In re St. Louis Freight Lines, Inc.
| Decision Date | 07 December 1984 |
| Docket Number | Bankruptcy No. 79-00352. |
| Citation | 45 BR 546 |
| Parties | In re ST. LOUIS FREIGHT LINES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Ralph I. Selby, Bay City, Mich., John W. Wolf, Saginaw, Mich., for debtor.
Leonard R. Gilman, U.S. Atty., Detroit, Mich., Michael Hluchaniuk, Asst. U.S. Atty., Bay City, Mich., for U.S.A.
DETERMINATION OF DEBTOR'S POST-PETITION FEDERAL TAX LIABILITY
The Internal Revenue Service requested a determination of and a judgment for the amount of the Debtor's post-petition, preconfirmation federal tax liability, and a conversion of the Debtor's case from Chapter 11 to Chapter 7. Two primary issues are raised by the briefs of the parties. First: are post-petition claims for tax penalties and interest allowable as administrative claims under § 503 of the Bankruptcy Code? Second: did the Internal Revenue Service correctly apply the payments made by the Debtor on the peculiar facts of this case?
St. Louis Freight Lines, Inc. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on October 18, 1979. On December 12, 1982, the Debtor's Fourth Amended Plan of Reorganization was confirmed by the Court. Article III of the Plan provides that:
"All federal and state withholding and related trust fund employer taxes incurred during the administration of the estate but not paid as of the date of confirmation shall be paid as follows: "In cash within sixty (60) days of the confirmation of the plan."
Between the filing of the petition and December 21, 1982, the Debtor incurred substantial federal withholding, Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and Highway Use taxes1. Although the precise amount of post-petition taxes owed is not clear,2 assessed liabilities exceeded $400,000; in addition, the IRS had assessed interest and penalties in excess of $120,000 for the Debtor's non-payment since filing for reorganization. The Debtor and the IRS reached an agreement whereby the Debtor would pay $266,070.60 at the time of the confirmation of the Plan, with the remainder of the balance to be paid in cash within sixty (60) days of the confirmation order. On January 18, 1983, the Debtor transferred $266,070.60 to the government.
The current dispute arose subsequent to this payment. The Debtor alleges that the above payment was made on the express written condition that the money be applied solely to the principal tax assessments and not to the accrued interest and penalties.3 The IRS, however, deemed the payment to be an involuntary payment. It therefore applied the sum first to the oldest post-petition, pre-confirmation principal, then to the oldest interest and penalties, (first in, first out) as summarized below:
ASSESSED
ASSESSED INTEREST AMOUNT OF UNPAID
TYPE OF PERIOD TAX AND PAYMENT ASSESSED
TAX ENDING LIABILITY PENALTY APPLIED BALANCE
Withholding
and FICA 03-31-80 $ 7,840.17 $ 7,443.90 $ 15,284.07 -0-
" 03-31-80 48,858.01 23,075.29 71,933.30 -0-
" 06-30-81 65,089.78 31,638.43 96,728.21 -0-
" 09-30-81 55,474.83 20,317.90 75,792.73 -0-
" 12-31-81 49,975.16 8,384.80 6,332.29 $52,027.67
Total Payment: $266,070.60
After this distribution, the government calculated the Debtor's outstanding post-petition, pre-confirmation balance to be $289,849.76. The Debtor, on the other hand, claims that this constituted a misapplication of the funds, resulting in an inflated and erroneous tax liability. It contends that had the payment been directed solely to principal, its remaining liability would have been approximately $179,000 rather than $289,849.76. Although no other payments have been made on the pre-confirmation debt, the Debtor says that it was willing to pay the balance, but that failure of the parties to reach consensus on the total amount due has prevented it from obtaining the financing necessary to do so. Meanwhile, the IRS has charged the Debtor with additional interest and penalties of $92,654.95 through March 31, 1984.
On August 31, 1983, the government filed a motion to convert the Debtor's case from Chapter 11 to Chapter 7. On November 14, 1983, it submitted a motion asking this Court to determine the tax liability of the Debtor pursuant to § 505(a)(1) of the Bankruptcy Code. Most recently, it moved for summary judgment on the amount of the Debtor's post-petition taxes. The Debtor has filed objections to all three requests for relief.
