In re Parchem

Decision Date12 August 1958
Docket NumberNo. 20276.,20276.
Citation166 F. Supp. 724
PartiesIn the Matter of Wilfred J. PARCHEM and Harold N. Langdon, dba Aladdin Food Plan, a co-partnership, Bankrupt.
CourtU.S. District Court — District of Minnesota

Gerald E. Magnuson, of Larson, Loevinger, Lindquist, Freeman & Fraser, Minneapolis, Minn., for trustee in Bankruptcy.

Kenneth G. Owens, Asst. U. S. Atty., St. Paul, Minn., for the United States.

NORDBYE, Chief Judge.

This proceeding comes before the Court upon a petition to review the order of the Referee in Bankruptcy dated February 7, 1958.

On September 3, 1954, Wilfred J. Parchem and Harold N. Langdon, doing business as Aladdin Food Plan, a co-partnership, were adjudged bankrupt. On May 14, 1954, the Director of Internal Revenue in St. Paul received assessment lists showing that the partnership was indebted to the Government in the sum of $808.84 for withholding and employment taxes for the first quarter of 1954. On July 8, 1954, a notice of a federal tax lien for $808.84 was filed pursuant to Sections 3670-3672, Internal Revenue Code of 1939, 26 U.S. C.A. §§ 3670-3672. This sum did not include interest and penalty which was subsequently computed, but the notice did state:

"Pursuant to the provisions of Sections 3670, 3671, and 3672 of the Internal Revenue Code of the United States, notice is hereby given that there have been assessed under the Internal Revenue laws of the United States against the following-named taxpayer, taxes (including interest and penalties) which after demand for payment thereof remain unpaid, and that by virtue of the abovementioned statutes the amount (or amounts) of said taxes, together with penalties, interest, and costs that may accrue in addition thereto, is (or are) a lien (or liens) in favor of the United States upon all property and rights to property belonging to said taxpayer. * * * "

On January 14, 1955, a date within the allotted period for filing claims in bankruptcy, the District Director of Internal Revenue filed a claim for $850.63 (Claim No. 25). This amount represented the aforementioned unpaid withholding and employment taxes, plus a five per cent delinquency penalty for $40.44, and lien filing fees of $1.35. On December 28, 1956, approximately nine months after the expiration of the period allotted for filing claims, the District Director filed a "Supplemental Proof of Claim" (Claim No. 38) for $561.40 for withholding and employment taxes of the bankrupt for the year ending June 30, 1954. This claim included an interest item of $2.79, representing interest at six per cent from June 30, 1954, to September 3, 1954, the date of bankruptcy.

On January 10, 1957, the District Director filed Claim No. 39, which was denominated as an "Amended Proof of Claim." However, it merely incorporated Claims Nos. 25 and 38 into a single claim. In addition, the claim asked for $135.40 in post bankruptcy interest upon the $850.63 lien claim allegedly owing as taxes, penalty and filing fees for the first quarter of the calendar year 1954.

The Trustee challenged the Government's right to the $40.44 included in the Government's claim as penalty, the right to post bankruptcy interest on the lien claim No. 25, and the claim for $561.40 (Claim No. 38) which was filed after the expiration of the allotted period for filing claims in the bankruptcy proceeding. The Referee, however, sustained the Government's claim in all respects with this summary:

"1. The Government's Tax Lien Notice is adequate. The Referee thinks that the preliminary portion of the Notice sufficiently discloses the Government's claim for penalty, interest and costs to import notice thereof. By the whole Notice, every mortgagee, pledgee, purchaser and judgment creditor was placed on inquiry with reference to the items mentioned. The Notice was filed in St. Paul. The Director of Internal Revenue for this District, who filed the Notice, has offices in St. Paul. It seems certain that a reasonably intelligent and prudent person, after so being placed on inquiry, would encounter little, if any, difficulty in ascertaining the total amount of the lien claimed.
"2. The trustee's objection to the penalty claimed by the Government should be overruled.
"3. The trustee's objection to Claim No. 38, on the theory that it introduces a different cause of action than is asserted in Claim No. 25, should be overruled. Both claims accrued and are for tax liabilities incurred in the same taxable year, whether fiscal ending July 1, 1954, or calendar ending December 31, 1954.
"4. The trustee's objection to post bankruptcy interest should be overruled.
"The Referee further concludes that since claims numbered 25 and 38 are consolidated in Claim No. 39, they should be stricken from the claim register in this proceeding and that the Order made herein should apply only to Claim No. 39, * *."

