Court Opinion

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Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

1-17-1997

In Re Michael Kaplan
Precedential or Non-Precedential:

Docket 95-5409,96-5180

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Recommended Citation
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         UNITED STATES COURT OF APPEALS

            FOR THE THIRD CIRCUIT

                 ___________

           Nos. 95-5409 and 96-5180

                 ___________

IN RE:   MICHAEL KAPLAN; MORRIS KAPLAN

                      Debtors

THE INTERNAL REVENUE SERVICE

                vs.

MICHAEL KAPLAN; MORRIS KAPLAN,

                      Appellants in No. 95-5409

          (D.C. Civ. No. 94-cv-05656)

IN RE:   KAPLAN BUILDING SYSTEMS, INC.

                      Debtor

                      1
          INTERNAL REVENUE SERVICE

                           vs.

          KAPLAN BUILDING SYSTEMS, INC.,

                                   Appellant in No. 96-5180

                     (D.C. Civ. No. 95-cv-04331)

                             ___________

          Appeal from the United States District Court

                    for the District of New Jersey

                             ___________

                                 Argued

                           December 10, 1996

    Before:     BECKER, MANSMANN and GREENBERG, Circuit Judges.

                       (Filed January 17, 1997)

                             ___________

Robert A. Baime, Esquire    (ARGUED)

Dechert, Price & Rhoads

Princeton Pike Corporate Center

P.O. Box 5218

Princeton, N.J.    08563

                                   2
Joel H. Levitin

Debra D. O'Gorman

Dechert, Price & Rhoads

477 Madison Avenue

New York, NY   10022

  COUNSEL FOR APPELLANTS

Loretta C. Argrett

Assistant Attorney General

Thomas Linguanti, Esquire (ARGUED)

Gary R. Allen, Esquire

David English Carmack, Esquire

Linda E. Mosakowski, Esquire

United States Department of Justice

Tax Division

P.O. Box 502

Washington, DC    20044

  COUNSEL FOR APPELLEE

Faith S. Hochberg

United States Attorney

  OF COUNSEL FOR APPELLEE

                                 3
                             ___________

                        OPINION OF THE COURT

                             __________

MANSMANN,   Circuit Judge.

            In this appeal, we are presented with two decisions of

the district court dated May 18, 1995, and February 20, 1996,

which reversed the orders of the bankruptcy court on two related

bankruptcy cases.   We are asked to decide whether the district

court erred in determining that the bankruptcy court was not

authorized to compel the Internal Revenue Service to reallocate

tax payments first to trust fund taxes.    We find that neither 11

U.S.C. § 105 nor the Supreme Court's decision in United States v.

Energy Resources Co., Inc., 495 U.S. 545 (1990), authorized the

bankruptcy court to order the Internal Revenue Service to

reallocate tax payments under the particular facts here.

Accordingly, we will affirm the decisions of the district court.

                                 I.

            We feel compelled to set forth the facts in detail

because these bankruptcy cases are so heavily fact-intensive.

            This consolidated appeal arises from two separate but

related Chapter 11 bankruptcy petitions filed by Michael and

Morris Kaplan and Kaplan Building Systems, Inc. ("KBS").     KBS

is a Pennsylvania corporation formed for the sole purpose of

acquiring and operating a modular home manufacturing business.

                                 4
Two brothers, Michael and Morris Kaplan, organized KBS and, at

all relevant times, were its sole owners.       During 1990, KBS made

only one payment of employment taxes in the approximate amount of

$200,000.    That payment was not accompanied by a quarterly

return.   For the four quarters of 1990, KBS failed to file timely

returns and to pay to the United States approximately $2 million

in federal employment taxes.    Of this amount, $1,564,468 were

"trust fund" taxes.1

            On February 11, 1991, Michael and Morris Kaplan filed

two separate Chapter 11 petitions with the United States

Bankruptcy Court for the District of New Jersey, which were later

consolidated.   KBS did not file for bankruptcy at that time.

Although the Kaplans owned or were partners in approximately 89

entities including KBS, they wanted to avoid preparing petitions

and paying filing fees with respect to each of the entities.       The

Kaplans thus sought an injunction under 11 U.S.C. § 105 to enjoin

specific creditors from instituting civil actions against the

"non-filing" Kaplan businesses.       Although a number of KBS's other

creditors were named in the injunctions, the IRS was not one of

the defendant-creditors named in the orders, nor did the IRS

participate in the matter.2    Invoking its powers under section

1.        Trust fund taxes refer to the employees' share of FICA
and FUTA taxes required to be withheld by the employer and held
in trust for the federal government pursuant to 26 U.S.C. §
7501(a). Under I.R.C. § 6672, the IRS may collect unpaid trust
fund taxes directly from the employer's officers or employees who
are responsible for collecting the tax. These individuals are
commonly referred to as "responsible persons."

2.        In their Brief in Support of Debtors' Motion to Compel
the Internal Revenue Service to Reallocate Certain Payments, the
Kaplans indicated that, at some later time but prior to June 15,

                                  5
105, the bankruptcy court enjoined all of the named defendant-

creditors from proceeding to litigate claims against the non-

filing Kaplan entities.    The injunction dissolved ninety days

after the effective date of the Kaplans' plan of reorganization.

          In March of 1991, KBS filed its employment tax returns

for the four quarters of 1990 and the corresponding taxes were

assessed against KBS.    In lieu of instituting formal collection

proceedings against KBS, the revenue officer determined that KBS

could make installment payments to satisfy the debts, provided

the Kaplans executed Forms 2751--Proposed Assessment of 100

Percent Penalty--and consented to the assessment and collection

of a responsible person's penalty in connection with KBS's unpaid

trust fund taxes for 1990.    The Kaplans executed the necessary

forms, thereby agreeing that the responsible person penalty could

be assessed against them on or before December 31, 1995.

