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?
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 taxes
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.
ASSESSED ASSESSED INTEREST AMOUNT OF UNPAID TYPE OF PERIOD TAX AND PAYMENT ASSESSED
TAX ENDING LIABILITY PENALTY APPLIED BALANCEWithholding 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
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 Code
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).
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).
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
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.
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.
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.
A careful reading of the relevant sections of the Bankruptcy Code and the legislative history accompanying the passage of the Bankruptcy Reform Act of 1978 indicate that the post-petition tax claims should be granted administrative expense status. Congress evidently intended the taxes to be treated as expenses of administration. S.Rep. 989, 95th Cong., 2d. Sess. 66, 72, U.S.Code Cong. & Admin.News 1978, p. 5787. Moreover, since § 507(a)(6) apparently applies only to pre-petition claims, In re Friendship College, Inc., 737 F.2d 430 (4th Cir.1984), "if § 502(i) is read to relegate all post-petition tax claims of the kind described in § 507(a)(6) to pre-petition status, . . . the statutory language in § 503(b), excluding taxes of a kind specified in § 507(a)(6) and denying them administrative priority, becomes meaningless . . ." In re Carlisle Court, Inc., 36 B.R. 209, 217 (Bankr.D.D.C. 1983). The language excepting taxes "of a kind" listed in § 507(a)(6) is apparently intended only to ensure that taxes which arise out of events prior to the debtor's petition, but are not actually assessed until after the commencement of the case, remain the sixth priority status they are intended to receive. 3 Collier on Bankruptcy, ¶ 503.04, 503-25 (15th ed. 1979).
For other cases which examine the nature of post-petition tax claims, see In re Stack Steel & Supply, 28 B.R. 151, 10 B.C.D. 232 (Bankr.W.D. Wash.1983); In re New England Carpet Co., 26 B.R. 934, 10 B.C.D. 227 (Bankr.D.Vt.1983); In re Westholt Mfg., Inc., 20 B.R. 368, 9 B.C.D. 181 (Bankr.D.Kan.1982), aff'd, 36 B.R. 932, 10 B.C.D. 1428 (D.Kan.1984).
Second, one could look at the practical implications of imposing both a penalty and interest. For example, interest on payments outstanding and due to the government between January 31, 1980 and January 31, 1982 are charged with interest at a rate of 12%; from February 1, 1982 to January 1, 1983, such amounts accumulated interest at a rate of 20%. 26 C.F.R. § 301.6621-1(a)(2). Penalties may range from 5% of the tax due, see 26 U.S.C. § 6653, to 100% of the tax due, see 26 U.S.C. § 6672. Obviously, the amount that any particular taxpayer might owe can vary tremendously. It is equally evident that the total amount can be substantial. In the instant case, the penalties and interest assessed by the IRS is approximately 28% of the base tax liability. Since in many cases each dollar paid to a party with an administrative claim results in one dollar less to the pool of resources available to non-priority claimants, it is not unreasonable to hypothesize that Congress intended to allow taxing authorities interest or penalties, but not both.
Finally, there are no other provisions in the Bankruptcy Code in which post-petition interest might be granted a priority other than as an administrative expense. Thus, it appears that the determination is an all-or-nothing proposition —either it is allowed as an expense of administration or it is disallowed in full.