Mansfield Tire & Rubber Co., In re

• Decision Date: 28 August 1991
• Docket Number: No. 90-4103,90-4103
• Citation: 942 F.2d 1055
• Parties: -5684, 60 USLW 2177, 91-2 USTC P 50,419, 25 Collier Bankr.Cas.2d 591, 22 Bankr.Ct.Dec. 43, Bankr. L. Rep. P 74,241, 14 Employee Benefits Cas. 1113 In re The MANSFIELD TIRE & RUBBER COMPANY, Debtor. UNITED STATES of America, Plaintiff-Appellant, v. The MANSFIELD TIRE & RUBBER COMPANY, Defendant, Samuel Krugliak, Trustee; Richard L. Phillips, Trustee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1055

942 F.2d 1055

68 A.F.T.R.2d 91-5684, 60 USLW 2177,

91-2 USTC P 50,419,

25 Collier Bankr.Cas.2d 591, 22 Bankr.Ct.Dec. 43,

Bankr. L. Rep. P 74,241,

14 Employee Benefits Cas. 1113

In re The MANSFIELD TIRE & RUBBER COMPANY, Debtor UNITED STATES of America, Plaintiff-Appellant, v. The MANSFIELD TIRE & RUBBER COMPANY, Defendant Samuel Krugliak, Trustee; Richard L. Phillips, Trustee Defendants-Appellees.

No. 90-4103.

United States Court of Appeals Sixth Circuit.

Argued July 29, 1991.

Decided Aug. 28, 1991.

Gary R. Allen, Acting Chief (briefed), Gary D. Gray, Kenneth W. Rosenberg (argued), U.S. Dept. of Justice, Appellate Section, Tax Div., Washington, D.C. for U.S.

David L. Simiele, Krugliak, Wilkins, Griffiths & Dougherty, Canton, Ohio, H. Jeffrey Schwartz (briefed), Jeremy Gilman (argued), Benesch, Friedlander, Coplan & Aronoff, Cleveland, Ohio, for defendants-appellees.

Before KENNEDY and JONES, Circuit Judges, and GIBSON, Chief District Judge. ^*

KENNEDY, Circuit Judge.

In this case we are called upon to determine the priority to be afforded under the Bankruptcy Code to federal pension excise tax claims which have been challenged by the trustees.

In 1979, debtors Mansfield Tire and Rubber Company, Pennsylvania Tire and Rubber Company of Mississippi, Inc., and Pennsylvania Tire Company filed petitions for relief under chapter 11 of the United States Bankruptcy Code of 1978, Title 11 U.S.C. The United States filed a proof of claim asserting, inter alia, unsecured claims in the amount of $363,111.20 for the debtors' pension excise tax liability under section 4971(a) of the Internal Revenue Code, 26 U.S.C. § 4971(a). The United States contended that the excise tax liabilities are entitled to distributive priority under section 507(a)(7) of the Bankruptcy Code, 11 U.S.C. § 507(a)(7). ¹

The trustees objected to the pension excise tax proof of claim, asserting that the claim is not entitled to priority, as it constitutes a penalty rather than a tax, and that it should therefore be subordinated to the claims of general unsecured creditors pursuant to either 11 U.S.C. § 726(a)(4) or § 510(c). The trustees then filed a motion for summary judgment on the same grounds.

The Bankruptcy Court granted summary judgment in favor of the trustees. The court determined that the government's section 4971 claim was not eligible for priority under 11 U.S.C. § 507(a)(7)(E) and that the claim should be subordinated in distribution to the claims of general unsecured creditors pursuant to 11 U.S.C. § 510(c).

The District Court affirmed, 120 B.R. 862, agreeing that excise taxes under section 4971(a) are penalties rather than excise taxes for purposes of the Bankruptcy Code and thus were not entitled to the priority granted to excise taxes by section 507(a)(7)(E) of the Bankruptcy Code. Reasoning from its characterization of the government's claims as penalties, the District Court then held that it was proper to equitably subordinate those claims to those of general unsecured creditors pursuant to section 510(c) of the Bankruptcy Code.

The questions presented are (1) whether a federal excise tax imposed by section 4971(a) of the Internal Revenue Code is an "excise tax" entitled to priority under section 507(a)(7)(E) of the Bankruptcy Code and (2) whether a tax owed to the federal government may be equitably subordinated to other claims only upon a showing of inequitable conduct by the federal government. We answer both questions in the affirmative, and REVERSE.

The challenged claims stem from assessments made pursuant to 26 U.S.C. § 4971(a) resulting from the debtors' failure to meet minimum funding requirements for a pension plan. Section 4971 was enacted as part of ERISA in 1974 as a means of enforcing the minimum funding requirements of ERISA. The validity and amount of the assessments are not disputed by the trustees.

