No. 95-325

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CFI FABRICATORS OF UTAH, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES 

DREW S. DAYS, III
Solicitor General 

Department of Justice
Washington, D.C. 20530
(202) 514-2217

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QUESTIONS PRESENTED

1. Whether the claim of the United States against
the debtor in bankruptcy for an excise tax owed under
Section 4971(a) of the Internal Revenue Code, 26
U.S.C. 4971(a), is entitled to the distributive priori-
ty for an "excise tax" accorded under Section
507(a)(7)(E) of the Bankruptcy Code, 11 U.S.C.
507(a)(7)(E).1
2. Whether, in the absence of inequitable conduct
by the government in obtaining or enforcing its claim,
the excise tax claim of the United States under
Section 4971(a) of the Internal Revenue Code may be
subordinated to general unsecured claims under the
"principles of equitable subordination" codified in
Section 51O(c) of the Bankruptcy Code, 11 U.S.C.
51O(c).2
                                   
___________________(footnotes)

1 Section 304(c) of the Bankruptcy Reform Act of 1994, Pub.
L. No. 103-394, 108 Stat. 4132, added a new seventh priority for
alimony and child support claims and changed the preexisting
priority for excise taxes from seventh to eighth. Those amend-
ments have no significance for the issues presented in this case.
2 This case will be argued in tandem with United States v.
Noland, No. 95-323, which presents a closely analogous question
concerning the proper scope of the "principles of equitable sub-
ordination" in bankruptcy cases. We have furnished a copy of
the brief for the United States in United States v. Noland to
counsel for respondents in this case. We have also furnished a
copy of the brief for the United States in this case to counsel
for respondent in United States v. Noland.

(I)

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     TABLE OF CONTENTS
			                   Page
Opinions below   . . . . 1
Jurisdiction   . . . . 1
Statutory provisions involved   . . . . 2
Statement   . . . . 2
Introduction and summary of argument  . . . . 10
Argument:

TABLES OF AUTHORITIES

I.   The claim of the United States for an excise
tax owed under Section 4971(a) of the Inter-
nal Revenue Code, 26 U.S.C. 4971(a), is en-
titled to the distributive priority for an "ex-
cise tax" provided by Section 507(a)(7)(E)
of the Bankruptcy Code, 11 U.S.C.
507(a)(7)(E) (1988) . . . . 13

II.  In the absence of inequitable conduct by the
government, the excise tax claim of the
United States under Section 4971(a) of the
Internal Revenue Code may not be subor-
dinated to general unsecured claims under
the "principles of equitable subordination"
codified in Section 51O(c) of the Bankruptcy
Code  . . . . 21

TABLE OF AUTHORITIES

Cases:

Begier v. IRS, 496 U. S. 53 (1990) . . . . 15
Benjamin v. Diamond, 563 F.2d 693(5th Cir.
1977) . . . . 21, 24
BFP v. Resolution Trust Corp., 114 S. Ct. 1757
(1994)  . . . . 18
Burden v. United States, 917 F.2d 115(3d Cir.
1990)  . . . . 10, 24, 25
Caminetti v. United States, 242 US. 470 (1917)  . . . . 16
Carpenter v. Wabash Ry. Co., 309 U.S. 23
(1940)  . . . . 19, 23, 28

(III)

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Iv

Cases-Continued:		              Page

City of Chicago v. Environmental Defense Fund, 114
S. Ct.. 1688 (1994)  . . . . 18
City of New York v. Feiring, 313 U.S. 283 (1941)  . . . . 19
Columbia Ribbon Co., In re, 117 F.2d 999 (3d Cir.
1941)  . . . . 22
Comstock v. Group of Institutional Investors, 335
U.S. 211 (1948)  . . . . 23
Connecticut National Bank V. Germain, 503 U.S.
249 (1992)  . . . . 20
County Sanitation District No. 2 v. Lorber Indus-
tries of California, Inc., 675 F.2d 1062 (9th Cir.
1982)  . . . . 6, 19
Credit Industrial Corp., In re, 366 F.2d 402 (2d Cir.
1966)  . . . . 24
A. Magnano Co. v. Hamilton, 292 U.S. 40 (1934) . . . 20
Mansfield Tire & Rubber, In re, 942 F.2d 1055 (6th
Cir. 1991), cert. denied, 502 U.S. 1092 (1992) .  4,5, 16,20
Nathanson v. Labor Board, 344 U.S. 25 (1952)  . . . . 18-19
New Jersey v. Anderson, 203 U.S. 483 (1906)  . . . . 19,26
Nicholas V. United States, 384 U.S. 678 (1966) . . . . 26
Norwest Bank Worthington v. Alders, 485 U.S.
197 (1988)  . . . . 23
Patterson v. Shumate, 504 U.S. 753 (1992)  . . . . 20
PBGC v. Reorganized CF&I Fabricators of Utah,
Inc., 179 B.R. 704 (D. Utah 1994)   . . . . 4
Pepper v. Litton, 308 U.S. 295 (1939)  . . . . 23
Schultz Broadway Inn v. United States, 912 F.2d
230 (8th Cir. 1990) . . . . 10, 25-26
Stebbins v. Crocker Citizens National Bank, 516
F.2d 784 (9th Cir.), cert. denied, 423 U.S. 913
(1975)  . . . . 23, 24, 29
Unified Control Systems, Inc., In re, 586 F.2d
1036 (5th Cir. 1978)   . . . . 8

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v

Cases-Continued:              Page

United States v. Dumler, 983 F.2d 161 (10th Cir.
1992)  . . . . 7, 8, 19
United States v. Embassy Restaurant, 359 U.S.
29 (1959) . . . . 18
United States v. Killoren, 119 F.2d 364 (8th Cir.),
cert. denied, 314 U.S. 640 (1941)  . . . . 24
United States v. Noland, 48 F.3d 210 (6th Cir.
1995), cert. granted, No. 95-323 (Dec. 1, 1995)  . . . . 25
United States v. Ron Pair Enterprises, Inc., 489
U.S. 235 (1989)  . . . . 16,20
Virtual Network Services Corp., In re, 902 F.2d
1246 (7th Cir. 1990) . . . . 10, 21, 25
Statutes and regulation:
Act of Nov. 6, 1978, Pub. L. No. 95-598, 92 Stat.
2549   . . . . 15
Bankruptcy Code, 11 U.S.C. 101 et seq.:
  11 U.S.C. 35(a) ( 17a) (1976) . . . . 15
  11 U.S.C. 103(b)  . . . . 28
  11 U.S.C. 104(a) ( 64a) (1976)  . . . . 14-15
  11 U.S.C. 501(c)(3)  . . . . 16-17
  11 U.S.C. 503(b)(1)(B) . . . . 3, 4, 19, 28
  11 U.S.C. 507 . . . . 4, 9, 11, 18
  11 U.S.C. 507(a)(1) . . . . 3, 4, 19, 28
  11 U.S.C. 507(a)(7) . . . . 2 ,6, 9
  11 U.S.C. 507(a)(7)(A)  . . . . 8, 19
  11 U.S.C. 507(a)(7)(E) . . . . passim
  11 U.S.C. 507(a)(7)(E)(i)  . . . . 4, 13
  11 U.S.C. 507(a) (7)(E)(ii)   . . . . 4
  11 U.S.C. 507(a)(7)(G)  . . . . 4, 17, 18
  11 U.S.C. 510(c)  . . . . passim
  11 U.S.C. 510(c)(1)  . . . . 21, 25
  11 U.S.C. 724(a)  . . . . 28
  11 U.S.C. 726(a)(1) . . . . 28
  11 U.S.C. 726(a)(4) . . . . 28, 29

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VI

Statutes and regulation-Continued:

Employee Retirement Income Security Act of 1974,
29 U.S.C. 1001 et seq  . . . . 2, 14 
  29 U.S.C. 1301 et seq . . . . 3
  29 U.S.C. 1306-1307 (1988 & Supp. V 1993)  . . . . 3
  29 U.S.C. 1342  . . . . 3
  29 U.S.C. 1362(a)  . . . . 3
  29 U.S.C. 1362(b)  . . . . 3
Internal Revenue Code (26 U.S.C.):
  72(t)  . . . . 7, 8, 19
  412(a)   . . . . 2
  4064   . . . . 16
  4681 (Supp. V 1993)  . . . . 16
  4701  . . . . 16
  4911  . . . . 16
  4941 et seq  . . . . 16
  4955  . . . . 16
  4971 . . . . 2, 4, 5, 12, 14, 15-16, 20, 27
  4971(a)  . . . . passim
  4971(b)  . . . . 3
  4981  . . . . 17
  4982  . . . . 17
  4999  . . . . 17
  5881  . . . . 17
26 C.F.R. 54.6011-1(a)   . . . . 14 
Miscellaneous:
2 Collier Bankruptcy Manual (3d ed. 1995)  . . . . 22
124 Cong. Rec. (1978):
  p. 32,416   . . . .   15, 17, 18, 20
  p. 32,998   . . . . 15
  p. 34,016   . . . . 15
A. Herzog &J. Zweibel, The Equitable Subordination
of Claims in Bankruptcy, 15 Vand. L. Rev. 83
(1961)   . . . . 23
H.R. Rep. No. 595, 95th Gong., 1st Sess. (1977) . . . . 25, 29

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VII

Miscellaneous-Continued:           Page

H.R. Rep. No. 807, 93d Cong., 2d Sess. (1974)  . . . . 14
l?. Kennedy, Foreword: A Brief History of the
Bankruptcy Reform Act, 58 N.C.L. Rev. 667
(1980) . . . . 15
S. Rep. No. 383, 93d Cong., 1st Sess. (1973) . . . . 14
S. Rep. No. 989,95 Cong., 2d Sess. (1978)  . . . . 25, 29
Report of the Commission on the Bankruptcy Laws
of the United States, H.R. Dec. No. 137, 93d Cong.,
1st Sess. Pt. II (1973)  . . . . 29
Staff of Senate Comm. on Finance, 100th Cong., 1st
Sess., Omnibus Budget Reconciliation Act of 1987,
et al. (Comm. Print No. 100-63) (1987)  . . . . 27

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In the Supreme Court of the United States

OCTOBER TERM, 1995

No. 95-325

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CF&I FABRICATORS OF UTAH, INC.,
COLORADO & UTAH LAND COMPANY) KANSAS
METALS COMPANY, ALBUQUERQUE METALS
COMPANY, REORGANIZED PUEBLO METALS COMPANY,
DENVER METALS COMPANY, REORGANIZED PUEBLO
RAILROAD SERVICE COMPANY, REORGANIZED CF&I
FABRICATORS OF COLORADO, INC., REORGANIZED
CF&I STEEL CORPORATION, AND REORGANIZED
COLORADO AND WYOMING RAILWAY COMPANY

ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
  FOR THE TENTH CIRCUIT

BRIEF FOR THE UNITED STATES         

      OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1a-9a)
is reported at 53 F.3d 1155. The opinion of the district
court (Pet. App. 10a-11a) is unreported. The opinion
of the bankruptcy court (Pet. App. 38a-62a) is reported
at 148 B.R. 332.

       JURISDICTION

The judgment of the court of appeals was filed on
April 27, 1995. On July 14, 1995, Justice Breyer ex-
tended the time for filing a petition for a writ of cer-

(1)

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2

tiorari to and including August 25, 1995. The petition
was filed on August 24, 1995, and was granted on De-
cember 1, 1995. The jurisdiction of this Court rests
upon 28 U.S.C. 1254(1).

  STATUTORY PROVISIONS INVOLVED

The relevant portions of Section 507(a)(7) and 510(c)
of the Bankruptcy Code, 11 U.S.C. 507(a)(7) and 510(c)
(1988), and of Section 4971 of the Internal Revenue
Code, 26 U.S.C. 4971, are set forth at Pet. App. 63a-
66a.

       STATEMENT

1. Respondents are the Reorganized CF&I Steel
Corporation and its nine subsidiaries. Prior to 1990,
these corporations maintained defined-benefit pension
plans for their employees that were subject to the
Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. 1001 et seq. For the year that
ended on December 31, 1989, respondents failed
to make required pension plan contributions of
$12,400,000. The plans therefore had an "accumulated
flu-ding deficiency" equal to that amount. See 26
U.S.C. 412(a). In November 1990, respondents filed
petitions for reorganization under Chapter 11 of the
Bankruptcy Code (Pet. App. 2a).
Subtitle D of the Internal Revenue Code is entitled
"Miscellaneous Excise Taxes." One of the provisions
of that subtitle-Section 4971(a) of the Internal
Revenue Code-imposes a 10% excise tax on the
amount of any "accumulated funding deficiency" of
qualified pension plans. 26 U.S.C. 4971(a). The excise
tax liability for respondents' "accumulated funding
deficiency" under Section 4971(a) was therefore
approximately $1,240,000.  The Internal Revenue

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3

Service filed proofs of claims for that amount in
respondents' bankruptcy case (Pet. App. 2a-3a).3
The government's proofs of claims assert that the
liability for this excise tax under Section 4971(a) of
the Internal Revenue Code is entitled to seventh pri-
ority in the distribution of the assets of the debtors'
estates under Section 507(a)(7)(E) of the Bankruptcy
Code.4 As applicable to this case, Section 507(a)(7)(E)
            
___________________(footnotes)

3 The proofs of claims filed by the United States also as-
serted (i) priority claims for excise taxes under Section 4971(a)
for the subsequent plan year, (ii) priority claims for excise
taxes under Section 4971(b) for both the 1989 and 1990 plan
years, (iii) nonpriority claims for penalties related to the Sec-
tion 4971(a) excise tax for 1980 and (iv) priority claims for in-
come taxes for various years. Section 4971(b) of the Internal
Revenue Code imposes an additional excise tax, equal to 100
percent of the "accumulated funding deficiency: on employ-
ers who fail to correct the deficiency within a specified period.
26 U.S.C. 4971(b). The government did not appeal the adverse
rulings relating to any of those claims.
4 The Pension Benefit Guaranty Corporation (PBGC) also
filed proofs of claims in this case. The PBGC is a corporation
owned by the United States that guarantees payment of certain
vested benefits under terminated pension plans. See 29 U.S.C.
1301 et seq. The PBGC obtains funds for that purpose from
insurance premiums paid by the employers whose pension plans
are subject to Title IV of ERISA. See 29 U.S.C. 1306-1307 (1988
& Supp. V 1993). In March 1992, when one of the debtors'
pension plans was terminated, the PBGC became the statutory
trustee for the plan pursuant to 29 U.S.C. 1342. The PBGC
thereby became liable to plan participants for guaranteed
benefits.
The PBGC filed proofs of claims in the bankruptcy case
seeking to recover unpaid pension plan contributions. The
PBGC also sought to recover its own statutory claim for un-
funded benefits. See 29 U.S.C. 1362(a) and (b). The PBGC as-
serted various priorities for its claims, including administrative
tax priority under Sections 503(b)(1)(B) and 507(a)(1) of the

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4

provides a "[s]eventh" priority for governmental
claims for any "excise tax" that arose during the
three years immediately preceding the date of the
filing of the bankruptcy petition. See 11 U.S.C.
507(a)(7)(E)(i) and (ii) (1988); note 1, supra. Section
507(a)(7)(G) of the Bankruptcy Code provides the same
"[s]eventh" priority to a statutory penalty that is
"related to a claim of a kind specified in this para-
graph and in compensation for actual pecuniary loss."
11 U.S.C. 507(a)(7)(G) (1988).
Respondents filed an objection to the government's
claim. They argue-d that the excise tax claims under
Section 4971(a) were neither a "tax" nor a penalty
compensating for pecuniary loss and should therefore
be denied any priority under Section 507 of the
Bankruptcy Code.
2, The bankruptcy court allowed the government's
claim under Section 4971(a) of the Internal Revenue
Code but denied that claim any priority under Section
507(a)(7)(E) of the Bankruptcy Code. The court rec-
ognized (Pet. App. 47a-48a) that, in In re Mansfield
Tire & Rubber Co., 942 F.2d 1055 (1991), cert. denied,
502 U.S. 1092 (1992), the Sixth Circuit held that the
excise tax imposed by Section 4971(a) must be given
priority in bankruptcy. In Mansfield Tire, the court
reasoned that, since Congress denominated Section
4971 as an excise tax and further expressly provided
that claims for excise taxes have priority in bank-

___________________(footnotes)

Bankruptcy Code, 11 U.S.C. 503(b)(1)(B), 507(a)(1). The bank-
ruptcy court concluded that most of the PBGC's claims were
unsecured and had no priority in distribution of assets of the
estates. The district court upheld those rulings but remanded
on another issue; its order is therefore not yet final. See PBGC
v. Reorganized CF&I Fabricators of Utah, Inc., 179 B.R. 704
(D. Utah 1994).

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5

ruptcy under Section 507(a)(7)(E), the plain language
of the statutes must be followed without regard to the
underlying "purpose" served by the tax. 942 F.2d at
1059. The bankruptcy court, however, rejected the
Sixth Circuit's ruling as "unnecessarily rigid" (Pet.
App. 48a).  The court stated that the fact that
Congress denominated the tax imposed by Section
4971 as an excise tax should be disregarded in apply-
ing the Section 507(a)(7)(E) priority provision, for
"blind acceptance of the label would defeat the purpose
of the Bankruptcy Code" (Pet. App. 49a).
The court concluded that allowing a priority for the
excise tax imposed under Section 4971(a) would be
anomalous for several reasons. First, the court ex-
pressed concern that priority treatment of the excise
tax claim would elevate that claim above the PBGC's
claims for the underlying funding deficiency (Pet.
App. 51a; see note 4, supra). Second, the court stated
that, because bankruptcy courts may independently
review state and local exactions to determine whether
they represent a priority "tax" or a non-priority
penalty, a failure similarly to review federal exac-
tions would result in a "disparate treatment" that
"the Bankruptcy Code does not contemplate" (Pet.
App. 51a). Third, the court stated that payment of
priority excise tax claims would burden respondents'
efforts to reorganize, would diminish the return of
other creditors and would give a "windfall" to the
government (ibid.).  Fourth, because the priority
excise tax claims would be paid before the claims of
the pensioners themselves, the court stated that the
excise tax priority would harm the very parties that
Section 4971 was intended to protect (Pet. App. 51a).
For these reasons, the court concluded that it must
be "empowered, under the circumstances of this case,

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6

to look behind the characterization of the exaction set
forth in the statute and focus on the actual nature of
the claims" (Pet. App. 52a).
The bankruptcy court applied what it termed the
Lorber Industries "test" to determine the "actual na-
ture" of the tax (Pet. App. 52a). That test derives
from County Sanitation District No. 2 v. Lorber
Industries of California, Inc., 675 F.2d 1062 (9th Cir.
1982), which was a bankruptcy case involving collec-
tion of a county sewer use fee. The Ninth Circuit held
in that case that the following four elements charac-
terize a "tax," as distinguished from a user fee, for
purposes of determining entitlement to priority under
the former Bankruptcy Act:
  (a) An involuntary pecuniary burden, re-
   gardless of name, laid upon individuals or
   property;
  (b) Imposed by, or under authority of the
   legislature;
  (c) For public purposes, including the purposes
   of defraying expenses of government or un-
   dertakings authorized by it;
  (d) Under the police or taxing power of the
   state.
675 F.2d at 1066. In the present case, the bankruptcy
court concluded, under "its own independent appli-
cation" of the Lorber standard, that the excise tax
imposed under Section 4971(a) is not a "tax" but is in
the nature of a penalty and is therefore not entitled to
priority under Section 507(a)(7) of the Bankruptcy
Code (Pet. App. 52a).
3. The United States appealed to the district
court. While that appeal was pending, respondents
issued a proposed plan of reorganization. The United
States objected to the proposed plan because it failed

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7

to make provision for payment of the Section 4971(a)
excise tax in the event that the United States pre-
vailed on its appeal of the priority issue. The bank-
ruptcy court nonetheless confirmed the plan. The
United States appealed from the order of confirma-
tion. In the meantime, respondents initiated an adver-
sary proceeding in their bankruptcy case, seeking to
subordinate the Section 4971(a) excise tax claims to
the claims of general unsecured creditors. Respond-
ents relied on Section 51O(c) of the Bankruptcy Code,
which authorizes bankruptcy courts to apply "prin-
ciples of equitable subordination [to] subordinate for
purposes of distribution all or part of an allowed claim
to all or part of another allowed claim." 11 U.S.C.
510(c). Respondents contended that "principles of
equitable subordination" permit the court to sub-
ordinate claims for "penalties" even if the holder of
the claim has not engaged in any inequitable conduct.
The bankruptcy court agreed with respondents and
ordered the Section 4971(a) excise tax claim to be
"subordinated to the claims of all other general
unsecured creditors of the Debtors pursuant to 11
U.S.C.  510(c)" (Pet. App. 21a). The United States
appealed that order.
4. a. Twelve days after the bankruptcy court
issued its original order denying priority to the
Section 4971(a) tax, the Tenth Circuit issued its
decision in United States v. Dumler, 983 F.2d 161
(1992). That case involved the bankruptcy priority of
the government's claim for the 10 % "additional tax"
imposed under Section 72(t) of the Internal Revenue
Code upon early distributions from qualified retire-
ment plans. The question in Dumler was whether
that "additional tax" (26 U.S.C. 72(t)) is a "tax on or

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8

measured by income" that is entitled to seventh
priority in bankruptcy under 11 U.S.C. 507(a)(7)(A)
(1988). The Tenth Circuit held in Dumler that,
although Section 72(t) purports to impose a "tax," it
in fact imposes a "penalty" for a nonpecuniary loss
and therefore has no priority in bankruptcy.5 983 F.2d
at 164-165. In reaching that conclusion, the Tenth
Circuit stated that it rejected the reasoning of the
Sixth Circuit in Mansfield Tire and held that it could
"recharacterize for purposes of bankruptcy what
Congress has deemed a tax in the Internal Revenue
Code." 983 F.2d at 162, citing In re Unified Control
Systems, Inc., 586 F.2d 1036 (5th Cir. 1978).
b. In the present case, the district court con-
solidated the government's appeals from the orders of
the bankruptcy court that (i) denied priority to the
Section 4971(a) claim, (ii) confirmed the plan of
reorganization, and (iii) subordinated the Section
4971(a) claim to the claims of all general unsecured
creditors. The district court affirmed all three or-
ders, reasoning that the Section 4971(a) excise tax "is
a nonpecuniary loss penalty, not a tax" (Pet. App.
18a). The court stated that equitable subordination of
the government's claim is appropriate "primarily" for
the reasons set forth in the Tenth Circuit's opinion in
the Dumler case (ibid.). But see note 5, supra.
5. The court of, appeals affirmed (Pet. App. 1a-9a).
Relying on its previous decision in Dumler, the court
held that the name that Congress gives an exaction
under the Internal Revenue Code does not determine

___________________(footnotes)

5 The question whether the doctrine of equitable subor-
dination would permit subordination of such a claim to all other
general unsecured claims was not presented or addressed in
United States v. Dumler.

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9

its status in applying the priority provisions of
Section 507(a)(7) of the Bankruptcy Code. The court
stated that whether an exaction is a "tax" or a "pen-
alty" for purposes of bankruptcy priority is to be
determined by application of the four-part test of
Lorber Industries (Pet. App. 6a). Under that test, the
court concluded that the Section 4971(a) excise tax is
in substance a "penalty," rather than a "tax," "for
substantially the reasons given by the bankruptcy
court" (Pet. App. 6a).
The court then addressed the equitable subor-
dination of the government's claim. The court first
noted that, "[b]ecause we have determined that the
[claim of the United States in this case] is a nonpecu-
niary loss penalty not entitled to section 507 prior-
ity," the court had no reason to consider whether a
claim that is entitled to priority under Section 507
may be subordinated to other claims under the
"principles of equitable subordination" (Pet. App. 6a).6
The court then acknowledged that equitable subord-
ination historically has been imposed only when a
creditor has engaged in wrongful conduct and that
"the bankruptcy court expressly found that `there
[had] been no inequitable conduct on the part of the
Internal Revenue Service'" in this case (Pet. App. 6a,
7a). The court stated, however, that in codifying the
"principles of equitable subordination" in Section
   
___________________(footnotes)

6 Whether a "case-by-case" balancing of the "equities" may
be applied to subordinate a claim that the court believes to be
"unfair" to other creditors even when Congress has expressly
designated such a claim as a priority claim in Section 507 of the
Bankruptcy Code-a question that the court of appeals asserted
that it was not required to reach in this case-was addressed
and answered affirmatively in United States v. Noland, No.
96-323. See note 2, supra.

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10

510(c) of Bankruptcy Code, "Congress intended
courts to continue developing" those principles (Pet.
App. 7a). The court reasoned that the "developing"
principles of equitable subordination permit a court
(id. at 8a, quoting In re Virtual Network Services
Corp., 902 F.2d 1246,1250 (7th Cir. 1990)):

to equitably subordinate claims to other claims
on a case-by-case basis without requiring in
every instance inequitable conduct on the part of
the creditor claiming parity among other unse-
cured general creditors.

In particular, the court held that these developing
"principles of equitable subordination" do "not
require a finding of claimant misconduct to subord-
inate nonpecuniary loss tax penalty claims" (Pet.
App. 8a, citing, e.g., Burden v. United States, 917 F.2d
115, 116-120 (3d Cir. 1990); Schultz Broadway Inn v.
United States, 912 F.2d 230,231-234 (8th Cir. 1990)).
Turning to "the equities in this case" (Pet. App.
8a), the court held that subordination is appropriate
because the PBGC and other "general unsecured
creditors of CF&I will receive only a small per-
centage of their claims" and `([declining to subor-
dinate the [excise.. tax claim of the United States]
would harm innocent creditors rather than punish the
debtor for failing to fund the pension plan" (ibid.).

