IN RE NATIONAL STEEL CORP.

• Decision Date: 24 March 2005
• Docket Number: No. 02 B 08699.,02 B 08699.
• Citation: 321 B.R. 901
• Parties: In re NATIONAL STEEL CORP. et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

321 B.R. 901

In re NATIONAL STEEL CORP. et al., Debtors.

No. 02 B 08699.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 24, 2005.

COPYRIGHT MATERIAL OMITTED

Ann Marie Bredin, Chicago, IL, Attorney for Objector to the Claim.

Mark Browning, Texas Comptroller of Public Accounts, Attorney for Claimant.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the twenty-seventh omnibus objection of the NSC Creditor Trust (the "Trust") and the NKK Litigation Trust to the classification as a priority claim of Claim No. 5370 filed by the Texas Comptroller of Public Accounts (the "Texas Comptroller") for unpaid state corporate franchise tax owed by National Steel Corporation for tax year 2002.¹ For the reasons stated herein, the Court finds that the franchise tax is an excise tax for purposes of 11 U.S.C. § 507(a)(8)(E). Accordingly, the Court overrules the objection and holds that the Texas Comptroller's claim is entitled to payment on an unsecured priority basis in the amount of $129,084.00.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (0).

II. UNDISPUTED FACTS AND BACKGROUND

The facts in this matter are not in dispute. On March 6, 2002, National Steel Corporation and certain of its subsidiaries and affiliates (collectively, "NSC") filed voluntary petitions for relief under Chapter 11. Objection to Claims at ¶ 1. The Court confirmed NSC's First Amended Joint Plan of Liquidation (the "Plan") on October 23, 2003, and the Plan went into effect about two months later, on December 19, 2003. Id. at ¶ 8. Under both the Plan and the NSC Creditor Trust Agreement, substantially all of NSC's assets were transferred to the Trust, and the Trust obtained authorization to pursue objections to claims. Id. at ¶ 9. Accordingly, the Trust identified certain claims asserted against NSC as "objectionable" and, thus, objected to "the allowance, amount, classification and/or treatment of those claims." Id, at ¶12.

On August 20, 2004, the NSC Creditor Trust and the NKK Litigation Trust filed their twenty-seventh omnibus objection to claims through which they sought entry of an order reducing, reclassifying, disallowing and expunging, or otherwise addressing the claims determined to be objectionable. Id. at ¶ 13. Among those claims was an unsecured priority proof of claim, numbered 5370, in the amount of $129,084.00, filed on August 7, 2002 against NSC for state corporate franchise tax for 2002 by the Texas Comptroller (the "Claim"). Response at ¶ 1; Reply at ¶ 2. The basis of the objection to the Claim was that it was "improperly characterized, in whole or in part, as a ... priority claim."² Objection to Claims, Ex. A, at 19.

On October 26, 2004, the Texas Comptroller filed a response to the objection, asserting that the state corporate franchise tax is an excise tax entitled to priority under § 507(a)(8)(E) of the Code and that, accordingly, the objection should be denied. Response at ¶¶ 3 and 4. The Trust filed a reply on January 20, 2005, arguing in direct contradistinction that the Texas franchise tax is, in fact, not an "excise tax" imposed on a "transaction" for purposes of § 507(a)(8)(E) and that it is, therefore, not entitled to payment on a priority basis.³ On February 1, 2005, the Texas Comptroller filed a surreply, reasserting its position and requesting that the Claim be allowed as filed.

The parties do not dispute that the Texas Comptroller is a governmental unit, that it holds an unsecured claim, or that the obligation to pay the corporate franchise tax accrued within the applicable temporal boundaries. Nor do the parties dispute the amount of franchise tax owed by NSC for the period at issue. Rather, the sole question presented is whether the franchise tax constitutes an excise tax within the meaning of § 507(a)(8)(E). If it does, then the Claim is entitled to payment on a priority basis.

