IN RE ST. LOUIS FREIGHT LINES, INC.

DETERMINATION OF DEBTOR'S POST-PETITION FEDERAL TAX LIABILITY

ARTHUR J. SPECTOR, Bankruptcy Judge.

The Internal Revenue Service requested a determination of and a judgment for the amount of the Debtor's post-petition, preconfirmation federal tax liability, and a conversion of the Debtor's case from Chapter 11 to Chapter 7. Two primary issues are raised by the briefs of the parties. First: are post-petition claims for tax penalties and interest allowable as administrative claims under § 503 of the Bankruptcy Code? Second: did the Internal Revenue Service correctly apply the payments made by the Debtor on the peculiar facts of this case?

FACTS

St. Louis Freight Lines, Inc. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on October 18, 1979. On December 12, 1982, the Debtor's Fourth Amended Plan of Reorganization was confirmed by the Court. Article III of the Plan provides that:

Between the filing of the petition and December 21, 1982, the Debtor incurred substantial federal withholding, Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and Highway Use taxes1. Although the precise amount of post-petition taxes owed is not clear,2 assessed liabilities exceeded $400,000; in addition, the IRS had assessed interest and penalties in excess of $120,000 for the Debtor's non-payment since filing for reorganization. The Debtor and the IRS reached an agreement whereby the Debtor would pay $266,070.60 at the time of the confirmation of the Plan, with the remainder of the balance to be paid in cash within sixty (60) days of the confirmation order. On January 18, 1983, the Debtor transferred $266,070.60 to the government.

The current dispute arose subsequent to this payment. The Debtor alleges that the above payment was made on the express written condition that the money be applied solely to the principal tax assessments and not to the accrued interest and penalties.3 The IRS, however, deemed the payment to be an involuntary payment. It therefore applied the sum first to the oldest post-petition, pre-confirmation principal, then to the oldest interest and penalties, (first in, first out) as summarized below:

                                       ASSESSED
                          ASSESSED     INTEREST      AMOUNT OF     UNPAID
  TYPE OF     PERIOD      TAX          AND           PAYMENT       ASSESSED
    TAX       ENDING      LIABILITY    PENALTY       APPLIED       BALANCE

Withholding
and FICA      03-31-80    $ 7,840.17   $ 7,443.90    $ 15,284.07      -0-
     "        03-31-80     48,858.01    23,075.29      71,933.30      -0-
     "        06-30-81     65,089.78    31,638.43      96,728.21      -0-
     "        09-30-81     55,474.83    20,317.90      75,792.73      -0-
     "        12-31-81     49,975.16     8,384.80       6,332.29   $52,027.67

                                Total Payment:       $266,070.60

After this distribution, the government calculated the Debtor's outstanding post-petition, pre-confirmation balance to be $289,849.76. The Debtor, on the other hand, claims that this constituted a misapplication of the funds, resulting in an inflated and erroneous tax liability. It contends that had the payment been directed solely to principal, its remaining liability would have been approximately $179,000 rather than $289,849.76. Although no other payments have been made on the pre-confirmation debt, the Debtor says that it was willing to pay the balance, but that failure of the parties to reach consensus on the total amount due has prevented it from obtaining the financing necessary to do so. Meanwhile, the IRS has charged the Debtor with additional interest and penalties of $92,654.95 through March 31, 1984.

On August 31, 1983, the government filed a motion to convert the Debtor's case from Chapter 11 to Chapter 7. On November 14, 1983, it submitted a motion asking this Court to determine the tax liability of the Debtor pursuant to § 505(a)(1) of the Bankruptcy Code. Most recently, it moved for summary judgment on the amount of the Debtor's post-petition taxes. The Debtor has filed objections to all three requests for relief.

I. NATURE OF POST-PETITION TAX PENALTIES AND INTEREST

The Debtor challenges the right of the government to impose penalties and interest on the post-petition, pre-confirmation tax debt. It asserts that the former are not provided for in the Plan, while the latter should not be imposed because it would be inequitable to do so under the circumstances. The government's responses are first, that post-petition penalties are expressly permitted as a priority expense under § 503(b)(1)(C) of the Bankruptcy Code; and second, that interest, although not expressly allowed by the statute, should also be considered an expense of estate administration. This argument assumes without stating, that the post-petition, pre-confirmation tax liability upon which the penalties and interest are assessed is itself properly classified as an administrative expense. A close examination of various sections of the Bankruptcy Code4 could lead one to seriously question the validity of this assumption;5 however, it is this Court's opinion that post-petition tax claims resulting from activities of the trustee or debtor-in-possession are administrative expenses entitled to first priority under 11 U.S.C. § 507(a)(1).

Should penalties and interest on those taxes be similarly treated? At least with regard to penalties, the Code provides a clear answer. Whenever any tax is an expense of administration, so is any penalty, fine, or reduction in credit based on that tax. 11 U.S.C. § 503(b)(1)(C). Accordingly, those penalties assessed by the IRS for the Debtor's failure to pay post-petition, pre-confirmation taxes should ordinarily be granted administrative expense status pursuant to § 507(a)(1).