INTRODUCTION AND SUMMARY OF ARGUMENT

1. This case presents two related questions
concerning the proper application of the statutory
priorities that Congress has established for the
distribution of the assets of a debtor's estate. The
first concerns whether the statutory "[s]eventh"
priority for "an excise tax" in Section 507 of the

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11

Bankruptcy Code (11 U.S.C. 507(a)(7)(E) (1988)) is
available only when the underlying purpose of the
"excise tax" is to raise revenue rather than to penal-
ize or discourage undesirable conduct.
Section 4971(a) of the Internal Revenue Code im-
poses a 10% excise tax on a taxpayer's failure to meet
the minimum funding requirements for its qualified
pension plan (26 U.S.C. 4971(a)). The tax imposed by
Section 4971(a) was expressly designated as an
"excise tax" by Congress and therefore falls literally,
and precisely, within the statutory priority for any
"excise tax" under Section 507(a)(7)(E) of the
Bankruptcy Code.
The text and history of Section 507 both reflect
that the priority that Congress granted to excise
taxes is not conditioned on a finding that the tax is
primarily designed to raise revenues. Excise taxes
are routinely enacted by Congress to monitor and
discourage particular types of conduct. Congress has
not authorized courts to limit the statutory priority
for such excise taxes to situations where the tax
reimburses the government for some "actual pecun-
iary loss" (Pet. App. 52a). Excise taxes-like other
taxes-are rarely designed to reimburse the govern-
ment for a "pecuniary loss." If the statutory priority
for "excise taxes" were available only when the gov-
ernment has incurred an "actual pecuniary loss," the
priority would only rarely apply. Congress did not
intend the unqualified, comprehensive priority that it
provided for excise taxes in Section 507(a)(7)(E) to be
given such an implausibly narrow scope.
2. The court of appeals not only concluded that the
excise tax imposed by Section 4971(a) should be denied
the statutory "[s]eventh" priority established for ex-
cise taxes under Section 507. The court further held

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 12

that the government's excise tax claim should be
subordinated even to the claims of general unsecured
creditors.  The court based that holding on the
"principles of equitable subordination" codified in
Section 510(c) of the Bankruptcy Code, 11 U.S.C.
51O(c).
The "principles of equitable subordination" that
Congress codified in Section 510(c) authorize courts
to subordinate an individual claim upon a showing
that the creditor obtained its claim through mis-
conduct or other inequitable behavior. The "princi-
ples of equitable subordination" do not permit a court
categorically to prefer one type of innocent claimant
over another. The categorical arrangement of the
priorities afforded to different types of claims is a
matter for Congress to decide, and a matter that Con-
gress has decided. Equitable subordination operates
in a field necessarily left unresolved by Congress-
counteracting inequities resulting from the indivi-
dual misconduct of creditors. That limited scope of
the doctrine of equitable subordination was well-
established when the "principles of equitable subor-
dination" were codified in Section 510(c). The text of
the statute and its legislative history confirm that
Section 510(c) does not provide the courts with
authority to disregard statutory priorities based upon
a judicial conclusion that a different categorical
priority scheme would result in a fairer or more
equitable scheme of distribution,
In cases that arise under Chapter 11 of the
Bankruptcy Code-such as the present case-''penal-
ty" claims not involving pecuniary loss are within the
same distributive category as general unsecured
claims. If, as the court of appeals concluded, the
Section 4971 excise tax claim involved in this case is

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13

not entitled to priority under Section 507(a)(7)(E) of
the Bankruptcy Code-on the theory that it is a
"penalty" claim not involving pecuniary loss-the
government's claim is then entitled to treatment on a
parity with the general unsecured claims of other
innocent creditors in this Chapter 11 case.

       ARGUMENT

I

THE CLAIM OF THE UNITED STATES FOR AN
EXCISE TAX OWED UNDER SECTION 4971(A)
OF THE INTERNAL REVENUE CODE, 26 U.S.C.
4971(A), IS ENTITLED TO THE DISTRIBUTIVE
PRIORITY FOR AN "EXCISE TAX" PROVIDED BY
SECTION SO OF THE BANKRUPTCY
CODE, 11 U.S.C. 507(A)(7)(E) (1988)

Before entering bankruptcy, respondents incurred
liability to the United States for an excise tax im-
posed under Section 4971(a) of the Internal Revenue
Code, 26 U.S.C. 4971(a). Under Section 507(a)(7)(E) of
the Bankruptcy Code, claims for excise taxes for
which a return was due within three years of the peti-
tion for relief are granted "[s]eventh" priority in the
distribution of the bankruptcy estate. See 11 U.S.C.
507(a)(7)(E)(i) (1988). See note 1, supra. The courts
below denied priority to the government's excise tax
claim in this case, however, on the ground that the
excise tax under Section 4971(a) is intended to pen-
alize the debtor rather than to raise revenue or com-
pensate the government for "actual pecuniary loss"
(Pet. App. 6a, 52a).
1. The court of appeals erred in holding that the
excise tax imposed by Section 4971(a) is not entitled
to the priority that Congress expressly provided to

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14

every "excise tax" under Section 507(a)(7)(E) of the
Bankruptcy Code. Congress enacted Section 4971 of
the Internal Revenue Code as part of the Employee
Retirement Income Security Act of 1974 (ERISA). In
connection with the qualified pension plan arrange-
ments authorized by ERISA, Section 4971 was en-
acted to "impose[] an excise tax on the employer if he
fails to fund the plan at the minimum required
amounts." H.R. Rep. No. 807, 93d Cong., 2d Sess. 97
(1974) (emphasis added). Even before the Bankruptcy
Code was enacted in 1978, Congress expressly desig-
nated the tax imposed by Section 4971 as an "excise
tax" (ibid.; see also S. Rep. No. 383, 93d Cong., 1st
Sess. 24,33,70 (1973)). Section 4971 was placed within
Subtitle D of the Internal Revenue Code-which is
entitled "Miscellaneous Excise Taxes"- precisely
because Congress understood and intended that Sec-
tion 4971 is an "excise tax" (H.R. Rep. No. 807, supra,
at 97).7
When the Bankruptcy Code was enacted in 1978,
one of the changes that it made to the provisions of
the former Bankruptcy Act was the new, express
specification of a "[s]eventh" priority for "excise tax"
claims. Compare 11 U.S.C. 507(a)(7)(E) (1988) with 11
                                      
___________________(footnotes)

7 Like other taxes- and unlike penalties-the Section 4971
excise tax is required to be reported on, and paid with, a
return (IRS Form 5330). 26 C.F.R. 54.6011-1(a). The return
for the tax at issue in the present case was due "after three
years before the date of the filing of the petition [for relief in
bankruptcy]" (11 U.S.C. 507(a)(7)(E)) and therefore comes
directly within the terms of the excise tax priority in Section
507(a)(7)(E). See Pet. App. 41a (the "payment should have
accompanied [respondent's] form 5330 annual report that the
parties agree was due on September 15, 1990").

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15

U.S. C. 104(a) (1976).8 The joint floor statements that
accompanied enactment of the Bankruptcy Code de-
scribed the intended scope of this specific "excise
tax" priority:

All Federal, State, or local taxes generally
considered or expressly treated as excises are
covered by this category, including sales taxes,
estate and gift taxes, gasoline and special fuel
taxes, and wagering and truck taxes.
124 Cong. Rec. 32,416 (1978) (Rep. Edwards) (emphasis
added); id. at 33,998, 34,016 (Sen. DeConcini) (same).9

Because Congress "expressly treated" the excise
tax created under Section 4971 of the Internal Rev-

___________________(footnotes)

8 Section 64a of the former Bankruptcy Act granted fourth
priority to "taxes which became legally due and owing by the
bankrupt to the United States or to any State or any
subdivision thereof which are not released by a discharge in
bankruptcy." 11 U.S.C. 104(a) (1976). In turn, Section 17a of
the former Act provided that a discharge in bankruptcy would
not release the bankrupt of liability for taxes that became due
and owing within three years before bankruptcy, certain
assessed and unassessed taxes for which the bankrupt failed to
make a return, taxes the bankrupt attempted to evade or
defeat or with respect to which the bankrupt made a
fraudulent return, and taxes the bankrupt collected or
withheld from others but failed to pay over. 11 U.S.C. 35(a)
(1976).
9 The House and Senate did not hold a formal conference in
connection with the final enactment of the Bankruptcy Code
(Act of Nov. 6, 1978, Pub. L. No. 95-598, 92 Stat. 2549, com-
monly known as the Bankruptcy Reform Act of 1978). The
floor statements of the sponsors served in place of a conference
committee report (see F. Kennedy, Foreword: A Brief History
of the Bankruptcy Reform Act, 58 N.C.L. Rev. 667, 676-677
(1980)) and have been regarded as persuasive evidence of
congressional intent. Begier v. IRS, 496 U.S. 53, 64 n.5. (1990).

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16

enue Code as an "excise tax" even before the Bank-
ruptcy Code was enacted, the Sixth Circuit correctly
concluded in United States v. Mansfield Tire &
Rubber Co., 942 F.2d at 1059, that this tax is entitled
to the "[s]eventh" priority established by Section
507(a)(7)(E). As this Court stated in United States v.
Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), when
the language of the Bankruptcy Code is plain, "the
sole function of the courts is to enforce it according
to its terms." Id. at 241, quoting Caminetti v. United
States, 242 U.S. 470,485 (1917). Moreover, as we have
shown, while resort to the Legislative history of these
provisions is therefore unnecessary, that history
leaves no room for any different conclusion.
2. The court of appeals erred in concluding (Pet.
App. 5a) that an "excise tax" that exacts a "penalty"
is not an "excise tax" within the meaning of Section
507(a)(7)(E) of the Bankruptcy Code. As the Sixth
Circuit explained in United States v. Mansfield Tire
& Rubber Co., 942 F.2d at 1059, Congress expressly
granted priority to any "excise tax" without adding
any limitation based upon the "purpose" of the tax.
Moreover, Congress clearly understood that an ex-
cise tax is no less. an "excise tax" because it has a
regulatory or deterrent purpose. Excise taxes in the
Internal Revenue Code are often imposed on dis-
favored activities and are often designed to discourage
or punish undesirable conduct. See, e.g., 26 U.S.C.
4064 (gas guzzler tax), 4681 (Supp. V 1993) (tax on
ozone-depleting chemicals), 4701 (tax on "registra-
tion-required" obligations not issued in registered
form), 4911 (tax on excess lobbying by public
charities), 4941 et seq. (tax on undistributed income
and speculative investments of private foundations),
4955 (tax on political expenditures by Section

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17
                   
501(c)(3) organizations), 4981 and 4982 (taxes on
undistributed income of real estate investment trusts
and regulated investment companies), 4999 (tax on
"golden parachute" payments), 5881 (tax on
"greenmail"). If Congress had intended to exclude so
many federal excise taxes from the excise tax
priority, one would expect to find some indication to
that effect in the Bankruptcy Code or in its
legislative history. Instead, the legislative history
specifies that the priority for excise taxes
comprehensively includes "[a]ll [f]ederal, [s]tate or
local taxes generally considered or expressly treated
as excises" (124 Cong. Rec. 32,416 (1978) (Rep.
Edwards) (listing the excise tax on "wagering" as one
example)).
Related provisions of the Bankruptcy Code evi-
dence that Congress intentionally omitted any dis-
tinction among excise taxes in enacting the priority
for such taxes in Section 507(a)(7)(E). In Section
507(a)(7)(G), separate and apart from the "excise tax"
priority of Section 507(a)(7)(E), Congress established
an additional "[s]eventh" priority for tax-related
"penalt[ies]" that are "in compensation for actual pe-
cuniary loss" (11 U.S.C.  507(a)(7)(G)).10 This Court
  
___________________(footnotes)

10 The courts below correctly noted (Pet. App. 4a, 52a) that a
"penalty" that does not represent compensation for "pecuniary
loss" does not fall within the priority for penalties that are
"in compensation for actual pecuniary loss" under Section
507(a)(7)(G) of the Bankruptcy Code, 11 U.S.C. 507(a)(7)(G).
The courts below erred, however, in reasoning (Pet. App. 5a,
52a) that, if the Section 4971(a) excise tax represents a
"penalty" that does not compensate for pecuniary loss, it is
therefore not entitled to priority under the Code. The fact that
an excise tax might not qualify for one priority-under Section
507(a)(7)(G)-has no logical or appropriate bearing on whether

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18

has noted that "it is generally presumed that Con-
gress acts intentionally and purposely when it in-
cludes particular language in one section of a statute
but omits it in another" (City of Chicago v. Envi-
ronmental Defense Fund, 114 S. Ct. 1588, 1593 (1994),
quoted in BFP v. Resolution Trust Corp., 114 S. Ct.
1757, 1761 (1994)). That presumption is especially
appropriate when, as here, language conditioning an
express priority is used in one paragraph and omitted
in another paragraph of the same subsection of the
statute. Thus, if Congress had intended to exclude
from the priority that it established for "excise
taxes" any excise tax that might be "punitive" rather
than "compensatory" in nature, it surely knew how to
do so-it had to look no further than Section
507(a)(7)(G) to find a model.  Instead, Congress
deliberately chose to include all of the numerous
"excise taxes" that it has enacted over the years
within the same "[s]eventh" priority, which encom-
passes all those taxes "generally considered or ex-
pressly treated as excises" (124 Cong. Rec. 32,416
(1978)). See also note 10, supra. That legislative
determination of the priority to be afforded to "excise
tax" claims in bankruptcy is, of course, binding on the
courts. United States v. Embassy Restaurant, 359
U.S. 29,31-32 (1959); Nathanson v. Labor Board, 344

___________________(footnotes)

such an excise tax is separately entitled to the different priority
established by Congress for "excise taxes" in Section
507(a)(7)(E). Indeed, if an excise tax had to qualify for prior-
ity as a "penalty" compensating for "pecuniary loss" (under
Section 507(a)(7)(G)), Congress would not have found it neces-
sary to specify that "excise taxes" are entitled to priority
under Section 507(a)(7)(E). In short, Congress specified that
excise taxes need qualify for priority only under one provision
of Section 507, not two.

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19

U.S. 25, 28-29 (1952); Carpenter v. Wabash Ry., 309
U.S. 23,28 (1940).
3. The four-part Lorber Industries standard on
which the court of appeals relied in concluding that a
"penalty" is not an "excise tax" for purposes of Sec-
tion 507(a)(7)(E) (see pages 6, 9, supra) has no proper
application in this context. That test was formulated
by the Ninth Circuit to determine whether an exac-
tion that a State describes as a priority "tax" is
instead a non-priority user fee. See 675 F.2d at 1066.
Even if we assume that the Lorber Industries analy-
sis is relevant in determining whether an exaction is
a "tax" or a user fee for purposes of the general bank-
ruptcy priority for a postpetition "tax" (11 U.S.C.
503(b)(1)(B), 507(a)(1)), it is not relevant in deter-
mining whether an exaction is a "penalty" or an
"excise tax" within the specific priority established
in Section 507(a)(7)(E).11  The test described in

___________________(footnotes)

11 In this case, in denying priority to the Section 4971(a) tax,
the court of appeals relied (Pet. App. 5a) on its earlier decision
in United States v. Dumler, 983 F.2d 161 (10th Cir. 1992).
That case concerned whether the tax on premature distrib-
utions from qualified pension plans (26 U.S.C. 72(t)) was a "tax
on or measured by income" for purposes of the priority estab-
lished in Section 507(a)(7)(A) of the Bankruptcy Code. 983
F.2d at 163-164. The court of appeals did not attempt in this
case to explain why the analysis of that decision should be
applied in determining whether an exaction is an "excise tax"
under the more specific provisions of Section 507(a)(7)(E) of
the Code.
This Court's decisions in City of New York v. Feiring, 313
U.S. 283 (1941), and New Jersey v. Anderson, 203 U.S. 483
(1906), on which the court of appeals relied in United States v.
Dumler, 983 F.2d at 163, involved whether state and local exac-
tions constituted "taxes" for purposes of the priority for taxes
under the former Bankruptcy Act (see note 8, supra). As the

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20

Lorber Industries does not address whether a tax
that is designed to discourage or monitor undesirable
conduct is an "excise" or a "penalty."
As we have explained, however, an "excise tax" is
often, if not ordinarily, designed to accomplish regu-
latory or deterrent objectives, as well as to raise
revenue. See pages 16-17, supra. Moreover, Con-
gress expressly designated the tax imposed under
Section 4971 as an "excise tax." See pages 14-16,
supra. The legislative history and the plain text of
Section 507(a)(7)(E) reflect that the priority for an
"excise tax" applies to all such exactions "generally
considered or expressly treated as excises" (124
Cong. Rec. 32,416 (1978) (Rep. Edwards) (emphasis
added)), The plain text, and the plain legislative
command, of the Bankruptcy Code should not have
been disregarded by the court of appeals. See, e.g.,
Patterson v. Shumate, 504 U.S. 753, 757-759 (1992);
Connecticut National Bank v. Germain, 503 U.S.
249, 253-254 (1992); United States v. Ron Pair
Enterprises, Inc., 489 U.S. at 242.

___________________(footnotes)

Sixth Circuit noted in Mansfield Tire & Rubber Co., 942 F.2d at
1060, although it is appropriate carefully to review the desig-
nation of state and local exactions to insure that such claims are
not improperly promoted within the federal priority scheme,
courts are not free to recast an exaction that Congress has
designated as a "tax" to be something else. In A. Magnano CO.
v. Hamilton, 292 U.S. 40, 43 (1934), this Court stated that
whether an exaction is for the public purpose of raising
revenues turns on "the use which is to be made of the revenue
derived from the tax, and not [on] any ulterior motive or
purpose which may have influenced the legislature in passing
the act." In any event, for the reasons we have explained,
cases involving a general priority for "taxes" are not relevant
in determining the scope of the more specific priority for
"excise taxes" under Section 507(a)(7)(E).

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21

II

IN THE ABSENCE OF INEQUITABLE CONDUCT BY
TEE GOVERNMENT, THE EXCISE TAX CLAIM OF
THE UNITED STATES UNDER SECTION 4971(A) OF
THE INTERNAL REVENUE CODE MAY NOT
BE SUBORDINATED TO GENERAL UNSECURED
CLAIMS UNDER THE "PRINCIPLES OF EQUIT-
ABLE SUBORDINATION" CODIFIED IN SECTION
510(C) OF THE BANKRUPTCY CODE

The court of appeals not only held that the claim of
the United States under Section 4971(a) of the In-
ternal Revenue Code should be denied the priority
established for every "excise tax" under Section
507(a)(7)(E) of the Bankruptcy Code. The court
further concluded that the government's claim should
be "equitably" subordinated even to the general unse-
cured claims of all other creditors (Pet. App. 6a-8a).12
The court recognized (Pet. App. 7a) that, "[i]n
general, equitable subordination is imposed only when
a creditor has committed some kind of wrongful con-
duct. In re Virtual Network Servs. Corp., 902 F.2d
1246, 1248 (7th Cir. 1990); Benjamin v. Diamond (In
re Mobile Steel Co.), 563 F.2d 692, 700 (5th Cir. 1977)."
The court stated, however, that under the "principles
of equitable subordination" codified in Section 510(c)
of the Bankruptcy Code, 11 U.S.C. 510(c)(1), "a court
        . 

___________________(footnotes)

12 Because the court of appeals did not treat the excise tax
claim as a claim entitled to priority under Section 507(a)(7)(E),
the court expressly declined to consider whether "principles of
equitable subordination" would permit the subordination of a
priority claim asserted by an innocent creditor (Pet. App. 6a).
That related question is the subject of United States v. Noland,
No. 95-323, which is to be argued in tandem with this case. See
note 2, supra.

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22

may subordinate a nonpecuniary loss tax penalty
claim without a showing of misconduct on the part of
the government" (Pet. App. 7a). The court reasoned
that "the equities in this case" favor subordinating
the government's claim in order to avoid "harm [to]
innocent creditors," such as "the PBGC, which will
be paying the pension benefits due under
[respondent's] terminated pension plan" (id at 8a).
1. The expansive powers that the court has
assumed under the doctrine of equitable subor-
dination reflect a fundamental transformation and a
serious misapplication of that doctrine. The judge-
made doctrine of equitable subordination has a clear
origin and a limited scope (In re Columbia Ribbon
Co., 117 F.2d 999,-1002 (3d Cir. 1941)):

[A] court of bankruptcy under its equitable
powers may disallow or subordinate a particular
claim in bankruptcy which, because of the fraudu-
lent nature of the claim or the bad faith or im-
proper conduct of the claimant, ought not in
equity and good conscience to be allowed or paid
on a parity with other claims.

As we explain in detail in the brief filed concur-
rently in United States v. No land (see note 2, supra),
the doctrine of equitable subordination permits a
court to subordinate a particular claim only if the
claimant has acted inequitably in obtaining or en-
forcing its claim, to the detriment of other creditors.
The issue that is to be resolved "under principles of
equitable subordination" is whether (2 Collier Bank-
ruptcy Manual Par. 510.01[1], at 510-2 (3d ed. 1995)):

harmful conduct [of the claimant] was directed at
other creditors. If it was, the claim which is
otherwise provable and allowable should be post-

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23

poned until the claims of the creditors, who were
harmed, have been satisfied.

See Comstock v. Group of Institutional Investors, 335
U.S. 211, 229 (1948); Pepper v. Litton, 308 U.S. 295,
311 (1939); A. Herzog & J. Zweibel, The Equitable
Subordination of Claims in Bankruptcy, 15 Vand. L.
Rev. 83,85 (1961).
The doctrine of equitable subordination does not,
however, authorize a court to disregard categories of
priorities specified by statute merely because the
court concludes that a different ordering of priorities
would yield a result that the court deems more
appropriate or fair. By enacting a specific hierarchy
of statutory priorities, Congress has itself measured
the "equities" of the various classes of claims. Car-
penter v. Wabash Ry., 309 U.S. 23, 28 (1940). Claims
that Congress has placed within the same class are to
be treated on identical terms. Equitable subordin-
ation does not authorize a court to "reweigh" the
equities that Congress itself has already adjusted.
As this Court has held, "whatever equitable powers
remain in the bankruptcy courts must and can only be
exercised within the confines of the Bankruptcy
Code." Norwest Bank Worthington v. Ahlers, 485
U.S. 197, 206 (1988). In Stebbins v. Crocker Citizens
National Bank, 516 F.2d 784, 787, cert. denied, 423
U.S. 913 (1975), the Ninth Circuit explained that:

it is important to keep in mind that the chancellor
never did, and does not now, exercise unrestricted
power to contradict statutory or common law
when he feels a fairer result may be obtained by
application of a different rule. Courts of equity
have long applied standards of conscience to
conduct on an individual basis to prevent formally

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24

proper but unconscionable applications of legal
rules; they have not engaged in the practice of
making abstract legislative judgments about the
fairness of a result contemplated by the legis-
lature's statutory scheme if it has otherwise been
followed in good faith and without overreaching.

Courts therefore traditionally and consistently
held that "[decisions about the treatment of cate-
gories of claims in bankruptcy proceedings * * * are
not dictated or illuminated by principles of equity and
do not fall within the judicial power of equitable
subordination." Burden v. United States, 917 F.2d at
122 (Alito, J., concurring in part and dissenting in
part; emphasis added).  See also Benjamin v.
Diamond, 563 F.2d 693, 700 (5th Cir. 1977) (equitable
subordination requires that "[t]he claimant must
have engaged in some type of inequitable conduct");
Stebbins v. Crocker Citizens National Bank, 516
F.2d at 788 ("there must be conduct either in
acquiring or asserting the claim which is itself
inequitable in order to subordinate a claim"); In re
Credit Industrial Corp., 366 F.2d 402, 408 (2d Cir.
1966). As the Eighth Circuit stated in United States
v. Killoren, 119 F.2d 364, 366, cert. denied, 314 U.S.
640 (1941), in reversing a decision that had applied
"equitable subordination" to a claim for taxes, "[t]he
plain mandate of the law cannot be set aside because of
considerations which may appeal to referee or judge
as falling within general principles of equity
jurisprudence."
2. a. In 1978, Congress codified the judge-made
doctrine of equitable subordination as Section 510(c)
of the Bankruptcy Code. That provision states that
bankruptcy courts may, "under principles of equitable

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25

subordination, subordinate for purposes of distribu-
tion all or part of an allowed claim to all or part of
another allowed claim." 11 U.S.C. 510(c)(1). As we
describe in detail in the brief filed concurrently in
United States v. Noland (see note 2, supra), the text
and history of this provision confirm that, in codi-
fying the "principles, of equitable subordination,"
Congress did not alter the established scope of that
doctrine.13  Because the "principles of equitable
                                                      
___________________(footnotes)

13 The House Report on the provision enacted as Section
510(c) of the Bankruptcy Code indicates that Congress under-
stood the doctrine of equitable subordination to be a narrow
one. The Report states (i) that equitable subordination may be
invoked only to deny equal treatment to creditors based on
inequitable or unconscionable conduct in which they engaged
or based on some special position which they occupied vis-a-vis
the bankrupt that justified subordination of their claims and (ii)
that the doctrine of equitable subordination is therefore inap-
plicable to the claims of innocent parties. H.R. Rep. No. 595,
95th Cong., 1st Sess. 196 (1977). See S. Rep. No. 989, 95th
Cong., 2d Sess. 74 (1978):

[A]ny subordination ordered under this provision must be
based on principles of equitable subordination. These prin-
ciples are defined by case law, and have generally indi-
cated that a claim may normally be subordinated only if its
holder is guilty of misconduct.

In addition to the decision in this case and in United States
v. Noland (note 2, supra), other courts have recently held that
the "principles of equitable subordination" codified in Section
510(c) are not confined to remedying creditor misconduct and
instead permit courts categorically to subordinate "penalty"
claims to the claims of other creditors who have incurred an
"actual pecuniary loss" (Pet. App. 52a). See Burden v. United
States, 917 F.2d 115, 119-120 (3d Cir. 1990); United States v.
Noland, 48 F.3d 210 (6th Cir. 1995), cert. granted, No. 95-323
(Dec. 1, 1995); In re Virtual Network Services Corp., 902 F.2d
1246, 1248-1250 (7th Cir. 1990); Schultz Broadway Inn v.

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26

subordination" do not permit courts to restructure
the categorical classifications of claims that Con-
gress has made, or to subordinate any claim in the
absence of inequitable conduct by a particular cred-
itor, the court of appeals erred in subordinating the
innocent claim of the government in this case. See
Pet. App. 6a (noting that there was "no inequit-
able conduct on the part of the Internal Revenue
Service").
b. Moreover, the court of appeals erred in this case
in asserting that the lawful enforcement of "penalty"
claims within the distributive classification that
Congress established for such claims would effect an
"inequitable" result. In reaching that conclusion, the
court of appeals disregarded the decisions of this
Court holding that_ penalties enacted by Congress are
a `legitimate means to enforce" compliance with the
law and must be given the priority in bankruptcy that
Congress established for such claims. Nicholas v.
United States, 384 U.S. 678,694 (1966).14

___________________(footnotes)

United States, 912 F.2d 230, 232-234 (8th Cir. 1990). In so
holding, these courts misinterpreted the legislative history of
Section 510(c) and erred for the reasons explained in detail in
the brief that we have tiled concurrently in United States v.
Noland (see note 2, supra).
14 In New Jersey V. Anderson, 203 U.S. 483 (1906), the Court
rejected the assertion that a statutory priority for state taxes
should not be recognized because it created an "injustice" for
other creditors and gave the State an undue "advantage" (id.
at 490):

[C]onsiderations of this character, however properly
addressed to the legislative branch of the government, can
have no place in influencing judicial determination. It is
the province of the court to enforce, not to make the laws,
and if the law works inequality the redress, if any, must
be had from Congress.