          KBS and the IRS entered into two installment

agreements.   The first installment agreement provided that KBS

would pay the IRS $30,000 per month from October, 1991 through

December, 1991; $35,000 per month from January, 1992, through

March, 1992; $40,000 per month from April through June, 1992; and

$50,000 from July, 1992, until December, 1994, when the balance

would be paid in full.    Although the installment agreement

contained several conditions, it did not address the allocation
(..continued)
1993, the IRS filed a proof of claim asserting an unliquidated
KBS tax liability against the Kaplans in their individual
bankruptcies. The Kaplans filed a motion to expunge the IRS's
claim, giving actual notice to the IRS; the IRS did not oppose.
Consequently, the bankruptcy court entered an order on June 15,
1993, expunging the IRS's claim.

                                 6
of payments.    By the end of 1993, KBS defaulted on the first

installment agreement.

            A second installment agreement was drawn up in May,

1994, which required KBS to make monthly payments of $60,000 from

July of 1994 to March of 1995, and $100,000 from April of 1995

until the debt was paid in full.       The installment agreement form,

which had been revised in January, 1993, provided as one of the

conditions that "[a]ll payments will be applied in the best

interest of the United States."       On May 27, 1994, the general

counsel for the Kaplan companies wrote to the revenue officer

advising him that before executing the installment agreement, KBS

deleted the language on the form providing that payments will be

applied in the best interest of the United States.       The revenue

officer informed KBS's counsel that the agreement could not be

accepted by the IRS with the deletion of this condition.      KBS

reversed the deletion, but reserved its right to further contest

this allocation.    The IRS executed the second installment

agreement on July 6, 1994 and KBS made payments through at least

September of 1994.    The Kaplans claim they have personally funded

KBS's tax liability payments in an amount in excess of $1

million.

            On January 29, 1993, the bankruptcy court confirmed the

Kaplans' first amended plan of reorganization.       The confirmed

plan dealt with some debts against the non-filing Kaplan

entities.    With respect to tax claims against KBS, the plan

provided:
Notwithstanding anything in this Plan to the contrary,
          Tax Claims against Kaplan Building Systems,

                                  7
          Inc. shall be paid in accordance with and
          pursuant to installment agreements with
          Internal Revenue Service.3

          On July 29, 1994, the Kaplans filed a motion in their

individual bankruptcy cases to compel the IRS to reallocate the

tax payments made by KBS (but funded by the Kaplans) to trust

fund obligations.4 Without such reallocation, the Kaplans remain

liable for 100% of KBs's unpaid trust fund taxes.   The bankruptcy

court held a hearing at which the Kaplans argued that because

reallocating the payments to KBS's trust fund liabilities would

"enhance the probability the Kaplans will fully consummate their

confirmed Plan which requires payments to be made to creditors

over time," the bankruptcy court has the authority to and should

compel the IRS to change the allocation of KBS's payments that

had been funded by the Kaplans, based on the Supreme Court's

holding in United States v. Energy Resources Co., Inc., 495 U.S.
545 (1990).   The government opposed the motion, asserting that

Energy Resources was inapposite here because the corporation was

not a debtor in the Kaplans' bankruptcy proceedings and whatever

the effect on KBS, the allocation of tax payments would not

affect the reorganization of the Kaplans, who were the only

debtors in the case.   The bankruptcy court concluded that this

case was completely analogous to Energy Resources, even though

3.        Article III, Section 3.1(B)(ii) of Debtors' First
Amended Joint Plan of Reorganization.

4.        The KBS tax payments were made prior to the execution
of the first installment agreement; these payments were also made
pursuant to the first and second installment agreement s. Thus,
the time period involved runs from 1990 to September, 1994.

                                8
the structure here was not a textbook structure.     Because it

found that the reallocation of KBS's taxes was necessary for the

Kaplans' reorganization, the bankruptcy court entered an order

directing the IRS to reallocate the prior payments to trust fund

taxes.

          The IRS appealed the bankruptcy court's order to the

district court.     On May 18, 1995, the district court issued an

order reversing the decision of the bankruptcy court, finding

that because KBS was not a debtor in bankruptcy, the bankruptcy

court was not authorized to order the IRS to reallocate payments

made by KBS.     The district court noted that unlike Energy

Resources, the bankruptcy court here lacked jurisdiction over KBS

and, therefore, was without the power to order reallocation of

the tax payments under 11 U.S.C. §§ 1123, 1129 and 105, as those

sections were not applicable.     The district court further held

that the bankruptcy court could order retroactive allocation of

tax payments.5    In dicta, the district court commented that KBS

could file its own Chapter 11 petition, thereby subjecting itself

to the bankruptcy court's jurisdiction.     The Kaplans filed a

timely appeal to this court, which was stayed on September 12,

1995, pending the district court's ruling on the same issue in

the KBS bankruptcy case.

5.        In support of this holding, the district court cited In
re Deer Park, Inc., 10 F.3d 1478 (9th Cir. 1993); In re Flo-
Lizer, Inc., 164 B.R. 79 (Bankr. S.D. Ohio 1993), aff'd, 164 B.R.
749 (S.D. Ohio 1994); and In re M.C. Tooling Consultants, 165
B.R. 590 (Bankr. D.S.C. 1993).

