In re Healis, Bankruptcy No. 1-83-00425.

• Decision Date: 10 June 1985
• Docket Number: Bankruptcy No. 1-83-00425.
• Citation: 49 BR 939
• Parties: In re Raymond HEALIS and Carmella Healis, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

49 B.R. 939 (1985)

In re Raymond HEALIS and Carmella Healis, Debtors.

Bankruptcy No. 1-83-00425.

United States Bankruptcy Court, M.D. Pennsylvania.

June 10, 1985.

Richard C. Ruben, Harrisburg, Pa., for debtor.

Lawrence G. Frank, Harrisburg, Pa., trustee.

MEMORANDUM

OBJECTION TO CLAIM NO. 2

ROBERT J. WOODSIDE, Bankruptcy Judge.

The debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on May 20, 1983; and subsequently, filed a plan of repayment and an amendment to that plan. They began making interim payments to the trustee pursuant to our "Interim Order Confirming Plan." The debtors have subsequently filed an Objection to Claim No. 2, the claim filed by the Internal Revenue Service (IRS). We granted final confirmation of the debtors' plan subject to modification of the plan based on our decision in this matter. The parties agreed to brief the legal issues.

The debtors were delinquent in the payment of federal income taxes for the years 1978, 1980, 1981 and 1982. The IRS has assessed penalties and interest accruing to the date of the debtors' petition. The total amount due and owing on Claim No. 2 was $26,025.90, according to the IRS. The accounting for taxes, interest, and penalties owing for the years in question is as follows:

1. For taxable year 1978, tax in the amount of $3,358.38, penalties in the amount of $1,071.61 and interest in the amount of $2,145.49, assessed on May 28, 1979.

2. For taxable year 1980, tax in the amount of $5,845.90, penalties in the amount of $1,145.06 and interest in the amount of $2,273.39, assessed on June 1, 1980.

3. For taxable year 1981, tax in the amount of $3,324.00, penalties in the amount of $534.94 and interest in the amount of $777.50, assessed on May 31, 1982.

4. For taxable year 1982, taxes in the amount of $4,941.00, penalties in the amount of $531.32 and interest in the amount of $77.31, assessed on May 16, 1983.

(all figures are current to date of the petition)

Tax liens were filed with the office of the Prothonotary, Dauphin County, Pennsylvania for taxable year 1978, on December 17, 1980, and January 20, 1982; for taxable year 1980, on January 20, 1982; and for taxable year 1981, on January 19, 1983.

Although the debtors have filed an amended plan, they have failed to provide for the 1978 income tax liabilities, maintaining that they need not provide for that year. They have also failed to provide for any penalties or postpetition interest and have objected to those portions of the IRS claim. The IRS has designated the questions presented in this case as follows: (1) Whether the 1978 income tax lien must be provided for in the repayment plan. (2) Whether the claims for penalties and post-petition interest on its tax claims should be allowed.

The debtors argue first that their tax indebtedness for 1978 owed to the IRS is dischargeable under section 523(a)(1) because it falls outside the three year limitation of subsection 507(a)(7)(A)(i) of the Bankruptcy Code. The debtors argue that because the 1978 indebtedness would have been dischargeable in a liquidation case no payments are required for the 1978 indebtedness under section 1322(a)(2) of the Bankruptcy Code. This argument overlooks the fact that the IRS has filed perfected tax liens on all of the debts including the 1978 indebtedness. Section 507(a)(7) was designed for the priority treatment of unsecured tax liability. See In re Crotty, 11 B.R. 507, 509 (Bankr.N.D. Tex.1981). The Court in Crotty set forth the procedure for the treatment of tax claims in a Chapter 13 case as follows:

as the Government has filed its entire claim as secured, it is not entitled to treatment under Section 507 which grants priority only to unsecured claims of governmental units.

. . . . .

Insofar as secured claims are dealt with in a plan, a condition to confirmation is that the value, as of the effective date of the plan, of property to be distributed under the plan on account of such secured claims is not less than the allowed amount of such claims, 11 U.S.C. § 1325(a)(5).

Section 506 of the Code sets forth the method for determining secured status. An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim only to the extent of the value of such creditor\'s interest in the estate\'s interest in such property, and the balance of the claim if any is unsecured. . . .

Id. at 509.

In a repayment plan, the approach is to pay the secured tax claim in full and then to provide for priority payments for the balance of the unsecured tax claims. In this case, the value of the collateral securing the tax liens is only approximately $4532.00. That amount is the value the debtors attributed to their property on Schedule B accompanying the petition. Although the IRS believes that the debtors have assets in the approximate amount of $7,000, its belief, raised only in its brief, is uncorroborated by any evidence on record. For the purposes of this analysis we accept the value of the assets to be $4532.00.

Since the lien on the 1978 indebtedness is first in time, it is first in right. Jordon v. Hamlett, 312 F.2d 121 (5th Cir.1963). The value of the collateral worth $4532.00 is therefore first applied against the 1978 tax lien which, including tax, interest and penalties, totals $6575. The lien is thus secured in the amount of $4,532.00 and unsecured is the amount of $2,043. The total unsecured tax claim is arrived at by adding the unsecured portion of the 1978 tax lien to the amount of the tax liens for 1980, 1981 and 1982. The total unsecured tax claim is thus $21,493.00. The treatment of that unsecured tax claim now requires an analysis under section 507 of the Bankruptcy Code.

The nexus between the provisions of Chapter 13 and section 507 with regard to priority treatment for tax indebtedness is found in section 1322. That section provides in part:

(a) the plan shall

. . . . .

(2) provide for the full payment, in deferred cash payments of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim;. . . .

11 U.S.C. § 1322(a)(2). To the extent the unsecured tax claims of the IRS would fall under section 507(a) priority claims, the IRS would be entitled to full deferred payment over the course of the debtors' repayment plan. The issue before us is, thus, what portions of Claim No. 2 come within the ambit of section 507(a) of the Bankruptcy Code?

The first portion of unsecured Claim No. 2 to be reviewed is the portion pertaining to the delinquent 1978 taxes. Section 507(a)(7)(A) provides in part for the priority treatment of the following unsecured tax claims of governmental units:

(A) a tax on or measured by income or gross receipts—

(i) for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extension, after three years before the date of the filing of the petition;

(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition;

. . . . .

Subparagraphs (i) and (ii) of 11 U.S.C. § 507(a)(7)(A).

Clearly the 1978 unsecured tax indebtedness falls within the exception to the priority payment status: it was last due more than three years prior to the debtors' petition; and was assessed in 1979, well beyond 240 days of the petition. See In re Coleman American Moving Services, Inc., 20 B.R. 267 (Bankr.D.Kan.1981). We conclude that no priority status exists for the debtors' 1978 tax indebtedness and hence no full deferred payments need to be made on the 1978 unsecured tax claim in the amount of $2,043. On the other hand, because the taxes due for the years 1980, 1981, and 1982 do not fall within the 507(a)(7)(A) exception to priority payment status they must be considered a priority claim.

...