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27

In evaluating the "equities" of enforcing the Sec-
tion 4971 excise tax, the court of appeals also erred in
narrowly focusing on the effect of the tax on a single
bankruptcy estate. The court acknowledged that this
excise tax is designed to promote compliance with the
minimum funding requirements of qualified pension
plans (Pet. App. 6a, 47a). The ability of the excise tax
to accomplish the `legitimate" legislative objective of
ensuring wide compliance with pension funding re-
quirements obviously depends upon the ability of the
government to enforce that tax. The priority that
Congress provided for excise taxes in 11 U.S.C.
507(a)(7)(E) is designed precisely to ensure the en-
forceability, and therefore the effectiveness, of such
taxes.
The court of appeals ignored the structural role of
the Section 4971(a) excise tax in concluding that it
was "inequitable" for that tax to be given priority
over the claim of "the PBGC, which will be paying the
pension benefits due under [respondent's] terminated
pension plan" (Pet. App. 8a). Even if the excise tax
priority would be adverse to the interest of the PBGC
in obtaining a distribution from a particular bank-
ruptcy estate, the function of the excise tax (and of
the priority afforded to it) is to make it ordinarily
unnecessary for the PBGC to participate in bank-
ruptcy cases by ensuring the full and timely funding
of pension plans in advance of bankruptcy. See, e.g.,
Staff of Senate Comm. on Finance, 100th Cong., 1st
Sess., Omnibus Budget Reconciliation Act of 1987, et
al. 180 (Comm. Print No. 100-63) (1987) (the excise tax
"for failure to make contributions [is] needed to help
ensure that contributions are made when due").
By focusing instead only on what the court per-
ceived to be "fair" or "unfair" on the facts of the pre-

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28

sent case, the court thus neglected to consider that,
in adopting categorical priorities for the distribution
of bankruptcy estates, Congress has itself measured
the "equities" of the various classes of claims.
Carpenter v. Wabash Ry., 309 U.S. at 28. The court
of appeals improperly relied on "principles of equit-
able subordination" to annul and supplant the legisla-
tive determination that Congress made of the proper
priority to be afforded to the government's innocent
assertion of its claim.
c. At the same time that the "principles of
equitable subordination" were codified as Section
510(c) of the Bankruptcy Code, Congress expressly
provided for the subordination of prepetition nonpe-
cuniary loss penalties only in cases under Chapter 7
of the Code. 11 U.S.C. 103(b), 726(a)(4).15 The text
and history of these provisions reflect an explicit con-
gressional determination not to subordinate prepeti-
tion nonpecuniary loss penalty claims in cases-such
as the present case-that arise under Chapter 11 of
the Bankruptcy Code.16 In enacting the Bankruptcy

___________________(footnotes)

15 The tax penalty involved in United States V. Noland,
supra, is a postpetition tax penalty for which Congress pro-
vided "[f]irst" priority in distribution in Chapter 7 cases. See
11 U.S.C. 503(b)(1)(B), 507(a)(1), 726(a)(1).
16 The trustee is similarly allowed to avoid liens securing
such penalties only in cases arising under Chapter 7. See 11
U.S.C. 724(a). The legislative reports emphasized the different
treatment envisioned for penalties in cases under Chapter 7
and under Chapter 11: 
  The lien is made voidable rather than void in chapter 7,
in order to permit the lien to be revived if the case is
converted to chapter 11, under which penalty liens are not
voidable. To make the lien void would be to permit the
filing of a chapter 7, the voiding of the lien, and the con-

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29

Code, Congress considered and rejected a proposal to
subordinate all "nonpecuniary loss" penalty claims
under all chapters of the Code.  Report of the
Commission on the Bankruptcy Laws of the United
States, H.R. Dec. No. 137, 93d Cong., 1st Sess. Pt. II,
at 115,  4-406(a)(3) (1973). Instead, Congress pro-
vided for the subordination of "nonpecuniary loss"
penalties only in Chapter 7 cases. See 11 U.S.C.
726(a)(4). In Chapter 11 cases, such as the present
case, Congress elected to place such penalties within
the class of general unsecured claims.
By concluding that a prepetition nonpecuniary loss
penalty should be subordinated to the claims of
general unsecured creditors in Chapter 11 cases, the
decision of the court of appeals thus contradicts the
statutory treatment that Congress deliberately pro-
vided for such claims. Through misapplication of the
"principles of equitable subordination: the court of
appeals substituted its judgment about the relative
worthiness of a category of claims for the different
judgment that Congress made in enacting the Bank-
ruptcy Code. As the Ninth Circuit stated in Stebbins
v. Crocker Citizens National Bank, 516 F.2d at 788,
the doctrine of equitable subordination does not
permit a court to say, "in effect, * * * `No, the
distribution scheme provided by the [Bankruptcy] Act
is a mistake.'"
The establishment of categorical priorities among
competing, innocent claimants has never been the
function of the judiciary in bankruptcy cases. In the
Bankruptcy Code itself, Congress has specified in

___________________(footnotes)

version to a chapter 11, simply to avoid a penalty lien,
which should be valid in a reorganization case.
H.R. Rep. No. 595, supra, at 382; S. Rep. No. 989, supra, at 96.

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30

detail the priorities that particular categories of
innocent claimants are to receive. By ignoring these
statutory priorities-and, indeed, adopting a precisely
opposite set of priorities in this case-the decision of
the court of appeals represents a marked departure
both from the common understanding of "equitable"
authority and from the specific understanding of the
doctrine of "equitable subordination" that Congress
codified in 1973 as Section 510(c) of the Bankruptcy
Code. The court erred in substituting its own view of
an "equitable" priority scheme for the statutory
scheme that Congress itself established.

      CONCLUSION

The judgment of the court of appeals should be
reversed.

Respectfully submitted.

         DREW S. DAYS, III
          Solicitor General
        
        LORETTA C. ARGRETT
        Assistant Attorney General

         LAWRENCE G. WALLACE
        Deputy Solicitor General

         KENT L. JONES
          Assistant to the Solicitor
           General

         GARY D. GRAY
         KENNETH W. ROSENBERG
          Attorneys

JANUARY 1996

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No. 95-325

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CFI FABRICATORS OF UTAH, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES 

DREW S. DAYS, III
Solicitor General 

Department of Justice
Washington, D.C. 20530
(202) 514-2217

---------------------------------------- Page Break ----------------------------------------                   

TABLE OF AUTHORITIES

Cases

Apex Oil Co., In re, 118 B.R. 683(Bankr. E.D.
Mo. 1990)  . . . . 6
Aztec Co., In re, 107 B.R. 585(Bankr. M.D.
Tenn.1989)  . . . . 6
Benjamin v. Diamond, 563 F.2d 692 (5th Cir.
1977)  . . . . 4
Coney v. National Bank of Texas, 814 F.2d 1008
(5th Cir.), cert. denied, 484 U.S. 898 (1987)  . . . . 
Comstock v. Group of Institutional Investors,
335 U.S. 211 (1948)  . . . . 7
Groetken v. Illinois Dep't of Revenue, 843 F.2d
1007 (7th Cir. 1988)  . . . . 4
Husted, In re, 142 B.R. 72(Bankr. W.D.N.Y.
1992)  . . . . 2
Michelson v. Lesser, 939 F.2d 669(8th Cir.
1991)  . . . . 6
Pepper v. Litton, 308 U.S. 295 (1939)  . . . . 4 
S.G. Wilson Co. v. Cleanmaster Industries, Inc.,
106 B.R. 628(Bankr. 9th Cir. 1989)  . . . . 7
Schultz Broadway Inn v. United States, 912
F.2d 230 (8th Cir. 1990)  . . . . 6
Seidle v. United States (In re Airljft International,
Inc.),120B.R. 597(S.D. Fla. 1990)  . . . .2 
Stebbins v. Crocker Citizens National Bank,
516 F.2d 784 (9th Cir.), cert. denied, 423 U.S.
913 (1975)  . . . . 4, 5
Taylor v. Standard Gas & Electric Co., 306 U.S.
307 (1939)  . . . . 4, 5
United States v. Dividend Development Corp.,
No. SA CV 94-84 (C.D. Cal. Apr. 6, 1994), appeal
pending, No. 94-55827 (9th Cir.)  . . . . 3 
United States v. Juvenile Shoe Corp., 180 B.R.
206(E.D. Mo. 1995), appeal pending, No. 95-2289
(8th Cir.)  . . . . 3

(III)

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In the Supreme Court of the United States
         
     OCTOBER TERM, 1995 
     
No. 95-325

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CF&I FABRICATORS OF UTAH, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
   FOR THE TENTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES
    
1. a. Respondents do not dispute that a conflict
among the circuits exists on the first question
presented in this case. The decision of the Tenth Cir-
cuit in this case conflicts directly with the decision of
the Sixth Circuit in United States v. Mansfield Tire
& Rubber Co., 942 F.2d 1055 (1991), cert. denied sub
nom. Krugliak v. United States, 502 U.S. 1092 (1992).
In Mansfield Tire, the Sixth Circuit held that an
excise tax claim under Section 4971 of the Internal
Revenue Code is entitled to the priority afforded
excise taxes under Section 507(a)(7)(E) of the Bank-
ruptcy Code. 942 F.2d at 1059. In the present case,
          
(1)

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2
          
the Tenth" Circuit held precisely to the contrary. See
Pet. App. 4a-6a. 
b. Unable to dispute the existence of this direct
conflict, respondents attempt to minimize its signif-
icance. They argue that the conflict is unimportant
because, in their view (Br. in Opp. 12), the cases could
have been resolved under the theory that Section
507(a)(7)(E) grants priority only to claims for excise
taxes on a "transaction" and that Section 4971 does
not impose an excise tax on a "transaction" (Br. in
Opp. 12). That contention, however, was in fact con-
sidered and rejected by the Sixth Circuit in Mans-
field Tire, 942 F.2d at 1059 n.4. Thus, even if the
court of appeals had adopted respondent's additional
contention, the direct conflict between the circuits
would still exist.1
c. Respondents concede (Br. in Opp. 15) that the
question of the proper priority to be afforded to excise
tax claims is litigated frequently. See, e.g., Seidle v.
United States (In re Airlift International, Inc.), 120
B.R. 597 (S.D. Fla. 1990); United Steelworkers of
America v. PBGC (In re Wheeling-Pittsburgh Steel
Corp.), 103 B.R. 672 (W.D. Pa. 1989). Indeed, excise
tax claims asserted under Section 4971 alone accumu-
late to hundreds of millions of dollars annually.
Moreover, the issue presented in this case has con-
sequences well beyond the Section 4971 excise tax
alone. Claims for other federal excise taxes have been

___________________(footnotes)

1 The Sixth Circuit correctly rejected this contention in
Mansfield Tire. As the petition notes (Pet. 13), Congress in-
tended the priority for excise taxes to be comprehensive in
scope. See also Groetken v. Illinois Dep't of Revenue, 843 F.2d
1007, 1013-1014 (7th Cir. 1988). The "transaction" taxed under
Section 4971 is the act of maintaining a pension plan that is not
funded adequately.

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3
     
contested on the same ground that the court of
appeals sustained in this case-that the tax is
"punitive" and should therefore be denied the priority
that Congress expressly provided for such claims in
Section 507 of the Bankruptcy Code. See, e.g., United
States v. Juvenile Shoe Corp., 180 B.R. 206 (E.D. Mo.
1995), appeal pending, No. 95-2289 (8th Cir.) (excise
tax under 26 U.S.C. 4980); United States v.
Unsecured Creditors' Committee of C-T of Virginia,
Inc., 977 F.2d 137 (4th Cir. 1992), cert. denied, 113 S.
Ct. 1644 (1993) (same); United States v. Dividend
Development Corp., No. SA CV 94-84 (C.D. Cal. Apr.
6, 1994), appeal pending, No. 94-55827 (9th Cir.) (excise
tax under 26 U.S.C. 4975).
When excise tax claims are denied priority, they
are paid along with general unsecured claims, typ-
ically at a fraction of their face value. And when, as in
the present case, such claims are further subordi-
nated to the claims of general unsecured creditors,
the excise tax claims are paid nothing at all. The
priority scheme that Congress enacted for excise tax
claims is thereby entirely nullified by the decision in
this case.
2. The second question presented in the petition is
whether principles of equitable subordination codified
in Section 510(c) of the Bankruptcy Code permit sub-
ordination of an excise tax claim in the absence of
inequitable conduct by the government in obtaining
or enforcing the claim.
a. Respondents err in contending that the decision
in this case does not conflict with the decisions of this
Court or of other circuits. This Court long ago held
that bankruptcy courts may use their equitable pow-
ers to subordinate claims that creditors acquired or
asserted in violation of fiduciary duties or by other-

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4

wise acting inequitably and to the detriment of other
creditors. Taylor v. Standard Gas & Electric Co., 306
U.S. 307 (1939); Pepper v. Litton, 308 U.S. 295 (1939);
Comstock v. Group of Institutional Investors, 335
U.S. 211 (1948). In the Comstock case, the Court made
clear that equitable subordination may not also be
used to subordinate legitimate claims of innocent
creditors (335 U.S. at 229):

It is not mere existence of an opportunity to do
wrong, that brings the rule into play; it is the un-
conscionable use of the opportunity afforded by the
domination to advantage itself at the injury of the
subsidiary that deprives the wrongdoer of the
fruits of his wrong. On the findings in this case,
the claim of [the parent] was the outgrowth of
complicated but legitimate good faith business
transactions, neither in design or effect producing
injury to the petitioner or the interests for which
he speaks.

Several of the courts of appeals have likewise
recognized that "creditor misconduct" must exist for
the doctrine of equitable subordination to apply. See
Benjamin v. Diamond, 563, F.2d 692,699-700 (5th Cir.
1977); Stebbins v. Crocker Citizens National Bank,
516, F.2d, 784,788 (9th Cir.), cert. denied, 423 U.S. 913
(1975),. Respondents' sole basis for suggesting that
these decisions, do not conflict with the decision
below-which subordinates the legitimate statutory
claim of a blameless creditor-is that decisions such
as Comstock, Benjamin, and Stebbins did not address
whether a statutory "penalty" claim might be sub or-
dinated under principles, of equitable subordination.
But the enforcement of a statutory claim, enacted to
prevent misconduct by the debtor, cannot plausibly be

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5

regarded as misconduct by the creditor.2 Respon-
dents thus err in suggesting that the decision in this
case does not conflict with the preexisting holdings of
this Court and of other circuits.
Section 510(c) of the current Bankruptcy Code did
no more than codify preexisting "principles of equit-
able subordination."  Prior to the enactment of
Section 510(c), decisions such as Comstock, Benja-
min, and Stebbins had firmly established that equit-
able subordination is not a license to subordinate on
the basis of "abstract legislative judgments about
*** fairness" (Stebbins v. Crocker Citizens
National Bank, 516 F.2d at 787). By holding that
equitable subordination may apply even in the absence
of a "showing of inequitable behavior" (Br. in Opp.
App. 4a), the decision in the present case contradicts
and conflicts with that established principle.
b. Respondents advance a new contention that was
not raised in the bankruptcy court or the district
court and, although raised in the court of appeals, was
not considered or addressed by that court. Respon-
dents' new contention is that subordination of the
government's claim might have been achieved in the
present case without  invoking principles of equitable
subordination, by applying other provisions of the
Bankruptcy Code. They contend (Br. in Opp. 13-15,
citing 11 U.S.C. 1129(b)(1)) that the bankruptcy court
could have confirmed their plan of reorganization,
over the government's objection, solely upon a finding

___________________(footnotes)

2 The fact that the creditor who asserts such a claim has not
contributed to the estate is also irrelevant. Many claims are
granted priority without regard to whether the claimant can
establish that it has contributed assets to the estate. See 11
U.S.C. 507(a).

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6

that it was "fair and equitable" and did not "discrim-
inate unfairly" to treat the Section 4971 claim worse
than general unsecured claims.
Of course, the courts below were not requested to-
and did not-make a finding that, in the absence of
equitable subordination, it would be "fair and equit-
able," and would not "discriminate unfairly," to omit
payment of the government's claim.  Instead, the
court's finding that. these statutory standards would
be met was premised on the assumption that the gov-
ernment's claim was properly subject to equitable
subordination (Pet. App. 28a; Br. in Opp. 17). Whether
the court would have made a finding that subor-
dination of a claim that was not subject to equitable
subordination would satisfy these statutory stan-
dards, and what relevance such a finding might have if
it had been made, are issues that this case clearly
does not present. The unsupported theory that re-
spondents belatedly seek to inject in this case has not
been adopted by any court.3 In particular, the court of

___________________(footnotes)

3 The statutory term "unfair discrimination" is not defined
in the Bankruptcy Code. Attempts to devise a definition have
produced a variety of results. See, e.g., Michelson v. Lesser,
939 F.2d 669, 672 (8th Cir. 1991); In re Aztec Co., 107 B.R. 585,
590 (Bankr. M.D. Term. 1989); In re Husted, 142 B.R. 72, 74
(Bankr. W.D.N.Y. 1992). None of the decisions applying that
term has subordinated a statutory penalty claim.  Instead,
when statutory penalty claims have been subordinated, courts
have relied on the "principles of equitable subordination" that
the present case involves. See, e.g., In re Apex Oil Co., 118 B.R.
683, 694-699 (Bankr. E.D. Mo. 1990). See also Schultz Broad-
way Inn v. United States, 912 F.2d 230 (8th Cir. 1990); In re
Virtual Network Services Corp., 902 F.2d 1246 (7th Cir. 1990).

---------------------------------------- Page Break ----------------------------------------                  
                    
7

appeals did not refer to it-much less rely on it-in
this case.4
Instead, the court applied the "principles of equit-
able subordination" codified in Section 510(c) of the
Code in a manner that nullifies the priority structure
that Congress enacted.  The conflict that exists
among the courts of appeals on the proper meaning of
the "principles of equitable subordination" codified in
Section 510(c) of the Bankruptcy Code merits this
Court's review.
c. Respondents suggest (Br. in Opp. 15) that
"unique facts" and "unusual circumstances" make
the present case inappropriate for consideration of
the equitable subordination issue. They refer to a
statement of the bankruptcy court (Br. in Opp. App.
5a) that allowing the Section 4971 excise tax claim on
a par with general unsecured claims would reduce the
amount available for distribution to holders of general
unsecured claims, some of whom the bankruptcy
court regarded as more worthy of payment (Br. in
Opp. App. 3a-5a).
There is obviously nothing unique or unusual about
the fact that, under a subjective scheme of valuation,
 
___________________(footnotes)

4 Respondents also err in suggesting (Br. in Opp. 14) that
the bankruptcy court could have subordinated the excise tax
claim under the authority provided in Section 502(j) of the
Bankruptcy Code to reconsider claims (11 U.S.C. 502(j)). This
is another provision that respondents did not seek to invoke in
the bankruptcy or district courts. In any event, Section 502(j)
is simply an analogue of Rules 59 and 60 of the Federal Rules of
Civil Procedure. It authorizes bankruptcy courts to reconsider
the allowance or disallowance of a claim where "the equities of
the case" justify reconsideration. See Coney v. National Bank

of Texas, 814 F.2d 1008, 1010 (5th Cir.), cert. denied, 484 U.S.
898 (1987); S.G. Wilson Co. v. Cleanmaster Industries, Inc., 106
B.R. 628, 630 (Bankr. 9th Cir. 1989).

---------------------------------------- Page Break ----------------------------------------                   
                   
8

some claims will appear more worthy than others.
That type of personal, individualized reaction. to the
"worthiness" of competing claims lies at the heart of
the issue that this, case presents for review. This
case squarely presents the question whether "princi-
ples of equitable subordination" authorize a bankrup-
tcy court to make a subjective assessment of the rel-
ative merits of the" legitimate claim of an innocent
creditor and, based on that assessment, subordinate
the claim to other claims that Congress provided
should be given parity or lower priority in the
statutory scheme. 
3. We have suggested that, if the petitions in this
case and United States v. Noland, No. 95-323, are both
granted, the two cases should be set for argument in
tandem because they present closely related ques-
tions concerning the proper scope of equitable subor-
dination. Respondents, however, dispute that the is-
sues are closely related, noting that Noland arises
under Chapter 7 of the Bankruptcy Code and that this
case arises under Chapter 11 (Br. in Opp. 16). That
distinction, however, makes no difference for appli-
cation of the principles of equitable subordination
codified in Section .510( c), which are to apply alike in
cases under both Chapters. See 11 U.S.C. 103(a).
Respondents correctly note (Br. in Opp. 16) that the
Noland case involves the subordination of a statutory
claim that the court acknowledged is entitled to
priority under the statutes enacted by Congress. In
the present case, by contrast, the court of appeals
held that the statutory claim was not within the
statutory priority category. That difference is the
reason why Noland and the present case should be
heard in tandem; neither case individually would
         

---------------------------------------- Page Break ----------------------------------------
9

require the Court to address all of the issues raised
by the two cases together.5

For the reasons stated above and in the petition, the
petition for a writ of certiorari should be granted.

Respectfully submitted.

DREW S. DAYS, III
Solicitor General

NOVEMBER 1995
      
___________________(footnotes)

5 Noland does not present the first question presented in
this case-the scope of the priority granted in Bankruptcy
Code Section 507(a)(7)(E).

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No. 95-325

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CF&I FABRICATORS OF UTAH, INC.,
REORGANIZED COLORADO & UTAH LAND COMPANY,
REORGANIZED KANSAS METALS COMPANY, 
REORGANIZED ALBUQUERQUE METALS COMPANY,
REORGANIZED PUEBLO METALS COMPANY,
REORGANIZED PUEBLO RAILROAD SERVICE COMPAN,
REORGANIZED DENVER METALS COMPANY,
REORGANIZED CF&I FABRICATORS OF COLORADO, INC.,
REORGANIZED CF&I STEEL CORPORATION, AND 
REORGANIZED COLORADO AND WYOMING COMPANY.

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS 
FOR THE TENTH CIRCUIT

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT 
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General 

GARY D. GRAY
KENNETH W. ROSENBERG
Attorneys 

Department of Justice
Washington, D.C. 20530
(202) 514-2217

               
---------------------------------------- Page Break ----------------------------------------

    QUESTIONS PRESENTED

1. Whether the claim of the United States against
the debtor in bankruptcy for an excise tax owed
under Section 4971 (a) of the Internal Revenue Code,
26 U.S.C. 4971 (a), is entitled to the distributive
priority for an "excise tax" provided by Section
507(a)(7)(E) of the Bankruptcy Code, 11 U.S.C.
507(a)(7)(E) (1988).1
2. Whether, in the absence of inequitable conduct
by the government in obtaining or enforcing its
claim, the excise tax claim of the United States under
Section 4971 (a) of the Internal Revenue Code may
be subordinated to general unsecured claims under
the "principles of equitable subordination" codified
in Section 510 (c) of the Bankruptcy Code, 11 U.S.C.
510 (c).2 

___________________(footnotes)

1 Section 304(c) of the Bankruptcy Reform Act of 1994,
Pub. L No. 103-394, 108 Stat. 4132, added a new seventh
priority for alimony and child support claims and changed
the preexisting priority for excise taxes from seventh to
eighth. Those amendments have no significance for the issues
presented in this case.
2 A closely analogous question concerning the proper scope
of the "principles of equitable subordination" in bankruptcy
cases is presented in United States V. Noland, 48 F.3d 210
(6th Cir. 1995). We are concurrently filing a petition for a
writ of certiorari in that case. Because of the closeness of the
issues presented in these two cases, we suggest that both
petitions be granted and that the cases be set for argument
in tandem.
We have furnished a copy of the petition in United States
V. Noland to counsel for the respondents in this case. We have
also furnished a copy of the petition in this case to the
respondent in United States V. Noland.