                                  9
          On June 2, 1995, KBS filed its own bankruptcy petition

under Chapter 11 of the Bankruptcy Code.    On that same date, KBS

filed several motions with the bankruptcy court, one of which

asked the court to compel the IRS to reallocate the tax payments

funded by the Kaplans on behalf of KBS to trust fund taxes.    KBS

argued that reallocation of the tax payments was necessary for

its successful reorganization, in that it would induce the

Kaplans to provide KBS with new emergency funding necessary for

the continued operation of KBS.    The IRS opposed the motion on

the basis that the bankruptcy court lacked authority to

reallocate, arguing that all of the payments at issue had been

made pre-petition and that the debtor had failed to designate the

manner in which they were to be applied.    The IRS applied the

payments in accordance with IRS written policy, which requires

that payments received be applied in a manner consistent with the

best interests of the government, unless otherwise designated.

          Having determined that it had jurisdiction over KBS,

the bankruptcy court considered whether it had the authority to

compel the IRS to reallocate the tax payments under Energy

Resources.   Concluding that the reallocation was necessary to

KBS's successful reorganization, the bankruptcy court entered an

order, with retroactive effect, directing the IRS to reallocate

the tax payments made by KBS to trust fund taxes.

          The IRS appealed that order to the district court.       In

reversing the decision of the bankruptcy court, the district

court held that the Supreme Court's holding in Energy Resources
did not displace the rule of law that the IRS may designate

                                  10
voluntary payments in its best interests when the debtor fails to

make a designation.   Having found that KBS never designated the

manner in which its tax payments would be allocated, the district

court found that the IRS was free to apply the tax payments

towards KBS's outstanding corporate income tax.

           On March 20, 1996, KBS filed a notice of appeal of the

district court's order and moved to consolidate the KBS appeal,

No. 96-5180, with the appeal in the Kaplans' bankruptcies, No.

95-5409.   We granted that motion and consolidated the cases on

June 10, 1996.   We have jurisdiction over these consolidated

appeals pursuant to 28 U.S.C. §§ 158(d) and 1291.

                                11
                                   II.

           At the core of the district court's ruling in the

Kaplans' bankruptcy cases stands its finding that the bankruptcy

court lacked jurisdiction over KBS.       Thus, we turn initially to

the issue of whether the bankruptcy court had jurisdiction over

KBS in the Kaplans' bankruptcy cases.       We begin our analysis by

examining 28 U.S.C. § 1334.

           Section 1334(b) provides in relevant part that "the

district courts shall have original but not exclusive

jurisdiction of all civil proceedings arising under title 11, or

arising in or related to cases under title 11."       28 U.S.C. §

1334(b) (1990).    The bankruptcy courts, in turn, obtain

jurisdiction by operation of 28 U.S.C. § 157, which allows the

district courts to refer, to the bankruptcy courts, cases over

which the district courts have jurisdiction pursuant to section

1334.   Quattrone Accountants, Inc. v. Internal Revenue Service,

895 F.2d 921, 926 n.3 (3d Cir. 1990).

           We have held that in a case involving non-debtors, the

bankruptcy court's jurisdiction is to be determined solely by 28

U.S.C. § 1334(b).    Id. at 926.   The Sixth Circuit has agreed with

our conclusion.    In re Wolverine Radio Co., 930 F.2d 1132, 1140

(6th Cir. 1991).    But cf. United States v. Huckabee Auto Co., 783
F.2d 1546, 1549 (11th Cir. 1986).6       The dispute at issue here

6.        In United States v. Huckabee Auto Co., 783 F.2d 1546,
1549 (11th Cir. 1986), the court of appeals refused to extend the
jurisdiction of the bankruptcy court to the section 6672
liabilities of the taxpayers who were not debtors under the
Bankruptcy Code. The court found that because the liability
imposed under section 6672 was separate and distinct from that
levied on the employer under sections 3102 and 3402 of the

                                   12
arose between KBS and the IRS, two non-debtors, which the Kaplans

are attempting to bring within the jurisdiction of the bankruptcy

court as a proceeding7 related to their Chapter 11 bankruptcy

case.   Thus, we must turn to the meaning of the terms, "related

to," in light of our explanation in Quattrone Accountants and

Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984).

           In Quattrone Accountants, we were asked to decide

whether, inter alia, the bankruptcy court had jurisdiction

pursuant to 28 U.S.C. § 1334 and 11 U.S.C. § 5058 to determine a
(..continued)
Internal Revenue Code, it was irrelevant that the section 6672
liability, if assessed against the responsible persons, would
adversely affect the corporate debtor's reorganization. Id. at
1548-49 (citations omitted).

          In Huckabee Auto, the corporation was the debtor and
taxpayer; here, the situation is reversed: the responsible
persons, i.e., the Kaplans, are the debtors and the corporation,
a non-debtor, is the taxpayer. In addition, the court of appeals
in Huckabee Auto failed to consider the bankruptcy court's
jurisdiction under 28 U.S.C. § 1334(b).

7.        The dispute between the IRS and KBS constitutes a civil
"proceeding" as that term is used in 28 U.S.C. § 1334.
Proceeding "is used in a broad sense, referring to `[a]nything
that occurs within a case,' including contested and uncontested
matters." Melodie Freeman-Barney, Notes and Comments,
Jurisdiction Under the Bankruptcy Amendments of 1984: Summing Up
the Factors, 22 Tulsa L.J. 167, 180 (1986) (citing Collier on
Bankruptcy (MB ¶ 3.01[1][c][ii] (15th ed. 1986)). The
legislative history to the Bankruptcy Reform Act of 1978 confirms
that the term "proceeding" should be broadly interpreted. H.R.
Rep. No. 598, 95th Cong., 2d Sess. (1978), reprinted in 1978
U.S.C.C.A.N. 5963, 6400-6401.