The Debtor challenges the right of the government to impose penalties and interest on the post-petition, pre-confirmation tax debt. It asserts that the former are not provided for in the Plan, while the latter should not be imposed because it would be inequitable to do so under the circumstances. The government's responses are first, that post-petition penalties are expressly permitted as a priority expense under § 503(b)(1)(C) of the Bankruptcy Code; and second, that interest, although not expressly allowed by the statute, should also be considered an expense of estate administration. This argument assumes without stating, that the post-petition, pre-confirmation tax liability upon which the penalties and interest are assessed is itself properly classified as an administrative expense. A close examination of various sections of the Bankruptcy Code4 could lead one to seriously question the validity of this assumption;5 however, it is this Court's opinion that post-petition tax claims resulting from activities of the trustee or debtor-in-possession are administrative expenses entitled to first priority under 11 U.S.C. § 507(a)(1).
Should penalties and interest on those taxes be similarly treated? At least with regard to penalties, the Code provides a clear answer. Whenever any tax is an expense of administration, so is any penalty, fine, or reduction in credit based on that tax. 11 U.S.C. § 503(b)(1)(C). Accordingly, those penalties assessed by the IRS for the Debtor's failure to pay post-petition, pre-confirmation taxes should ordinarily be granted administrative expense status pursuant to § 507(a)(1).
With regard to interest, the answer is not directly expressed in the Code, since § 503(b) makes no mention of interest on taxes. The IRS, not surprisingly, asserts that interest should be granted administrative priority. In support of this claim, it notes that the Senate favored administrative status for interest;6 additionally, it contends that failure to allow interest defeats the Code's goal of encouraging creditors to deal with the post-petition estate. If interest is not allowed as an administrative claim, the creditor is essentially forced to give the estate an interest-free loan, at the expense of the creditor and for the benefit of unsecured creditors. Finally, it argues that since § 503(b) is not an exhaustive declaration of allowable administrative expenses, interest can and should be allowed. See In re Labine, 12 B.C.D. 186 (Bankr.E.D.Mich.1984).
Courts addressing the classification of interest on administrative tax claims have come to different conclusions. In In re Friendship College, 737 F.2d 430 (4th Cir. 1984), the court examined the legislative history and held that interest on post-petition taxes are an administrative expense of the estate because it should be treated consistently with assessed penalties. See also In re Razorback Ready-Mix Concrete Co., 45 B.R. 917, 12 B.C.D. 356 (Bankr.E. D.Ark.1984).7 On the other hand, two other cases which examined the same legislative background held that the omission of interest was intentional and denied the claim of the taxing authority. H & C Enterprises, 35 B.R. 352 (Bankr.D.Idaho 1983); In re Stack Steel & Supply Co., 28 B.R. 151, 10 B.C.D. 232 (Bankr.W.D.Wash. 1983). This Court could analyze in detail whether and under what circumstances interest is to be treated as an administrative expense.8 However, as will be explained shortly, it is unnecessary to do so since the facts of this case prevent the Internal Revenue Service from claiming interest payments for the post-petition, pre-confirmation debt.
Having determined that post-petition tax claims and penalties are to be allowed administrative priority under § 503(b) (), it is now appropriate to examine the treatment of these claims with respect to the facts of this case. The parties are in dispute over the government's application of those funds already paid by the Debtor. The Debtor claims that since its plan provides only for the payment of "federal and state withholding and related trust fund employer taxes", and that since interest and penalties are not included in these Class 2 administrative claims, the payments made on January 18, 1983 should have been allocated entirely to the base tax liability. The IRS justifies its distribution of that payment by claiming that because the payments were involuntary, they could be allocated according to the government's discretion.
Under IRS Policy Statement P-5-60 (reprinted in CCH Internal Revenue Manual at 1305-15) the government may allocate involuntary payments to principal, interest and penalties at its discretion, regardless of the taxpayer's instructions. This policy has been judicially approved; see e.g., United States v. DeBeradinis, 395 F.Supp. 944, 952 (D.Conn.1975), aff'd mem. 538 F.2d 315 (2nd Cir.1976). It is the IRS' contention that tax payments made during the course of bankruptcy proceedings are involuntary; case law discussing this issue tends to support the argument....
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