(I)

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TABLE OF CONTENTS     			Page

Opinions below . . . . 1 
Jurisdiction  . . . . 2 
Statutory provisions involved  . . . . 2
Statement  . . . . 2 
Reasons for granting the petition    . . . . 11
Conclusion   . . . . 22
Appendix A  . . . . 1a 
Appendix B  . . . .10a 
Appendix C  . . . . 12a     
Appendix D . . . . 19a
ppendix E     . . . .22a
Appendix F . . . . 63a

     TABLE OF AUTHORITIES

Cases:

A. Magnano Co. V. Hamilton, 292 U.S. 40 (1934 )....16
BFP v. Resolution Trust Corp., 114 S. Ct. 1757
  (1994)     . . . . 15
Benjamin V. Diamond, 563 F.2d 692 (5th Cir.
  1977)    . . . . 19    
Burden V. United States, 917 F.2d 115 (3d Cir.
  1990) .  . . .10
Caminetti V. United States, 242 U.S. 470 (1917)  . . . .14 
Carpenter V. Wabash Ry., 309 U.S. 23 (1940)  . . . . 18
City of Chicago v. Environmental Defense Fund,
  114 S. Ct. 1588 (1994)   . . . . 15
City of New York V. Feiring, 313 U.S. 283 (1941 ).. . . 16
Columbia Ribbon Co., In re, 117 F.2d 999 (3d Cir.
  1941)  . . . . 19
Comstock V. Group of Institutional Investors, 335
  U.S. 211 (1948)    . . . . 19

(III)

---------------------------------------- Page Break ----------------------------------------
                
         IV

Cases-Continued:   		         Page

Connecticut National Bank V. Germain, 503 U.S.
  249 (1992 )     . . . .   17
County Sanitation District No. 2 V. Lorber Indus-
  tries of California, Inc., 675 F.2d 1062 (9th Cir.
  1982) . . . .  6, 16
Juvenile Shoe Corp. of America, In re, 166 B.R.
  404 (Bankr. 1994), rev'd, 180 B.R. 206 (E.D.
  Mo. 1995), appeal pending No. 95-2289 (8th
  Cir.)     . . . . 18
New Jersey V. Anderson, 203 U.S. 483 (1906) . . . .16, 19
PBGC V. Reorganized CF&I Fabricators of Utah,
  Inc., 179 B.R. 704 (D. Utah 1994) . . . . 4
Patterson V. Shumate, 504 U.S. 753 (1992) . . . . 17
Pepper V. Litton, 308 U.S. 295 (1939)   . . . . 19
Schultz Broadway Inn V. United States, 912 F.2d
  230 (8th Cir. 1990)  . . . . 10
Seidle V. United States, 120 B.R. 597 (S.D. Fla 
  1990)    . . . . 18
Stebbins V. Crocker Citizens National Bank, 516
  F.2d 784 (9th Cir.), cert. denied, 423 U.S. 913
  (1975)    . . . . 12, 19, 21
Taylor V. Standard Gas & Electric CO., 306 U.S.
  307 (1939)  . . . . 19
Unified Control Systems, Inc., In re, 586 F.2d 1036
  (5th Cir. 1978)  . . . .  8, 17
United States V. Dumler, 983 F.2d 161 (10th Cir.
  1992) . . . .8, 11, 16, 17
United States V. Mansfield Tire & Rubber Co., 942
  F.2d 1055 (6th Cir. 1991), cert. denied, 502 U.S.
  1092 (1992)    . . . . 4, 5, 11, 13, 14, 16, 17
United States v. Noland, 48 F.3d 210 (6th Cir.
  1995)          . . . . 20, 21
United States V. Ron Pair Enterprises, Inc., 489
  U.S. 235 (1989)   . . . .  14
United States V. Unsecured Creditors' Committee
  of C-T of Virginia, Inc., 977 F.2d 137 (4th Cir.
  1992), cert. denied, 113 S. Ct. 1644 (1993) . . . . 17
United Steelworkers of America V. PBGC, 103 B.R.
  672 (Bankr. W.D. Pa. 1989) . . . . 18

 --------------------------------------- Page Break ----------------------------------------                     
 
        v

Cases-Continued:		          Page

Virtual Network Services Corp., In re, 902 F.2d
  1246 (7th Cir. 1990)    . . . . 10

Statutes: 

Bankruptcy Act, 11 U.S.C. 104 (a) (1976) . . . .  13
Bankruptcy Code, 11 U.S.C. 101 et seq.:
  11 U.S.C. 507 . . . . 4, 9, 63a
  11 U.S.C. 507 (a)  . . . . 21, 63a
   11 U.S.C. 507 (a) (7)     . . . . 2, 7, 9
   11 U.S.C. 507 (a) (7) (A)     . . . . 8, 16
   11 U.S.C. 507 (a) (7) (E)  . . . . 3, 4, 5, 11, 13, 14, 15, 16, 17, 21
11 U.S.C. 507 (a) (7) (E) (i) (1988)    . . . . 4, 63a
11 U.S.C. 507 (a) (7) (E) (ii) (1988) - . . . . 4, 63a
11 U.S.C. 507 (a) (7) (G) (1988) . . . .  4, 15
11 U.S.C. 510 (c)     . . . .       2, 7, 10, 11, 63a
11 U.S.C. 726 (a) (4)     . . . . 20

Employee Retirement Income Security Act of 1974,

29 U.S.C. 1001 et seq    . . . .   2
29 U.S.C. 1306    . . . . 3
29 U.S.C. 1342   . . . . 4

Internal Revenue Code (26 U.S.C.):

72 (t)     . . . . 8, 17
 412(a) . . . . 2
501 (c) (3)  . . . . 14
4064 (SUPP. V 1993)  . . . . 14
 4681  . . . . 14
 4701   . . . . 14
 4911 . . . .  14
 4941 et seq. . . . . 14
 4955   . . . . 14
 4971  . . . . . 2, 5, 6, 13
 4971(a)  . . . . . 3, 5, 7, 8, 9, 12
 4971 (b)    . . . . 3
 4981 . . . . 14
 4982     . . . .  14
4999 . . . .14
5881 . . . . 14
29 U.S.C. 1301 et seq . . . . 3

---------------------------------------- Page Break ----------------------------------------
        
         VI

Miscellaneous:  			            Page

2 Collier Bankruptcy Manual (3d ed. 1995) . . . . 19
124 Cong. Rec. (1978):
  p. 32,416    . . . .  13, 15, 17
  p. 33,998     . . . .13
  p. 34,016 -    . . . .13
H.R. Rep. No. 807, 93d Cong., 2d Sess. (1974)    . . . . 12, 13
Herzog & Zweibel, The Equitable Subordination of
  Claims in Bankruptcy, 15 Vand. L. Rev. 83
  (1961)     . . . . 19
Report of the Commission on the Bankruptcy Laws
  of the United States, H.R. Doc. No. 137, 93d
  Cong., 1st Sess. Pt. II (1973)   . . . . 20
S. Rep. No. 383, 93d Cong,, 1st Sess. (1973) . . . . 13

---------------------------------------- Page Break ----------------------------------------
                   
OCTOBER TERM, 1995

No.

UNITED STATES OF AMERICA, PETITIONER

v.

REORGANIZED CF&I FABRICATORS OF UTAH, INC.,
REORGANIZED COLORADO & UTAH LAND COMPANY,
REORGANIZED KANSAS METALS COMPANY, REOR-
GANIZED ALBUQUERQUE METALS COMPANY, REOR-
GANIZED PUEBLO METALS COMPANY, REORGANIZED
PUEBLO RAILROAD SERVICE COMPANY, REORGANIZED
DENVER METALS COMPANY, REORGANIZED CF&I
FABRICATORS OF COLORADO, INC., REORGANIZED
CF&I STEEL CORPORATION, AND REORGANIZED
COLORADO AND WYOMING RAILWAY COMPANY

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
    FOR THE TENTH CIRCUIT

The Solicitor General, on behalf of the United
States of America, petitions for a writ of certiorari
to review the judgment of the United States Court
of Appeals for the Tenth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra,
1a-9a) is reported at 53 F.3d 1155. The opinion of
the district court (App., infra, 10a-11a) is unre-
         (1)

---------------------------------------- Page Break ----------------------------------------
                    
         2

ported. The opinion of the bankruptcy court (App.,
infra, 38a-62a) is reported at 148 B.R. 332.

      JURISDICTION

The judgment of the court of appeals was filed on
April 27, 1995. On July 14, 1995, Justice Breyer ex-
tended the time for. filing a petition for a writ of
certiorari to and including August 25, 1995. The
jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).

  STATUTORY PROVISIONS INVOLVED

The relevant portions of Sections 507(a)(7) and
510 (c) of the Bankruptcy Code, 11 U.S.C. 507(a) (7)
and 510 (c) (1988), and of Section 4971 of the In-
ternal Revenue Code, 26 U.S.C. 4971, are set forth
in the Appendix, infra, at 63a-66a.

       STATEMENT

1. Respondents are the CF&I Steel Corporation
and its nine wholly owned subsidiaries. Prior to 1990,
these corporations maintained defined-benefit pension
plans for their employees that were subject to the
Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. 1001 et seq. For the year that
ended on December 31, 1989, respondents failed
to make required pension plan contributions of
$12,400,000. The plans therefore had an "accumu-
lated funding deficiency" equal to that amount. See
26 U. S.C. 412(a). In November 1990, respondents
filed petitions for reorganization under Chapter 11
of the Bankruptcy Code (App., infra, 2a).
Subtitle D of the Internal Revenue Code is entitled
"Miscellaneous Excise Taxes." One of the provisions

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3

of that subtitle section 4971(a) of the Internal
Revenue Code-imposes a 10 percent excise tax on
the amount of any "accumulated funding deficiency"
of qualified pension plans. 26 U.S.C. 4971(a). The
excise tax liability for respondents' "accumulated
funding deficiency" under Section 4971 (a) was there-
fore approximately $1,240,000. The Internal Reve-
nue Service filed proofs of claims for that amount
in respondents' bankruptcy case (App., infra,
2a-3a).3
The government's proofs of claim assert that the
liability for this excise tax under Section 4971 (a)
of the Internal Revenue Code is entitled to seventh
priority in the distribution of the assets of the debtors'
estates under Section 507 (a) (7) (E) of the Bank-
ruptcy Code.4 As applicable to this case, Section

___________________(footnotes)

3 The proofs of claim filed by the United States also asserted
(i) priority claims for excise taxes under Section 4971 (a)
for the subsequent plan year, (ii) priority claims for excise
taxes under Section 4971 (b) for both the 1989 and 1990
Plan years, (iii) nonpriority claims for penalties related to
the Section 4971 (a) excise tax for 1989 and (iv) priority
claims for income taxes for various years. Section 4971 (b)
of the Internal Revenue Code imposes an additional excise
tax, equal to 100 percent of the "accumulated funding defi-
ciency," on employers who fail to correct the deficiency within
a specified period. 26 U.S.C. 4971 (b). The government did
not appeal the adverse rulings relating to those claims.
4 The Pension Benefit Guaranty Corporation (PBGC) also
filed proofs of claim in this case. The PBGC guarantees pay-
ment of certain vested benefits under terminated pension
plans. See 29 U.S.C. 1301 et seq. The PBGC obtains funds
for that purpose from insurance premiums paid by the em-
ployers whose pension plans are subject to Title IV of ERISA.
See 29 U.S.C. 1306. In March 1992, when one of the debtors'
pension plans was terminated, the PBGC became the statu-

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4

507 (a) (7) (E) provides a "[s]eventh" priority for
governmental claims for any "excise tax" that arose
during the three years immediately preceding the
date of the filing of the bankruptcy petition. See 11
U.S.C. 507(a)(7)(E)(i) and (ii) (1988); note 1,
supra. Section 507 (a) (7) (G) of the Bankruptcy
Code provides the same "[s]eventh" priority to a
statutory penalty that is "related to a claim of a
kind specified in this paragraph and in compensation
for actual pecuniary loss." 11 U.S.C. 507(a)(7)(G)
(1988).
Respondents filed an objection to the government's
claim. They argued that the excise tax claims under
Section 4971 (a) were neither a "tax" nor a penalty
compensating for pecuniary loss and should therefore
be denied any priority under Section 507 of the Bank-
ruptcy Code.
2. The bankruptcy court allowed the government's
claim under Section 4971 (a) of the Internal Revenue
Code but denied that claim any priority under Sec-
tion 507 (a) (7) (E) of the Bankruptcy Code. The
court recognized (App., infra, 47a-48a) that, in
United States v. Mansfield Tire & Rubber Co., 942
F.2d 1055 (6th Cir. 1991 ), cert. denied, 502 U.S. 1092

__________________(footnotes)

tory trustee for the plan pursuant to 29 U.S.C. 1342. The
PBGC thereby became liable to plan participants for guaran-
teed benefits.
The PBGC filed proofs of claim in the bankruptcy case
seeking to recover unpaid pension plan contributions. The
PBGC also sought to recover its own statutory claims for
unfunded benefits. The bankruptcy court concluded that most
of the PBGC's claims were unsecured and had no priority in
distribution of the assets of the estates. The district court
upheld those rulings. PBGC V. Reorganized CF&I Fabrica-
tors of Utah, Inc., 179 B.R. 704 (D. Utah 1994).

---------------------------------------- Page Break ----------------------------------------
                   
5

(1992 ), the Sixth Circuit held that the excise tax im-
posed by Section 4971(a) must be given priority in
bankruptcy. In Mansfield Tire, the court reasoned
that, since Congress denominated Section 4971 as an
excise tax and further expressly provided that claims
for excise taxes have priority in bankruptcy under
Section 507 (a) (7) (E), the plain language of the stat-
utes must be followed without regard to the under-
lying "purpose" served by the tax. 942 F.2d at 1059.
The bankruptcy court, however, rejected the Sixth
Circuit's ruling as "unnecessarily rigid" (App., infra,
48a). The court stated that the fact that Congress
denominated the tax imposed by Section 4971 as an
excise tax should be disregarded in applying the
Section 507 (a) (7) (E) priority provision, for "blind
acceptance of the label would defeat the purpose of
the Bankruptcy Code" (App., infra, 49a).
The court concluded that allowing a priority for
the excise tax imposed under Section 4971 (a) would
be anomalous for several reasons. First, the court
expressed concern that priority treatment of the ex-
cise tax claim would elevate that claim above the
PBGC's claims for the underlying funding deficiency
(App., infra, 51a; see note 4, supra). Second, the
court stated that, because bankruptcy courts may in-
dependently review state and local exactions to deter-
mine whether they represent a priority "tax" or a
non-priority penalty, a failure similarly to review
federal exactions would result in a "disparate treat-
ment" that "the Bankruptcy Code does not contem-
plate" (App., infra, 51a). Third, the court stated
that payment of priority excise tax claims would
burden respondents' efforts to reorganize, would
diminish the return to other creditors and would give

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 6

a "windfall" to the government (ibid.). Fourth, be-
cause the priority excise tax claims would be paid
before the claims of the pensioners themselves, the
court stated that the excise tax priority would harm
the very parties that Section 4971 was intended to
protect (ibid.). For these reasons, the court con-
cluded that it must be "empowered, under the circum-
stances of this case, to look behind the characteriza-
tion of the exaction set forth in the statute and focus
on the actual nature of the claims" (id. at 52a).
The bankruptcy court applied what it termed the
Lorber Industries "test" to determine the "actual
nature" of the tax (App., infra, 52a). That test
derives from County Sanitation District No. 2 v.
Lorber Industries of California, Inc., 675 F.2d 1062
(9th Cir. 1982), which was a bankruptcy case involv-
ing collection of a county sewer use fee. The Ninth
Circuit held in that case that the following four ele-
ments characterize a "tax," as distinguished from a
user fee, for purposes of determining entitlement to
priority under the former Bankruptcy Act:

  (a) An involuntary pecuniary burden, regard-
less of name, laid upon individuals or property;

  (b) Imposed by or under authority of the legis-
lature;

  (c) For public purposes, including the purposes
of defraying expenses of government or under-
takings authorized by it;

  (d) Under the police or taxing power of the
state.

675 F.2d at 1066. In the present case, the bankruptcy
court concluded, under "its own independent applica-
tion" of the Lorber standard, that the excise tax

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7

imposed under Section 4971 (a) is not a "tax" but
is in the nature of a penalty and is therefore not
entitled to priority under Section 507(a)(7) of the
Bankruptcy Code (App., infra, 52a).
3. The United States appealed to the district court.
While that appeal was pending, respondent issued
a proposed plan of reorganization. The United States
objected to the proposed plan because it failed to make
provision for payment of the Section 4971 (a) excise
tax in the event that the United States prevailed on
its appeal of the priority issue. The bankruptcy court
nonetheless confirmed the plan. The United States
appealed from the order of confirmation.
In the meantime, respondents initiated an adver-
sary proceeding in their bankruptcy case, seeking to
subordinate the Section 4971 (a) excise tax claims to
the claims of general unsecured creditors. Respond-
ents relied on Section 510(c) of the Bankruptcy Code,
which authorizes bankruptcy courts to apply "prin-
ciples of equitable subordination [to] subordinate for
purposes of distribution all or part of an allowed
claim to all or part of another allowed claim." 11
U.S.C. 510(c). Respondents contended that the "prin-
ciples of equitable subordination" permit the court to
subordinate claims for "penalties" even if the holder
of the claim has not engaged in any inequitable con-
duct. The bankruptcy court agreed with respondents
and ordered the Section 4971 (a) excise tax claim to
be "subordinated to the claims of all other general
unsecured creditors of the Debtors pursuant to 11
U.S.C. 510(c)" (App., infra, 21a). The United
States appealed that order.
4. a. Twelve days after the bankruptcy court is-
sued its original order denying priority to the Section

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 8

4971 (a) tax, the Tenth Circuit issued its decision in
United States v. Dumler, 983 F.2d 161 (1992). That
case involved the bankruptcy priority of the govern-
ment's claim for the 10 percent "additional tax" im-
posed under Section 72(t) of the Internal Revenue
Code upon early distributions from qualified retire-
ment plans. The question in Dumler was whether
that "additional tax" (26 U.S.C. 72 (t)) is a
"tax on or measured by income" that is entitled
to seventh priority in bankruptcy under 11 U. S. Cl.
507 (a) (7) (A). The Tenth Circuit held in Dumler
that, although Section 72(t) purports to impose a
"tax," . it in fact imposes a "penalty" for a nonpe-
cuniary loss and therefore has no priority in bank-
ruptcy.5 983 F.2d at 164-165. In reaching that con-
clusion, the Tenth Circuit stated that it rejected the
reasoning of the Sixth Circuit in Mansfield Tire and
held that it could "recharacterize for purposes of
bankruptcy what Congress has deemed a tax in the
Internal Revenue Code." 983 F.2d at 162, citing
In re Unified Control Systems, Inc., 586 F.2d 1036
(5th Cir. 1978).
b. In the present case, the district court consoli-
dated the government's appeals from the orders of
the bankruptcy court that (i) denied priority to
the Section 4971 (a) claim, (ii) confirmed the plan
of reorganization and (iii) subordinated the Section
4971 (a) claim to the claims of all general unsecured
creditors. The district court affirmed all three orders,
reasoning that the Section 4971 (a) excise tax "is

__________________(footnotes)

5 The question whether the doctrine of equitable subordina-
tion would permit subordination of such a claim to all other
general unsecured claims was not presented in United States
V. Dumler.

---------------------------------------- Page Break ----------------------------------------
                     
9

a nonpecuniary loss penalty, not a tax" (App., infra,
18a). The court stated that equitable subordination
of the government's claim is appropriate "primarily"
for the reasons set forth in the Tenth Circuit's opin-
ion in the Dumler case (App., infra, 18a). But see
note 5, supra.
5. The court of appeals affirmed (App., infra,
1a-9a). Relying on its previous decision in Dumler,
the court held that the name that Congress gives
an exaction under the Internal Revenue Code does
not determine its status in applying the priority
provisions of Section 507(a) (7) of the Bankruptcy
Code. The court stated that whether an exaction is
a "tax" or a "penalty" for purposes of bankruptcy
priority is to be determined by application of the
four-part test of Lorber Industries (App., infra, 6a).
Under this test, the court concluded that the Section
4971 (a) excise tax is in substance a "penalty," rather
than a "tax," " for substantially the reasons given
by the bankruptcy court" (App., infra, 6a).
The court then addressed the equitable subordina-
tion of the government's claim. The court first noted
that, "[b]ecause we have determined that the [claim
of the United States in this case] is a nonpecuniary
loss penalty not entitled to section 507 priority," the
court had no reason to consider whether a claim that
is entitled to priority under Section 507 may be sub-
ordinated to other claims under the "principles of
equitable subordination" (App., infra, 6a).6 The

___________________(footnotes)

6 Whether a "case-by-case" balancing of the "equities" may
be applied to subordinate a claim that the court believes to be
"unfair" to other creditors even when Congress has expressly
designated such a claim as a priority claim in Section 507 of
the Bankruptcy Code-a question that the court of appeals

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10

court then acknowledged that equitable subordination
historically has been imposed only when a creditor
has engaged in wrongful conduct and that "the bank-
ruptcy court expressly found that `there [had] been
no inequitable conduct on the part of the Internal
Revenue Service'" in this case (App., infra, 6a, 7a).
The court stated, however, that in codifying the
"principles of equitable subordination" in Section
510 (c) of the Bankruptcy Code, "Congress intended
courts to continue developing" those principles (App.,
infra, 7a). The court reasoned that the "developing"
principles of equitable subordination permit a court
(id. at 8a, quoting In re Virtual Network Services
Corp., 902 F.2d 1246, 1250 (7th Cir. 1990)):

to equitably subordinate claims to other claims
on a case-by-case basis without requiring in
every instance inequitable conduct on the part
of the creditor claiming parity among other
unsecured general creditors,

In particular, the court held that these developing
"principles of equitable subordination" do "not re-
quire a finding of claimant misconduct to subordinate
nonpecuniary loss tax penalty claims" (App., infra,
8a, citing e.g., Burden v. United States, 917 F.2d
115, 116-120 ( 3d Cir. 1990); Schultz Broadway Inn
v. United States, 912 F.2d 230, 231-234 (8th Cir.
1990) ).
Turning to "the equities in this case" (App., infra,
8a), the court held that subordination is appropriate
because the PBGC and other "general unsecured
creditors of CF&I will receive only a small percent-

___________________(footnotes)

asserted that it was not required to reach in this case-was
addressed and answered affirmatively in United States v.
Noland, supra. See note 2, supra.

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11

age of their claims" and [d]eclining to subordinate
the [excise tax claim of the United States] would
harm innocent creditors rather than punish the
debtor for failing to fund the pension plan" (ibid.).

REASONS FOR GRANTING THE PETITION

This case presents two closely related questions of
substantial recurring importance. The first concerns
whether the statutory priority for an "excise tax" is
available only if the underlying purpose of the excise
tax is to raise revenue rather than discourage con-
duct. Both the plain language and the clear history
of Section 507(a)(7)(E) of the Bankruptcy Code
reflect that the priority that Congress granted to
"excise taxes" is not conditioned on a finding that
the excise tax is primarily designed to raise reve-
nues. As the court of appeals acknowledged (App.,
infra, 4a, 48a; see United States v. Dumler, 938 F.2d
at 162), its decision on this issue directly conflicts
with the contrary decision of the Sixth Circuit in
United States v. Mansfield Tire & Rubber Co., 942
F.2d at 1059. The proper scope of the statutory
priority for "excise tax" claims under Section 507
(a) (7) (E) of the Bankruptcy Code is frequently
litigated and often involves substantial sums. Absent
further review by this Court, the conflicting under-
standings of Section 507(a) (7) (E) that the courts
of appeals have adopted will engender wasteful liti-
gation and result in disparate treatment of otherwise
identical claims.
The second question presented in this case concerns
whether, under the judge-made "principles of equi-
table subordination" that Congress codified in Section
510 (c) of the Bankruptcy Code, a bankruptcy court
may subordinate the claim of a creditor who has

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12

not acted in an inequitable or wrongful manner. By
assuming an authority to subordinate the claim of an
innocent creditor in order to prefer the claim of other
creditors who have not been granted priority by
Congress, the decision in this case conflicts with the
established rule that "principles of equitable sub-
ordination" do not permit a court to make "abstract
legislative judgments about the fairness of a result
contemplated by the legislature's statutory scheme if
it has otherwise been followed in good faith and
without oveerreaching."  Stebbins v. Crocker Citizens
National Bank, 516 F.2d 784, 787 (9th Cir. ), cert.
denied, 423 U.S. 913 (1975). In applying the doc-
trine of "equitable subordination" to subordinate the
claim of an innocent creditor, the decision in this case
broadens an existing conflict among the courts of
appeals. The authority that the court assumed to
engage in a "case-by-case" analysis of what is "fair"
in the distribution of a debtor's assets loosens the
doctrine of "equitable subordination" from its estab-
lished moorings; it also threatens to disrupt the ordi-
nary enforcement not only of excise taxes but of
other types of tax and private claims as well.
1. a. The court of appeals erred in holding that
the excise tax imposed by Section 4971 (a) of the
Internal Revenue Code is not entitled to the priority
that Congress expressly provided for an "excise tax"
under Section 507 (a) (7) (E) of the Bankruptcy
Code. Congress enacted Section 4971 of the Internal
Revenue Code as part of the Employee Retirement
Income Security Act of 1974 (ERISA). In connec-
tion with the qualified pension plan arrangements
authorized by ERISA Section 4971 was enacted to
"impose [] an excise tax on the employer if he fails

to fund the plan at the minimum required amounts."
H.R. Rep. No. 807, 93d Cong., 2d Sess. 97 (1974).

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13

Even before the Bankruptcy Code was enacted in
1978, Congress thus expressly designated the tax im-
posed by Section 4971 as an "excise tax" (ibid.; see
also S. Rep. No. 383, 93d Cong., 1st Sess. 24, 33, 70
(1973) ). Section 4971 was placed within Subtitle D
of the Internal Revenue Code-which is entitled
"Miscellaneous Excise Taxes''-precisely because
Congress understood and intended that Section 4971
is an "excise tax" (H.R. Rep. No. 807, supra, at 97).
When the Bankruptcy Code was enacted, one of
the changes that it made to the provisions of the
former Bankruptcy Act was the new, express specifi-
cation of a priority for "excise tax" claims. Compare
11 U.S.C. 507(a) (7) (E) (1988) with 11 U.S.C.
104 (a) (1976). The joint floor statements that ac-
companied enactment of the Bankruptcy Code in
1978 described the intended scope of this specific
"excise tax" priority:

All Federal, State, or local taxes generally con-
sidered or expressly treated as excises are cov-
ered by this category, including sales taxes,
estate and gift taxes, gasoline and special fuel
taxes, and wagering and truck taxes.

