Opinion
No. CA 3-86-0616-R.
June 24, 1986.
Steven A. Maurer, Attorney, Tax Division, Department of Justice, Dallas, Tex., attorney for the United States.
Elizabeth A. Bates, Palmer, Palmer Coffee. P.C., Dallas, Tex., attorney for debtor.
Appeal from the United States Bankruptcy Court for the Northern District of Texas.
Taxes — Unsecured Claims — Priorities — Interest. — Pre-petition interest on priority tax claims is entitled to priority status as a "tax," since such interest is assessed against delinquent taxpayers under the Internal Revenue Code and thus becomes a tax liability.
See Sec. 507(a)(7) at ¶ 9032.
Individual Repayment Plan — Taxes — Unsecured Claims — Interest. — A bankruptcy court cannot grant interest on a Chapter 13 debtor's deferred payments for unsecured priority taxes to the United States, or otherwise require the payments to equal the discounted present value of the tax claims as of the effective date of the debtor's plan. Section 1322(a)(2) only calls for "full payment" of unsecured claims. Nowhere in the legislative history of this section is the time value of money mentioned. This policy decision was a conscious legislative policy to favor debtors over tax claimants, part of the trade-off of rights and obligations that Chapter 13 was designed to balance.
See Sec. 1322(a)(2) at ¶ 13,203.
The case comes here on appeal from a final judgment of the bankruptcy court. This Court has jurisdiction under 28 U.S.C. § 158.
53 B.R. 545 (Bkrtcy.N.D. Tex. 1985).
28 U.S.C. § 158 provides that district courts shall have jurisdiction to hear appeals from final judgments entered in cases referred to bankruptcy judges.
The case presents two issues. First, whether pre-petition interest on priority tax claims is entitled to priority status. Second, whether the value of the deferred cash payments of an unsecured priority tax claim of the United States in a Chapter 13 plan must be discounted as of the effective date of the plan so that the payments equal the face value of the claim at the time of confirmation.
These issues address the bankruptcy judge's conclusions of law. Therefore, this Court shall apply a de novo standard of review. Matter of Missionary Baptist Foundation of America, 712 F.2d 206, 209 (5th Cir. 1983).
Facts
The facts are not in dispute and may be summarized as follows:
1. On October 5, 1984 the debtor filed a Chapter 13 bankruptcy petition;
2. After the debtor filed his petition, the United States filed a proof of claim in the total amount of $65,458.84;
3. The United States made a secured claim in the amount of $64,854.67, an unsecured priority claim in the amount $186.52, and an unsecured general claim in the amount of $417.56;
4. Of the United States' claim for $65,458.84, pre-petition tax equaled $35,111.02, pre-petition interest equaled $16,471.61, and pre-petition penalties equaled $13,876.21;
5. On February 8, 1985 the United States filed its objections to confirmation of the debtor's proposed plan, and subsequently stipulated that for purposes of confirmation, the government's secured claim should be treated as unsecured;
6. On July 8, 1985 the bankruptcy court concluded that the government's claim for pre-petition interest was a priority claim and that the debtor's deferred payments to the government for its priority tax claims need not bear an interest factor;
The parties had stipulated that the government's claim for pre-petition taxes was a priority claim and that the government's claim for pre-petition penalties was a general unsecured claim.
7. On August 21, 1985 the bankruptcy court denied confirmation of the debtors' Chapter 13 plan as the plan failed to provide for full payment of the government's priority tax claim.
Discussion
I. Pre-Petition Interest
The debtor argues that 11 U.S.C. § 507(a)(6)(A), which governs the priority of claims in a bankruptcy proceeding, states only that the government receives the sixth priority on "a tax on or measured by income or gross receipts[;]" the statute makes no mention of interest on that tax and therefore pre-petition interest should not receive priority status. The debtor further relies on the history of section 507; the provision originated in the House of Representatives and the House stated that it would exclude pre-petition interest from priority status.
The debtor filed this case prior to the enactment of the Technical Corrections Act of 1984. Therefore, this Court must apply the Bankruptcy Act of 1978.
The United States reaches the opposite conclusion by relying on the legislative metamorphosis of section 507 in the Senate and conference committee and related bankruptcy code provisions. The government also cites the treatment of pre-petition interest under the Bankruptcy Act of 1898.
Both sides agree that the plain language of section 507 is not dispositive of the first issue. Thus, to properly give effect to the provision, a view of the legislative history is appropriate.
