Opinion
No. 87-459
November 12, 1991
Francis P. Dicello, Washington, D.C.
Harry M. Glazer, Washington, D.C.
David M. Katinsky, U.S. Department of Justice, Washington, D.C.
Liquidation — Priorities — Claims — Taxes — Treatment of. — Pursuant to Section 724(b), the secured claims of the Internal Revenue Service took priority over unsecured sales tax claims of the District of Columbia. Here, a D.C. statute was ineffective to give its unsecured claims (for which no tax lien was held) any priority in the bankruptcy over federal tax claims (secured or unsecured).
See Sec. 507(a)(7) at ¶ 9032 and Sec. 724(b) at ¶ 10,108.
At issue in this case is whether tax claims filed by the District of Columbia are entitled to priority over tax claims filed by the Internal Revenue Service in this Chapter 7 case. For the reasons that follow, the court concludes that the secured claims of the Internal Revenue Service take priority over the District's unsecured priority tax claims under 11 U.S.C. § 724(b).
FACTS
On January 22, 1990, the Trustee in this. Chapter 7 proceeding filed his Final Report and Account (the "Trustee's Report"). The Trustee's Report lists $6,072.77 as the amount of assets available for distribution to priority claims other than administrative expenses. The only priority claims listed in the Trustee's Report are those filed by the District of Columbia in the amount of $102,226.17 and the Internal Revenue Service ("IRS") in the amount of $33,391.10. The Trustee's Report indicates that "[p]ursuant to the provisions of District of Columbia Code § 47-2012, D.C. Government's Claim has priority over IRS Claim." Thus, under the Trustee's Report, the District is to receive the entire $6,072.77, and the IRS is to receive nothing.
In an Order entered on April 9, 1990, the court stated its belief that the Trustee erred in reciting that D.C. Code § 47-2012 gives the District priority over the IRS on its priority tax claims, citing District of Columbia v. Greenbaum, 223 F.2d 633 (D.C. Cir. 1955), and Pearlstein v. U.S. Small Business Admin., 719 F.2d 1169, 1178 (D.C. Cir. 1983). The court noted that in the event the tax claims were to share in the distribution on a pro rata basis, the penalty portions of their claims and interest attributable to penalties should not be treated as priority claims. Accordingly, the court ordered the parties to file papers setting forth the portions of their claims not attributable to penalties or interest thereon, together with any briefs they wished to submit on the issue of the proper distribution in this case.
In response to the court's order, the District filed a brief arguing that it holds sales tax liens senior to the tax liens of the United States. The District states that it is not taking the untenable position taken in Greenbaum by seeking a priority above the seventh priority accorded sales tax claims by Bankruptcy Code § 507(a)(7)(C). Rather, the District argues that its claim of absolute priority for its sales tax claims based upon D.C. Code § 47-2012 can be safely made within the seventh priority by relying upon Bankruptcy Code § 724(b)(1), which gives priority between tax lien holders to the "senior" tax lien. The District relies upon Pearlstein for the proposition that the senior tax lien within the meaning of § 724(b)(1) is to be determined by the application of local nonbankruptcy law. Further, citing Malakoff v. Washington, 434 A.2d 432 (D.C.App. 1981) and United States v. Saidman, 231 F.2d 503 (D.C. Cir. 1956), the District argues that the application of local nonbankruptcy law accords absolute priority to the District's sales tax liens agains the world, including the United States.
The District only argues that it holds sales tax liens entitled to priority by virtue of D.C. Code § 47-2012. The District does not assert that it has a lien for withholding taxes, nor does it assert that any of its tax claims, other than the sales tax claims, are entitled to priority over the tax claims of the IRS. Accordingly, the court will not address the issue of whether the District's tax claims, other than its sales tax claim, are entitled to priority over the tax claims of the IRS. Rather, the court treats the District's other tax claims as unsecured priority claims, which would share in any distribution on a pro rata basis under section 726(b) with the unsecured priority claims of the IRS.
The United States argues, on behalf of the IRS, that the District's reliance upon D.C. Code § 47-2012 is wrong as a matter of law because that section applies only to local insolvency proceedings. Further, the United States argues that this case is governed by the decision in In re Davis Perry Enterprises, Inc., 110 B.R. 97 (D.D.C. 1989), which held that the federal rules of "first in time, first in right" and choateness govern a lien priority contest between a District of Columbia withholding tax lien and a federal tax lien, and that the withholding tax lien does not become choate merely because the statute says that it arises with the nonpayment of the tax. Thus, the United States claims that its tax liens should be accorded priority unless the District can prove that its tax liens became choate before the federal tax assessments were made.
An examination of the IRS's proof of claim reveals that the IRS had not only allowed priority claims under 11 U.S.C. § 507(a)(7) but also allowed secured claims, based on the filing of notices of tax liens before this case commenced. The trustee's final report erroneously treated the IRS's claims as all unsecured. The IRS's secured claims exceed the $6,072.77 at stake. The District's proof of claim, in contrast, asserted no secured claims. The District has only invoked D.C. Code § 47-2012 in arguing that its claims are superior to the IRS's claims.
DISCUSSION
The court concludes that the IRS's allowed secured claims (federal taxes for which notices of tax liens were filed and secured status claimed) are entitled to priority. However, the court does not reach this conclusion under a "first in time, first in right" and choateness analysis. Rather, the court reaches this conclusion as follows. As in In re Sylvana Corp., Case No. 86-090774, decided today, the District of Columbia has no sales tax lien, either choate or inchoate; it only asserts priority for its sales taxes under D.C. Code § 47-2012. Under Greenbaum, that statute is ineffective to give the District's unsecured tax claims any priority in bankruptcy over the tax claims, secured or unsecured, of the Internal Revenue Service. As Sylvana Corp. holds, Pearlstein does not make 11 U.S.C. § 724(b)(1) applicable to the District's claim here so as to make Greenbaum inapplicable because Pearlstein only applies when the District in fact has a lien.
Outside bankruptcy, under Malakoff, unsecured District sales tax claims enjoy absolute priority over private liens by virtue of the second sentence of § 47-2012. No reported case has held that such priority is effective against a Federal tax lien. The IRS argues that Davis Perry Enterprises and Pearlstein suggest § 47-2012 would be ineffective to give an unsecured District sales tax claim priority over a Federal tax lien. But even if § 47-2012 were to accord an unsecured District sales tax claim priority over a Federal tax lien outside bankruptcy, § 47-2012 does not accord any priority to that unsecured claim in bankruptcy as against either secured or unsecured Federal tax claims. The District could escape from the sphere of treatment as an unsecured claim under 11 U.S.C. § 726 to the sphere of treatment under 11 U.S.C. § 724(b) (wherein it might attempt to urge that § 47-2012 confers priority) only if it had a lien for its sales tax claim.
CONCLUSION
Based on the foregoing, the court concludes the the IRS' secured claims take priority over the District's unsecured priority claims. The court will order the Trustee to submit an amended Final Report and Account in accordance with this decision.