8.         Section 505(a)(1) provides in relevant part:

. . . the court may determine the amount or legality of
          any tax, any fine or penalty relating to a
          tax, or any addition to tax, whether or not
          previously assessed, whether or not paid, and
          whether or not contested before and
          adjudicated by a judicial or administrative
          tribunal of competent jurisdiction.

                                13
non-debtor's tax liability under section 6672 of the Internal

Revenue Code.   Concluding that section 505 did not address a

situation involving non-debtors9 and, therefore, neither limited

nor granted jurisdiction, we turned to section 1334 to resolve

the issue of the bankruptcy court's jurisdiction. 895 F.2d at

925-26.

          We examined the "related to" language of section 1334

by looking at our previous explanation of those terms in Pacor,

Inc. v. Higgins, supra.10   In Pacor, we explained that under
section 1334, a civil matter is "related to" a bankruptcy

proceeding when "the outcome of that proceeding could conceivably

have any effect on the estate being administered in bankruptcy."
743 F.2d at 994 (citations omitted).   We then stated that "[a]n

action is related to bankruptcy if the outcome could alter the

debtor's rights, liabilities, options, or freedom of action

(either positively or negatively) and which in any way impacts

upon the handling and administration of the bankrupt estate."

Id.   Our analysis of the "related to" language of section 1334(b)

9.        The IRS assessed a section 6672 responsible person
penalty against the debtor, Quattrone Accountants, for failing to
pay withholding taxes on behalf of its client, United Dairy
Farmers Cooperative Association (UDF). Philip Quattrone, part
owner and principal officer of the debtor, filed a complaint
requesting the bankruptcy court to determine his section 6672 tax
liability, as well as that of the debtor.

10.       In Pacor, we held that a personal injury suit in which
the defendant filed a third party claim seeking indemnification
against the debtor, JohnsManville, was not related to the
JohnsManville bankruptcy, reasoning that the outcome of the
original personal injury action would not bind JohnsManville
until a third party action was actually brought and tried. 743
F.2d at 995.

                                 14
was followed by the Supreme Court in Celotex Corp. v. Edwards,

___ U.S. ___, 115 S. Ct. 1493, 1498-99 (1995).

          Applying these decisions to the facts of this case, we

conclude that the dispute between the IRS and KBS is related to

the Kaplans' bankruptcy proceeding.     Here the debtors, Michael

and Morris Kaplan, agreed to section 6672 responsible person

liability, in effect guaranteeing that KBS's trust fund taxes

would be paid in full.   By virtue of their agreement with the

IRS, if KBS failed to pay its trust fund taxes in full, the

Kaplans would automatically be liable for the shortfall.     If the

IRS is allowed to allocate the pre-petition tax payments it

received to non-trust fund taxes, there is no effect on the

Kaplans -- they are still 100% liable for the shortfall.     If,

however, the IRS is not permitted to designate how the payments

will be applied, and the bankruptcy court is allowed to order the

IRS to allocate the pre-petition payments to trust fund taxes

first, then the Kaplans' responsible persons liability is reduced

to the extent that the trust fund tax liability of KBS is

likewise reduced.   Thus, the outcome of the dispute between KBS

and the IRS could conceivably affect, in a positive manner, the

Kaplans' estate in bankruptcy.

          We find, therefore, that the bankruptcy court had

jurisdiction over the dispute between KBS and the IRS.

                                 III.

          Although we have determined that the bankruptcy court

had jurisdiction over the non-debtors pursuant to section 1334,

                                 15
our inquiry does not end there.11     Notwithstanding the bankruptcy

court's jurisdiction, we must examine whether the bankruptcy

court was authorized to issue the order to compel allocation of

tax payments under the broad grant of equitable powers in 11

U.S.C. § 105.12

          Section 105(a) states in pertinent part:
          The court may issue any order, process, or
          judgment that is necessary or appropriate to
          carry out the provisions of this title.13

That the bankruptcy court has the power under section 105 to

enjoin creditors from proceeding in a state court against third

parties where failure to enjoin would affect the bankruptcy

estate has been recognized by numerous bankruptcy courts and two

courts of appeals.14   Moreover, the Supreme Court in Energy

11.       We note that while the district court found incorrectly
that the bankruptcy court lacked jurisdiction over KBS in the
Kaplans' bankruptcy, this error is not fatal to its decision.

12.       In In re Cardinal Industries, Inc., 109 B.R. 748, 752
(Bankr. S.D. Oh. 1989), the bankruptcy court held that
jurisdiction under section 1334 was not sufficient by itself to
determine whether an injunction should issue; but rather, the
court must examine, under 11 U.S.C. § 105(a), whether the usual
standards for injunctive relief are met.

13.       The legislative history to section 105 is sparse. The
House Report states merely that section 105 is similar in effect
to the All Writs Statute, 28 U.S.C. § 1651. H.R. Rep. 595, 95th
Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 6273. The
legislative history further provides that section 105 authorizes
a court of the United States to stay a state court action. Id.
at 6274.

14.       In re Monroe Well Service, Inc., 67 B.R. 746, 750-51
(Bankr. E.D.Pa. 1986); In re Otero Mills, 25 B.R. 1018, 1021-1022
(D.N.M. 1982); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002
(4th Cir.), cert. den., 479 U.S. 876 (1986). See also, National
Labor Relations Board v. Superior Forwarding, Inc., 762 F.2d 695,
698 (8th Cir. 1985) (Bankruptcy court is empowered under section
105 to enjoin federal regulatory proceedings when those
proceedings would threaten the assets of the debtor's estate).