III. APPLICABLE STANDARDS

A. Objection to Claims

Pursuant to Federal Rule of Bankruptcy Procedure 3001(f), a properly filed proof of claim constitutes prima facie evidence of the validity of the claim. Fed. R. Bankr.P. 3001(f); Starnes v. United States (In re Starnes), 231 B.R. 903, 912 (N.D.Tex.1998); In re Farley, Inc., 211 B.R. 889, 894 (Bankr.N.D.Ill.1997); S.N.A. Nut Co. v. Tulare Nut Co. (In re S.N.A. Nut Co.), 204 B.R. 537, 540 (Bankr.N.D.IU. 1997); see also 11 U.S.C. §§ 501 and 502(a). Creditors who claim priority status usually bear the burden of showing that they are entitled to the asserted priority. In re Chi. P'ship Bd., Inc., 237 B.R. 726, 732 (Bankr.N.D.Ill.1999). However, the United States Supreme Court has noted that "creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation...." Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Thus, "in the absence of modification expressed in the Bankruptcy Code the burden of proof on a tax claim in bankruptcy remains where the substantive tax law puts it." Id. at 26, 120 S.Ct. 1951. Accordingly, the taxpayer bears the burden to produce some evidence to rebut the presumption of the validity of a tax claim. Id. at 20, 120 S.Ct. 1951; see also Starnes, 231 B.R. at 912; S.N.A. Nut, 204 B.R. at 540. To meet this burden, the taxpayer objecting to a claim must present sufficient evidence to "refute at least one of the allegations that is essential to the claim's legal sufficiency." Starnes, 231 B.R. at 912 (quoting In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992)) (internal quotation omitted). Only then does the burden shift back to the creditor claimant. Id.

In the matter at bar, the properly filed claim of the Texas Comptroller constitutes prima facie evidence of the validity of the claim. As the taxpayer and objecting party, the Trust has the burden of presenting evidence to rebut the validity of the priority classification. Only if that burden is met must the claimant, the Texas Comptroller, prove entitlement to the claim.

B. 11 U.S.C. § 507: Priority of Claims

Section 507(a) of the Bankruptcy Code sets forth, in descending order, nine categories of claims that are entitled to priority in bankruptcy cases. 11 U.S.C. § 507(a). This priority schedule is designed to insure payment to certain classes of claims by requiring that they be paid before other claims. New Neighborhoods, Inc. v. W. Va. Workers' Comp. Fund, 886 F.2d 714, 718 (4th Cir.1989); In re Olga Coal Co., 194 B.R. 741, 745 (Bankr. S.D.N.Y.1996). However, the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among its creditors in the prescribed order of priority as Congress has legislated. See Joint Indus. Bd. of Elec. Ind. v. United States, 391 U.S. 224, 228, 88 S.Ct. 1491, 20 L.Ed.2d 546 (1968). Thus, provisions granting priority in bankruptcy are narrowly construed. Olga Coal, 194 B.R. at 745; In re Dynacircuits, L.P., 143 B.R. 174, 176 (Bankr.N.D.Ill.1992); In re O.P.M. Leasing Servs., Inc., 60 B.R. 679, 680, 683 (Bankr.S.D.N.Y.1986).

Among the classifications under § 507, the Code gives priority to specific "allowed unsecured claims of governmental units." 11 U.S.C. § 507(a)(8).⁴ In particular, § 507(a)(8)(E) provides in relevant part as follows:

(a) The following expenses and claims have priority in the following order:

...

(8) Eighth, allowed unsecured claims of governmental units; only to the extent that such claims are for—

(E) an excise tax on—

(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition.

11 U.S.C. § 507(a)(8)(E). Under this provision, the Code provides priority status to an excise tax on a prepetition transaction for which a return, if required, was last due within the three years immediately preceding the filing of the petition. Id.

Taxing authorities are accorded priority treatment because they are involuntary creditors who are unable to select their debtors or take a consensual security interest before taxes become due. 4 Collier § 507.10lb, at 507-57. However, if a taxing authority is unable to obtain either payment or secured status by a certain point, "the special justification for priority is weakened and the interest of the taxing authority needs to be balanced against interests of the debtor and of other creditors." Id. at 507-58. Specifically, the legislative history of § 507 points to a balance that must be struck among the interests of:

(1) general creditors, who should not have the funds available for payment of debts exhausted by an excessive accumulation of taxes for past years; (2) the debtor, whose "fresh start" should likewise not be burdened with such an accumulation; and (3) the tax collector, who should not lose taxes which he has not had reasonable time to collect or which the law has restrained him from collecting.

S.Rep. No. 95-989, at 14 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5800.

IV. DISCUSSION

Under Texas law, a franchise tax is imposed on all domestic and foreign corporations for the privilege of doing business in the state. Tex. Tax Code Ann. § 171.001(a)(1); see also Ford Motor Co. v. Clark, 100 F.2d 515, 516 (5th Cir.1938); Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268, 270 (Tex.1979); Universal Frozen Foods Co. v. Rylander, 78 S.W.3d 588, 590 (Tex.App.2002); Rylander v. Fisher Controls Int'l, Inc., 45 S.W.3d 291, 293 (Tex.App.2001). The grant of this privilege confers upon corporations various economic benefits, including the opportunity to realize income and the right to invoke the protection...