S., 448 F.2d 509 (5th Cir.1971), cert. denied 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117 (1972). Thus, the U.S. can apply a voluntary undesignated payment in its discretion; it did not need to be applied against the trust portion only.

The Debtors cannot dictate that the $2,326.00 in credits from their 1986 and 1987 income tax returns be setoff against the priority claims of the U.S. The priorities given by 11 U.S.C. § 507 are expressions of Congressional policy that certain claims against a debtor should be given priority in payment above others, and to preserve that priority payment scheme, the debtor's claims should be setoff first against the non-priority claims. In re Braniff Airways, Inc., 42 B.R. 443, 452 (Bankr.N.D.Tex.1984). "It would completely defeat this statutory scheme if a debtor were allowed to setoff its claims against the creditor, first against the creditors sic priority claims and secondly against the creditors sic general non-priority claims." Id. (original emphasis). The Supreme Court's recent holding that a bankruptcy court has the authority to order the I.R.S. to apply a Chapter 11 debtor's tax payments under a reorganization plan to withholding-tax debts where the designation is necessary to the success of the debtor's reorganization plan does not affect this result. U.S. v. Energy Resources, 495 U.S. ___, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990). Thus, the U.S. may allocate setoff of the Debtors' income tax refunds in its discretion, not only against the priority claim and including to the satisfaction of the unsecured debt.

The Debtors claim that they are entitled to refunds for the 1981 through 1984 taxable years from carrybacks of net operating losses arising in 1984 and 1985. A net operating loss for any taxable year can be carried back to each of the three taxable years preceding the taxable year of the loss. 26 U.S.C. § 172(b)(1). Therefore, the 1981 refund could only be recovered from the carryback of the 1984 net operating loss. Returns made on the basis of a calendar year must be filed on or before April 15th of the following year, and the statute of limitations for claiming a refund of loss carrybacks is three years from the due date of the return for the year in which the loss carrybacks arose. 26 U.S.C. §§ 6072(a), 6511(d)(2)(A). Thus, the 1984 tax return was due April 15, 1985, and any claims for loss-carryback refunds must have been made by April 15, 1988. Because no claim was filed by that date, collection of the 1981 refund is barred by the statute of limitations.

The 1982, 1983, and 1984 refunds, totalling $287.00, possibly could be recovered from the carryback of the 1985 net operating loss. Although the 1985 tax return was due April 15, 1986, the refund claim was due April 17, 1989. April 15, 1989, was a Saturday, and when the last...