                                 16
Resources found the Bankruptcy Code implicitly authorized the

bankruptcy courts to approve reorganization plans designating tax

payments as either trust fund or non-trust fund, based on the

bankruptcy courts' residual authority to approve reorganization

plans under section 1123(b)(5) and 1129 of the Bankruptcy Code,

and on the statutory directive of section 105. 495 U.S. at 549.

            Energy Resources involved two corporations which filed

petitions for reorganization under Chapter 11 of the Bankruptcy

Code:    Newport Offshore, Ltd. (Newport) and Energy Resources Co.,

Inc. (Energy Resources).    In the Newport bankruptcy, the IRS

objected unsuccessfully to a provision in the reorganization plan

which stated that Newport's tax payments would be applied to

extinguish all trust fund tax liabilities prior to paying the

non-trust fund portion of the tax liability.     The IRS appealed to

the district court, which reversed the decision of the bankruptcy

court.    The debtor appealed to the Court of Appeals for the First

Circuit.

            In the Energy Resources bankruptcy case, the bankruptcy

court approved a reorganization plan which created a special

trust to fund the corporation's federal tax liability.     When the

IRS refused to apply a tax payment out of the special trust to

Energy Resources' trust fund taxes, the trustee successfully

petitioned the bankruptcy court to order the IRS to allocate the

payment to trust fund taxes.    The IRS appealed this order to the

district court, which affirmed the bankruptcy court.     The IRS

then filed an appeal to the Court of Appeals for the First

                                 17
Circuit.   The Newport and Energy Resources cases were

consolidated on appeal.

           The court of appeals reversed in In re Newport Offshore

Ltd. and affirmed in In re Energy Resources Co.15   Initially, the

court of appeals examined the characterization of tax payments

made pursuant to a Chapter 11 reorganization plan as "voluntary"

or "involuntary."16   Although the court of appeals concluded that

the payments were involuntary, deferring to the IRS's

interpretation of its own rules, it held that the "Bankruptcy

Courts nevertheless had the authority to order the IRS to apply

an `involuntary' payment made by a Chapter 11 debtor to trust

fund tax liabilities if the Bankruptcy Court concluded that this

designation was necessary to ensure the success of the

reorganization." 871 F.2d at 230-34.

           The Supreme Court affirmed the judgment of the court of

appeals, holding that regardless of whether the payments are

properly characterized as "involuntary", a bankruptcy court has

the authority to order the IRS to apply tax payments made by

Chapter 11 debtor corporations to trust fund liabilities if the

15.       In re Energy Resources Co., Inc., 871 F.2d 223 (1st
Cir. 1989).

16.       IRS policy allows taxpayers who "voluntarily" pay their
tax liability to designate the manner in which the tax payments
will be applied. Energy Resources, 495 U.S. at 548 (citations
omitted). Traditionally, a tax payment has been considered
"involuntary" when it is made to "agents of the United States as
a result of distraint or levy or from a legal proceeding in which
the Government is seeking to collect its delinquent taxes or file
a claim therefor." United States v. Pepperman, 976 F.2d 123, 127
(3d Cir. 1992) (citing Amos V. Commissioner, 47 T.C. 65, 69
(1966)).

                                 18
bankruptcy court determines that this designation is necessary to

the success of a reorganization plan. 495 U.S. at 548-49.     To

find such authority for the bankruptcy court, the Court looked to

sections 1123, 1129, and 105 of the Bankruptcy Code.     Under

sections 1123(b)(5) and 1129, the Court found that the Code

"grant[ed] the bankruptcy courts residual authority to approve

reorganization plans including `any . . . appropriate provision

not inconsistent with the applicable provisions of this title.'"

Id. at 549.    Turning to section 105, the Court noted that the

Code also provides that bankruptcy courts may "`issue any order,

process, or judgment that is necessary or appropriate to carry

out the provisions' of the Code."    Id. (citing 11 U.S.C. §

105(a)).   The Court further noted that these "statutory

directives are consistent with the traditional understanding that

bankruptcy courts, as courts of equity, have broad authority to

modify creditor-debtor relationships."    Id.   (citations omitted).

           The Court rejected the government's argument that

bankruptcy court orders directing allocation to trust fund taxes

conflict with sections 507(a)(7), 523(a)(1)(A), 1129(a)(11), and

1129(a)(9)(C) of the Bankruptcy Code, provisions which protect

the government's ability to collect delinquent taxes.      The Court

found that the restrictions in those sections of the Code do not

address the bankruptcy court's ability to designate whether tax

payments are to be applied to trust fund or non-trust fund tax

liabilities and, thus, did not preclude the court from issuing

the type of orders involved here.    Id. at 550.

                                19
            The Court found equally unpersuasive the government's

argument that it stands in a better position to have all of its

debt discharged if the debtor corporation's tax payments are

first applied to non-trust fund taxes because the debt that is

not guaranteed will be paid off first.      The Court stated that

while from the government's viewpoint this result is more

desirable, it is an added protection not provided for in the Code

itself.    Id.   Finally, the government contended that the

bankruptcy court's orders contravened section 6672 of the

Internal Revenue Code, which permits the IRS to collect unpaid

trust fund taxes directly from the "responsible" individuals.

The government reasoned that if the IRS cannot designate a debtor

corporation's tax payments as non-trust fund, the debtor might

only be able to pay the guaranteed debt, leaving the government

at risk for non-trust fund taxes.      Discarding this argument as

well, the Supreme Court found that section 6672, by its terms,

does not protect against this eventuality.      Id. at 551.

