Matter of Peter DelGrande Corp.
| Decision Date | 16 March 1992 |
| Docket Number | Bankruptcy No. 82-00538. |
| Citation | 138 BR 458 |
| Parties | In the Matter of PETER DelGRANDE CORP. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Julia A. Cannarozzi, Sp. Asst. U.S. Atty., Newark, N.J., for I.R.S.
Robert W. Lynch, Sherman, Silverstein, Kohl, Rose & Podolsky, P.C., Pennsauken, N.J., for objectors.
Before the Court is a motion to reduce the claim of the Internal Revenue Service ("IRS"), which includes interest on withholding taxes which accrued during the pendency of a Chapter 11 reorganization proceeding. This Court has jurisdiction pursuant to 28 U.S.C. § 1334. Since this is a motion involving claims, it is a "core" matter pursuant to 28 U.S.C. § 157(b)(2)(B).
The Peter DelGrande Corporation ("Debtor"), was incorporated in 1978. Debtor's principal business was general warehousing. Debtor filed a Chapter 11 petition on January 29, 1982 and remained in possession pursuant to 11 U.S.C. § 1107. A plan of reorganization was confirmed on April 25, 1984. In July 1986, the IRS filed a motion to convert the case or to appoint a trustee, because the debtor was not paying post-petition withholding taxes. This Court revoked the plan of reorganization on October 23, 1986 and appointed a trustee on December 5, 1986. The case was converted to one under Chapter 7 on November 7, 1988.
Peter DelGrande was the sole shareholder of the Debtor from the date of incorporation until his death on January 10, 1986. He died intestate. On April 26, 1984, the day after the plan of reorganization was confirmed, DelGrande transferred substantial managerial control of Debtor to Peter J. O'Connor ("O'Connor") and Deborah DelGrande ("Deborah") (Peter DelGrande's daughter). O'Connor became the manager of finance and capital improvements, while Deborah became chief of bookkeeping and payroll. Both remained in these positions throughout the reorganization period. In addition, O'Connor was the attorney for Peter DelGrande personally, the Debtor corporation and the estate of Peter DelGrande.
On April 17, 1991, both O'Connor and Deborah ("Objectors" or Potentially Responsible Persons") received notices as potentially responsible persons from the IRS, purporting to hold them personally liable for unpaid withholding taxes incurred during the Chapter 11 reorganization period, pursuant to 26 U.S.C. § 6672.
On April 17, 1991, the Trustee filed a motion to reduce, modify or expunge priority and secured claims of the IRS. This motion sought to fix the IRS's administrative claims at $130,044.85. The IRS objected to the amount allocated to pay its administrative claim and asserted that interest and penalties continued to accrue until paid. O'Connor and Deborah argue that the interest ceases to accrue upon conversion of the case to a Chapter 7 proceeding.
O'Connor and Deborah filed objections to the administrative claim of the IRS on June 20, 1991. The recipients of notices of potential responsibility have standing to object as parties in interest when the assets of the estate are insufficient to pay the full administrative claim. Accordingly, if the debt continues to accrue interest, the liability of the Objectors is increased. The objection of the Potentially Responsible Persons is presently before this Court.
1. Whether interest accruing on post-petition taxes is a first priority administrative expense.
2. If so, whether interest retains its administrative expense status when a case has been converted from a Chapter 11 reorganization to a Chapter 7 liquidation.
a. Whether the interest on the post-petition taxes continues to accrue beyond the date of conversion.
3. Whether the Potentially Responsible Persons can instruct the IRS to allocate the payments such that trust fund tax obligations are satisfied prior to a debtor's other IRS obligations.
The Potentially Responsible Persons and the IRS agree that post-petition withholding taxes are administrative expenses of the estate entitled to first priority. 11 U.S.C. §§ 503(b)(1)(B) and 507(a)(1). In re General Polymerics Corp., 54 B.R. 523 (Bankr.D.Conn.1985); U.S. v. Friendship College, Inc., 737 F.2d 430 (4th Cir.1984). The dispute arises over the treatment of interest accruing on these taxes.