124 Cong. Rec. 32,416 (1978) (Rep. Edwards) (em-
phasis added) ; id. at 33,998, 34,016 (Sen. DeConcini)
(same).
Since Congress "expressly treated" the excise tax
created under Section 4971 of the Internal Revenue
Code as an "excise tax" even before the Bankruptcy
Code was enacted, the Sixth Circuit correctly con-
cluded in United States v. Mansfield Tire & Rubber
Co., 942 F.2d at 1059, that this tax is entitled to the
priority established by Section 507(a) (7) (E). As
this Court stated in United States v. Ron Pair Enter-

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14

prises, Inc., 489 U.S. 235 (1989), when the language
of the Bankruptcy Code is plain, "the sole function
of the courts is to enforce it according to its terms."
Id. at 241, quoting Caminetti v. United States, 242
U.S. 470, 485 (1917). While resort to the legislative
history of these provisions is therefore unnecessary,
that history leaves no room for any different con-
clusion.
In particular, the court of appeals erred in con-
cluding that an "excise tax" that exacts a "penalty"
is not an "excise tax" within the meaning of Section
507 (a) (7) (E) of the Bankruptcy Code. As the Sixth
Circuit explained in United States v. Mansfield Tire
& Rubber Co., 942 F.2d at 1059, Congress expressly
granted priority to any "excise tax" without adding
any limitation based upon the "purpose" of the tax.
Moreover, Congress clearly understood that an excise
tax is no less an "excise tax" because it has a regula-
tory or punitive purpose. Excise taxes in the Internal
Revenue Code are often imposed on disfavored activi-
ties and are often designed to discourage or punish
undesirable conduct. See, e.g., 26 U.S.C. 4064 (gas
guzzler tax), 4681 ( Supp. V 1993) (tax on ozone-
depleting chemicals), -4701 (tax on "registration-
required" obligations issued in bearer form), 4911
(tax on excess lobbying by public charities), 4941
et seq. (tax on undistributed income and speculative
investments of private foundations), 4955 (tax on
political expenditures by Section 501(c) (3) organi-
zations), 4981 and 4982 (taxes on undistributed in-
come of real estate investment trusts and regulated
investment companies), 4999 (tax on "golden para-
chute" payments), 5881 (tax on "greenmail"). If
Congress had intended to exclude so many federal
excise taxes from the excise tax priority, one would

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15

expect to find some indication to that effect in the
Bankruptcy Code or in its legislative history. In-
stead, the legislative history specifies that the prior-
ity for excise taxes comprehensively includes "[a]ll 
[f]ederal, [s]tate or local taxes generally considered
or expressly treated as excises" (124 Cong. Rec. at
32,416 (Rep. Edwards) (listing the excise tax on
"wagering" as one example).
The text of the Bankruptcy Code provides further
evidence that Congress intentionally omitted any dis-
tinction among excise taxes in enacting the priority
for such taxes in Section 507(a) (7) (E). In Section
507 (a) (7) (G), Congress expressly drew a distinc-
tion among different types of tax-related penalties
and established a priority only for such penalties that
are "in compensation for actual pecuniary loss" (11
U.S.C. 507(a) (7) (G)). As this Court has observed,
"it is generally presumed that Congress acts inten-
tionally and purposely when it includes particular
language in one section of a statute but omits it in
another" (City of Chicago v. Environmental Defense
Fund, 114 S. Ct. 1588, 1593 (1994), quoted in BFP
V. Resolution Trust Corp., 114 S. Ct. 1757, 1761
(1994) ). That presumption is especially appropriate
when, as here, language conditioning an express
priority is used in one paragraph and omitted in
another paragraph of the same subsection of the
statute. If Congress intended to exclude from the
priority for "excise taxes" any excise tax that might
be "punitive" rather than "compensatory," it surely
knew how to do so. Instead, it deliberately chose not
to do so.
b. The four-part Lorber Industries standard on
which the court of appeals relied (see page 9,
supra) has no proper application in this context.

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16

That test was formulated by the Ninth Circuit to
determine whether an exaction that a State describes
as a priority "tax" is instead a non-priority user fee.
See 675 F.2d at 1066. Whatever relevance that anal-
ysis may have in determining whether an exaction
is a "tax" for purposes of the bankruptcy priority
for a "tax on or measured by income" (11 U.S.C.
507 (a) (7) (A) ), it has no relevance in determining
whether an exaction is an "excise tax" under Section
507 (a) (7) (E).7 As both the legislative history of

___________________(footnotes)

7 United States V. Dumler, 983 F.2d at 163-164, concerned
whether the challenged exaction was a "tax on or measured
by income" for purposes of the priority established in Section
507 (a) (7) (A) of the Bankruptcy Code. The court of appeals
did not attempt in this- case to explain why the analysis of
that decision should be applied in determining whether an
exaction is an "excise tax" under the more specific provisions
of Section 507(a) (7) (E) of the Cede. As we describe in the
text, an "excise tax" is often, if not ordinarily, designed to
accomplish regulatory or punitive objectives, as well as rais-
ing revenue.
This Court's decisions in City of New York V. Feiring, 313
U.S. 283 (1941), and New Jersey v. Anderson, 203 U.S. 483
(1906), on which the court of appeals relied in United States
V. Dumler, 983 F.2d at 163, involved whether state and local
exactions constituted "taxes" for purposes of priority for
taxes under the former Bankruptcy Act. As the Sixth Cir-
cuit noted in United States v. Mansfield Tire & Rubber Go.,
942 F.2d at 1060, although it is appropriate carefully to re-
view the designation of state and local exactions to insure
that such claims are not improperly promoted within the
federal priority scheme, courts are not free to recast an
exaction that Congress has designated as a "tax" to be some-
thing else. In A. Magnano Co. V. Hamilton, 292 U.S. 40, 43
(1934), this Court stated that whether an exaction is for
the public purpose of raising revenues turns on "the use
which is to be made of the revenue derived from the tax, and
not [on] any ulterior motive or purpose which may have

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 17

that Section and its plain text reflect, the priority for
an "excise tax" applies to all such exactions "gen-
erally considered or expressly treated as excises"
(124 Cong. Rec. at 32,416) (Rep. Edwards) (em-
phasis added). The plain text of the Bankruptcy
Code should not have been disregarded by the court
of appeals. See, e.g., Patterson v. Shumate, 504 U.S.
753, 757-759 (1992) ; (Connecticut National Bank v.
Germain, 503 U.S. 249, 253-254 (1992) ; United
States v. Ron Pair Enterprises, Inc., 489 U.S. at 242.
c. As the court of appeals recognized, the decision
in this case directly conflicts with the decision of the
Sixth Circuit in United States v. Mansfield Tire &
Rubber Co., 942 F.2d at 1059-1060. The question ad-
dressed in these conflicting decisions-whether bank-
ruptcy courts may deny the statutory priority for
taxes based upon a perceived punitive purpose of the
tax-is frequently litigated and often involves sub-
stantial sums. Compare United States v. Unsecured
Creditors' Committee of C-T of Virginia, Inc., 977
F.2d 137 (4th Cir. 1992) (the 10 percent tax for
withdrawals from a qualified pension plan is a
priority "excise tax," not a penalty), cert. denied,
113 S. Ct. 1644 (1993), with United States v. Dum-
ler, 983 F.2d at 162 (the 10 percent tax under Sec-
tion 72(t) is a non-priority "penalty"), and In re
Unified Control Systems, Inc., 586 F.2d at 1037-1038
(a tax that is a "penalty" is not entitled to priority).
See also In re Juvenile Shoe Corp. of America, 166
B.R. 404 (Bankr. 1994), rev'd, 180 B.R. 206 (E.D.

___________________(footnotes)

influenced the legislature in passing the act." In any event,
for the reasons we have explained, cases involving a general
priority for "taxes" are not relevant in determining the scope
of the more specific priority for "excise taxes" under Section
507(a) (7) (E).

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18

Mo. 1995), appeal pending, No. 95-2289 (8th Cir.);
Seidle v. United States, 120 B.R. 597 (S.D. Fla.
1990); United Steelworkers of America v. PBGC,
103 B.R. 672 (Bankr. W.D. Pa. 1989). Absent reso-
lution by this Court of this important recurring
question, the existing conflict among the courts of
appeals will produce  repetitive and wasteful litiga-
tion that will result in disparate treatments of
otherwise identical claims and debtors.
2. The court of appeals further erred in concluding
that, under the "principles of equitable subordina-
tion" codified in Section 510(c) of the Bankruptcy
Code, a bankruptcy court is to evaluate the "equities"
of the claims of innocent creditors cm a "case-by-
case" basis to arrive at a distribution scheme that the
court deems fair to all creditors (App., infra, 8a).
In particular, the court erred in applying that ra-
tionale to subordinate the "penalty" claims of inno-
cent creditors (ibid.). The expansive powers that the
court has assumed under the doctrine of equitable
subordination reflect a serious misapplication of that
doctrine.
By enacting a specific set of statutory priorities,
Congress has itself measured the "equities" of the
various classes of claims. Carpenter v. Wabash Ry.,
309 U.S. 23, 28 (1940). Claims that Congress has
placed within the same class are to be treated on
identical terms, Equitable subordination does not
authorize a court to "reweigh" the equities that Con-
gress itself has already adjusted. As we explain in
detail in the petition for a writ of certiorari in
United States v. Noland (see note 2, supra), the doc-
trine of equitable subordination permits a court to
subordinate a particular claim only if the claimant
has acted inequitably in obtaining or enforcing its

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19

claim, to the detriment of other creditors. See, e.g.,
Stebbins v. Crocker Citizens National Bank, 516 F.2d
at 787; In re Columbia Ribbon Co., 117 F.2d 999,
1002 (3d Cir. 1941). The issue that is to be resolved
under `(principles of equitable subordination" is
whether (2 Collier Bankruptcy Manual Par. 510.01 [1],
at 510-2 (3d ed. 1995)) :

harmful conduct [of the claimant] was directed
at other creditors, If it was, the claim which
is otherwise provable and allowable should be
postponed until the claims of the creditors, who
were harmed, have been satisfied.

See Comstock v. Group of Institutional Investors, 335
U.S. 211, 229 (1948) ; Pepper v. Litton, 308 U.S.
295, 311 (1939 ) ; Taylor v. Standard Gas & Electric
Co., 306 U.S. 307, 323 (1939) ; Benjamin v. Diamond,
563 F.2d 692, 699 (5th Cir. 1977) ; Herzog & Zwei-
bel, The Equitable Subordination of Claims in Bank-
ruptcy, 15 Vand. L. Rev. 83, 85 (1961). As the
Ninth Circuit held in Stebbins v. Crocker Citizens
National Bank, 516 F.2d at 787:8

[I]t is important to keep in mind that the chan-
cellor never did, and does not now, exercise
unrestricted power to contradict statutory or

___________________(footnotes)

8 Similarly, in New Jersey V. Anderson, 203 U.S. 483
(1906), this Court rejected the assertion that a statutory
priority for state taxes should not be recognized because it
created an "injustice" for other creditors and gave the State
an undue "advantage" (id. at 490):

[C]onsiderations of this character, however properly
addressed to the legislative branch of the government,
can have no place in influencing judicial determination.
It is the province of the court to enforce, not to make the
laws, and if the law works inequality the redress, if any,
must be had from Congress.

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20

common law when he feels a fairer result may
be obtained by application of a different rule.
Courts of equity have long applied standards of
conscience to conduct on an individual basis to
prevent formally proper but unconscionable ap-
plications of legal rules; they have not engaged
in the practice-of making abstract legislative
judgments about the fairness of a result con-
templated by the legislature's statutory scheme
if it has otherwise been followed in good faith
and without overreaching.

By subordinating the statutory claims of innocent
creditors for "nonpecuniary loss" penalties, the deci-
sion in this case reaches a result that is directly con-
trary to the statutory treatment that Congress
enacted for such claims. In enacting the Bankruptcy
Code, Congress considered and rejected a proposal to
subordinate all "nonpecuniary loss" penalty claims
under all chapters of the Code. Report of the Com-
mission on the Bankruptcy Laws of the United States,
H. It. Dec. No. 137, 93d Cong., 1st Sess. Pt. 11 at 115,
 4-406(a) (3) (1973). Instead, Congress provided
for the subordination of "nonpecuniary loss" penal-
ties only in Chapter 7 cases. See 11 U.S.C.
726 (a) (4). In Chapter 11 cases, such as the present
one, Congress left such penalties within the class of
general unsecured claims. Through misapplication of
the "principles of equitable subordination," however,
the decision in the present case rejects and annuls
that specific legislative determination.
The Sixth Circuit's invocation of the "principles of
equitable subordination" to subordinate a first prior-
ity claim in United States v. Noland, 48 F.3d 210
(1995), and the Tenth Circuit's invocation of the same
principles to subordinate what the court regarded as a

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21

general unsecured claim in the present case are
closely related variants of the same error.9 In both
instances, the court substituted its judgment about
the relative worthiness of a category of claims for
the judgment that Congress made in enacting the
Bankruptcy Code. In holding that a statutory "pen-
alty" that was asserted in good faith and in com-
pliance with law is to be subordinated to make the
distribution to other creditors more "fair" than
under the scheme that Congress enacted, the decision
in this case simply disagrees with (and reaches a
result precisely at odds with) the statutory scheme.
As the Ninth Circuit stated in Stebbins v. Crocker
Citizens National Bank, 516 F.2d at 788, the doctrine
of equitable subordination does not permit a court to
say, "in effect, * * * the distribution scheme provided
by the [Bankruptcy] Act is a mistake."
In the petition for a writ of certiorari that we are
filing concurrently in United States v. Noland, we
describe the conflict that exists among the courts of
appeals in their application of the "principles of
equitable subordination." See note 2, supra. That
petition also describes the substantial recurring im-
portance of this question and the significant need for
review by this Court of the recent decisions that have
misapplied the doctrine of equitable subordination in
bankruptcy cases. For the reasons set forth in that

___________________(footnotes)

9  In United States V. Noland, 48 F.3d at 210, the Sixth
Circuit applied "principles of equitable subordination" to sub-
ordinate a claim that the court acknowledged was entitled to
"[f]irst" priority under Section 507(a) of the Bankruptcy
Code. In the present case, the Tenth Circuit applied "prin-
ciples of equitable subordination" to subordinate a claim that
the court erroneously held was not entitled to priority under
Section 507 (a) (7) (E) of the Code.

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22

petition, and for the reasons stated above, the peti-
tions in both cases should be granted. Because the
two cases present related but different aspects of the
same analytical issue, we suggest that the cases be
set for argument in tandem.

CONCLUSION

The petition for a writ of certiorari should be
granted.

Respectfully submitted.

DREW S. DAYS, III
Solicitor General

LORETTA  C. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General

GARY D. GRAY
Kenneth W. ROSENBERG
Attorneys

AUGUST 1995

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APPENDIX   A

[Filed Apr. 27, 1995]

UNITED STATES COURT OF APPEALS
    TENTH CIRCUIT

Nos. 94-4034
        94-4035
        94-4036

IN RE: CF&I FABRICATORS OF UTAH, INC., DEBTOR

UNITED STATES OF AMERICA, APPELLANT

v.

REORGANIZED CF&I FABRICATORS OF UTAH, Inc.,
REORGANIZED COLORATO & UTAH LAND COMPANY,
REORGANIZED KANSAS METALS COMPANY, REORGA-
NIZED ALBUQUERQUE METALS COMPANY, REORGA-
NIZED PUEBLO METALS COMPANY, REORGANIZED
PUEBLO RAILROAD SERVICE COMPANY, REORGANIZED
DENVER METALS COMPANY, REORGANIZED CF&I
FABRICATORS OF COLORADO, INC., REORGANIZED
CF&I STEEL CORPORATION, REORGANIZED THE
COLORADO AND WYOMING RAILWAY COMPANY,
APPELLEES

Appeal from the United States District Court
   for the District of Utah

(D.C. No. 93-CV-68, 93-CV-317, 93-CV-424)

(1a)

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2a

Before TACHA and HOLLOWAY, Circuit Judges, and
BURRAGE,* District Judge.

TACHA, Circuit Judge.

I. Background

CF&I Fabricators of Utah, and various related
entities (collectively, "CF&I" ) sponsored two quali-
fied pension plans established for the benefit of their
employees and retirees. Under the plans, CF&I was
obligated to make annual plan funding contributions.
On September 15, 1990, CF&I failed to make a re-
quired $12.4 million plan funding payment for the
year ending December 31, 1989. Two months later,
CF&I petitioned for reorganization under Chapter 11
of the Bankruptcy Code. The larger of the two pen-
sion plans was subsequently terminated by the Pen-
sion Benefit Guaranty Corporation ("PBGC" ), a
wholly-owned government corporation that guaran-
tees payment of certain pension benefits. See 29
U.S.C.  1321 -1322b.1
The Internal Revenue Service ("IRS" ) filed sev-
eral proofs of claim in the bankruptcy court. The
claim that is the subject of this appeal arises under
Internal Revenue Code ("IRC") section 4971 (a),

* The Honorable Michael Burrage, District Judge, United
States District Court for the Eastern District of Oklahoma,
sitting by designation.

1 Most of the funds from which the PBGC pays pension
benefits come from insurance premiums paid by sponsors of
qualified pension plans. See 29 U.S.C.  1305. The PBGC
filed proofs of claims against the debtors in the bankruptcy
court. The bankruptcy court ruled that these claims are
unsecured and are not entitled to priority or administrative
status. That ruling is not at issue in this appeal.

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3a

under which the IRS imposes a ten percent tax on
the "accumulated funding deficiency" of specified
pension plans. 26 U.S.C. 4971 (a). CF&I's failure
to make the required pension plan contribution on
September 15, 1990, triggered the immediate imposi-
tion of the tax. See id. The parties do not dispute
CF&I's underlying section 4971 liability. At issue
is what, if any, priority the claim should be accorded.
In its proof of claim, the IRS asserted that CF&I's
section 4971 (a) liability was entitled to priority as
an excise tax under Bankruptcy Code section 507(a)
(7) (now codified at. 11 U.S.C.  507(a) (8) ).2 The
bankruptcy court disagreed with the IRS's position
and held that CF&I's section 4971 (a) liability was
not an excise tax. Instead, the court characterized
the claim as a penalty that did not compensate for
pecuniary loss and was therefore not entitled to prior-
ity status. In re CF&I Fabricators, 148 B.R. 332,
337-40 (Bankr. D. Utah 1992). In a subsequent or-
der, the bankruptcy court subordinated the IRC sec-
tion 4971 (a) claim to all other general unsecured
claims pursuant to the Bankruptcy Code's equitable
subordination provision, 11 U.S.C. 510 (c) (1). The
district court affirmed the bankruptcy court's orders,
and the government appealed to this court. We have
jurisdiction pursuant to 28 U.S.C.  1-58(d) and
1291.
 In its appeal, the IRS argues that the bankruptcy
and district courts erred (1) by concluding that the

___________________(footnotes)

2 Congress amended section 507 on October 22, 1994. For-
mer subsection 507 (a) (7) is currently located at subsection
507 (a) (8). Other than the change in priority of govern-
mental claims, the text of the subsection is unchanged. In
this opinion we will refer to the provision as it was codified
at the time the IRS asserted its claim.

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 4a

exaction imposed by IRC section 4971 (a) was not
entitled to priority under section 507(a) (7), and (2)
by subordinating the IRS's claim to all other un-
secured creditors under the doctrine of equitable sub-
ordination. In addition, the government suggests that
we reconsider, in an en bane hearing, our decision in
United States v. Dumler (In re Cassidy), 983 F.2d
161 (10th Cir. 1992).

       II. Discussion

We review determinations of law by the bank-
ruptcy court de novo. Davidovich v. Welton (In re
Davidovich), 901 F.2d 1533, 1536 (10th Cir. 1990).
Our review of the district court's order affirming the
bankruptcy court is de novo as well. Burden v.
United States (In re Burden), 917 F.2d 115, 116 (3d
Cir. 1990).

A. Priority Under Sect-ion 507(a)(7)

The IRS contends that CF&I's section 4971(a) lia-
bility is a governmental claim entitled to priority
under subsection 507(a) (7) (E) or, in the alterna-
tive, subsection 507 (a) (7) (G). Section 507 (a) (7)
(E) accords priority to "an excise tax on . . . a trans-
action occurring before the date of the filing of the
petition for which a return . . . is last due . . . after
three years before the date of the filing of the peti-
tion." 11 U.S.C.  507(a) (7) (E) (i). The same pri-
ority is accorded to "a penalty related to a claim of a
kind specified in this paragraph and in compensation
for actual pecuniary loss." Id.  507(a) (7) (G). The
tax at issue here, IRC section 4971 (a), is included in
Subtitle D of the IRC, entitled "Miscellaneous Ex-
cise Tax." The IRS argues that, because the tax is

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 5a

labeled an "excise tax" under the IRC, it must be con-
sidered an excise tax under the Bankruptcy Code as
well.
 On December 7, 1992, after the bankruptcy court
issued its first order in this case, we decided Cassidy,
983 F.2d 161. In Cassidy, we held that "Congress'
labeling of [an] exaction as a tax is not determina-
tive of its status for priority in bankruptcy." Id. at
163. The tax at issue in Cassidy was the ten percent
additional tax imposed by 26 U.S.C.  72(t) on early
distributions from qualified retirement plans. Sec-
tion 72 is in subtitle A, chapter 1, subchapter B, part
II of the IRC, which is titled "Items Specifically In-
cluded in Gross Income." Thus, the government ar-
gued, it should be given priority under section 507
(a) (7) (A) as "a tax on or measured by income."
We disagreed with the government and held that the
label given a tax in the IRC was not determinative of
its status for priority under section 507 (a) (7). Cas-
sidy further held that, to determine whether an exac-
tion is a tax or penalty for priority in bankruptcy
purposes, we apply the four-part test from In re
Lorber Indus., 675 F.2d 1062 (9th Cir. 1982). Cas-
sidy, 983 F.2d at 163.
In the present case, the government vigorously
argues that Cassidy was wrongly decided, again con-
tending that a court should defer to Congress's desig-
nation of an exaction rather than look beyond the
statutory label to the nature of the exaction. Cassidy
binds this panel, however, because it is the law of
this circuit. See In re Smith, 10 F.3d 723, 724 (10th
Cir. 1993) (per curiam) ("We are bound by the
precedent of prior panels absent en bane reconsidera-
tion or a superseding contrary decision by the Su-
preme Court."), cert. denied, 115 S. Ct. 53 (1994).

---------------------------------------- Page Break ----------------------------------------
                   
6a

We therefore conclude that the bankruptcy court cor-
rectly refused to treat the IRC's label as determina-
tive for priority in bankruptcy purposes.
Instead, the bankruptcy court looked beyond the
IRC's label and analyzed the nature of the exaction
using the Lorber test. The court concluded that
CF&I's section 4971 (a) liability was not entitled to
priority. We agree with the bankruptcy court's
analysis and therefore affirm the order of the district
court for substantially the reasons given by the bank-
ruptcy court. See In re CF&I Fabricators, 148 B.R.
332.

B. Equitable Subordination

The government's first argument against equitable
subordination of its claim is that a bankruptcy court
may not subordinate a claim under section 510(c) (1)
if that claim is entitled to priority under section 507.
Because we have determined that the IRS's claim
here is a nonpecunitry loss penalty not entitled to sec-
tion 507 priority, we need not discuss the merits of
this argument.
The government next contends that the phrase
"under principles of equitable subordination" in sec-
tion 510 (c) prohibits the bankruptcy court from sub-
ordinating a claim without a finding of misconduct
on the part of the subordinated, claimant. In this
case, the bankruptcy court expressly found that
"there [had] been no inequitable conduct on the part
of the Internal Revenue Service."
The Bankruptcy Code neither defines the doctrine
of equitable subordination, see United States v. No-
land, No. 93-4311, 1995 WL 82886, at *4 (6th Cir.
Mar. 2, 1995), nor specifies the circumstances under

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7a

which it should be imposed, see United States Abate-
ment Corp. v. Mobil Exploration & Producing U. S.,
Inc. (In re United States Abatement Corp.), 39 F.3d
556, 561 (5th Cir. 1994). Consequently, courts ap-
plying section 510 (c) (1) have looked to common law
principles for guidance. See, e.g., id.
In general, equitable subordination is imposed only
when a creditor has committed some kind of wrong-
ful conduct. In re Virtual Network Servs. Corp., 902
F.2d 1246, 1248 (7th Cir. 1990) ; Benjamin v. Dia-
mond (In re Mobile Steel Co.), 563 F.2d 692, 700
(5th Cir. 1977). Nevertheless, the four circuit courts
that have considered the matter have concluded that
a court may subordinate a nonpecuniary loss tax pen-
alty claim without a showing of misconduct on the
part of the government. See Noland, 1995 WL 82886,
at *8-9; Burden, 917 F.2d at 118-19; Schultz Broad-
way Inn v. United States, 912 F.2d 230, 234 (8th
Cir. 1990); In re Virtual Network, 902 F.2d at
1249-50.3
The question was addressed first by the Seventh
Circuit in Virtual Network. After a thorough analy-
sis of the legislative history of section 510(c) (1), the
court decided that Congress intended courts to con-
tinue developing the principles of equitable subordina-

___________________(footnotes)

3 In addition, a number of district and bankruptcy courts
have subordinated nonpecuniary loss tax penalties under sec-
tion 510 (c) (1). See, e.g., In re Juvenile Shoe Corp. of Am.,
166 B.R. 404, 410 (Bankr. E.D. Mo. 1994); Walker v. Fer-
guson (In re Import & Mini Car Parts, Ltd.), 136 B.R. 178,
182 (Bankr. N.D. Ind. 1991); Retail Marketing Corp. v.
United States (In re Make, Inc.), 135 B.R. 902, 904 (E.D.
Okla. 1991); Seidle v. United States (In re Airlift Int'l Inc.),
120 B.R. 597, 601-02 (S.D. Fla. 1990); In re Merwede, 84
B.R. 11,14 (Bankr. D. Corm. 1988).

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8a

tion. Virtual Network, 902 F.2d at 1249-50. The
court further found that "[section] 510 (c) (1) au-
thorizes courts to equitably subordinate claims to
other claims on a case-by-case basis without requir-
ing in every instance inequitable conduct on the part
of the creditor claiming parity among other unse-
cured general creditors. " Id. at 1250.
In subsequent cases addressing this issue, other
courts have employed substantially the same analysis
as the Virtual Network court. See Noland, 1995 WL
82886, at *3-8; Burden, 917 F.2d at 116-20; Schultz
Broadway Inn, 912 F.2d at 231-34. We find the rea-
soning of Virtual Network persuasive and hold that
section 510 (c) (1) does not require a finding of claim-
ant misconduct to subordinate nonpecuniary loss tax
penalty claims.
The bankruptcy court considered the equities in
this case and determined that subordination of the
IRS'S section 4971 claim to all other unsecured claims
was appropriate. After noting that the facts in the
case were undisputed, the bankruptcy court observed
that general unsecured creditors of CF&I will receive
only a small percentage of their claims. One of
CF&I's unsecured creditors is the PBGC, which will
be paying the pension benefits due under CF&I's ter-
minated pension plan. Declining to subordinate the
IRS's penalty claim would harm innocent creditors
rather than punish the debtor for failing to fund the
pension plan. Thus, the bankruptcy court reasoned,
allowing the IRS's penalty claim would not advance
the purposes of either IRC section 4971 or the Bank-
ruptcy Code. We conclude that the bankruptcy court
correctly addressed the equities in this case and there-
fore affirm the orders subordinating the IRS's section
4971 claims.

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9a

III. Conclusion

For the reasons stated in this opinion, the judg-
ment of the district court is AFFIRMED. In addi-
tion, the government's suggestion for hearing en bane
to reconsider our decision in In re Cassidy, 983 F.2d
161, has been brought to the attention of all the active
judges of the court. As no poll has been requested on
the suggestion, it is hereby DENIED.