            Despite the Supreme Court's finding that the residual

authority of the bankruptcy court under sections 1123, 1129 and

105(a) authorized the reallocation of tax payments, Energy
Resources does not change the result here.      The facts in the

Kaplans' bankruptcy cases simply do not provide the bankruptcy

court with the authority to grant the relief sought by the

Kaplans.    First and foremost, KBS, the taxpayer, was not the

debtor.    Indeed, we agree with the IRS that Energy Resources does

not reach the situation where a third party might benefit:      the

Kaplans could not be deemed necessary to the success of KBS's

                                  20
plan because at the time the payments were made, KBS did not have

a reorganization plan.17   In addition, as KBS was not a debtor

prior to June 1995, the IRS was not afforded the usual

protections in a Chapter 11 reorganization:    a priority for

specified tax claims, including trust fund taxes, and a provision

making these tax debts nondischargeable, 11 U.S.C. §§ 507(a)(7),

523(a)(1)(A); the requirement that the bankruptcy court assure

itself that the reorganization will succeed, 11 U.S.C. §

1129(a)(11), making it more likely that the IRS will collect the

tax liability; and a provision that the tax debt must be paid off

within six years, 11 U.S.C. § 1129(a)(9)(C).

          As we stated in Pepperman, "the Court in Energy

Resources consistently linked its holding with the fact of

reorganization and the debtor's need for rehabilitation." 976
F.2d at 130.   Because KBS had not filed its own Chapter 11

petition, the bankruptcy court did not have before it all of the

17.       Although KBS and some of its creditors were being
reorganized under the Kaplans' bankruptcies, the IRS was not
listed as a creditor of KBS in the schedule of defendants in the
section 105 stay litigation. Moreover, the Kaplans'
reorganization plan provided that the tax claims against KBS
would be paid in accordance with the installment agreements with
the IRS. We note, however, that these installment agreements
were voluntary agreements which KBS could, and eventually did,
default on. The fact that the Kaplans never sought the
bankruptcy court's intervention with regard to the IRS's tax
claims against KBS and, indeed, specifically provided in their
plan that the normal rule pertaining to payment of allowed tax
claims (i.e., allowed tax claims must be paid in full within
fifteen days after the effective date of the plan or, pursuant to
11 U.S.C. § 1129(a)(9)(C), paid in full over six years from the
earlier of the assessment date or plan effective date), did not
apply to the IRS's tax claims against KBS, mandates the
conclusion that the bankruptcy court lacked authority to order
the reallocation of KBS's tax payments.

                                 21
claims and, therefore, could not have made an appropriate

determination as to whether the KBS reorganization was likely to

succeed.   Since this determination is a prerequisite to the

Court's holding in Energy Resources, the bankruptcy court lacked

the authority to order the IRS to reallocate tax payments in the

Kaplans' bankruptcies.   We observed in Pepperman that "section

105 does not `give the court the power to create substantive

rights that would otherwise be unavailable under the Code,'"

noting that Energy Resources does nothing to undermine this

observation. 976 F.2d at 131 (citations omitted).   Further,

"`[t]he fact that a [bankruptcy] proceeding is equitable does not

give the judge a free-floating discretion to redistribute rights

in accordance with his [or her] personal views of justice and

fairness, however enlightened those views may be.'"    Id. (quoting

Matter of Chicago, Milwaukee, St. Paul & Pac. R.R., 791 F.2d 524,

528 (7th Cir. 1986)).

           Because KBS, the taxpayer, was not a debtor under the

facts here,18 the bankruptcy court was precluded from making an

appropriate determination regarding the likelihood of KBS's

successful reorganization as required by Energy Resources.     We

hold, therefore, that the bankruptcy court lacked authority under

section 105 to order the IRS to allocate KBS's tax payments in

the Kaplans' bankruptcy.

18.       The IRS did not file a proof of claim against KBS in
the Kaplans' bankruptcies. KBS was organized as a corporation,
not a partnership. As a separate legal entity, KBS, in order to
avail itself of the full protections and powers of the bankruptcy
court, must itself be a debtor. See, In re FTL, Inc., 152 B.R.
61 (Bankr. E.D. Va. 1993). The tax payments at issue were pre-
petition and not made pursuant to a reorganization plan.

                                22
                                IV.

           Likewise in KBS's bankruptcy, we are compelled to find

that the bankruptcy court lacked authority under section 105 to

order the IRS to reallocate tax payments to trust fund taxes

first.   The broad powers granted to the bankruptcy court under

section 105 are insufficient alone to authorize a retroactive

allocation of pre-petition tax payments.   Pepperman, 976 F.2d at

131 ("section 105 does not `give the court the power to create

substantive rights that would otherwise be unavailable under the

Code.'") (citations omitted).   The bankruptcy court's equitable

powers under section 105 are not triggered where, like the

situation before us, the requirements of Energy Resources have

not been met.19   Indeed, since a reorganization plan was not

filed in the KBS bankruptcy, the bankruptcy court had no basis

upon which to exercise its equitable authority under section

105.20

           We agree with the following inquiry set forth by the

Court of Appeals for the First Circuit to be made by the
19.        When the bankruptcy court here determined that
reallocation was necessary to the successful reorganization of
KBS, it did not have before it a plan of reorganization. In
Energy Resources, a reorganization plan existed under 11 U.S.C.
§§ 1123 and 1129. In that situation, the bankruptcy court has
the authority to oversee the reorganization and, under § 105, has
the equitable power to do what is necessary to get the plan
confirmed.

20.       Thus, the bankruptcy court could not have assured
itself, as it was required to do under 11 U.S.C. § 1129(a)(11),
that the reorganization plan would succeed; and that the debtor
would take no more than six years within which to structure the
tax payments, 11 U.S.C. § 1129(a)(9)(C).

