Court Opinion

ID: 9690382
Source: CourtListenerOpinion
Date Created: 2023-08-24 19:10:13.453236+00
Date Added: 2024-06-11T18:18:56.426134
License: Public Domain

RUSSELL, Bankruptcy Judge,
concurring:
I am constrained to concur in the result in this matter due to the precedential effect of the Ninth Circuit’s decision in In re Technical Knockout Graphics, Inc., 833 F.2d 797 (9th Cir.1987), and the BAP’s decision in In re Condel, Inc., 91 B.R. 79 (9th Cir. BAP 1988).
I still personally believe that the payments made pursuant to the Court approved plan in a voluntary Chapter 11 case are voluntary, thereby permitting the debt- or in possession’s plan to dictate how the Internal Revenue Service must allocate the tax payments.
Nevertheless, it appears to me that the recent decision of the First Circuit in In re Energy Resources Co., 871 F.2d 223 (1st Cir.1989), is correct which in effect held that pursuant to Section 105 of the Bankruptcy Code, the Court may confirm a plan which dictates the manner in which the taxes are to be allocated between trust fund and non-trust fund tax liability, and in so doing, must balance the interest of the estate and its creditors with the interest of the I.R.S.
Although the First Circuit concluded that, for the purposes of the IRS’s own *235rules, “payments made pursuant to a Chapter 11 plan are ‘involuntary,’ ” the First Circuit went on to hold that this did not end the inquiry:
A central legal question remains: Does a bankruptcy court possess the legal power to order the IRS to apply a payment in a way that runs counter to IRS’s own internal policies? That is to say, may a bankruptcy court order the IRS to apply an “involuntary” payment made by a Chapter 11 debtor to “trust fund" tax liabilities first, and only later apply payments to ordinary, non-trust fund tax liabilities?_ We conclude that the answer to this question is “yes,” for several reasons.
First, Congress has granted bankruptcy courts broad equitable powers, including those powers “expressly or by necessary implication conferred by Congress.”_ The bankruptcy court may “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code. 11 U.S.C. § 105 (emphasis added). At least on some occasions, an order allocating Chapter 11 tax payments to “trust fund” liabilities first would seem “appropriate.”_
Second, bankruptcy courts have long had the legal power to tell creditors against which of a debtor’s several debts they are to apply a particular payment; .... There is case law authority holding that courts may order the IRS to ignore its own “allocation” rules. And, to the extent that courts have held to the contrary, they have simply assumed that the IRS’s internal “voluntary”/“involuntary” categorization determined the matter without considering whether a bankruptcy court held the legal power to allocate tax payments over the IRS’s objection.
Third, nothing in the bankruptcy statute limits, in any relevant way, the bankruptcy court’s power to allocate when the creditor is the IRS. To the contrary, Congress specifically granted the bankruptcy court the power to restructure tax debts, along with other debts, insisting, only by way of compromise, that a Chapter 11 plan must ensure that the debtor will pay all tax debts within six years (from the date of assessment.) We must read the absence of such restrictions in light of Congress’ specific recognition of the compromise nature of Chapter ll’s tax debt policy....
Fourth, it makes administrative sense for the bankruptcy court to have the power to determine, in some cases, the debt allocation of Chapter 11 tax payments. It is unlikely that the IRS, charged with the duty to collect taxes rather than to worry about firms in bankruptcy, could easily balance on a case-by-case basis the increased “tax collection” risk against the increased likelihood of “rehabilitation.” But, it is very likely that the bankruptcy court could and would do so; indeed, it is just this kind of work that it ordinarily performs.
Fifth, the IRS’ policy of allocating payments first to a corporate debtor’s non-trust fund tax liability is not a statutory policy. That policy, created by internal rule, is designed to preserve the liability of the “responsible” individuals. It thereby increases the likelihood that the IRS will ultimately collect the entire tax debt (“trust fund” and non-trust fund) owed by the corporation. This objective is understandable, even commendable, for an agency whose mission is to collect taxes..... But, we can find no statute that attaches so overriding an importance to this tax objective as to circumscribe a court’s statutorily granted powers to the contrary. As a general matter, the IRS cannot, in any obvious way, circumscribe, by using an internal rule, a court’s statutory powers.
Sixth, we can find no policy embodied in any specific statute, tax or otherwise, that either directly, or by manifesting a congressional intent, circumscribes a bankruptcy court’s general power in the respect at issue here. The IRS argues strongly that requiring the IRS to allocate tax payments in Chapter 11 proceedings to “trust fund” debts first would frustrate the congressional intent of 11 U.S.C. § 6672 — the statute that permits the IRS to collect unpaid “trust fund” *236taxes directly from the personal assets of “responsible” individuals. But, we do not see how that is so.
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The IRS seeks to use the personal liability of “responsible” persons, not to help collect “trust fund” tax debts, but to collect total tax debts. And, in order to help maximize that total collection, it is willing, by not crediting the “trust fund” debt first, to run a greater risk of not collecting the “trust fund” debt at all, as would be the case if the reorganized corporation ran out of money while paying the non-trust fund tax debt and there were no personal assets of “responsible” persons.
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Thus, in weighing the competing aims of the Bankruptcy Code and Internal Revenue Code, we reach the same result as the Eleventh Circuit in In re A & B Heating & Air Conditioning, [823 F.2d 462 (11th Cir.1987) ]. We hold that “ ‘the allocation question in a Chapter 11 case under the Bankruptcy Code should be left to judicial discretion to be decided on a case-by-case basis.’ ”_
In re Energy Resources Co., 871 F.2d at 230-33 (emphasis in original; citations omitted).