Opinion
No. 94-01949
August 9, 1995
Opinion
Before the Court is Debtor's Motion for Determination of Allocation of Claim. The United States of America on behalf of the Internal Revenue Service ("IRS") opposes the Motion. The Court conducted a hearing on the matter on July 26, 1995. After due consideration of the evidence and the parties' written and oral arguments, the Court intends this Decision as its findings of fact and conclusions of law, F.R.B.P. 7052, and will dispose of the matter.
Background.
Debtor, a corporation, filed for Chapter 11 relief on August 3, 1994. The Court has now approved Debtor's proposed disclosure statement. That statement and Debtor's proposed Chapter 11 plan indicate Debtor's desire to completely liquidate the assets of the company, and to distribute the proceeds of the liquidation to Debtor's creditors. The Chapter 11 plan has not yet come before the Court for a confirmation hearing.
The IRS has filed a proof of claim in this case based in part on Debtor's failure to pay withholding taxes during certain periods between 1992 and 1994. As a result of Debtor's failure to pay these withholding taxes, the IRS also made an assessment against Debtor's president and principal stockholder pursuant to 26 U.S.C. § 6672 for his failure to pay over the trust fund portion of the withholding taxes owed.
Previously in this case, Debtor sold a portion of its assets. On June 15, 1995, the Court approved a compromise agreement between Debtor, the IRS and West One Bank concerning distribution of the sale proceeds. The Compromise agreement calls in part for Debtor to pay the IRS $48,566.26 on its secured claim out of funds held by Debtor. Debtor paid this sum, as agreed, to the IRS. Debtor's tender to IRS was with instructions, however, directing that the payment be applied first to the tax owed and secondly to interest and penalties. The IRS rejected such tender, arguing that it has the right to allocate the payment as it chooses.
The Compromise agreement is silent as to how the payment to the IRS from the asset sale proceeds will be applied, other than that the money would be applied to its "allowed secured claim." This obscure reference does not answer whether the payment should be applied to tax or to interest and penalties. Debtor has now filed its Motion seeking an order directing the IRS to apply the payment as instructed by Debtor.
Analysis and Disposition.
Taxpayers may designate the application of tax payments that are voluntarily made, but may not designate the application of payments that are involuntary. United States v. Energy Resources Co., 495 U.S. 545, 546-47, 110 S.Ct. 2139, 2141 (1990); United States v. Technical Knockout Graphics, Inc., 833 F.2d 797, 801 (9th Cir. 1987). The resolution of the issue before the Court would therefore appear to turn on whether the payment to the IRS was voluntary or involuntary.
The Ninth Circuit has unequivocally stated that "payments made by a debtor in possession after filing a petition for reorganization under Chapter 11, but prior to confirmation of a reorganization plan, are involuntary and the bankruptcy court does not have equitable jurisdiction to order otherwise." Technical Knockout Graphics, 833 F.2d at 802. A few years after the Ninth Circuit's decision, though, the United States Supreme Court held that in connection with confirmation of a debtor's proposed Chapter 11 reorganization plan "a bankruptcy court has the authority to order the IRS to apply the payments to trust fund liabilities if the bankruptcy court determines that this designation is necessary to the success of a reorganization plan." Energy Resources, 110 S.Ct. at 2141.
Most Courts have interpreted the holding in Energy Resources as not allowing a debtor to allocate trust fund tax payments if the debtor's Chapter 11 plan calls for a liquidation of its assets. See United States v. Kare Kemical, Inc., 935 F.2d 243, 244 (11th Cir. 1991); Jehan-Das, Inc. v. United States, 925 F.2d 237 (8th Cir. 1991); In re Equipment Fabricators, Inc., 127 B.R. 854 (Bankr.D.Ariz. 1991), affirmed without published opinion, 990 F.2d 1257 (9th Cir. 1992). The Ninth Circuit in In re Deer Park, Inc., 10 F.3d 1478, 1482 (9th Cir. 1993), disagrees, holding that "[i]t does not matter that the Chapter 11 reorganization plan is a liquidating plan, so long as the allocation of trust fund tax payments is necessary to the success of the reorganization."
The Court in Deer Park held that allocation of trust fund tax payments was necessary to the success of the reorganization in that case because of the provisions in the debtor's liquidation plan. The debtor operated a ski facility and the plan called for a sale of all of the debtor's real property and other assets. The plan also provided that in the event the purchaser were to resell the real property within a certain time for an amount greater than it paid the debtor, that debtor would be entitled to a portion of the resale proceeds. In addition, the plan provided that if the purchaser reopened the property for skiing within a certain time, the purchaser would be required to transfer an interest in the entities conducting the operations to the debtor.
The Court reasoned that these contingencies were a fundamental part of the plan approved by the creditors, and that the person most likely to make this part of the plan succeed was Debtor's principal. The Court also concluded that if payments were not allocated to the trust fund taxes before payment of interest and penalties, thus reducing the principal's exposure, that the principal would not have the same incentive to assist with the reorganization. 10 F.3d at 1482. For this reason the Court held that the allocation of payments was necessary to the reorganization.
In this case, while Debtor's plan calls for allocation of payments to IRS first to satisfy the taxes due, that plan is not yet before the Court for confirmation. Rather, Debtor asks for an order requiring allocation of a payment made preconfirmation as part of a partial distribution of its assets to secured creditors. Under these circumstances, the rule announced in Technical Knockout Graphics would characterize this post-bankruptcy, preconfirmation payment as involuntary, and therefore not subject to allocation by Debtor.
Whether the allocation is necessary to the success of Debtor's plan appears to be a confirmation issue which must await the outcome of the balloting and confirmation hearing. However, even if this payment is viewed as being made in connection with Debtor's proposed plan, the case is distinguishable from Deer Park. Debtor has not shown the Court that the allocation of the tax payment is necessary to the success of Debtor's reorganization plan. Debtor's plan calls for sale of its assets to Tuxedos, Inc., a new corporation organized by Debtor's principal. The proceeds of the sale will be distributed to creditors, including IRS. There is nothing in the record at this point to prove that this particular sale is especially advantageous or distinctive as compared to any other sale. In other words, it must be shown that creditors will be prejudiced unless the sale is to Debtor's principal as compared to some other purchaser. Otherwise, the principal's continued cooperation is not critical to the success of the plan.
For these reasons, and for other good cause, Debtor's Motion for Determination of Allocation of Claim will be denied by separate order.