Section 507 originated in the House. The debates there make clear that for purposes of the Bankruptcy Reform Act of 1978, pre-petition interest on taxes was not included within the class of items accorded priority status. The House then sent the bill to the Senate for its consideration.
The Senate Judiciary Committee, after acting on its own bill, submitted it to the Senate Finance Committee for consideration of the tax related provisions in the bill. The Senate Judiciary's bill included a section granting pre-petition interest on taxes priority status. The Finance Committee struck the pre-petition interest section; however, the report accompanying the amended Senate bill clearly indicates that pre-petition interest should remain a priority claim. S.Rep. No. 95-1106, 95th Cong., 2d Sess. 20(1978).
The full Senate adopted the Finance Committee bill. Furthermore, the Senate substituted its bill for the House bill still under consideration, passed its "House version" and returned it. A conference committee adopted a compromise bill — approved by both Houses — which provided that any tax liability collectable as a "penalty" would receive priority status under section 507. Congress defined a "penalty" as a tax liability under the Internal Revenue Code resulting from a pecuniary loss. See 124 Cong. Rec. H 11113 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S. 17430-34 (daily ed. Oct. 6, 1978). Thus, the term "penalty" must be understood as a pecuniary loss arising under some section in the tax code. Cf. 1978 U.S. Code Cong. Ad. News 6151.
Section 6601 of the tax code provides that taxpayers who pay their taxes late must pay interest on the outstanding taxes until final extinguishment of liability. This provision exists to compensate the United States — and its citizens — for the late payment and consequential lost use of that money. Indeed, where the government experiences a shortfall in revenues, it must borrow from the capital markets — and pay interest on those sums. That interest is not a penalty charged by a conspiring public, but a charge to compensate for the use of the money.
Understanding "interest" under the tax code consistently with "penalty" under the bankruptcy code leads this Court to conclude that pre-petition interest should be accorded priority status under section 507(a)(6)(A). Congress intended that pecuniary losses to the government attributable to specific internal revenue sections be considered "taxes" for purposes of the priority provisions.
Several other courts have reached the same conclusion by relying on related bankruptcy code sections; those related provisions solidify this Court's conclusion. See In re Treister, 52 B.R. 735, 739 (Bkrtcy.S.D.N.Y. 1985) (relying on 11 U.S.C. § 101(4)); In re Healis, 49 B.R. 939, 942 (Bkrtcy.M.D.Pa. 1985) (relying on 11 U.S.C. § 507(a)(6)(G)). Moreover, the holding that pre-petition interest should receive priority status is not inconsistent with its prior treatment under the Bankruptcy Act of 1898. Cf. Bruning v. United States, 376 U.S. 358, 360 (1964). Therefore, this Court concludes that prepetition interest on priority tax claims is entitled to priority status as a "tax" under section 507(a)(6).
II. Interest on Deferred Payments of a Priority Tax Claim
The debtor argues on the second issue that 11 U.S.C. § 502(b)(2) — a general provision dealing with the allowable amount of a claim — binds this Court to deny the United States the application of an interest factor on the deferred payments for unsecured priority tax claims. Further, the debtor asserts that unlike Chapter 11, Chapter 13 provides no provision that can be construed to require that these payments account for the time value of money.
Section 502(b)(2) applies to Chapter 13 through 11 U.S.C. § 103(a) unless specifically overruled by a separate provision in Chapter 13.
The government acknowledges that Chapter 13 contains no specific language that unequivocally mandates the application of a present value calculation to the deferred payment of unsecured priority tax claims. However, the government urges that 11 U.S.C. § 1322(a)(2) must be interpreted in the light of 11 U.S.C. § 1129(a)(9)(C) and 1325(a)(5)(B)(ii) — each of which require that the deferred payments measure the present value of the tax claim.
Section 502(b)(2) provides that, with certain exceptions not relevant here, a claim or interest should be allowed except to the extent that the claim or interest "is for unmatured interest." This section has been interpreted to preclude the allowance of post-petition interest during the automatic stay period — but only to the effective date of the plan; thereafter, other sections of the code must be referred to. See Kuhn v. Pennsylvania Higher Educ. Asst. Agency, 33 B.R. 759, 782 (Bkrptcy.S.D.Ohio 1983).
