Opinion
No. 8-70072
February 14, 1979
Arrangements — Discharge — Tax Penalties — Provable Debts
Tax penalties which accrue during Arrangement proceedings are debts that are not discharged by the Chapter XI proceedings and remain the personal liability of the debtor after the plan of arrangement is confirmed.
The United States government sought to collect $31,853.08, representing delinquency penalties for Federal Insurance Contribution Act and Federal Unemployment Tax Act taxes that accrued during the twenty month period between debtor's filing a petition for arrangement under Chapter XI and the date the plan of arrangement was confirmed by the Bankruptcy Court.
Under Section 371 of the Bankruptcy Act, the confirmation of a Chapter XI plan discharges the debtor from those debts provided for in the plan but does not discharge those debts which are not dischargeable under Section 17 of the Bankruptcy Act. Those debts which are dischargeable but not provided for in the plan also remain the liability of the debtor. Section 17 provides that a discharge releases the debtor from all of his "provable debts" whether allowable in full or in part with the exception of certain debts listed in that section. Although that section does not directly address the issue of whether the penalties are exempt from discharge, courts have held that they are not. See Custom Wood Products, Inc. v. United States, CCH Dec. ¶ 64,309. In the instant case then, the issue is whether tax penalties are provable debts as these are the only ones released by a discharge under Section 17.
Section 57j disallows governmental claims for penalties and forfeitures. This section does not expressly say that a fine or penalty claim asserted by the United States or any state or subdivision thereof is not provable. However, the court cited Custom Wood, supra, and several other cases as standing for the proposition that "a liability for a fine or penalty is not dischargeable, if for no other reason than the imperative necessity of enforcing criminal sanctions enacted for the public welfare." In addition, the court pointed out that the rationale behind disallowing penalties from the estate is not applicable to claims against the rehabilitated debtor. The rationale behind disallowing penalties from the estate is that when there is a fixed amount available to all the creditors, the creditors should not be disadvantaged in relation to the government, another creditor, by the delay that necessarily is involved in Chapter XI proceedings. In ordering that the debtor pay the tax penalties to the government the court noted that in this case the government's claim will not work to the disadvantage of other creditors because the debtor is an ongoing business enterprise rather than a mere fixed fund of assets. See Sec. 17a [§ 523] at ¶ 9226, Sec. 57j [§ 724(a)] at ¶ 10,107, and Sec. 371 [§ 1141(d)] at ¶ 12.204.