Matter of Irvin

• Decision Date: 13 February 1989
• Docket Number: Adv. No. 88-0686-3.,Bankruptcy No. 82-02594-3
• Citation: 95 BR 1014
• Parties: In the Matter of William F. IRVIN and Nancy K. Irvin, Debtors. William F. IRVIN and Nancy K. Irvin, Plaintiffs, v. UNITED STATES of America, on Behalf of the INTERNAL REVENUE SERVICE, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Missouri

95 B.R. 1014 (1989)

In the Matter of William F. IRVIN and Nancy K. Irvin, Debtors William F. IRVIN and Nancy K. Irvin, Plaintiffs, v. UNITED STATES of America, on Behalf of the INTERNAL REVENUE SERVICE, Defendant.

Bankruptcy No. 82-02594-3, Adv. No. 88-0686-3.

United States Bankruptcy Court, W.D. Missouri, W.D.

February 13, 1989.

Stephen B. Strayer, Liberty, Mo., for plaintiffs.

Charles S. Kennedy, Trial Atty., Tax Div., Office of Sp. Litigation, Washington, D.C., for defendant.

AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND FINAL DECREE AND JUDGMENT DECLARING PLAINTIFF TO HAVE NO LIABILITY FOR POSTPETITION INTEREST AND PENALTIES ON NONDISCHARGEABLE TAX OBLIGATION

DENNIS J. STEWART, Chief Judge.

This is an action brought by the plaintiff debtors for a declaration by this court that the debtors are not obligated to pay postpetition interest and penalties on a prepetition tax liability which has been or will be wholly paid from the bankruptcy estate. The court, by means of its prior orders in this action, set the hearing of the merits of the action for December 28, 1988. At that time, the parties submitted the following stipulation of facts, which is incorporated herein by reference so as to constitute the findings of fact required by Bankruptcy Rule 7052:

"COMES NOW Plaintiff and Defendant, by their respective counsel, and stipulate that the matters at issue in this cause shall be determined by the Court upon the following undisputed and uncontradicted facts, to wit:

"1. The Plaintiffs William and Nancy Irvin (hereinafter `Debtors\') filed a Petition for Relief under Chapter 7 of the Bankruptcy Code on August 12, 1982.

"2. On June 29, 1984, the Debtors filed a complaint in Adversary No. 84-0290-3, under Section 505 of the Bankruptcy Code to determine their liability for taxes owing to the Defendant, Internal Revenue Service (hereinafter `IRS\'), a copy of which is attached hereto as Exhibit `A\'.

"3. On August 2, 1984, the IRS served its answer to the Debtors\' complaint in Adversary No. 84-0290-3, a copy of which is attached hereto as Exhibit `B\'.

"4. On October 16, 1984, IRS served answers to Plaintiff\'s First Interrogatories in Adversary No. 84-0290-3, a copy of which is attached hereto as Exhibit `C\'.

"5. Prior to February 22, 1985, the Debtors and IRS settled the Debtor\'s complaint in Adversary No. 84-0290-3 and agreed to entry of judgment on that complaint upon the terms which are set forth in the Court\'s `Final Judgment Determining Liability for Taxes and Allowing Tax Claims Against the Estate\' filed March 6, 1985, a copy of which is attached hereto as Exhibit `D\'.

"6. That at all times herein pertinent the Debtor\'s Chapter 7 case is an asset case, which had sufficient monetary assets to pay the taxes owing to IRS, in full.

"7. In December, 1986, the Debtors\' Trustee in Bankruptcy paid to IRS the sum of $2,980.87 in full satisfaction of the Court\'s judgment determining tax liability.

"8. The Debtors received their Discharge in Bankruptcy on May 15, 1987, a copy of which is attached hereto as Exhibit `E\', and the case was closed.

"9. Since the Debtors\' discharge and closure of the case the IRS has sought to collect from the Debtors late payment penalties and interest accruing on the Debtors\' tax liability after August 12, 1982, the date the Debtors filed their Chapter 7 Petition. The amount of late penalties and interest sought by the IRS as of September 8, 1988, is $2,887.05.

"10. On October 25, 1988, the Debtors filed in Adversary Proceeding No. 88-0686-3 their `Complaint to Enforce Judgment Determining Liability for Taxes, to Determine Dischargeability of Claim for Post-petition Penalties and Interest, or, in the Alternative, to Abate Post-petition Penalties and Interest\', a copy of which is attached hereto as Exhibit `F\'.

"11. On November 29, 1988, the IRS filed in Adversary No. 88-0688-3 its Answer to Debtors\' complaint, a copy of which is attached hereto as Exhibit `G\'.

"12. The post-petition interest sought to be collected from the Debtors by IRS was unmatured on August 12, 1982, the date the Debtors\' Chapter 7 Petition was filed.

