L.J. O'Neill Shoe Co., In re

• Decision Date: 30 August 1995
• Docket Number: No. 94-3751,94-3751
• Citation: 64 F.3d 1146
• Parties: , 27 Bankr.Ct.Dec. 1020, Bankr. L. Rep. P 76,619 In re L.J. O'NEILL SHOE COMPANY; Hy-Test, Inc., Debtors. MISSOURI DEPARTMENT OF REVENUE, Claimant-Appellant, v. L.J. O'NEILL SHOE COMPANY; Hy-Test, Inc., Debtors-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1146

64 F.3d 1146

64 USLW 2151, 27 Bankr.Ct.Dec. 1020,

Bankr. L. Rep. P 76,619

In re L.J. O'NEILL SHOE COMPANY; Hy-Test, Inc., Debtors MISSOURI DEPARTMENT OF REVENUE, Claimant-Appellant, v. L.J. O'NEILL SHOE COMPANY; Hy-Test, Inc., Debtors-Appellees.

No. 94-3751.

United States Court of Appeals Eighth Circuit.

Submitted April 12, 1995.

Decided Aug. 30, 1995.

Alana Maria Barragan-Scott, Assistant Attorney General, argued, Jefferson City, MO (John R. Munich, on brief), for appellant.

Gregory D. Willard, argued, St. Louis, MO, for appellee.

Before MAGILL and HANSEN, Circuit Judges, and GOLDBERG, ^* Judge.

HANSEN, Circuit Judge.

The Missouri Department of Revenue (MDOR) appeals the district court's ¹ decision affirming the bankruptcy court's ² decision which sustained the debtors' objections to MDOR's claim for corporate income taxes for the year in which each of the debtors filed chapter 11 bankruptcy. The bankruptcy court and the district court both found that the portions of MDOR's tax claims that related to the debtors' prepetition corporate income were not entitled to a first distribution priority as administrative expenses under 11 U.S.C. Secs. 507(a)(1) & 503(b). MDOR argues that its entire tax claims are entitled to administrative expense priority. We affirm.

I.

The facts are not in dispute. On January 24, 1991, INTERCO Inc., and thirty of its affiliates, including L.J. O'Neill Shoe Company and Hy-Test, Inc., filed for chapter 11 bankruptcy protection. On January 25, 1991, the bankruptcy court consolidated all of the cases for administrative purposes. The debtors continue to operate and manage their businesses as debtors-in-possession pursuant to 11 U.S.C. Sec. 1107 & 1108. These chapter 11 bankruptcy cases were the largest ever filed in the Eastern District of Missouri and are believed to be the fifth largest ever filed in the United States.

On April 18, 1991, the bankruptcy court entered a standing order (standing order # 3) setting July 1, 1991, as the bar date for filing claims. Paragraph 4 of the standing order provided that certain types of creditors did not need to file proofs of claim by the bar date including, "[a]ny creditor whose claim is allowable under section 507(a)(1) of the Bankruptcy Code as an expense of administration of the Debtors' chapter 11 cases." In short, all creditors, except creditors holding administrative expense claims, were required to file claims by the July 1, 1991, claims bar date.

MDOR's claim is for Missouri corporate income taxes. Under Missouri law, the taxable year for corporate income taxes is the corporation's fiscal year. Here, the debtors' relevant fiscal years began on February 25, 1990, and ended February 23, 1991. Thus, the debtors' taxable years ended about a month after the debtors filed for bankruptcy. The debtors' Missouri tax returns were due June 17, 1991. The debtors received extensions on the returns. Under the extensions, the L.J. O'Neill return was due on October 15, 1991, and the Hy-Test return was due on December 15, 1991.

On December 2, 1991, five months after the expiration of the claims bar date, MDOR filed a proof of claim against L.J. O'Neill for $23,959.47. On January 13, 1992, more than six months after the claims bar date, MDOR filed a proof of claim against Hy-Test for $65,384.81. Both claims were labeled as "administrative" in the upper right hand corner of the proof of claim form and additionally stated that both claims were "unsecured priority claims under section 507(a)" for corporate taxes for the period 3/1/90-2/28/91.

The debtors objected to both claims. The debtors also filed a counterclaim in the form of an adversary proceeding (a lawsuit within the bankruptcy cases) against MDOR seeking the return of some of the year's taxes the debtors had already paid to MDOR. The bankruptcy court initially sustained the debtors' objection to MDOR's claim for taxes against L.J. O'Neill on the basis that MDOR failed to respond to the objection. The bankruptcy court, however, later reconsidered that ruling and decided to consolidate the two sets of claims and objections and decide them both on the merits.