With regard to interest, the answer is not directly expressed in the Code, since § 503(b) makes no mention of interest on taxes. The IRS, not surprisingly, asserts that interest should be granted administrative priority. In support of this claim, it notes that the Senate favored administrative status for interest;6 additionally, it contends that failure to allow interest defeats the Code's goal of encouraging creditors to deal with the post-petition estate. If interest is not allowed as an administrative claim, the creditor is essentially forced to give the estate an interest-free loan, at the expense of the creditor and for the benefit of unsecured creditors. Finally, it argues that since § 503(b) is not an exhaustive declaration of allowable administrative expenses, interest can and should be allowed. See In re Labine, 12 B.C.D. 186 (Bankr.E.D.Mich.1984).

Courts addressing the classification of interest on administrative tax claims have come to different conclusions. In In re Friendship College, 737 F.2d 430 (4th Cir. 1984), the court examined the legislative history and held that interest on post-petition taxes are an administrative expense of the estate because it should be treated consistently with assessed penalties. See also In re Razorback Ready-Mix Concrete Co., 45 B.R. 917, 12 B.C.D. 356 (Bankr.E. D.Ark.1984).7 On the other hand, two other cases which examined the same legislative background held that the omission of interest was intentional and denied the claim of the taxing authority. H & C Enterprises, 35 B.R. 352 (Bankr.D.Idaho 1983); In re Stack Steel & Supply Co., 28 B.R. 151, 10 B.C.D. 232 (Bankr.W.D.Wash. 1983). This Court could analyze in detail whether and under what circumstances interest is to be treated as an administrative expense.8 However, as will be explained shortly, it is unnecessary to do so since the facts of this case prevent the Internal Revenue Service from claiming interest payments for the post-petition, pre-confirmation debt.

II. APPLICATION OF FUNDS RECEIVED BY THE IRS

Having determined that post-petition tax claims and penalties are to be allowed administrative priority under § 503(b) (while refraining from making a ruling regarding interest at this time), it is now appropriate to examine the treatment of these claims with respect to the facts of this case. The parties are in dispute over the government's application of those funds already paid by the Debtor. The Debtor claims that since its plan provides only for the payment of "federal and state withholding and related trust fund employer taxes", and that since interest and penalties are not included in these Class 2 administrative claims, the payments made on January 18, 1983 should have been allocated entirely to the base tax liability. The IRS justifies its distribution of that payment by claiming that because the payments were involuntary, they could be allocated according to the government's discretion.

Under IRS Policy Statement P-5-60 (reprinted in CCH Internal Revenue Manual at 1305-15) the government may allocate involuntary payments to principal, interest and penalties at its discretion, regardless of the taxpayer's instructions. This policy has been judicially approved; see e.g., United States v. DeBeradinis, 395 F.Supp. 944, 952 (D.Conn.1975), aff'd mem. 538 F.2d 315 (2nd Cir.1976). It is the IRS' contention that tax payments made during the course of bankruptcy proceedings are involuntary; case law discussing this issue tends to support the argument. In Amos v. Commissioner, 47 T.C. 65, 69 (1966), the tax court defined an involuntary payment as "any payment received by agents of the United States as a result of distraint or from a legal proceeding in which the government is seeking to collect its delinquent taxes or file a claim therefor". Courts applying this definition have generally held that payments made during bankruptcy proceedings meet these criteria. In Muntwyler v. United States, 703 F.2d 1030 (7th Cir.1983), for example, the court held that the filing of a tax claim with a non-bankruptcy trustee was not sufficient administrative action to make the payments involuntary, but implied that it might have reached a different result had the debtor been involved in a formal bankruptcy proceeding. Id., 703 F.2d at 1034, n. 2. A recently decided case in this district expressly adopted the position that a payment made by a debtor's bankruptcy estate is involuntary. In In re Mr. Marvins, Inc., 84-1 USTC ¶ 9270 (E.D.Mich.1984) the bankruptcy judge had entered an order authorizing the trustee to designate the allocation of payments to the debtor's tax trust fund liability. Upon appeal by the IRS, the district court reversed the order, ruled that the payments were involuntary, and held that the IRS had the right to apply the payments it received in its own manner. Relying largely on the Amos and Muntwyler decisions, the district court noted that the payments resulted from various litigation and that payments to creditors under the Bankruptcy Code can not be voluntary.