In that there are three distinct questions which arise, they will be considered separately.

I. The Penalties Question

At the outset it seems clear that the Trustee's contention that the Government's lien was only for the specific amount listed in the lien claim cannot be sustained. Section 3670, Internal Revenue Code of 1939, provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

Clearly, the words "interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto" indicate a legislative intent to grant a lien in excess of the actual amount of the tax. In that interest and penalties may not be ascertainable when the assessment is made, it necessarily follows that the word "including" as used in the statute contemplates the addition of these amounts when they are determinable. But granted that the Government has a valid lien for the amount of the tax, together with the statutory penalty, the question arises whether Section 57, sub. j of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. j, applies to the $40.44 penalty in this case. This section reads:

"Debts owing to the United States or to any State or any subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued on the amount of such loss according to law."

Both the Trustee and the Government support their respective positions as to this question with numerous decisions. It may be conceded that the weight of authority seemingly favors the Government's position. Grimland v. United States, 10 Cir., 1953, 206 F.2d 599; Commonwealth of Kentucky ex rel. Unemployment Compensation Commission v. Farmers Bank & Trust Co., 6 Cir., 1943, 139 F.2d 266; In re Knox-Powell-Stockton Co., Inc., Ltd., 9 Cir., 1939, 100 F.2d 979; In re Urmos, D.C.E.D.Mich. 1955, 129 F.Supp. 298; In re John S. Goff, Inc., D.C.D.Me.1955, 141 F.Supp. 862. However, I am convinced that the reasoning of the cases which support the Trustee's position is more persuasive, although they are all opinions of the District Courts. In re Burch, D.C.D.Kan. 1948, 89 F.Supp. 249; In re Hankey Baking Co., D.C.W.D.Pa.1954, 125 F.Supp. 673; In re Lykens Hosiery Mills, Inc., D.C.S.D.N.Y.1956, 141 F.Supp. 895; In re C. J. Dick Towing Company, D.C.S.D. Tex.1958, 161 F.Supp. 751. And see In re Mill City Plastics, D.C.Minn.1955, 129 F.Supp. 86, affirmed Northtown Theatre Corp. v. Mickelson, 8 Cir., 226 F.2d 212.

The Government admits that the item of $40.44 is a penalty. Moreover, it has not established that it has sustained any pecuniary loss by reason of the bankrupt's failure to pay the tax lien claim of $808.84 outside of the interest thereon. It reasons that Section 57, sub. j does not operate upon perfected liens regardless of the fact that a portion of the lien has come into existence by way of a penalty. In other words, the Government recognizes that Section 57, sub. j is applicable to a penalty on a federal tax claim not perfected by a lien before bankruptcy. But where a tax lien has been perfected and such lienholder is not required to file a proof of claim within the time allotted to unsecured creditors, it is urged that Section 57, sub. j does not apply.

In considering this question, some courts seem to find an inconsistency or a conflict between Sections 60-67 and 70 of the Bankruptcy Act and Section 57, sub. j, and in effect conclude that by implication Section 57, sub. j with reference to tax lien penalties has been rendered inoperative thereby. Grimland v. United States, supra; Commonwealth of Kentucky ex rel. Unemployment Compensation Commission v. Farmers Bank & Trust Co., supra; In re Knox-Powell-Stockton Co., Inc., Ltd., supra. However, there seems to be scant bases for such a conclusion. The mere fact that Congress provided that the Government should be clothed with a perfected tax lien upon complying with certain statutes does not mean that as to such liens it intended to render inoperative a broad and comprehensive statute which denies to a sovereign the right to collect tax penalties in a bankruptcy court. However, I do not find it necessary to discuss in detail the various approaches that the different courts have made to this problem. Suffice it to say that the most cogent argument in support of the Government's position is that Congress did not intend that Section 57, sub. j, should apply to government tax liens because valid liens at the commencement of bankruptcy have always been preserved. But it would seem that that well-established principle does not divest the Bankruptcy Court of the power and...

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