The bankruptcy court heard oral arguments and eventually sustained the objections in part, and overruled the objections in part. Hy-Test, Inc. v. Missouri Dep't of Revenue (In re L.J. O'Neill Shoe Co., In re Hy-Test, Inc.), 143 B.R. 707 (Bankr.E.D.Mo.1992). The bankruptcy court concluded that only a small percentage of MDOR's tax claims against both L.J. O'Neill and Hy-Test, which related to postpetition income, qualified as timely filed administrative expense claims. The bankruptcy court struck the remaining portions of MDOR's tax claim, which was attributable to prepetition income, as time barred under the standing order. The district court affirmed. MDOR appeals.

II.

The only issue presented for our review deals with the complicated interface between the tax laws and the bankruptcy laws. The particular question presented here is whether the portions of MDOR's corporate income tax claims that relate solely to the income of the debtors earned before the date they filed for bankruptcy ("prepetition income") qualify as administrative expense claims under 11 U.S.C. Sec. 503(b)(1)(B)(i). There is no dispute here that the portions of the claims relating to income the debtors earned after they filed for bankruptcy ("postpetition income") are entitled to administrative expense treatment. More than eleven months of each debtor's tax year, however, fell within the prepetition period. If those prepetition portions of MDOR's tax claims are entitled to administrative expense treatment, then both claims in their entirety would be deemed timely filed under the bankruptcy court's standing order and would be entitled to a first priority distribution under 11 U.S.C. Sec. 507(a)(1). If we affirm the bankruptcy and district courts, however, the prepetition portion of each claim is time barred.

This is a question of first impression in the circuit courts. We review the bankruptcy and district courts' legal conclusions de novo. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987). Section 503 of the Bankruptcy Code sets out which claims may be allowed as administrative expenses. Administrative expenses, as defined in section 503, are a category of claims given first priority under 11 U.S.C. Sec. 507(a)(1) in the distribution of the bankruptcy estate. See Zagata Fabricators v. Superior Air Prod., 893 F.2d 624, 627 (3d Cir.1990). "By placing creditors who are entitled to payment of these administrative expenses first in line, sections 503 and 507 advance the estate's interest in survival above all other financial goals." Id. It is well settled, however, that because administrative expense priority (and other priorities in distribution) are contrary to the Bankruptcy Code's general policy of equal distribution, these priorities should be narrowly construed. Stuart v. Carter (In re Larsen), 59 F.3d 783, 786 (8th Cir.1995) (citing In re Northwest Fin. Express, Inc., 950 F.2d 561, 563 (8th Cir.1991)).

The relevant portion of section 503 states:

(b) After notice and a hearing, there shall be allowed, administrative expenses, ... including:

....

(1)(B) any tax--

(i) incurred by the estate, except a tax of a kind specified in section 507(a)(7) ³ of this title.

11 U.S.C. Sec. 503(b)(1)(B)(i). Under the terms of this section, the tax claim must satisfy a "two-prong test" to qualify as an administrative expense claim. City of New York, Dept. of Finance v. R.H. Macy & Co. (In re R.H. Macy & Co.), 176 B.R. 315, 316-17 (S.D.N.Y.1994) (citing In re O.P.M. Leasing Serv., Inc., 68 B.R. 979, 982 (Bankr.S.D.N.Y.1987)). First, the tax must be "incurred by the estate." Id. Second, the tax must not be "specified in section 507(a)(7)." Id. Section 507(a)(7) provides a seventh priority in distribution to certain types of tax claims. If either of these two requirements is not satisfied, then the claim is not entitled to administrative expense treatment.

The bankruptcy court and the district court both held that while the entire corporate tax was "incurred by the estate" (i.e.--incurred postpetition), the portion of the tax attributable to prepetition income was "of a kind specified in section 507(a)(7)." Thus, both courts concluded that the prepetition portions of MDOR's tax claims were not entitled to be first priority administrative expenses but instead were entitled to a seventh priority under Sec. 507(a)(7). Under the standing order, however, the portion of MDOR's claims falling under Sec. 507(a)(7) are time barred.

MDOR contends that the district court and the bankruptcy court erred by concluding that the prepetition portions of the tax claims were not entitled to administrative expense treatment. MDOR argues that its entire tax claim against each debtor qualified for administrative expense treatment under Sec. 503 because the tax was both "incurred by the estate" and it is not the kind of tax specified in Sec. 507(a)(7). The debtors argue that the lower courts properly concluded that only the portion of each claim that is derived from postpetition income should receive administrative expense treatment. The debtors also contend, however, that we could reach the same result under the first prong of the test, i.e., that the prepetition portion of the tax was not "incurred by the estate.". ⁴

We need not accept the debtors' invitation to reach the difficult question of whether the portion of the tax attributable to prepetition income was "incurred by the estate," because like the courts below, we conclude that the prepetition portion of the claim was for a tax of a kind specified in section 507(a)(7). We thus will assume, for the purposes of this analysis only, that the tax was "incurred by the estate" and proceed to determine whether the tax is "of a kind specified in section 507(a)(7)." If the tax is of a kind specified in section 507(a)(7), then it...