As a matter of tax law, the ruling of the district court is controlling upon this Court and precludes questioning whether the mere existence of a bankruptcy proceeding automatically renders all payments made by the debtor involuntary. As a matter of bankruptcy law, however, this Court has jurisdiction to examine and interpret the terms of the confirmed plan which address the distribution of post-petition, pre-confirmation taxes. Shores v. Hendy Realization Co., 133 F.2d 738 (9th Cir.1943); In re Hermitage Bldg. Corp., 100 F.2d 597 (7th Cir.1938); In re Coral Air, Inc., 40 B.R. 979 (Bankr.D.V.I.1984); In re Arctic Enterprises, Inc., 35 B.R. 978, 11 B.C.D. 855 (Bankr.D.Minn.1983). Section 1141(a) of the Code provides that confirmation binds the debtor, creditors and other parties in interest to the terms of the plan, even if a party has not accepted the plan.9 Case law has established the binding contractual nature of the plan. Miller v. Meinhard-Commercial Corp., 462 F.2d 358 (5th Cir.1972); Denver & R.G.W.R. Co. v. Goldman, Sachs & Co., 212 F.2d 627 (10th Cir.1954); Evans v. Dearborn Machinery Movers Co., 200 F.2d 125 (6th Cir.1953); In re Garsal Realty, Inc. 12 B.C.D. 173 (N.D.N.Y.1984). This rule has recently been used to bind the IRS and other taxing authorities to the terms of a debtor's confirmed plan. In re Gurwitch, 10 C.B.C.2d 722 (Bankr.S.D.Fla.1984); In re Penn-Dixie Indus., 32 B.R. 173, 10 B.C.D. 1226 (Bankr.S.D.N.Y.1983). It is equally well-established that an order confirming a plan is an appealable order which has a res judicata effect on all issues that could have been raised regarding the claim. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938); Miller v. Meinhard-Commercial Corp., supra; In re Penn-Dixie Indus., supra. See also 5 Collier on Bankruptcy, ¶ 1141.01 (15th ed. 1979). In other words, a party in interest—in this case the IRS—is bound by the terms of the plan when confirmed, even if the plan ultimately provides it with less than that to which it is otherwise legally entitled.

Article III of the plan provides only that "withholding and related trust fund employer taxes" incurred between filing and confirmation were to be paid within 60 days in cash. No reference is made to payment of interest and penalties, nor does the plan mention whether "taxes" are meant to include interest and penalties as well as the original tax. No insight can be gleaned from other provisions of the plan. The Court must therefore read the plain words of the part of the plan at issue. Penalties are penalties and are not taxes. The Bankruptcy Code treats them as different.10 Thus it is not only simplistic but inaccurate to characterize a "penalty" as merely a "part and parcel of the tax".11 The plan classifies12 "federal and state withholding and related trust fund employer taxes" as administrative expenses and says that only these will be paid as such (essentially in cash in full at about the date of confirmation). The universe of claims theoretically entitled to administrative expense priority includes more than mere withholding taxes. It includes post-petition wages, for example. § 503(b)(1)(A). It includes professional compensation. § 503(b)(2). Most importantly, it also includes any penalty relating to a tax entitled to such priority. § 503(b)(1)(C). But the Debtor's plan included only withholding-type taxes—one species only of such claims—within the class of administrative expense priority. By impermissibly excluding penalties assessed on these taxes from the class entitled to administrative expense priority, the Debtor's plan may not comply "with the applicable provisions of . . . title [11]", § 1129(a)(1), and therefore perhaps should not have been confirmed over a timely objection on this ground.13 Thus, if the Court were today deciding an objection to the confirmation of the debtor's plan of reorganization on the ground that it omits reference to tax penalties and therefore does not propose payment of them as required by § 503(b)(1)(C), we might be constrained to agree and deny confirmation. But that day has long since passed. The plan proposed to pay taxes—not penalties and interest. The plan was confirmed. No appeal was taken.14 The matter is res judicata. Stoll v. Gottlieb, supra; In re Penn-Dixie Indus., supra. Our task now is merely to interpret and enforce the terms of the confirmed plan. As stated above, the plan is interpreted to provide the IRS with only part of what it would have been entitled to if it had timely acted. It requires the nearly immediate cash payment of all withholding-type taxes incurred post-petition. It does not require the payment of interest on those taxes in that fashion. And, it does not require the payment of penalties derived from those taxes as expenses of estate administration (even though upon a timely objection it would have been amended to do so). Accordingly, the IRS' application of the January 18, 1983 payment by the Debtor is inconsistent with the terms of the plan, to which it is bound. The correct application would be to apply all of it towards its administrative claim— as that term is defined in the plan: "federal . . . withholding and related trust fund employer taxes".

Finally, the Court notes that even had the payments made on January 18, 1983, been allocated according to the Debtor's directions and pursuant to the guidelines in this opinion, the payments would still have been significantly lower than that needed to pay off its tax debt. The Debtor has asserted that it could not pay the remainder of the tax debt within the allotted 60-day period because the uncertainty of its tax liability prevented it from obtaining financing; the IRS has done nothing to refute this assertion. Thus conversion to Chapter 7 is not now warranted. The Court is unable to make a precise determination of the precise amount of tax due because the figures present in the record are insufficient for that purpose. Therefore, the parties are directed to submit to the Court a final determination of the Debtor's post-petition, pre-confirmation tax liability within 30 days, using the formula and guidelines stated herein. Once this figure is ascertained, the Debtor shall have 34 days—the period between January 18, 1983 when it made the payment and February 21, 1983 when the 60-day period would have expired—to obtain the necessary financing and to make these payments. Upon the Debtor's failure to timely pay, the government's motion to convert the case to Chapter 7 will again be considered. Upon presentation, an appropriate order will be signed by the Court.