                                 23
bankruptcy court when assessing whether reallocation for tax

payments is necessary to the successful reorganization of the

debtor:
upon consideration of the reorganization plan as a
          whole, in so far as the particular structure
          or allocation of payments increases the risk
          that the IRS may not collect the total tax
          debt, is that risk nonetheless justified by
          an offsetting increased likelihood of
          rehabilitation, i.e., increased likelihood of
          payment to creditors who might otherwise lose
          their money?

In re Energy Resources Co., Inc., 871 F.2d at 234.   It is clear

from the record that the bankruptcy court in KBS's case did not

undertake to perform this analysis.   Thus, the holding by the

Supreme Court in Energy Resources, which clearly took into

consideration the existence of a reorganization plan, does not

control the resolution of this case.21

          We further note that all of the cases cited by KBS in

support of retroactive allocation are factually distinguishable

as they involved post-petition, post-confirmation tax payments.22

 Appellants do not cite any authority which would support a

retroactive allocation involving pre-petition payments not made

21.       The fact that the IRS had not challenged the bankruptcy
court's determination that reallocation was necessary for a
successful reorganization is not dispositive here, as that
determination was prematurely reached.

22.       In addition to Energy Resources, the appellants rely on
In re Deer Park, Inc., 10 F.3d 1478 (9th Cir. 1993), and In re
Flo-Lizer, Inc., 164 B.R. 79 (Bankr. S.D. Ohio 1993),
to support their contention that the allocation order may be
applied retroactively. In all three of these cases, the tax
payments at issue were made post-petition, pursuant to an
approved plan of reorganization.

                                24
pursuant to a reorganization plan.     Moreover, in asking us to

approve the retroactive allocation of pre-petition tax payments,

KBS is, in effect, asking us to extend the time applicable to

preferential transfers under 11 U.S.C. § 547 well beyond that

allowed by the Bankruptcy Code.    We find no basis in the

Bankruptcy Code or other legal authority which would justify this

treatment.   Accordingly, we find that retroactive allocation of

pre-petition tax payments is not permitted.23

                 Because we find that Energy Resources does not

apply here, we must turn to the common law regarding voluntary

payments.    The parties have agreed that the tax payments at issue

were made voluntarily.   "IRS policy has long permitted a taxpayer

who `voluntarily' submits a payment to the IRS to designate the

tax liability . . . to which the payment will apply."    In re

Energy Resources Co., Inc., 871 F.2d at 227 (citing Rev. Rul. 79-

284, 1979-2 C.B. 83; Slodov v. United States, 436 U.S. 238

(1978)) (other citations omitted); Pepperman, 976 F.2d at 127.

This policy reflects the generally recognized common law rule

between debtors and creditors that "the debtor may indicate which

debt it intends to pay when it voluntarily submits a payment to a

creditor, but may not dictate the application of funds that the

creditor involuntarily collects from it."    Pepperman, 976 F.2d at
127 (citing O'Dell v. United States, 326 F.2d 451, 456 (10th Cir.

1964)) (citation omitted).

23.       To the extent that the district court in the Kaplans'
bankruptcy cases ruled that retroactive allocation was allowed,
that conclusion constitutes legal error.

                                  25
           The long-standing policy of the IRS with regard to

voluntary payments is reflected in IRS Policy Statement P-5-60,

which provides:
In determining the amount of the 100 percent penalty to
          be assessed in connection with employment
          taxes, any payment made on the corporate
          account involved is deemed to represent
          payment of the employer portion of the
          liability (including assessed and accrued
          penalty and interest) unless there was some
          specific designation to the contrary by the
          taxpayer. The taxpayer, of course, has no
          right of designation in the case of
          collections resulting from enforced
          collection measures. To the extent partial
          payments exceed the employer portion of the
          tax liability, they are considered as being
          applied against the trust fund portion of the
          assessment.

1 Administration, CCH Internal Revenue Manual at 1305-15 (Mar.

1981).   Rev. Rul. 79-284, 1979-2 C.B. 83, was promulgated in

agreement with this policy.   Kinnie v. United States, 771 F. Supp.
842, 853 (E.D. Mich. 1991), aff'd, 994 F.2d 279 (6th Cir. 1993).

 Rev. Rul. 79-284, modifying Rev. Rul. 73-305,24 1973-2 C.B.43,

states that a taxpayer must provide specific written instructions

24.       Rev. Rul. 73-305, which provides that where no specific
instructions are given by the taxpayer as to the application of a
partial tax payment, the amount of the payment will be applied to
tax, penalty, and interest, in that order, did not apply to
withheld employment taxes. Rev. Rul. 79-284 made Rev. Rul. 73-
305 applicable to withheld employment taxes by providing:

Rev. Rule 73-305 applies to withheld employment taxes .
          . . where the taxpayer provides specific
          written instructions for the application of a
          voluntary partial payment. If no designation
          is made by the taxpayer, the Internal Revenue
          Service will allocate partial payments of
          withheld employment taxes . . . in a manner
          serving its best interest.

                                26
for the application of a voluntary partial payment of withheld

employment taxes.

           Revenue rulings are entitled to great deference, but

courts may disregard them if they conflict with the statute they

purport to interpret or its legislative history, or if they are

otherwise unreasonable.   Geisinger Health Plan v. C.I.R., 985
F.2d 1210, 1216 (3d Cir. 1993) (citations omitted); Kinnie v.

United States, 994 F.2d 279, 286 (6th Cir. 1993); Amato v.

Western Union Intern, Inc., 773 F.2d 1402, 1411 (2d Cir. 1985);

Certified Stainless Services, Inc. v. United States, 736 F.2d
1383, 1386 (9th Cir. 1984).    The Court of Appeals for the Sixth

Circuit in Kinnie specifically found that the IRS's

interpretation of Rev. Rul. 79-284 was not unreasonable, nor did

it conflict with any specific statute. 994 F.2d at 287.    The

court of appeals further found that requiring the designation to

be in writing serves an important purpose:     it prevents

litigation over various oral statements and understandings.      Id.