The issue here is not whether the government is entitled to post-petition interest on its prepetition claims from the date of filing; rather, the United States asks that the deferred payments required under section 1322(a)(2) reflect the present value of the tax claims from the effective date of the plan. Cf. In re Healis. 49 B.R. at 942. Therefore, the debtor's reliance on section 502 is misplaced.
The pertinent text of section 1322(a)(2) provides that a petitioner's plan shall "provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507. . . ." The United States argues that the term "full payment" — when read in conjunction with the phrase "deferred cash payments" — requires a calculation of the present value of the tax claim in future dollars in order to preserve the value of claim. The debtor asserts that these terms — when compared to the Chapter 11 analogue of section 1322 — do not require that the deferred payments account for the future value of the money because Congress made no mention in section 1322(a)(2) of the "value" of unsecured priority tax claims — only full payment.
In Matter of Burgess Wholesale Mfg. Opticians, Inc., 721 F.2d 1146 (7th Cir. 1983), the court addressed whether or not under Chapter 11 the United States was entitled to receive deferred cash payments that equaled the present value of its unsecured priority tax claims in future dollars. The key provision was section 1129(a)(9)(C); it provided that a court may approve a plan, over an objection, only if with respect to an unsecured priority tax claim, "the [government] will receive on account of such claim deferred cash payments . . . of a value, as of the effective date of the plan, equal to the allowed amount of such claim."
The issue in Burgess was the equivalent under Chapter 11 of the issue here.
The Burgess court held that a debtor in Chapter 11 must make deferred future payments in an amount that preserved the discounted present value of the claim on the effective date of the plan. The court relied very heavily on the legislative history — which explicitly contemplated a present value analysis. Furthermore, it must be recognized that Chapter 11 provides relief only for businesses and not individuals. See In re 312 West 91st Street Co., Inc., 35 B.R. 346, 347 (Bkrtcy.S.D.N.Y. 1983).
Section 1322(a)(2) — in distinction to section 1129(a)(9)(C) — contains no reference to the "value" of a claim as of the effective date of the plan. Indeed, given the mention of "value" in section 1129 — which, like section 1322, was drafted as part of the Bankruptcy Reform Act of 1978 — and not in section 1322(a)(2), Congress must not have intended for persons in Chapter 13 to make payments equal to the discounted present value of the governmnet's priority tax claim. Further, the legislative history indicates that Congress had to account for other considerations in enacting section 1322(a)(2) than in enacting section 1129.
The Senate noted that in Chapter 13 cases, the interests of creditors, the tax collector and the debtor must be balanced. Under section 1322 the government would receive the full amount of its unsecured priority claims — plus pre-petition interest on those claims. See Part I, ante, at 2. However, consideration must be made for the creditors and the debtor's new start. Unlike section 1129(a)(9)(C) — where Congress' concern lay with businesses that collect "employee trust fund" taxes — section 1322(a)(2) struck a balance in favor of the debtor — who may be a small business person, a wage earner or a person on social security. 1978 U.S. Code Cong. Ad. News 5800; 6153.
In addition to the distinct difference in the words of sections 1129(a)(9)(C) and 1322(a)(2), the legislative history is equally divergent. Nowhere in the history of 1322 does Congress mention the time value of money — the key ingredient of distinction in the history of section 1129. See 1978 U.S. Code Cong. Ad. News 6384-6385. As these two provisions were enacted simultaneously and reflect plain differences in language as well as legislative discussion, this Court concludes that section 1322(a)(2) prohibits the bankruptcy court from either granting interest on the deferred payments for unsecured priority taxes to the United States or from requiring the deferred payments to equal the discounted present value of the unsecured priority tax claims on the effective date of the plan.
The government also relies on certain language in section 1325(a)(5)(B)(ii) regarding the value of secured claims subject to deferred cash payment. There — as in section 1129(a)(9)(C) — Congress made a specfic reference to "value" as of the effective date of the plan, and not merely "full payment" of the claim. Furthermore, the legislative history of section 1325 makes the same reference to "value" as of the effective date of the plan as was made in regard to section 1129 — and not section 1322(a)(2). 1978 U.S. Code Cong. Ad. News 6385. Therefore, the language of section 1325(a)(5)(B)(ii) only serves to reinforce this Court's conclusion that the 1322(a)(2) prohibits the creation of an interest factor in the calculation of deferred payments for unsecured priority tax claims.
III. Conclusion
It is the ORDER of this Court that the judgment of the bankruptcy judge is AFFIRMED.