"13. The late payment penalty sought to be collected from the Debtors by IRS was unmatured on August 12, 1982, the date the Debtors\' Chapter 7 Petition was filed.

"14. The post-petition interest and post-petition late payment penalties sought to be collected by IRS are not entitled to priority under Section 507 of the Bankruptcy Code."

Conclusions of Law

There can be little question that the virtually-undisturbed course of the existing law holds that postpetition interest is chargeable to debtors on nondischargeable tax obligations. The law which has governed the issue of postpetition interest on nondischargeable tax obligations has arisen in an era of bankruptcy administration in which the process of closing a case sometimes consumed years from and after the date on which estate collection and administration had been completed. In several notable instances, this has resulted in an extremely large tax liability, attributable solely to postpetition interest, for which the debtor has been liable despite the fact that there has been, nearly throughout the bankruptcy process, a sufficient sum in the bankruptcy estate to pay the entire tax liability until the interest ultimately, while the frequently tortuous procedure of case closing took place, outdistanced the sum in the estate.¹ The case at bar is, according both to the parties' stipulation of facts and the files and records before the court,² one such case — one in which the trustee simply failed timely to pay out the monies attributable to the Internal Revenue Service claim and on which interest has now accumulated in a sum which the debtors may not be able to pay and which has made their electing to avail themselves of the bankruptcy process a lasting source of liability rather than the granting of the fresh economic start which it was intended by Congress to be.³ And it is certain that the delay in payment to which the interest sub judice is attributable is not due to any fault of the debtors, but rather to the bankruptcy process itself, a process which this court has constantly striven to improve, but which must nevertheless remain dependent upon the satisfactory functioning of the administrators who must implement it.

It was in this historical context that this court made its initial decision on the issue which is now again before it in this adversary proceeding. See Matter of Benson, 64 B.R. 128 (Bkrtcy.W.D.Mo.1986), on motion for reconsideration, 65 B.R. 148 (Bkrtcy.W.D.Mo.1986). In that decision, it was observed that virtually none of the reported decisions as of that date had ruled precisely on the issue of whether postpetition interest was chargeable to the debtor, under current laws, where the entire tax obligation, as it existed as of the date of bankruptcy, was paid from the bankruptcy estate. Otherwise, however, it was uniformly held that postpetition interest had to be paid until the date of actual payment of the tax liability to the Internal Revenue Service, without respect to whether it was the debtor or those who administered the bankruptcy estate or others who were responsible for the delay.⁴

In the absence of a ruling directly on the issue before it, this court found the provisions of the new Bankruptcy Tax Act of 1980 instructive in Matter of Benson, supra. Although the Benson case was one which was required to be decided under the pre-1979 Bankruptcy At⁵, before the Bankruptcy Tax Act was applicable, it is appropriate for a court to resolve an ambiguity in the pre-existing state of the law by reference to a later expression of the Congress clarifying the issue.⁶ Thus, in Matter of Benson, supra, at 151, this court pertinently reasoned as follows by reference to the new Bankruptcy Tax Act provisions with respect to penalties:

"Further, in other provisions, the Bankruptcy Tax Act of 1980 appears to make it clear that the reason for this change was, in part, to ensure that debtors did not bear the burdens of penalties and interest for delay in distribution to the Internal Revenue Service on tax liabilities, when that delay was necessitated by title 11 laws and exigencies of estate administration rather than by any delay or fault of the debtor. Thus, new section 6658, Title 26, United States Code, entitled `coordination with title 11,\' prohibits the imposition of penalties and certain other additions to a tax `for failure to make timely payment of tax with respect to a period during which a case is pending under title 11 of the United States Code . . . if such tax was incurred by the debtor before the . . . order of relief . . . and . . . the petition was filed before the due date prescribed by law.\' According to the legislative history of this section, it:

`relieves the debtor or the trustee from penalties which otherwise might be applicable . . . for failure timely to pay certain taxes, with respect to a period during which a bankruptcy case is pending, to the extent that the bankruptcy case precludes payment of such taxes when due . . . No inference is intended, by virtue of the adoption of these rules, that under present law such penalties should be imposed where a debtor or the trustee of a bankruptcy estate is precluded from timely paying such taxes by virtue of bankruptcy proceedings.\' (Emphasis added.)

6 U.S.Code Cong. and Adm.News, 96th Cong.2d Sess., p. 7064. The reference to prior law in the emphasized portion of the above quoted statement, along with the clear letter of the Bruning case, supra 376 U.S. 358, 361, 84 S.Ct. 906, 908, 11 L.Ed.2d 772 (1964), supports this court\'s foregoing interpretation of the law applicable to the case at bar. The amount which may be collected subsequent to bankruptcy is the principal amount which remains unpaid at the conclusion of the bankruptcy proceedings and the interest thereon is the interest which remains

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