 Accordingly, the court upheld the IRS's application of voluntary

tax payments in the best interest of the government absent a

written instruction from the taxpayer.   Id.    See also, Slodov v.

United States, 436 U.S. 238, 252 n. 15 (1978) (acknowledging IRS

Policy Statement P-5-60 prevails unless the government is

notified in writing that taxes are to be applied in a different

manner).

           The crucial issue before us is what constitutes an

effective designation where voluntary payments are involved.       KBS

would have us find that it effectively designated its payments to

                                27
be applied first to trust fund taxes because it had an

"understanding" with the IRS that payments were to be applied in

that manner and because the IRS failed to notify them to the

contrary.   KBS further argues that to be effective, the

designation need not be in writing.    The weight of authority,

however, goes against this argument.   In addition, the cases

cited by KBS to support their argument that the designation need

not be in writing are factually distinguishable.25

            We also reject KBS's contention that the language of

the first installment agreement is consistent with its belief

that payments were being applied to trust fund taxes first.

While it is true that the first installment agreement does not

contain any provisions contrary to the Kaplans' and KBS's beliefs

that the payments would be applied first to trust fund taxes,

this fact alone does not obviate the requirement that the

taxpayers provide a written designation contemporaneously with

their payment.

25.       Freck v. I.R.S., 37 F.3d 986, 994 (3d Cir. 1994)
(Taxpayer did not have an opportunity to designate because tax
payments were made by a third party); McKenzie v. United States,
536 F.2d 726, 730 (7th Cir. 1976) (Bankruptcy Court found
evidence established IRS agent told taxpayer he would apply
payments first to trust fund taxes and, therefore, it was not
necessary for taxpayer to give specific instructions or
directions); In re Mallory, 32 B.R. 73, 74 (Bankr. D. Colo. 1983)
(Even though government admitted that designation under Rev. Rul.
73-305 can be oral if the designation is made when the payment is
tendered, bankruptcy court found no "specific directions" were
given with the tender of payment); In re T.M. Products, 118 B.R.
131, 134 (Bankr. S.D. Fla. 1990) (where IRS's efforts and the
court orders were specifically directed to the payment of trust
fund taxes, the bankruptcy court found that the taxpayer was
entitled to designate and, thus, the IRS could not apply payments
to non-trust fund taxes after it learned that reorganization was
no longer possible).

                                 28
          In our view, the record clearly establishes that a

designation, written or otherwise, was not made with respect to

any of the payments at issue.   Undeniably, at the September 26,

1994, hearing before the bankruptcy court, counsel for the

Kaplans clarified that there was no written agreement to allocate

tax payments to trust fund liabilities first, nor was there a

binding oral agreement.   In addition, the evidence suggests that

a tax return was not filed with the 1990 payment,26 and that a

designation did not accompany either the payments made before the

first installment agreement, or those made pursuant to the

installment agreements.

          In order to prevail in the absence of a written

designation, KBS must show that the IRS assured it that the

payments would be allocated to trust fund taxes first, thereby

equitably estopping the IRS from changing the allocation at this

late date.   The evidence of record, however, does not suggest

that the IRS agreed to apply KBS's payments to trust fund taxes

first, nor does it show that the Kaplans were led to believe the

IRS was not contesting designation requests.    Other than the

statements of the Kaplans, there is no evidence to suggest that

the designation requests were, in fact, made.

          In support of its equitable estoppel argument, KBS

cites In re Jones, 181 B.R. 538, 543-44 (D. Kansas 1995).    That

26.       A tax return accompanying a payment is considered a
written designation to apply the payment as shown on the return;
a payment received without a return is considered undesignated
and is applied first to the employer's non-trust fund taxes.
Internal Revenue Manual 56(18)3.1 (11-21-89).

                                29
case is distinguishable inasmuch as the Chapter 13 debtor had an

oral agreement with a specifically identified IRS agent.     The

district court found that there was a running dialogue between

the agent and the debtor in which the agent made it clear to the

debtor that the IRS was interested in initially collecting the

payroll withholding taxes and provided the debtor with an

incentive to make these payments.    The district court further

found that the actions of the IRS gave the debtor strong reason

to believe that his payment would be applied to his withholding

taxes.   The district court held that the debtor, having shown

that the elements of equitable estoppel were met,27 was entitled

to have his payment credited to his withholding tax liability.

           Unlike In re Jones, the taxpayers here have not

produced any evidence to suggest that the IRS engaged in conduct

which could have led the Kaplans and KBS to believe that their

tax payments were being applied to trust fund taxes first.     KBS's

equitable estoppel argument, therefore, fails.

           Accordingly, we find that KBS failed to designate that

its payments be applied to trust fund taxes first.    The IRS was

allowed, therefore, to apply the tax payments in the best

interests of the government.

27.       The traditional elements of equitable estoppel are:
"(1) the party to be estopped must have known the facts; (2) the
party to be estopped must intend that his conduct will be acted
upon or must so act that the party asserting the estoppel has the
right to believe it was so intended; (3) the party asserting
estoppel must be ignorant of the true facts; and (4) the party
asserting estoppel must rely on the other party's conduct to his
injury. In re Jones, 181 B.R. 538, 543 (D. Kansas 1995) (citing
Penny v. Giuffrida, 897 F.2d 1543, 1545-46 (10th Cir. 1990).

                                30
                               V.

          For the reasons set forth above, we will affirm the

decisions of the district court.

                               31