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APPENDIX  B

 [Filed Nov. 24, 1993]

THE UNITED STATES DISTRICT COURT
  FOR THE DISTRICT OF UTAH
    CENTRAL DIVISION

Consolidated Appeals
Civil No. 93C-068W
Civil No. 93C-317S
Civil No. 93C-424W

IN RE: CF&I FABRICATORS of UTAH, INC., DEBTORS

REORGANIZED CF&I FABRICATORS OF UTAH, INC.,
REORGANIZED COLORADO & UTAH LAND Co., REOR-
GANIZED KANSAS METALS Co., REORGANIZED ALBU-
QUERQUE METALS Co., REORGANIZED Pueblo
METALS Co., REORGANIZED PUEBLO RAILROAD SERV-
ICE Co., REORGANIZED DENVER METALS Co., REOR-
GANIZED CF&I FABRICATORS OF COLORADO, INC.,
REORGANIZED CF&I STEEL CORP., REORGANIZED
THE COLORADO AND WYOMING RAILWAY Co.,
PLAINTIFFS/APPELLEES

vs.

   THE UNITED STATES OF AMERICA,
   DEPARTMENT OF THE TREASURY,
INTERNAL REVENUE SERVICE, DEFENDANT/APPELLANT

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11a

        ORDER

These appeals came on for oral argument before
the Court on November 23, 1993. For the reasons
stated by the Court in its findings and conclusions
made on the record which are incorporated herein,
the decisions of the Bankruptcy Court which are the
subject of these appeals are affirmed.

DATED this 23d day of November, 1993.

      /s/ David K. Winder
        DAVID K. WINDER
        United States District Judge

APPROVED AS TO FORM:

/s/ Steven J. McCardell
STEVEN J. MCCARDELL

/s/ Kirk Lusty
KIRK LUSTY

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      APPENDIX C

IN THE UNITED STATES DISTRICT COURT
  FOR THE DISTRICT OF UTAH
    CENTRAL DIVISION

Case No. 93-C-068W
                93-C-317S
                93-C-424W

REORGANIZED CF&I FABRICATORS OF UTAH, INC.,
REORGANIZED COLORADO & UTAH LAND Co., REOR-
GANIZED KANSAS METALS Co., REORGANIZED ALBU-
QUERQUE METALS Co., REORGANIZED Pueblo
METALS Co., REORGANIzED PUEBLO RAILROAD SERV-
ICE Co., REORGANIZED DENVER METALS Co., REOR-
GANIZED CF&I FABRICATORS OF COLORADO, INC.,
REORGANIZED CF&I STEEL CORP., REORGANIZED
THE COLORADO AND WYOMING RAILWAY Co.,
PLAINTIFF/APPELLEES

vs.

   THE UNITED STATES OF AMERICA,
   DEPARTMENT OF THE TREASURY,
INTERNAL REVENUE SERVICE, DEFENDANT/APPELLANT

TRANSCRIPT OF ARGUMENT ON
  BANKRUPTCY APPEAL
BEFORE THE HONORABLE DAVID K. WINDER
UNITED STATES DISTRICT JUDGE
    November 23, 1993

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[3]      PROCEEDINGS

      November 23, 1993

THE COURT: All right. We're here in these
three consolidated appeals, and this is Number 93-C-
68W, 93-C-317S and 93-C-424W. And this involves
the debtor, which is Reorganized C.F.&I. Fabricators.
And, let's see, it's Mr. Waterman?
MR. McCARDELL: Mr. McCardell, Your Honor.
THE COURT: I'm sorry. Mr. Steven J. Mc-
Cardell is here representing The Reorganized C.F.&I.
Fabricators of Utah, and Mr. Kirk C. Lusty is here
representing the U.S.A.
And I've read carefully your memos. I appreciate
your being here on time. I've got to resume a jury
trial at 9:00 o'clock and I would ask you to take a
maximum of 15 minutes a side.
I have read Judge Boulden's decision. I've read
your memos carefully. I read the In Re Cassidy
Tenth Circuit, the Mansfield case, and so I'm pretty
familiar with what's involved here.
Mr. Lusty.
MR. LUSTY: Your Honor, I do realize you have
a jury trial. And I realize, you know, I like you
have several times read Cassidy and Mansfield Tire.
We think the Mansfield Tire is the correct logic, but
I realize the position the [4] court's in-
THE COURT: I don't overrule the Tenth Circuit.
They ruled on 26(T), but there to me-what's the
difference between the ten percent penalty on taking
out your pension prematurely and 4791 (A) ?
MR. LUSTY: Well, the difference there, not talk-
ing about how broad the Cassidy opinion is, is that
on the-on taking it out it's just a penalty for with-

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 14a

drawal, and I thing pretty much you get into the
legislative history and the statute, and at times they
refer to it as a penalty, other times a tax.
Here it's-the pension excise, at least the first tier
penalty, is always referred to as a tax. And basically
when you fill out the form that's to accompany pay-
ment, you know, you look and w-hat you haven't paid
you list a ten percent penalty, almost like a-or ten
percent tax I should say, much like, oh, on your in-
come tax return, underreporting or underpayment,
there's just a penalty.
It's associated with the return. It goes in different
-for instance, you'll notice that in this appeal we
don't, although Judge Boulden ruled against US, deal
with the second tiered penalties, which are I think
much more closer to penalties.
The first tier is, you know, reported on a return.
It's figured, self-reported, that type of thing. There's
I.R.S. [5] is generally less involved in the audit
assessment process with the first tier tax.
Before I go on with that, Your Honor, T guess the
simplest way to proceed-because I do realize the
time pressures on the- court-Cassidy is a very broad
opinion, and it doesn't purport to limit itself to the
tax penalty that was raised in-in that particular
case, a different penalty here, but it does specifically
discuss Mansfield.
THE COURT: And rejects it.
MR. LUSTY: And rejects it. Is there anything
I could convince or add to that that would help the
court in that area.
THE COURT: I really don't. And to give you
the bad news, Mr. Lusty, and 1 think you better get
up to the circuit, if you're going there, pretty fast,
because I denied the stay back in January. I guess

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15a

the reorganization, I don't know what's going on,
but it seems to me if you're going to appeal this,
you better do it quickly, and I notice Judge Boulden
moved pretty swiftly in the bankruptcy court.
But I don't see there's any distinguishing factor
with Cassidy. Cassidy didn't rule on the 510(C) of
the code, the equitable subordination thing, but I
think frankly that follows, and I'm inclined to affirm
the bankruptcy court.
MR. LUSTY: Okay. Let me, to enlighten that,
discuss simply for a moment the equitable subordina-
tion issue, [6] because it is a very similar argument.
Mansfield did, of course, involve equitable subordina-
tion, and Cassidy didn't; of course, Cassidy being a
different type of tax didn't really need to get into
that, or a much smaller amount.
And as we've discussed in our brief, the equitable
subordination issue we submit early involved basically
cases where there was credit or misconduct. Judge
Boulden specifically stated in this case that there
wasn't any.
Since in the last few years there have been cases,
the virtual network and so forth, that have come
down that at least have ruled or appear to rule that
equitable misconduct is not the sole ground and you
can do a-subordinate without equitable misconduct.
We think, quite frankly, that they're misinterpret-
ing the law, but nevertheless that's where they are.
We think the same distinction, and in light of
Cassidy, there is some concern, but Cassidy didn't
address it, that where it is a tax, that the subordina-
tion Moore is talking about penalties and so forth.
And so that the court should make the same distinc-
tion as Mansfield Tire made and not subordinate

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16a

where it is a tax, and we think that's going further
than the bankruptcy court should.
I realize that's very close to the same logic that
Cassidy, if not the same logic, Cassidy rejected, but
as we've set forth in our brief-
[7] THE COURT : You hadn't of course, read
-the Tenth Circuit decided Cassidy December 7,
of '92.
MR. LUSTY: Yes.
THE COURT: And you had read Judge Wein-
shank and Judge Clark, is it, in the bankruptcy
court
MR. LUSTY: In Colorado, yes.
THE COURT: But the Tenth Circuit opinion, of
course, was not available to Judge Boulden when
she decided that case.
MR. LUSTY: No. She had already decided. And
I don't think, quite frankly, it would-obviously the
same analysis she rejected and accepted, it seems like
she essentially-you know, they're essentially the
same. I don't want to take more of the court's time-
THE COURT: You're not taking my time. It's
just you've got an uphill battle here, Mr. Lusty.
MR. LUSTY: I appreciate that.
THE COURT: I know you know that.
MR. LUSTY: Is there anything I can add on the
subordination? Because that's it in a nutshell, that
this is a tax, Congress has called it a tax-
THE COURT : I know.
MR. LUSTY: -and it should be not subordi-
nated, and in this case that subordination essentially
means the taxpayers bear the full brunt of this de-
cision.
[8] I don't-really don't think there's anything I
can add, unless- .

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17a

THE COURT: Yes. You say the taxpayers bear
the brunt. I mean this-I think this is a penalty. I
don't know that the taxpayers are bearing any brunt.
What's the reverse of this are these general creditors
are going to take gas. I mean if you take 1,241,000
out of here, I guess there isn't a cent for anybody
else.
 MR. LUSTY: Well, in terms of this case, maybe,
maybe not. Money has been set aside to pay other
taxes if they're determined to be due; for instance,
corporate income tax and others. And to the ex-
tent there will be-should be funds if-in the long-
run if the United States were to prevail and hap-
pened to Iose-particularly if it happened to lose on
other taxes. In the long-run though if the United
States gets it, I think it's fair to say that some other
creditor wouldn't receive it-no question.
THE COURT: Thank you, Mr. Lusty, very much.
Do you want to say anything, Mr. McCardell?
MR. MCCARDELL: Your Honor, I'm not one to
argue myself out of court, and so I don't want to
say anything Your Honor doesn't want to hear. I
can answer your question with regard to Section
72(t) because that is a point of consideration since
the Tenth Circuit did not directly rule on the 4971
tax.
[9] THE COURT: Yes. I think I said 4791-
4971, and you're of course right.
MR. MCCARDELL: The two points of distinc-
tion that the service raised in their brief are, num-
ber one, that the tax is self-assessing and, number
two, that the notice of deficiency procedure applies
to the Section 72 ( t) tax.
In reviewing those sections of the Internal Reve-
nue Code though, Your Honor, it's apparent to me

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18a

that the same is true of the taxes ruled on in the
Cassidy case. In other words, Section 72(t) is also
self-assessing and the circuit's opinion said so, and
this notice of deficiency procedures applies just the
same. So that in substance we're dealing with the
exact issue, and so I believe the service must seek
their leave from the Supreme Court on this issue to
get the law changed.
THE COURT: Okay, thank you. I affirm the
Bankruptcy Court, and I hold that Section 4971(a)
tax claim for 1989 is a nonpecuniary loss penalty,
not a tax. It's not entitled to priority status pur-
suant to 507(A) (7) of the Bankruptcy Code, and I
further hold that it's. a claim that should be equi-
tably subordinated to the claims of the general credi-
tors under Section 510 (c) of the code, and I do
this primarily based on the In Re Cassidy case at
983 Fed, 2nd 161 decided by the Tenth Circuit last
December.
Thank you very much. Prepare an order, Mr. Mc
Cardell, and get it to me.
[10] MR. McCARDELL: I'll do that.
THE COURT: Thank you, gentlemen.
MR. LUSTY: Thank you.

(Hearing concluded at 8:40 a.m.)

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19a

      APPENDIX  D

       IN THE
UNITED STATES BANKRUPTCY COURT
  FOR THE DISTRICT OF UTAH
     CENTRAL DIVISION

     Jointly Administered
    Under Case No. 90B-6721

       Chapter 11

  Adversary Proceeding No. 92PB-2395
IN RE: CF&I FABRICATORS OF UTAH, INC., ET AL.,
        DEBTORS

CF&I FABRICATORS OF UTAH, INC., ET AL.,
       PLAINTIFFS

         vs.

    UNITED STATES OF AMERICA,

    Department of the Treasury,
  Internal Revenue Service, DEFENDANT

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 20a

ORDER GRANTING DEBTORS' MOTION FOR
SUMMARY JUDGMENT (DATED 12/22/92)
AND SUBORDINATING ALL CLAIMS OF THE
INTERNAL REVENUE SERVICE ARISING
OUT OF 26 U.S.C.  4971 TO ALL OTHER
     UNSECURED CLAIMS

The Debtors' Motion for Summary Judgment
(Dated 12/22/92) (the "Motion") came on for hear-
ing before the Court at 10:00 a.m. on Thursday, Jan-
uary 28, 1993. Steven C. Strong of LeBoeuf, Lamb,
Leiby & MacRae appeared on behalf of CF&I Fabri-
cators of Utah, Inc. and nine other related debtors
whose bankruptcy cases are being jointly adminis-
tered by this Court under Case No. 90B-6721 (col-
lectively the "Debtors"). Steven T. Waterman of
Ray, Quinney & Nebeker appeared on behalf of the
Unsecured Creditors' Committee (the "Committee" ).
Mark Howard, Special Assistant United States At-
torney, appeared on behalf of the Internal Revenue
Service.
Having considered (i) the Motion, (ii) the Memo-
randum in Support of the Motion, (iii) the Memo-
randum of the United States in Opposition to the
Motion, (iv) the Reply Memorandum in Support of
the Motion, and (v) this Court's Order granting the
Committee's intervention as a party plaintiff in this
proceeding, the Court announced certain findings of
fact and conclusions of law in open court (the "Janu-
ary 28th Ruling" ), which Ruling is incorporated
herein by this reference. Pursuant to the findings
and conclusions contained in the January 28th
Ruling.

IT IS HEREBY ORDERED AND ADJUDGED
as follows:

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21a

1. The Debtors' Motion shall be and hereby is
GRANTED, and judgment is entered in favor of the
plaintiffs on all causes of action in the Debtors' Veri-
fied Complaint (except that, as requested in the Mo-
tion, the Court reserves judgment on that portion of
the Complaint which seeks to subordinate claims to
interests of CF&I Steel Corporation in its sub-
sidiaries).
2. The claims of the IRS based on 26 U.S.C.
4971(a) for the year ended December 31, 1989 and
subsequent years are subordinated to the claims of
all other general unsecured creditors of the Debtors
pursuant to 11 U.S.C.  51O(c).
3. The claims of the IRS based on 26 U.S.C.
4971(b) for the year ended December 31, 1989 and
any subsequent years are subordinated to the claims
of all other general unsecured creditors of the
Debtors pursuant to 11 U.S.C. 510(c).
4. The claims of the IRS for late payment pen-
alties are subordinated to the claims of all other un-
secured general creditors of the Debtors pursuant to
11 U.S.C.  510(c).

DATED this 9 day of March, 1993.

        BY the COURT:

/s/ HONORABLE JUDITH A. BOULDEN
United States Bankruptcy Judge

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22a

APPENDIX E

IN THE UNITED STATES BANKRUPTCY
COURT FOR THE DISTRICT OF UTAH
    CENTRAL DIVISION

Jointly Administered
Under Case No. 90B-6721

Chapter 11

IN RE: CF&I FABRICATORS OF UTAH, INC., ET AL.,
       DEBTORS

(Case No. 90B-6721)
(Case No. 90B-6722)
(Case No. 90B-6723)
(Case No. 90B-6724)
(Case No. 90B-6725)
(Case No. 90B-6726)
(Case No. 90B-6727)
(Case No. 90B-6728)
(Case No. 90B-6729)
(Case No. 90B-6730)

(CF&I FABRICATORS OF UTAH, Inc.) (COLORADO &
UTAH LAND COMPANY) (KANSAS METALS COM-
PANY) (ALBUQUERQUE METALS COMPANY) (PUEBLO
METALS COMPANY) (DENVER METALS COMPANY)
(PUEBLO RAILROAD SERVICE COMPANY) (CF&I
FABRICATORS OF COLORADO, Inc.) ( CF&I STEEL
CORPORATION) (THE COLORADO AND WYOMING
RAILWAY COMPANY)

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 23a

ORDER CONFIRMING DEBTORS' AND
RAILROAD TRUSTEE'S FIRST AMENDED
   AND RESTATED JOINT PLAN
     OF REORGANIZATION
   DATED DECEMBER 1, 1992

On January 27, 1993, the Court held a hearing to
consider confirmation of the Debtors' and Railroad
Trustee's First Amended and Restated Joint Plan
of Reorganization dated December 1, 1992, a copy
of which is attached to this Order as Exhibit 1 (the
plan, together with the following modifications is re-
ferred to as the "Plan"), and the sale thereunder of
those assets described in an Asset Purchase Agree-
ment among Debtors (other than Kansas Metals Com-
pany), William J. Westmark, as trustee for the bank-
ruptcy estate of The Colorado and Wyoming Rail-
way Company (the "Railroad Trustee" ), CF&I Steel,
L.P. (formerly known as and identified in the Plan
as New CF&I Limited Partnership), New CF&I,
Inc., and Oregon Steel Mills, Inc. (a copy of the
Asset Purchase Agreement is attached to the Plan
as Exhibit B ).
At the hearing, the Debtors and Railroad Trus-
tee proposed the following modifications to the Plan
and the Court determined pursuant to Bankruptcy
Rule 3019 that the proposed modifications do not
adversely change the treatment of the claim of any
creditor or the interest of any equity security holder
who has not accepted in writing the modification:

a. Provisions concerning objection to Plan filed
  by IRS.

i. Federal tax claims entitled to administrative
priority must be filed by the Internal Revenue Serv-

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24a

ice ("IRS") not later than 180 days following the
later of (1) the Effective Date or (2) the date a
tax return is filed for a tax year or tax period. The
IRS may request additional time to file any such
claim as the Bankruptcy Court, for cause shown,
permits; and
ii. Paragraphs 60 and 61 of the Plan shall not
apply to any claims of the IRS against officers and
directors for withholding taxes pursuant to section
6672 of the Internal Revenue Code; and
iii. Paragraph 61 of the Plan applies only to claims
for which, pursuant to paragraph 60 of the Plan,
indemnification obligations of the Debtors survive un-
affected by the reorganization contemplated by the
Plan; and
iv. Paragraph 70a (3) (iv) of the Plan (as re-
flected below in this Order) is modified to insert the
words "for any Claims" in paragraph 70a(3) (iv)
between the words "liability" and "by;" and
v. On the Effective Date, pursuant to the Plan's
provisions for the treatment of Class 16, CF&I Steel
Corporation's stock in each of its subsidiaries shall
be canceled; and
vi. CF&I Steel Corporation shall, on the Effec-
tive Date of the Plan, pay to the United States In-
ternal Revenue Service all amounts received after
the date of the commencement of these cases by way
of refunds of fuel excise taxes, and the United States
Internal Revenue Service shall be authorized to ap-
ply such funds, plus any refunds of fuel excise taxes
not distributed to CF&I Steel Corporation as of the
Effective Date of the Plan, to post-petition alterna-
tive minimum tax claims of the Internal Revenue
Service.

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25a

b. Provisions concerning objection to Plan filed by
Salt Lake County. The Claim of Salt Lake County
against CF&I Fabricators of Utah, Inc., which in-
cludes a secured claim for a penalty in the amount
of $220.57, is an Allowed Secured Claim to be
treated in Class 4 under the Plan.
c. Provisions concerning objection to Plan filed
by State of Colorado, Division of Labor. Debtors
shall continue payments in the ordinary course of
their businesses, through the Effective Date on ac-
count of workers' compensation claims but, after the
Effective Date, shall discontinue all such payments.
With respect to Debtors with employees in Colorado,
the Division of Labor of the State of Colorado shall
designate, on or before the Effective Date, a succes-
sor administrator to receive delivery of documents
and information concerning Debtors' present known,
and potential Colorado workers' compensation claims,
such administrator to administer said workers' com-
pensation claims and to continue such payments
thereon.
d. Provisions concerning objection of Debtors to
certain claims of PBGC. Debtors' objections to the
Claims of the Pension Benefit Guaranty Corporation
as to the Non-Contributory Pension Plan of CF&I
Steel Corporation shall be suspended pending the
Debtors' and the Reorganization Debtors' implemen-
tation of Paragraph 56 of the Plan. Upon comple-
tion of a standard termination of the Non-Contribu-
tory Pension Plan of CF&I Steel Corporation in ac-
cordance with Section 4041 (b) of ERISA, PBGC's
Claims as to the Non-Contributory Pension Plan of
CF&I Steel Corporation shall be deemed satisfied in
full, and the Debtors objections thereto shall be
deemed withdrawn. In the event the standard termi-

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26a

nation cannot be completed and the Debtors and the
Reorganized Debtors decide to press the objection,
they shall notify PBGC in writing and PBGC shall
have thirty (30 ) days to respond.
e. Provisions concerning Coastal Gas contract.
CF&I Steel Corporation shall have until the Effective
Date to assume or reject its gas supply contract with
Coastal Gas Marketing. The bar date for Coastal
Gas Marketing to file any claims arising from any
rejection of such contract shall be thirty (30) days
after the Effective Date. If such contract is assumed,
Coastal Gas Marketing shall have no remaining claim
against the Debtors.
f. Paragraph 70(a) (2) of Plan. The conditions
set forth in Paragraph 70a(2) of the Plan has been
waived.
The Court then considered confirmation of the Plan
as modified by paragraphs a through f above. Based
on evidence presented at the hearing, the papers con-
tained in the dockets of these cases on file with the
Court, and the arguments of counsel, the Court made
certain findings and conclusions on the record in ad-
dition to those findings and conclusions set forth be-
low, which findings and conclusions are incorporated
by this reference. Now, therefore, the Court finds
as follows:
1. Notice. Notice of parties in interest of the time
fixed for filing objections and the hearing to con-
sider confirmation of the Plan has been given and
is sufficient pursuant to applicable law. The solicita-
tion package with respect to the Plan as approved
by the Court was properly served on all necessary
parties. Debtors have satisfied their obligations with
respect to service of the solicitation package.

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 27a

2. Acceptance. The balloting process on the Plan
has been proper and the Plan has been accepted in
writing by the creditors and equity security holders
whose acceptance is required by law.
3. Objections to Confirmation. All objections to
Confirmation, including without limitation those
stated by way of letters to the Court, have been con-
sidered by the Court and have been overruled or
withdrawn.
4. Plan Conditions to Confirmation. All conditions
to Confirmation set forth in the Plan have been sat-
isfied or effectively waived.
5. Section 1129 (a) (1). The Plan complies with
the applicable provisions of the Bankruptcy Code,
including without limitation the provisions of the
Bankruptcy Code respecting classification of Claims
and the requirements of Bankruptcy Code section
1123. The Court specifically finds that Classes 1 and
11 are appropriate classes.
6. Section 1129(a) (2). The Plan Proponents have
complied with the applicable provisions of the Bank-
ruptcy Code.
7. Section 1129(a) (3). The Plan has been pro-
posed in good faith and not by any means forbidden
by law.
8. Section 1129(a) (4). All payments made or
promised by the Debtors or by a person issuing se-
curities or acquiring property under the Plan or by
any other person for services or for costs and ex-
penses in, or in connection with, the Plan and inci-
dent to the cases, have been fully disclosed to the
Court and are reasonable or, if to be fixed after con-
firmation of the Plan, will be subject to approval of
the Court.

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28a

9. Section 1129(a) (5.). The identity, qualifica-
tions, and affiliations of the persons who are to be
the directors or officers, or voting trustees, if any,
of the Debtors after confirmation of the Plan have
been fully disclosed, and the appointment of such
persons to such offices, or their continuance therein,
is equitable, and consistent with the interests of cred-
itors and equity security holders and with public pol-
icy; and the identity of any insider that will be em-
ployed or retained by the Debtors and the nature of
his compensation have been fully disclosed.
10. Section 1129(a) (6). The Plan does not pro-
pose any changes of rates under the jurisdiction of
any regulatory commission and the rates of The Col-
orado and Wyoming Railway Company will continue
to be regulated by such regulatory authorities as
have jurisdiction under applicable nonbankruptcy
law.
 11. Section 1129(a)(7) and Section 1129(a)(8).
Each holder of a claim or interest has accepted the
Plan or will receive or retain under the Plan prop-
erty of a value, as of the Effective Date of the Plan,
that is not less than the amount that such holder
would receive or retain if the Debtors were liqui-
dated under Chapter 7 of the Bankruptcy Code on
such date; or the Plan does not discriminate unfairly,
and is fair and equitable, with respect to each class
of claims or interests that is impaired under, and
has not accepted the Plan.
12. Section 1129 (a) (9). Except to the extent that
the holder of a particular claim has agreed to a dif-
ferent treatment of such claim, the Plan satisfies the
requirements of Bankruptcy Code Section 1129(a)
(9) with respect to the payment of Claims having
priority under Bankruptcy Code Section 507.

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29a

13. Section 1129 (a) (10). For each Debtor, at
least one class of claims that is impaired under the
Plan has accepted the Plan, determined without in-
cluding any acceptance of the Plan by any insider.
14. Section 1129 (a) (11). Confirmation of the Plan
is not likely to be followed by the liquidation or the
need for further reorganization of the Debtors ex-
cept as provided in the Plan.
15. Section 1129 (a) (K?). All fees payable under
28 USC $1930, as determined by the Court at the
hearing on confirmation of the Plan have been or will
be paid on the Effective Date of the Plan.
16. Section 1129 (a) (13). Class 1 and each sub-
class thereof have accepted the Plan. The level of
retiree benefits has not been modified during the period
of reorganization, and therefore subsections (e)(1)
(B) and (g) of Section 1114 of the Bankruptcy
Code have not been invoked and section 1129 (a)
(13) is not applicable.
17. Section 1173 (a), With respect to The Colo-
rado and Wyoming Railway Company,
a. All applicable requirements of Bankruptcy
Code section 1129 have been met; and
b. Each creditor or equity security holder will re-
ceive or retain under the Plan property of a value,
as of the Effective Date of the Plan, that is not less
than the value of property that each such creditor
or equity security holder would so receive or retain if
all of the operating lines of the debtor were sold,
and the proceeds of such sale, and the other property
of the estate, were distributed under Chapter 7 of
the Bankruptcy Code on such date; and
c. In light of the debtor's past earnings and the
probable prospective earnings of the reorganized
debtor, there will be adequate coverage by such pro-

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30a

spective earnings of any fixed charges, such as in-
terest on debt, amortization of funded debt, and rent
for leased railroads, provided for by the Plan; and
d. The Plan is consistent with the public interest.
18. Sales of Assets under Asset Purchase Agree-
ment. Notice satisfying the provisions of Bankruptcy
Code Section 363 (b) (1) of the Bankruptcy Code
that the Debtors and the Railroad Trustee in-
tend to sell those assets described in the Asset Pur-
chase Agreement, attached as Exhibit B to the Plan,
was provided to all parties in interest on or about
December 22 and 23, 1992, as part of the solicitation
package sent to parties in interest.
19. Clayton Act Notices. Debtors have advised the
Court that they have given all notices of the sale
as required by subsection (a) of Section 7A of the
Clayton Act in accordance with Bankruptcy Code
Section 363(b) (2).
20. Purchase Price and Satisfaction of Liens. All
entities which hold interests in the assets to be sold,
other than the bankruptcy estates, are holders of liens
and such entities will receive money in satisfaction
of the interest that they hold therein; and the price
at which the assets are to be sold is greater than the
aggregate value of all liens on such assets. The pur-
chase price provided in the Asset Purchase Agree-
ment is fair consideration for the assets being pur-
chased.
21. Good Faith of Buyer. The Buyer, as defined
in the Asset Purchase Agreement, is a good faith
purchaser within the meaning of Bankruptcy Code
section 363 (m).