Section 4971 is located in Subtitle D of the Internal Revenue Code under the heading "Miscellaneous Excise Taxes." That section is captioned "Taxes on failure to meet minimum funding standards" and provides, in relevant part:

(a) Initial tax.--For each taxable year of an employer who maintains a plan to which section 412 applies, there is hereby imposed a tax of 10 percent ... on the amount of the accumulated funding deficiency under the plan, determined as of the end of the plan year ending with or within such taxable year.

....

(e) Liability for tax.--

(1) In general.--... the tax imposed by subsection (a) or (b) shall be paid by the employer responsible for contributing to or under the plan the amount described in section 412(b)(3)(A).

26 U.S.C. § 4971.

The Bankruptcy Code, by section 507, provides for priority of certain claims in bankruptcy. It reads, in relevant part:

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

....

(7) Seventh, 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 filing of the petition; or

(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.

11 U.S.C. § 507(a)(7)(E).

The government's argument is a simple one: section 4971 assessments are "excise taxes"; section 507(a)(7)(E) says an "excise tax" is entitled to priority; therefore, section 4971 assessments are entitled to priority. The trustees argue that such assessments are actually penalties disguised as taxes and thus should not be given priority under section 507(a)(7)(E). Further, the trustees argue that the section 4971 assessments are nonpecuniary loss penalties, which should be subordinated to the claims of general unsecured creditors.

The trustees argue that those payments which Congress defined as "excise taxes" in the Internal Revenue Code are not necessarily "excise taxes" under the Bankruptcy Code. The trustees maintain that the government is not entitled to a priority distribution for its section 4971(a) claims because, despite its label as an "excise tax," section 4971 exacts nonpecuniary loss penalties as a matter of bankruptcy law. They maintain that section 4971 claims do not satisfy the four-part test used by the courts below for determining whether a particular governmental exaction is a "tax," which test we are urged to adopt. ²

"The task of resolving the dispute over the meaning of [§ 507(a)(7)(E) ] begins where all such inquiries must begin: with the language of the statute itself." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). In Ron Pair, the Supreme Court held that where the language of the Bankruptcy Code is plain, " 'the sole function of the courts is to enforce it according to its terms.' " Id. (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)). The statutory language held to have plain meaning in Ron Pair--a lengthy phrase in Bankruptcy Code § 506(b) containing several clauses--is undoubtedly less plain than the language we are presented with here, the term "excise tax."

Acknowledging that the government prevails if we apply the plain language of the Bankruptcy Code, the trustees contend that "[t]he bankruptcy laws, and the laws which affect them, must be construed so as to effectuate their fundamental purposes" and that "courts are empowered to look behind the labels affixed to statutes when those labels are inconsistent with overriding legislative objectives." The trustees argue that the purpose and legislative history of section 4971 reveal that its primary goal is to achieve punitive purposes and they point out that bankruptcy law looks with disfavor on nonpecuniary loss penalties. See 11 U.S.C. § 507(a)(7)(G); cf. Simonson v. Granquist, 369 U.S. 38, 40-41, 82 S.Ct. 537, 538-539, 7 L.Ed.2d 557 (1962) ("Enforcement of penalties against the estates of bankrupts ... would serve not to punish the delinquent taxpayer, but rather their entirely innocent creditors."). Therefore, the trustees maintain that to allow prioritization of the government's "penalty" claim is inimical to fundamental bankruptcy policy and thus we should construe the term "excise tax" in Bankruptcy Code section 507(a)(7)(E) so as not to include the excise taxes payable under 26 U.S.C. § 4971.

The Bankruptcy Code does not define "tax" or "excise tax" and therefore we are not persuaded that Congress intended to give a special bankruptcy-context meaning to those words. With respect to the regulatory nature of section 4971 excise taxes, Congress granted priority to excise tax claims without regard to whether their purpose was primarily regulatory. Indeed, many, if not most, of the excise taxes contained in Subtitles D and E of the Internal Revenue Code are intended to discourage undesirable conduct. We see no indication, either in the statute itself or in the legislative history underlying that provision, that Congress intended to deny priority to any federal excise tax. ³

In urging their construction of section 507(a)(7)(E), the trustees argue that prioritizing the government's section 4971 claims "would afford them a distributive advantage not envisioned by the drafters of the Bankruptcy Code--an advantage whose ultimate cost would be borne by Mansfield's innocent creditors." We find this argument specious. Section 4971 was an existing federal excise tax at the time the Bankruptcy Code drafters used the term excise tax. Although the Bankruptcy Code does not define "tax" or "excise tax" it seems to us that when Congress said "excise tax" in section 507(a)(7)(E), Congress at the very least meant to include those exactions which Congress itself had previously deemed to be federal excise taxes.

With respect to the...