11 U.S.C. § 503 provides, in pertinent part:
This section is silent with respect to the treatment of interest which accrues on taxes. The IRS claims that the interest is part of the tax and should be accorded identical treatment as the tax. O'Connor and Deborah claim that Congress specifically omitted interest from the category of administrative expenses.
In the Pre-Code case of Nicholas v. United States, the Supreme Court held that under § 64(a)(1) of the Bankruptcy Act, interest on taxes which were incurred in the bankruptcy proceeding, but which were never paid, were entitled to priority treatment. 384 U.S. 678, 688, 86 S.Ct. 1674, 1682, 16 L.Ed.2d 853 (1966). Since the enactment of the Bankruptcy Code, however, courts have split on the issue of according administrative expense status to interest accruing on post-petition taxes.
O'Connor and Deborah request that this Court follow the basic analyses of courts which have rejected treatment of interest on post-petition withholding taxes as an administrative expense. The rationale of these decisions hinges on an examination of the legislative history of 11 U.S.C. § 503(b). Specifically, the Senate version of § 503 stated that "taxes, including interest thereon," shall be treated as administrative expenses. S. 2266, 95th Cong.2d Sess. (1978). The House version of § 503 contained no reference to interest. Finally, the adopted version contains no mention of interest. Accordingly, these courts reason that Congress deliberately omitted interest from § 503.1 This Court declines to follow the Objectors' argument.
The issue was considered by a New Jersey Bankruptcy Court in Pharmadyne Laboratories, Inc., 53 B.R. 517 (Bankr. D.N.J.1985). After finding that post-petition trust fund taxes are administrative expenses under 11 U.S.C. § 503(b)(1)(B) falling within 11 U.S.C. § 507(a)(1), Judge DeVito considered whether the IRS was entitled to post-petition interest on the debt. Holding that the interest on the taxes was an administrative expense, the court relied on a Supreme Court decision which stated that interest is generally considered an integral part of the continuing debt, and interest on unpaid taxes is "part and parcel of the tax due." Pharmadyne, 53 B.R. at 523; Bruning v. United States, 376 U.S. 358, 360, 84 S.Ct. 906, 907-08, 11 L.Ed.2d 772 (1964). The court declined to follow Pharmadyne's argument that failure to include interest in § 503 was a deliberate omission. Pharmadyne, 53 B.R. at 523.2 This Court declines to follow the analysis advanced by Pharmadyne, and endorsed by the Objectors here.
Given the rule of statutory construction that "no changes in law or policy are to be presumed from changes in language in a statutory revision unless an intent to make such changes is clearly expressed,"3 the interest that accrues on post-petition taxes must be treated as an administrative expense. In re F.A. Potts & Co., Inc., 114 B.R. 92, 94 (Bankr.E.D.Pa.1990). See also, In re Allied Mechanical Services, 885 F.2d 837, 839 (11th Cir.1989); In re Mark Anthony Const., Inc., 886 F.2d 1101, 1107 (9th Cir.1989).
In re Flo-Lizer, Inc., 107 B.R. 143, 146 (S.D.Ohio 1989) aff'd 916 F.2d 363 (6th Cir. 1990).
Moreover, treating interest in the same manner as the underlying tax is consistent with the general treatment of interest in both the Bankruptcy Code and in the Internal Revenue Code. Allied Mechanical Services, 885 F.2d at 830; Friendship College, Inc., 737 F.2d at 433 (4th Cir.1984).4
Similarly, it would be inconsistent to give priority status to a penalty associated with a tax, but not to interest on the tax.5 Penalties, unlike interest are not usually considered integral to the tax itself, therefore, it would be awkward to construe Congressional intent to give penalties higher priority than interest. In re Flo-Lizer, 916 F.2d 363, 366 (6th Cir.1990). See also In re Bergin Corp., 77 B.R. 210, 212 (Bankr. E.D.Wis.1987).
Finally, the structure of 11 U.S.C. § 503 is inconsistent with a restrictive interpretation of its list of administrative expenses. The Code itself specifies that the term "including" is not a limiting term. 11 U.S.C. § 102(3). See In re Flo-Lizer, 107 B.R. at 145.
Based on the foregoing, this Court holds that the interest accruing on the unpaid withholding taxes during the administration of the Chapter 11...
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