NOW, THEREFORE, it is hereby
ORDERED :

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 31a

1. Approval of Modifications. The modifications to
Debtors' and Railroad Trustee's First Amended and
Restated Joint Plan of Reorganization Dated De-
cember 1, 1992 proposed in paragraphs a through f
above are approved.
2. Confirmation of Plan. Debtors' and Railroad
Trustee's First Amended and Restated Plan of Re-
organization, Dated December 1, 1992, as modified
by this Order, is confirmed and all objections to the
confirmation of the Plan are overruled.
3. Authorizations for Asset Purchase Agreement.
Debtors and the Railroad Trustee are authorized to
execute, deliver, and perform their respective obliga-
tions under an Asset Purchase Agreement in form
substantially similar to the Asset Purchase Agree-
ment attached as Exhibit B to the Plan as amended
on January 27, 1993 and to execute any and all other
documents and to take any and all actions necessary
to complete the asset purchase and sale and upon
its execution and delivery by all parties thereto, the
Asset Purchase Agreement shall be valid, binding
upon and enforceable against the Debtors and the
Railroad Trustee.
4. Authorizations for Implementation of Plan.
Debtors, the Reorganized Debtors, and the Railroad
Trustee are authorized to execute any and all other
documents and to take any and all actions necessary
to implement the Plan.
5. Retention of Property. Except as otherwise ex-
pressly provided in this Order, each Debtor's estate
shall retain all the property of its estate dealt with
by the Plan free and clear of all Claims, liens, en-
cumbrances, charges, and other interests of creditors
and equity security holders, except as provided in the

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 32a

Plan or this Order and each Debtor and Reorganized
Debtor shall perform its obligations under the Plan.
6. Transfers of Assets. The transfers of assets
pursuant to the Asset Purchase Agreement by the
Debtors to CF&I Steel, L.P. (or such other entity
purchasing such assets pursuant to the Asset Pur-
chase Agreement or designated by CF&I Steel, L.P.,
to receive such assets), and pursuant to the Plan by
the Debtors to Reorganized CF&I Steel Corporation
when made (i) will be legal, valid and effective
transfers of such assets; (ii) will vest CF&I Steel,
L. P., or Reorganized CF&I Steel Corporation's estate
or such other entity purchasing such assets pursuant
to the Asset Purchase Agreement or the Plan with
good title to such assets free and clear of all liens,
charges, claims, encumbrances, or interests; (iii) do
not and will not constitute fraudulent transfers or
conveyances under the Bankruptcy Code or under the
laws of the United States, any state, territory, pos-
session or in the District of Columbia; (iv) will not
subject Oregon Steel Mills, Inc., New CF&I, Inc.,
CF&I Steel, L.P. (or any of their affiliates) or Re-
organized CF&I Steel Corporation to any liability for
any Claims from any creditors of the Debtors and
the Railroad Trustee, including, without limitation,
any Claims under the Coal Industry Retiree Health
Benefits Act of 1992 (including those filed or as-
serted by the 1992 United Mine Workers of America
Benefit Plan and the United Mine Workers of Amer-
ica Combined Fund or the trustees thereof), by rea-
son of such transfer under the laws of the United
States, any state, territory, or possession thereof, or
the District of Columbia based, in whole or in part,
directly or indirectly, on any theory of law, including,
without limitation, any theory of successor or trans-

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33a

feree liability; and (v) all executory contracts, in-
cluding, without limitation, product, patent, trade-
mark, and know-how licenses and unexpired leases
assumed by the Debtors and the Railroad Trustee
during the Cases or under the Plan which are also
assumed by CF&I Steel, L.P. pursuant to the Asset
Purchase Agreement shall be assigned and trans-
ferred to, and remain in full force and effect for the
benefit of, CF&I Steel, L. P., notwithstanding any
provision in such contracts or leases (including those
described in Sections 365(b) (2) and (f) of the
Bankruptcy Code) that prohibit such assignment or
transfer or that enables or requires termination of
such contracts or leases based on the acquisition of
assets pursuant to the terms of the Asset Purchase
Agreement.
7. Release. Except as otherwise expressly pro-
vided in the Plan or in this Order, on the Effective
Date all Persons (i) who have held, hold, or may
hold Claims, or (ii) who have held, hold, or may hold
CF&I Steel Corporation stock or stock of subsidiaries
of CF&I Steel Corporation, in consideration for the
obligations of the Debtors under the Plan, will be
deemed to have forever waived, released, and dis-
charged all rights or Claims, whether based upon
tort, fraud, contract or otherwise, which they here-
tofore, now or hereafter possess or may possess
against any of the Debtors.
8. Injunction. Except as otherwise expressly pro-
vided in the Plan or in this Order, all Persons who
have held, or may hold Claims against or interests
in any of the Debtors or liens against or interests in
property of the Debtors or of any of the Debtors'
estates are permanently enjoined on and after the
Confirmation Date from taking any of the following

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34a

actions against the Debtors, the Railroad Trustee,
the Reorganized Debtors, the Reorganized Creditors'
Committee, CF&I Steel, L.P.j New CF&I, Inc., or
Oregon Steel Mills, Inc., or any of their officers, direc-
tors, agents, or affiliates or against any of the prop-
erty of such entities. with respect to such Claims or
interests from: (a) commencing or continuing in
any manner any action or other proceeding of any
kind with respect to any such Claim or interest; (b)
the enforcement, attachment, collection or recovery
by any manner or means of any judgment, award,
decree, or order; (c) creating, perfecting, or enforc-
ing any lien or encumbrance of any kind; (d) assert-
ing any setoff, right of subrogation, or recoupment
of any kind against any obligation due to such en-
tities; and (e) any act, in any manner, in any place
whatsover, that does not conform to or comply with
the provisions of the Plan.
9. Validity of Sale Notwithstanding Reversal or
Modification on Appeal. The reversal or modification
on appeal of the authorization to sell granted by this
order shall not affect the validity of the sale under
the Asset Purchase Agreement unless such authoriza-
tion shall be stayed pending appeal.
10. Claim of CF&I Steel, L.P. for Overpaymtent.
CF&I Steel, L.P. shall have a claim to any cash held
by the Reorganized Debtors or the Railroad Trustee
after the Effective Date for return of any overpay-
ment as defined in Section 3.3 (d) of the Asset Pur-
chase Agreement. CF&I Steel, L.P.'s claim to such
cash shall have a priority superior to all claims of
general unsecured creditors in Classes 12, 13, and
14.
 11. VEBA Trust. The VEBA Trust provided for
in the Plan shall be established pursuant to a Trust

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 35a

Agreement for CF&I Retiree Voluntary Employees
Beneficiary Association in substantially the form of
Exhibit 10 received in evidence at the confirmation
hearing, as modified during the hearing, and attached
as part of Exhibit C to the Plan, which is attached
as Exhibit 1 to this Order. On the Effective Date,
pursuant to the Agreement for Substitution of
Sponsors of the CF&I Retiree Voluntary Employee
Beneficiary Association in substantially the form of
Exhibit 11 received in evidence at the confirmation
hearing and attached as part of Exhibit C to the
Plan, which is attached as Exhibit 1 to this Order,
CF&I Steel, L.P. shall succeed Debtors as sponsors
of the CF&I Retiree Voluntary Employee Beneficiary
Association, and the plan and trust established there-
under. The "Payment Recipient" identified in Sec-
tion 3 of the Asset Purchase Agreement shall be the
VEBA Trust provided for in the Plan.
12. VEBA Trustees. The initial trustees of the
VEBA Trust provided for in the Plan shall be the
following:

a. Trustees selected by Debtors: Robert W. Mac
Cannon, Joan F. Vialpando, and Arthur L.
Schwager.
b. Trustees selected by the United Steelworkers
of America: Ray MacDonald, Dallas Alexander, and
a representative of the Steelworker Organization of
Active Retirees ("SOAR"), to be named by the
United Steelworkers of America.
13. Assumption, Assignment, and Rejection of
Executory Contracts and Leases. The assumption
and assignment of those executory contracts and
leases specified in Exhibit D to the Plan a copy of
which is attached to this Order as Exhibit 1, is ap-

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36a

proved and the rejection of all other executory con-
tracts and leases as provided in the Plan is approved.
14. Governance Provisions. The provisions for
governance of the Debtors and the Reorganized
Debtors set forth in Exhibit 9 received in evidence
at the confirmation hearing and attached as Exhibit
2 to this Order are hereby approved.
15. Commitment Relating to Non-Contributory
Pension Plan. In order to effectuate the provisions
of the Plan concerning the Non-Contributory Pension
Plan of CF&I Steel Corporation, Debtors are author-
ized to enter into and make all commitments under
the Agreement for Commitment to Make Plan Suffi-
cient for Benefit Liabilities in substantially the form
of Exhibit 3 to this Order.
16. Distributions. Distributions shall be made in
the manner set forth in the Plan and as provided
herein. As set forth in the Amended and Restated
Agreement of Limited Partnership, the Pension Ben-
efit Guaranty Corporation ( "PBGC" ) shall be the
limited partner of CF&I Steel, L.P. on the Effective
Date of the Plan, with Debtors contributing partner-
ship assets to CF&I Steel, L.P. on the Effective Date
for the benefit of and on behalf of the PBGC in
deemed distribution to it. Neither Debtors nor Re-
organized Debtors shall be partners in CF&I Steel,
L.P. The PBGC's limited partnership interest shall be
subject to the obligation of PBGC to transfer all or
such portion thereof as may be required in order to
carry out the terms of the Plan, including to comply
with the provisions of Paragraph 92 of the Plan and
the provisions of the Plan for distributions to Class
12. 
17. Distribution of Certain Securities. Distribu-
tion of the Deferred Stock Payment and the Five

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37a

Year Warrants (as those terms are defined in Sec-
tion 3.1 of the Asset Purchase Agreement) to be
delivered by Oregon Steel Mills, Inc., pursuant to
the terms of the Asset Purchase Agreement, shall be
made after the Effective Date, pursuant to an order
of the Court, to the holders of any Allowed Claims
entitled to such distributions under the Plan or as
the Court may further order; provided, however,
that Oregon Steel Mills, Inc., shall be obligated to
issue the Deferred Stock Payment and the Five Year
Warrants, only if the conditions in Section 10.15 of
the Asset Purchase Agreement have been satisfied;
and provided, further, that any such distribution
shall comply with the provisions of Paragraph 92
of the Plan and the provisions of the Plan for distri-
bution to Class 12, and shall take into account any
transfer of the PBGC's limited partnership interest
as may be required in the last sentence of the preced-
ing paragraph 16 of this Order.
18. Bar Dates Provided in Plan. All bar dates
provided in the Plan, as modified by this Order, shall
be effective and Debtors shall give notice thereof with
notice of this Order.

DATED: February 12, 1993.

/s/ Judith A. Boulden
JUDITH A. BOULDEN
United States Bankruptcy Judge

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38a

IN THE UNITED STATES BANKRUPTCY
COURT FOR THE DISTRICT COURT OF UTAH
    CENTRAL DIVISION

Jointly Administered Under
Under Case No. 90B-6721
  [Chapter 11]

IN RE: CF&I FABRICATORS OF UTAH, INC., ET AL.,
       DEBTOR

(Case No. 90B-6721)
(Case No. 90B-6722)
(Case No. 90B-6723)
(Case No. 90B-6724)
(Case No. 90B-6725)
(Case No. 90B-6726)
(Case No. 90B-6727)
(Case No. 90B-6728)
(Case No. 90B-6729)
(Case No. 90B-6730)

(CF&I FABRICATORS OF UTAH, Inc.) (COLORADO &
UTAH LAND Co. ) (KANSAS METALS COMPANY)
(ALBUQUERQUE METALS COMPANY) (Pueblo
METALS COMPANY) (DENVER METALS COMPANY)
(PUEBLO RAILROAD SERVICE Co.) (CF&I FABRICA-
TORS of COLORADO, INC. ) (CF&I STEEL Corpora-
TION) (The COLORADO AND WYOMING RAILWAY
COMPANY)

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39a

MEMORANDUM DECISION AND ORDER
RELATING TO DEBTORS' OBJECTIONS,
DATED 10/02/92, FOR DISALLOWANCE AND
DETERMINATION OF PRIORITY OF CLAIMS
OF THE INTERNAL REVENUE SERVICE

On November 7, 1990, these related steel produc-
tion companies (Debtors) filed petitions under chap-
ter 11, primarily in an attempt to reorganize in light
of their inability to fund two defined benefit pension
plans. The United States of America, Department of
the Treasury, Internal Revenue Service (IRS), filed
proofs of claim1  against each of the Debtors jointly
and severally asserting priority tax claims under
 507(a) (7) (E) and (G) of the United States Bank-
ruptcy Code or alternatively as administrative claims
for "excise taxes" pursuant to 26 U.S.C. 4971 (a)
and (b) (section 4971 ). The claims are based on
the Debtors' failure to pay certain amounts due under
their pension plans. Both the Debtors and the Official
Unsecured Creditors Committee (Committee)2 ob-
jected to the proofs of claim, The legal issues were
presented to the court in a claims objection hearing
on November 13, 1992.3 Speedy resolution of the

___________________(footnotes)

1 The IRS filed an identical claim in each Debtor's case
that will be referred to collectively as the proofs of claim.
2 The Committee has fully participated in arguing the is-
sues in dispute here, and its argument generally tracks and
supports the position of the Debtors. Where reference is made
to the position of the Debtors, the court acknowledges that
the Committee's position is similar.
3 The Debtors have also filed an adversary proceeding in-
volving much the same arguments presented here, but in-
cluding a prayer for equitable subordination under 11 U.S.C.
 506 (c) as additional relief.

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 40a

legal issues is critical. The Debtors' hopes for re-
organization center upon the sale of portions of the
Debtors' assets implemented through a proposed plan
of reorganization. The prospective purchaser has es-
tablished a schedule that requires resolution of these
and other issues or its participation in the Debtors'
reorganization will be withdrawn. If the court allows
the status asserted by the IRS for its claims, it is
unlikely that the Debtors will have sufficient funding
to propose a feasible plan of reorganization. Because
of the critical nature of the resolution of these core
issues, the court issued a bench ruling at the hearing,
but indicated that it would supplement the bench
ruling with a written decision.

        FACT'S

At the time of filing, the Debtors were sponsors of
two pension plans that provided pension and pension-
related benefits for employees and retirees. CF&I
Steel Corporation (CF&I) was the administrator of
those plans. These two pension plans were the Pen-
sion Plan of CF&I Steel Corporation and Certain
Subsidiaries (the Master Plan ) and the Non-Contrib-
utory Pension Plan of CF&I Steel Corporation as
Amended and Restated Effective January 1, 1989,
(the Non-Contributory Plan). Under these pension
plans, CF&I promised to provide fixed pension ben-
efits calculated with reference to each employee's pay
and years of service. CF&I was obligated to provide
annual funding contributions based on the actuarial
valuation of the benefits earned by its employees.
The Pension Benefit Guaranty Corporation (PBGC)
is a wholly-owned United States government corpora-
tion established under 4002 of the Employee Re-

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41a

tirement Income Security Act of 1974 (ERISA), 29
U.S.C. 1302, to administer the pension plan termi-
nation provision of Title IV of ERISA, 29 U.S.C.
1302-1461. The PBGC is required to guarantee
payment of non-forfeitable or vested benefits under
terminated pension plans, subject to certain limita-
tions. If the PBGC pays pension benefits pursuant
to its guaranty under the terminated pension plans,
the funds do not come from the United States treas-
ury, but from insurance premiums paid by sponsors
of ERISA qualified plans.
CF&I failed to make the minimum funding pay-
ment of $12,400,000 on the Master Plan for the year
ending December 31, 1989. The payment should have
accompanied CF&I's form 5330 annual report that
the parties agree was due on September 15, 1990. On
November 7, 1990, the Debtors filed petitions for re-
organization under chapter 11 of the Bankruptcy
Code. Since the date of filing, the Debtors have not
made any continuing minimum funding payments to
the pension plans attributable to services rendered
by employees before the date of filing. The annual
reports and minimum funding payments for the year
ending December 31, 1990, of approximately $12,-
100,000, were due September 15, 1991. The Debtors
assert the pension plans are pre-petition obligations,
therefore, the Debtors did not make the minimum
funding payments for 1990.4

___________________(footnotes)

4 On March 13, 1991, the PBGC filed two proofs of claim
against each of the Debtors in connection with the Master
Plan. These claims fall into two general categories: (1)
claims for unfunded benefit liabilities under the Master Plan
(the Unfunded Benefit Claims) designed to reimburse the
PBGC for at least a portion of the amounts that it must pay

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42a

The Debtors attempted to persuade the PBGC into
terminating the Master Plan both before and after
filing the chapter 11 petitions. It was not until March
19, 1992, that the PBGC instituted proceedings to
terminate the Master Plan. The Non-Contributory
Pension Plan has not been terminated. CF&I, on
behalf of the Master Plan, consented to the termina-
tion and entered into a trusteeship agreement with
the PBGC effective March 19, 19922 and the PBGC
became the successor trustee of the Master Plan. The
PBGC became liable for guaranteed benefits to plan
participants.

   IRS CLAIMS

Under section 4971 (a), the IRS imposes an im-
mediate 10% "first tier" tax based on the accumu-
lated funding deficiency if the employer fails to make
the minimum funding contribution by the date when
the employer's annual report is due (in this case
reports for both plan were due on September 15,
1990). If the sponsoring employer does not thereafter
correct the accumulated funding deficiency by making
the required contribution to the applicable pension

___________________(footnotes)

to pensioners from its own funds; and (2) claims for due
and unpaid minimum funding contributions allegedly due and
owing the Master Plan (the Minimum Contribution Claims).
On July 1, 1992, after termination of the Master Plan, the
PBGC amended its proofs of claims, increasing the amount
of each of the ten Unfunded Benefit Claims to an estimated
amount of $263,200,00.0- and the amount of each of the ten
Minimum Contribution Claims to an estimated amount of
$64,874,511. The claims were filed variously as priority or
administrative claims. The court has ruled that the majority
of the PBGC's claims are pre-petition, unsecured claims, not
entitled to priority or administrative payment status.

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        43a

plan during the taxable period as defined in section
4971 (c) (3), then section 4971 (b) imposes an addi-
tional "second tier" tax on the employer equal to
100% of the amount of the accumulated funding
deficiency.
On March 13, 1991, the IRS timely filed various
proofs of claim asserting tax liability based on excise
taxes pursuant to section 4971. The proofs of claim
alternatively asserted secured or priority status for
section 4971 (a) liability for the 1989 plan year as-
sessed January 21, 1991. They also included a claim
indicating "examination liability unassessed" for the
second tier excise tax for the 1989 plan year. The
IRS audited the second tier tax for the plan year
1989, and issued a post-petition notice of deficiency
to the Debtors for the 1989 second tier liability. The
original proofs of claim made no reference to section
4971 liability for 1990, despite an assertion in the
IRS memorandum to the contrary. The IRS audited
the 1990 plan year and issued the appropriate notice
letters to the Debtors on September 3, 1992. The
proofs of claim indicate that the 1989 second tier and
the 1990 first and second tier excise taxes remain
unassessed.
The original proofs of claim filed by the IRS also
included amounts for income taxes for 1983 and in-
come taxes under audit for 1984 and 1985. The only
amount indicated on the original proofs of claim
regarding income tax liability for 1987, 1988, and
1989, was an amount owing of $.00 with an asterisk
referring to an explanation in which the IRS asserted
a "protective" claim.5         .

___________________(footnotes)

5 The original proofs of claim contained the following lan-
guage: "No income tax liability is shown for the tax years

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44a

The IRS amended each of its proofs of claim on
September 24, 1992, three weeks prior to the filing
of the Debtors' disclosure statement, and after the
claims bar date. The amended proofs of claim declare
that the 1989 tax claimed pursuant to section 4971(a)
is a pre-petition priority tax liability and asserts that
the Debtors must pay, in addition to the claims of
the PBGC for the underlying funding payment of
$12,400,000, the following amounts: 6

(TABLE/CHART OMITTED)

The amended proofs of claims state that the 1989
section 4971 (b) and the 1990 section 4971 (a) and
(b) claims are post-petition tax liabilities entitled to
administrative expense priority pursuant to 11 U.S.C.
 503(b)(1) (B) (i) in the following amounts:

___________________(footnotes)

85 through 89 for the consolidated group of corporations of
which CF&I Steel Corporation was the parent corporation.
The returns for those years report net operating losses for
all years except 1987. The carryback and/or carryforward
of losses from other years to 1987 eliminates the income tax
liability shown for 1987. These returns have not yet been
audited but could be audited in the future for the purpose of
eliminating any net operating loss carryforward which the
debtor might attempt to claim."
6 The IRS has asserted general unsecured claims for late
payment penalties and interest of $198,713 for failure to pay
the 1989 10% first tier penalties under section 4971 (a).
7 The IRS has designated the Master Plan as plan 010,
and the Non-Contributory Plan as plan 008 in its proofs of
claim.

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45a

(TABLE/CHART OMITTED)

Alternatively, if the court does not accord the claims
post-petition administrative status, the IRS asserts
the claims represent pre-petition priority taxes under
11 U.S.C.  507(a) (7) (E) and (G), The amended
IRS proofs of claim also seek income taxes and in-
terest to the date of the petition of $265,910.62 due
for `the years 1987, 1988, and 1988 pursuant to an
audit completed after the IRS filed the original proofs
of claim.
On December 2, 1992, the Debtors filed objections
to the IRS proofs of claim. The Debtors object to all
the section 4971 excise tax claims asserted pursuant
to 11 U.S.C.  507(a) (7) (E) and argue that the
claims are, in fact, penalties and must be disallowed.
They also contend that the section 4971 excise tax
claims are not pecuniary loss penalties related to a
governmental claim under 11 U.S.C.  507(a) (7) (G)
and should be disallowed.8 In addition, the Debtors
objected to the 1989 section 4971 (b) second tier
claims and the 1990 section 4971 (a) and (b) claims.

___________________(footnotes)

8 The Debtors object to the classification of the 1989 first,
tier claims as administrative claims under 11 U.S.C.  503,
but is not apparent from the amended proofs of claim that
the IRS asserted administrative status for these claims.

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46a

They maintain that as of the date of filing, the tax-
able period had not expired and that they are still
able to avoid the 100%  penalty by correcting the
accumulated funding deficiency for 1989, but that
they are prohibited from so doing except pursuant to
a plan of reorganization or as directed by this Court.
The Debtors expect the IRS to assert section 4971(a)
and (b) claims against the Debtors for each year,
ad infinitum, in which the Debtors are prohibited
from making the minimum funding payments by
virtue of the filing of these chapter 11 proceedings.
The Debtors also argue that any priority claims filed
by the IRS for section 4971(a) and (b) claims for
1990 are late filed and should be disallowed,
The Debtors also object to those portions of the
amended claims that add prepetition priority income
tax liability for 1987, 1988, and 1989 as untimely
filed. The IRS contends the 1987, 1988, and 1989
income tax liabilities were included in the initial
timely filed claims by incorporating the protective
language contained in the proofs of claim and that the
claims filed after the bar date were merely amend-
ments to cure defects in the previously filed claims.

ISSUES

A. The proofs of claim represent exactions that
  are not excise taxes allowed priority payment
  pursuant to-n U.S.C.  507(a) (7) (E), and
  are not pecuniary loss penalties allowed pri-
  ority payment pursuant to 11 U. S. Cl.  507(a)
  (7) (G).

The initial issue presented in resolving the Debtors'
objections to the IRS's proofs of claim is to deter-
mine if the IRS's characterization of the claims as

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47a

excise taxes is correct. The IRS describes its claims
as excise taxes based, not unreasonably, on the cap-
tion of section 4971 that indicates "Subtitle D-
Miscellaneous Excise Taxes." All parties, however,
acknowledge that the legislative history indicates that
the excise taxes created in section 4971 are, in real-
ity, penalties imposed upon an employer to prevent
an accumulated funding deficiency under a plan.9
No argument has been advanced that these claims in
fact compensate the United States for actual pecuni-
ary loss. Payment by the PBGC of any nonforfeit-
able or vested benefits under terminated pension
plans is from premiums collected from all ERISA
qualified plan sponsors, and not by the United States
from general revenue. Though the IRS acknowledges
that legislative intent indicates the taxes imposed are
penalties, it asserts this court may not look at the
actual nature of the exaction, but must rely on the
designation stated by Congress in the statute and
may not re-characterize the IRS's classification of
the excise taxes.
The IRS relies on the Sixth Circuit's reversal of
the lower courts in In re Mansfield Tire & Rubber
Co., 942 F.2d 1055 (6th Cir. 1991) cert. denied sub
nom, Krugliak v. United States, 112 S. Ct. 1165
(1992), as being directly on point and controlling in

___________________(footnotes)

9 The legislative history indicates: "The bill also provides
new and more effective penalties where employers fail to
meet the funding standards . . . This procedure, however, has
proved to be defective since it does not directly penalize those
responsible for the under-funding. For this reason, the bill
places the obligation for funding and the penalty for under-
funding on the person on whom it belongs-namely, the em-
ployer." H.R. Rep. No. 807, 93rd Cong., 2nd Sess. 28 (1974),
reprinted in 1974 U.S.C.C.A.N. 4670, 4694-95 (italics added).

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48a

this case. Mansfield held that, since section 4971
was an existing federal excise tax at the time the
Bankruptcy Code was enacted, Congress meant to
include those exactions in the category Congress it-
self had previously deemed to be federal excise taxes
under 11 U.S.C.  507(a) (7) (E). Mansfield held
that courts should not employ any other test to de-
termine if the section 4971 taxes are in fact excise
taxes. Mansfield indicated that such deference would
not be given, however, in cases involving state and
local exactions. In those instances, a federal question
arises, therefore a federal court may determine
whether the state or local tax characterization is cor-
rect when applied to the Bankruptcy Code.
The Debtors invite this court to conclude that
Mansfield is unnecessarily rigid and contrary to prior
law. Instead, they argue that this court is empow-
ered to look behind Congress' characterization of the
tax and should instead employ a four part test to de-
termine if the assessment is properly characterized
as a tax.10 The IRS agreed that if the court employed

___________________(footnotes)

10 In County Sanitation Dist. No. 2 of Los Angeles County
v. Lorber Industries of California, Inc. (In re Lorber Indus.
of California, Inc.) 675 F.2d 1062, 1066 (9th Cir. 1982),
citing Dugan v. Dept. of Agriculture, State of Cal., 332 F.2d
793 (9th Cir. 1964), the Ninth Circuit approved the follow-
ing four part test to determine the elements of whether a
state charge can be afforded tax priority under the Bank-
ruptcy Act:

1) An involuntary pecuniary burden, regardless of name,
laid upon individuals or property;
2) Imposed by, or under authority of the legislature;
3) For public purposes, including the purpose of defray-
ing expenses of government or undertakings authorized
by it;
4) Under the police or taxing power of the state.

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49a

such a test it would not be able to sustain the position
that the section 4971 excise taxes are not penalties
because it could not meet the third prong of the
Lorber Industries test. In re Cassidy, 126 B.R. 94,
96-8 (Bankr. D. Colo. 1991); In re Airlift Int'l,, Inc.,
120 B.R. 597,601 (S.D. Fla. 1990).
This issue should be viewed in the context of the
Tenth Circuit's controlling instruction that courts
should not interpret a statute so that the literal mean-
ing of the words thwarts the obvious purpose of a
statute. State of Okla. ex. rel., Dept. of Human
Serv. v. Weinberger, 741 F.2d 290, 292 (10th Cir.
1983). Even in Mansfield, the court acknowledged
that there are "rare cases" in which the literal appli-
cation of a statute will produce a result at odds with
the intent of the statute. Mansfield, 942 F.2d at
1059, citing Griffin v. Oceanic Contractors, Inc., 458
U.S. 564, 571 (1982). Courts should also be circum-
spect in interpreting ERISA, or related provisions of
the Internal Revenue Code, in a manner that alters
or impairs the Bankruptcy Code.11
This court concludes that the label adopted by
Congress in its characterization of these excise taxes
is not controlling, especially where blind acceptance of
the label would defeat the purpose of the Bankruptcy
Code. United States v. Unsecured Creditors Comm.
of C-T of Vs., Inc. (In re C-T of Vs.), 1992 WL
247459 (4th Cir., Oct. 2, 1992) (it is the purpose of

___________________(footnotes)

11 ERISA 514 (d), 29 U.S.C.  1144(d), indicates that in
interpreting ERISA, "nothing in this title shall be construed
to alter, amend, modify, invalidate, impair, or supersede any
law of the United States (except as provided in sections 1031
and 1137 (c) of this title) or any rule or regulation issued
under any such law."

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 50a

the tax, not its name, that controls); United States
v. River Coal Co., Inc., 748 F.2d 1103, 1106 (6th
Cir. 1984) (fact that Congress labeled a reclamation
charge a fee rather than a tax is not controlling); In
re Unified Control Sys., Inc., v. I.R.S. (In re Unified
Control Sys., Inc.), 586 F.2d 1036, 1037-38 (5th
Cir. 1978) (label placed upon an imposition in a
revenue measure is not decisive in determining its
character); United Steelworkers of America, AFL-
CIO-CLC v. PBGC (In re Wheeling-Pittsburgh Steel
Corp.), 103 B.R. 672, 693 (W. D. Penn., 1989) (the
mere label of an exaction as a tax will not govern
its characterization for purposes of bankruptcy law) ;
Kline v. Feinblatt, 403 F. Supp. 974, 977 (D. Md.
1975) aff'd. 547 F.2d 823 (4th Cir. 1977) (finding
5$4941 and 4944 of the IRS Code to be penalties,
court indicated the name given to the exaction by the
legislature is not conclusive) .12
This case presents one of those "rare cases" where
the court should examine the characterization of the
statute because of the obvious inconsistencies that
arise if the excise tax status is upheld. First, unlike
Mansfield, the IRS'S section 4971 claims are for both
the first and the second tier taxes. This court pre-
viously found that the claims of the PBGC for the
underlying obligation are, for the most part, pre-
petition unsecured claims. To allow priority treat-

___________________(footnotes)

12 Mansfield considered but rejected Unified Control Sys-
tems, River Coal Co. and Kline, considering them as wrongly
decided because they blurred the distinction between a federal
question involving a state statute and a characterization made
by Congress. Each case, however, found additional equitable
reasons for looking behind the label applied to a tax when
considered in light of the purpose of the applicable statute.

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51a

ment for alleged tax claims based on pension funding
deficiencies, when the pension plan's claims do not
receive such treatment, would elevate the section 4971
claims to a status ahead of those claims. Second, such
an interpretation would result in state and local
taxes being subject to judicial scrutiny, but not fed-
eral taxes. The effect could be that state taxes would
be treated differently or accorded different priority
than federal taxes and the Bankruptcy Code does not
contemplate such disparate treatment. Third, the
payment of such large priority claims would defeat
any attempt by the Debtors to reorganize, would pre-
vent any return to creditors and would provide a
windfall to the IRS. Fourth, such an interpretation
would harm the parties that are intended to be pro-
tected by the pension plan that section 4971 seeks to
enforce, because payment of section 4971 penalty
claims would be at the expense of pre-petition un-
secured creditors including pensioners. Fifth, allow-
ance of the 1990 first and second tier claims and
the 1989 second tier claims would penalize the Detbors
for obeying the Bankruptcy Code. The Debtors com-
plied with the Bankruptcy Code by not paying pre-
petition debts outside a plan of reorganization. How-
ever, it is the Debtors compliance with the Bankruptcy
Code that results in the accrual of the section 4971
claims after the date of filing.13 Based upon the fore-

___________________(footnotes)

13 In In re Wheeling-Pittsburgh Steel Corp., 103 B.R. 672,
694 (W.D. Pa. 1989), the court found that the IRS's claims
under section 4971 were penalty claims for bankruptcy pur-
poses. Since Wheeling-Pittsburgh was forbidden from paying
pre-petition plan contributions post-petition under the bank-
ruptcy law, equitable considerations dictated that the IRS's
claims be disallowed so as not to punish the debtor's credtiors.

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52a

going, the court finds that it is empowered, under the
circumstances of this case, to look behind the charac-
terization of the exaction set forth in the statute and
focus on the actual nature of the claims. Based on its
own independent application of the four pronged test
advanced in Lorber Industries, the court finds the
IRS has failed to meet the third prong of the test.
The excise taxes are penalty claims, and that the
penalty claims are not assessed as compensation for
the government's actual pecuniary loss. Therefore,
to the extent that the IRS's section 4971 claims for
1989 and 1990 are deemed to be pre-petition claims,
they are not afforded priority status under 507
(a) (7) (E) or (G).

B. The section 4971 penalty claims are not en-
titled to administrative status under 11 U.S.C.
 503.

The Debtors object to the IRS's proofs of claim
that assert post-petition administrative status for
the penalty claims. The IRS argues that its 1989
and 1990 section 4971 (b) claims all accrued post-
petition because either the notice of deficiency was
mailed or the date of assessment occurred post-peti-
tion creating administrative expenses.14 Likewise the

___________________(footnotes)

14 The IRS argues that the section 4971(a) excise tax
accrues as of the date eight and one-half months after the
end of the plan year, or for 1989, on September 15, 1990.
See. Temp. Treas. Reg.  11,412(c) -12 (b). The IRS also
takes the position that the section 4971 (b) claims accrue
as of the earlier of the date of mailing of a notice of deficiency
with respect to the penalty imposed by section 4971 (a) or
the date of assessment of the tax if the funding deficiency
has not been cured. Section 4971 (a) (3) (A) and (B). In this

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53a

1990 section 4971 (a) liability arose as a result of the
post-petition failure of the Debtors to pay the accumu-
lated funding deficiency on September 15, 1991. The
IRS's statement of the date these events transpired
is correct, but the IRS's position ignores the effects
the filing of the Debtors' chapter 11 petitions had on
the underlying obligation.
The IRS declares that a tax is incurred by the
estate on the date that the tax accrues. See, e.g., In
re 0.P.M. Leasing Servs., Inc., 68 B.R. 979 (Bankr.
S.D.N.Y. 1987); accord Wheeling-Pittsburgh Steel
Corp., 103 B.R. at 693. Because the IRS sent notice
of deficiency for the 1989 and 1990 section 4971 (b)
claims post-petition, and because the IRS assessed the
penalties post-petition,15 the IRS argues the penalties
were incurred as administrative expenses.
The difficulty with the IRS's approach is that it
presumes that it assessed excise taxes instead of pen-
alties, and that an obligation has been incurred by the
Debtors post-petition in spite of the operation of the
automatic stay. The Bankruptcy Code prevented pay-
ment of the pre-petition obligation that is the founda-
tion of the IRS penalty claims. The operation of the

___________________(footnotes)

case, both the notice of deficiency and the date of assessment,
if any, for the 1989 section 4971 (b) and the 1990 section
4971 (a) and (b) occurred post-petition.

15 IRS relies upon the District Court Rule of Bankruptcy
Practice and Procedure, D. Utah 508, that indicates that the
stay afforded by 11 U.S.C. 362 is modified to allow the IRS
to assess tax liabilities unless a party in interest objects and
the court orders otherwise, This provision is of no comfort
to the IRS because it allows for the assessment of taxes, not
for the assessment of penalties such as the section 4971 claims
asserted in this case.

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54a

automatic stay tolled the correction period so that
the claims have not yet been incurred and remain
contingent claims. Therefore, there are no taxes to
which the penalties attach.
The bankruptcy filing prohibited the Debtors from
making any payment on the underlying pre-petition
obligation that is the basis for the penalty claims,
except payment through a plan of reorganization or
as ordered by the court. Official Comm. of Equity
Security Holders v. Mabey (In Re A.H. Robins Co.),
832 F.2d 299, 302 (4th Cir. 1987), cert. denied, 485
U.S. 962 (1988). Since the basis for the IRS'S proofs
of claim for these periods is the Debtors' compliance
with the Bankruptcy Code, it would be inequitable to
allow the claims. Any failure to make such contribu-
tion is protected under bankruptcy law and cannot be
penalized by the IRS. Wheeling-Pittsburgh Steel
Corp., 103 B.R. at 693.
The penalty claims are also contingent because sec-
tion 4971 (b) provides that the claims do not arise
unless the accumulated deficiency is not corrected
within the taxable period. The correction period does
not expire until at least ninety days after the date on
which the IRS mails notice of deficiency for the 10%
first tier penalty due under section 4971 (a). Under
section 4961 (a), the correction period is extended
for ninety days following the mailing of the notice
of deficiency, and for any additional time beyond the
ninety days during which "a deficiency cannot be
assessed under section 6213(a)" of the Internal Rev-
enue Code. 26 U.S.C.  4961(a), 4963(e) (1). One
such period is the period during which a debtor is
prevented from filing a petition in the United States
Tax Court, and for sixty days thereafter. Since 11

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55a

U.S.C.  362(a) (8) precludes the commencement or
continuation of a proceeding before the United States
Tax Court, the correction period extends until sixty
days after the conclusion of the bankruptcy proceed-
ing. Therefore, the running of the correction period
is tolled during the period in which the automatic stay
is in effect and no 100%  penalty may be assessed.
Wheeling-Pittsburgh. Steel Corp., 103 B.R. at 695.
The 1989 plan year correction period was still open
as of the date of filing of these petitions and remains
open. The notice of deficiency for 1990 was issued
while the automatic stay was in effect, therefore, the
correction period cannot expire until 150 days after
the date on which the stay expires. The Debtors
argue that the term "correct" means to contribute to
the pension plan the amount necessary to reduce the
accumulated funding deficiency, as of the end of the
plan year, to zero. The confirmation of a plan oper-
ates to discharge "all claims and interest of cred-
itors," thus effectively reducing all claims to zero.
11 U.S.C. $1141. The Debtors propose that the pre-
petition claims related to the pension plans can be
cured or corrected through their proposed plan. This
may be correct, but the proposed plan has not been
confirmed and the court makes no determination at
this time that such a provision would cure or correct
the funding deficiency, The court reserves any ruling
based upon this theory until the facts of the case sup-
port consideration of the argument.
The language of 11 U.S.C.  503(b) (1) (C) grants
administrative status to "any fine, penalty or reduc-
tion in credit relating to a tax of a kind specified in
subparagraph (B) of this paragraph." 11 U.S.C.
503 (b) (1) (C) emphasis added). The logical in-

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56a

terpretation of this language is that such penalty
must relate to a tax allowed administrative status
under 11 U.S.C.  503 (b). Though it may be argued
that 11 U.S.C.  503(b) (1) (C) includes penalties
without the restriction that such penalties be com-
pensation for actual pecuniary losses and may there-
fore include section 4971 penalties, these penalties
do not relate to a tax. The Debtors are subject to
section 4971 liability on the accumulated funding de-
ficiency in the qualified plan resulting from failure to
make minimum contributions to the plan rather than
failure to pay any identifiable, separate, revenue pro-
ducing tax. The only obligation related to the section
4971 penalty is the obligation owed by the Debtors to
fund the pension plan, or upon termination of the
plan, the obligation to pay any under-funding to the
PBGC. The Debtors simply have no underlying obli-
gation owing to the United States that can be char-
acterized as a tax.
Based upon a consideration of all the foregoing
factors, the court finds that the IRS's proofs of claim
for 1989 section 4971 (b) and for 1990 section
4971 (a) and (b) are disallowed and expunged. See,
e.g., LTV Corp. v. IRS, (In re Chateaugay Corp.),
slip op. Nos. 92 Civ, 3394, 3395 (S.D.N.Y. October 19,
1992). If the Debtors fail to confirm a plan that
cures the accumulated funding deficiency, the IRS
may be entitled to file an administrative claim and
again assert administrative status for a portion of
its proofs of claim. But for a determination whether
such claims may be allowed must await circumstances
different from those currently before the court.

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57a

C. The timeliness of the IRS proofs of claim raises
issues of fact that must be resolved through
an evidentiary hearing.

The third basis for the Debtors' objections to the
proofs of claim is that a portion of the claims are
untimely. The Debtors contend that the IRS should
not be permitted to amend its proofs of claim to
assert additional income tax liabilities for 1987, 1988
and 1989, or to assert new pre-petition section 4971
liabilities for 1990. The IRS argues that the pro-
tective language in the original proofs of claim clearly
placed the 1985 through 1989 income tax liabilities in
issue. The IRS reasons that the original proofs of
claim may not have indicated the exact nature of the
tax liability, but the Debtors were on notice that an
income tax audit could be anticipated for those years.
The IRS admits that there was no specific language
in the original proofs of claim regarding the 1990
liability under section 4971 because the IRS viewed
this liability as post-petition administrative liability.
However, the IRS argues that its original proofs of
claim did inform the Debtors of the general concept
of placing these liabilities at issue. Nonetheless, the
IRS claimed the 1990 excise taxes as priority pre-
petition taxes as well as post-petition administrative
taxes.
Although amendments to proofs of claim may be
freely permitted "to cure a defect in the claim as
originally filed," a creditor may not assert new claims
after the bar date under the guise of amending its
claim. In re Unioil, Inc., 962 F.2d 988, 992 (10th
Cir. 1992) (quoting Lease America Corp. v. Eckel,
710 F.2d 1470, 1473 (10th Cir. 1983)). In Unioil,
an individual creditor sought by motion to amend his

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58a

proof of claim to identify a trust as the proper prin-
cipal on whose behalf he was pursuing the claim. The
court held that ordinarily an amendment of a proof
of claim is freely permitted so long as the claim ini-
tially provided adequate notice of the existence, na-
ture, and amount of the claim as well as the creditor's
intent to hold the estate liable, but a truly new claim
should not be permitted. The court found that the
original proof of claim at issue in that case was
adequate and that its content was unaltered by the
requested amendment. The court concluded that
under the particular circumstances before it, the
debtor was not prejudiced by the amendment because
the amended proof of claim asserted the same sub-
stantive interests as the original proof of claim. Uni-
oil, 962 F.2d at 993.
The IRS suggests that in Unioil, the Tenth Cir-
cuit took a more liberal approach to claims amend-
ment than the traditional view. This court finds
nothing in the Unioil decision that deviates from the
traditional narrow standard that an amendment is
permitted only where the creditor provided notice to
the debtor of the existence, nature and amount of the
claim and the creditor's intent to hold the estate
liable. Walsh v. Lockhart Assocs., 339 F.2d 417 (5th
Cir.), cert. denied, 380 U.S. 953 (1965).
The IRS' original proofs of claim listed income tax
liability for 1985-89 as $.00. The IRS reserved the
right to audit the Debtors' returns for tax years 1985
through 1989 for the "purpose of eliminating any net
operating loss carry forward which the debtor might
attempt to claim." The IRS may have intended the
Debtors to infer from this protective language notice
that some amount of additional income tax liability

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 59a

may arise from the audit as a result of a change in
calculating the loss carryforward which the Debtors
were entitled to claim. The IRS admits that liability
for "alternative minimum tax was not identified in
the proof of claim but was clearly a possibility from
the audit." IRS Response at p. 24. It does not appear
from this anticipatory language that the IRS could
maintain a claim for additional income tax liability
if the audit produced evidence and the amended proofs
of claim were based, for example, on the Debtors
under-reported income or resulted from improper
claims of other types of deductions.
Even if it were reasonable to make such an infer-
ence regarding the existence and nature of the addi-
tional tax liability resulting from elimination of a
loss carryforward, the amount of the additional tax
liability could not be even remotely inferred from the
original claim. It is unlikely that, on its face, an
inference of increased tax liability without any indi-
cation of the amount of increase supplies sufficient
notice to the Debtors to open the door for a later
amendment intended merely to cure a defect. In this
case, whether: (1) the original proofs of claim were
sufficient to provide notice of the nature of the IRS's
claim; (2) the Debtors made the correct inference
from the original proofs of claim and; (3) the addi-
tional income tax liability actually resulted from ad-
justment to the amount of loss carryforward avail-
able to the Debtors is a factual determination that
the court reserves for a later evidentiary proceeding.

D. The 1990 priority tax proofs of claim are
  untimely filed.

The IRS admits that the amendment to add the
section 4971 liability for the Debtors' 1990 pension

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60a

plan funding deficiency is problematic. It is clear
from the original proofs of claim that the IRS at-
tempted to protect its claim for section 4971 liability
for the plan year ending December 31, 1989. The
IRS reasons that the protective language regarding
the 1989 excise tax-put the Debtors on notice of the
general concept of continuing liability for subsequent
years. The IRS also relies on its characterization of
section 4971 penalties as an administrative expense
liability for its failure to anticipate and include the
1990 section 4971 liability on the original proofs of
claim. The IRS claims priority status for the 1990
section 4971 claims as well as administrative expense
status.
As the IRS noted, many courts summarily disallow
amended claims to add additional tax periods for the
same type of tax. See, e.g., In re Butcher, 74 B.R.
211 (Bankr. E.D. Term. 1987). Other courts allow
addition of another tax period of the same type of
liability as an almost automatic amendment. See,
e.g., In re Bajac Const. Co., 100 B.R. 524 (Bankr.
E.D. Cal. 1989). `Even under the most generous
standard of freely allowing amendments used by other
courts outside the Tenth Circuit, if the 1990 liability
was determined to be a pre-petition obligation, the
amendment to add new and unspecified liability for
the 1990 section 4971 penalties could not be allowed.
In the present case, the reorganization is too far along
and the various parties that have struggled over
formulation of a plan would be adversely prejudiced
if the court permitted such an amendment. Further-
more, applying the two-step analysis of Unioil leads
to the same result. Even if it could be argued that
the Debtors had notice of the existence and amount

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61a

of the 1990 excise liability, such an amendment does
much more than merely cure a defect, it creates a
new claim. This new claim would insolubly delay and
complicate the administration of this estate. Per-
mitting a late-filed amendment for an additional tax
period that triples the amount of the original claim
this close to plan confirmation cannot be justified
under these circumstances. The court will not exer-
cise its discretion to allow such an amendment.

CONCLUSION

In accord with the above determination, the section
4971 assessments against the Debtors are in fact
penalties that do not compensate the United States
for actual pecuniary loss. The penalties asserted by
the IRS as administrative claims are disallowed and
expunged because the proofs of claim penalize the
creditors of these Debtors for the Debtors' compliance
with the Bankruptcy Code's prohibition against satis-
faction of pre-petition claims absent a confirmed plan
of reorganization, because of their contingent nature,
and because the Debtors' right to cure any deficiency
has not expired. The court will not as a matter of
law disallow the pre-petition income tax claims, but
will reserve ruling thereon pending an evidentiary
hearing.
Based upon the forgoing, it is hereby

ORDERED, as follows:

1) the 26 U.S.C. 4971 (a) and (b) proofs of
claim for excise taxes are in fact penalty claims
and are therefore denied priority status under
 507(a) (7) (E);

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62a

2) the 26 U.S.C. 4971 (a) and (b) proofs of
claim are not in compensation for actual pecuni-
ary loss and are therefore denied priority statue
under  507(a) (7) (G);
3) the 198926 U.S.C.  4971(b) and the 1990
26 U.S.C. 4971(a) and (b) proofs of claim
are not entitled to administrative status and are
expunged;
4) the 1989 26 U.S.C.  4971(a) proofs of
claim are pre-petition unsecured claims;
5) no determination is made at this time as to
whether any pre-petition unsecured claim as-
serted by the IRS is subject to equitable subordi-
nation;
6) to the extent that the 1990 penalty claims
may have accrued pre-petition, they are disal-
lowed because such claims were not timely filed;
7) the court reserves ruling as to whether the
1987, 1988, and 1989 income tax liability con-
tained in the amended proofs of claim were
timely filed pending an evidentiary hearing; and
8) future proofs of claim filed by the IRS pur-:
suant to 26 U.S.C. 4971 that may arise because
of the Debtors' failure to cure or correct the pre-
petition accumulated funding deficiency are not
entitled to preferred status until such time as
this court determines that no cure or correction
of the deficiency has been effectuated.

DATED this 25 day of November, 1992.

/s/ Judith A. Boulden
Judith A. BOULDEN
United States Bankruptcy Judge

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 63a

       APPENDIX F

1. Section 507, 11 U.S.C. (1988), provides in rele-
vant part:

(a) The following expenses and claims have prior-
ity in the following order:

		*        *       *        *        *
  (7) Seventh, allowed unsecured claims of gov-
ernmental units, only to the extent that such
claims are for-        
		*        *       *       *       *   
    (E) an excise tax on-

     (i) a transaction occurring before
    the date of the filing of the petition for
    which a return, if required, is last due,
    under applicable law or under any ex-
    tension, after three years before the
    date of the filing of the petition; or
     (ii) if a return is not required, a
     transaction occurring during the three
    years immediately preceding the date
    of the filing of the petition;

                        *  *  *  *  *

2. Section 510, 11 U.S.C., provides in relevant
part: 
 
   *      *      *      *       *

(c) Notwithstanding subsections (a) and (b) of
this section, after notice and a hearing, the court
may-

  (1) under principles of equitable subordina-
tion, subordinate for purposes of distribution
all or part of an allowed claim to all or part of
another allowed claim or all or part of an al-

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64a

lowed interest `to all or part of another allowed
interest; or
(2) order that any lien securing such a sub-
ordinated claim be transferred to the estate.

3. Section 4971, 26 U.S.C. (1988), provides in
relevant part:

(a) Initial tax

For each taxable year of an employer who
maintains a plan to which section 412 applies,
there is hereby imposed a tax of 10 percent (5
percent in the case of a multiemployer plan) on
the amount of the accumulated funding defici-
ency under the plan, determined as of the end
of the plan year ending with or within such
taxable year.

(b) Additional tax

In any case in which an initial tax is imposed
by subsection (a) on an accumulated funding
deficiency and such accumulated funding defi-
ciency is not corrected within the taxable period,
there is hereby imposed a tax equal to 100 per-
cent of such accumulated funding deficiency to
the extent not corrected.

(c) Definitions

For purposes of this section-

(1) Accumulated funding deficiency

The term "accumulated funding defi-
ciency" has the meaning given to such term
by the last two sentences of section 412
(a).

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 65a
 
(2) Correct

The term "correct" means, with respect
to an accumulated funding deficiency, the
contribution, to or under the plan, of the
amount necessary to reduce such accumu-
lated funding deficiency as of the end of a
plan year in which such deficiency arose to
zero.

(3) Taxable period

The term "taxable period" means, with
respect to an accumulated funding defici-
ency, the period beginning with the end of
the plan year in which there is an accumu-
lated funding deficiency and ending on the
earlier of-

(A) the date of mailing of a notice
of deficiency with respect to the tax
imposed by subsection (a), or
(B) the date on which the tax im-
posed by subsection (a) is assessed.

(d) Notification of the Secretary of Labor

Before issuing a notice of deficiency with re-
spect to the tax imposed by subsection (a) or
(b), the Secretary shall notify the Secretary of
Labor and provide him a reasonable opportunity
(but not more than 60 days)-

(1) to require the employer responsible
for contributing to or under the plan to
eliminate the accumulated funding defici-
ency, or
(2) to comment on the imposition of such
tax.

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66a

In the case of. a multiemployer plan which is in
reorganization- under section 418, the same no-
tice and opportunity shall be provided to the
Pension Benefit Guaranty Corporation.

(e) Liability for tax

(1) In general

Except as provided in paragraph (2), the
tax imposed by subsection (a) or (b) shall
be paid by the employer responsible for con-
tributing to or under the plan the amount
described in section 412(b) (3) (A).

(2) Joint and several liability where em-
ployer member of controlled group

(A) In general

In the case of a plan other than a
multiemployer plan, if the employer re-
ferred to in paragraph (1) is a mem-
ber of a controlled group, each member
of such group shall be jointly and sev-
erally liable for the tax imposed by
subsection (a) or (b).

(B) Controlled group

For purposes of subparagraph (A),
the term "controlled group" means any
group treated as a single employer un-
der subsection (b), (c), (m) or (o)
of section 414.
 
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*U.S. GOVERNMENT PRINTING OFFICE; 1995 587147 20104