Kipperman v. Internal Revenue Service, U.S.A. (In Re 800Ideas.com, Inc.)

FILED
JUL 22 2013
1
SUSAN M SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. SC-12-1496-JuBaPa
)
6 800IDEAS.COM, INC., ) Bk. No. 07-00207
)
7 Debtor. )
______________________________)
8 )
RICHARD M. KIPPERMAN, Chapter )
9 7 Trustee, )
)
10 Appellant, )
)
11 v. ) O P I N I O N
)
12 INTERNAL REVENUE SERVICE, )
U.S.A.; UNITED STATES TRUSTEE;)
13 800IDEAS.COM, INC, )
)
14 Appellees. )
______________________________)
15
16 Argued and Submitted on May 15, 2013
at Pasadena, California
17
Filed - July 22, 2013
18
Appeal from the United States Bankruptcy Court
19 for the Southern District of California
20 Honorable James W. Meyers, Bankruptcy Judge, Presiding
21 _______________________
22 Appearances: Geraldine A. Valdez, Esq., Financial Law Group,
argued for Appellant Richard M. Kipperman,
23 Chapter 7 Trustee; Anne E. Nelson, Esq.,
U.S. Department of Justice, argued for
24 Appellee Internal Revenue Service.
_________________________
25
26 Before: JURY, BASON* and PAPPAS, Bankruptcy Judges.
27 Opinion by Judge Jury
Concurrence by Judge Bason
28

*
Hon. Neil W. Bason, United States Bankruptcy Judge for
the Central District of California, sitting by designation.
 1 JURY, Bankruptcy Judge:
2
3 Richard M. Kipperman, chapter 71 trustee in the case of
4 debtor 800Ideas.com, appeals the bankruptcy court’s order
5 allowing the claim of the Internal Revenue Service (IRS) with
6 priority as an actual and necessary cost and expense of
7 preserving the estate under § 503(b)(1)(A).2
8 IRS’s claim arose postpetition when it assessed penalties
9 against debtor under 26 U.S.C. (IRC) § 6699 due to trustee’s
10 failure to timely file debtor’s corporate tax returns for the
11 years 2008 and 2010. The bankruptcy court found that trustee
12 had not proved reasonable cause for the late-filed returns
13 within the meaning of IRC § 6699 and allowed IRS’s claim as an
14 administrative expense claim with first priority under
15 § 503(b)(1)(A).
16 We agree with the bankruptcy court’s decision that trustee
17 failed to demonstrate reasonable cause for his delay in filing
18 the tax returns and AFFIRM on this issue. However, in this case
19 of first impression, we disagree with the court’s decision that
20 the penalties qualified as an administrative expense under
21 § 503(b)(1)(A). The penalties did not “preserve the estate” as
22
1
23 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
24 “Rule” references are to the Federal Rules of Bankruptcy
Procedure and “Civil Rule” references are to the Federal Rules of
25 Civil Procedure.
26 2
The bankruptcy court referenced § 503(b) and not
27 (b)(1)(A) in its ruling. However, implicitly the court was
referring to § 503(b)(1)(A) because it found that the penalties
28 were an administrative expense “as an actual and necessary cost
of preserving the estate.” Therefore, we refer to § 503(b)(1)(A)
throughout our discussion.

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 1 required under the plain language of § 503(b)(1)(A) nor do they
2 fall within the fundamental fairness doctrine espoused in
3 Reading Co. v. Brown, 391 U.S. 471 (1968) and its progeny.
4 Although we REVERSE the bankruptcy court’s decision on the
5 priority issue as it pertains to § 503(b)(1)(A), we REMAND this
6 matter to the bankruptcy court to decide if the penalties
7 qualify as an administrative expense for other reasons.
8 I. FACTS AND PROCEDURAL BACKGROUND
9 The facts are undisputed. On January 19, 2007, debtor, a
10 California S corporation, filed its chapter 7 petition.
11 Kipperman was appointed the chapter 7 trustee. Debtor’s
12 liabilities greatly exceeded its assets, with its main asset the
13 potential right to an excise tax refund in an unknown amount for
14 the 2006 tax year.
15 On March 12, 2007, trustee requested debtor’s prepetition
16 accountants, Schaim, Hyde & Company, Inc. (SHCI), to prepare the
17 tax return for the 2006 tax year. SHCI began work on the return
18 and Ms. Hyde, an accountant with the firm, advised trustee that
19 the return would be completed by April 15, 2008. Over a year
20 after the promised date for the return and two years after the
21 initial request, in June 2009, trustee contacted Ms. Hyde to
22 inquire about the status of the return. Ms. Hyde explained that
23 there was a delay because debtor’s files were inadvertently sent
24 to storage. In July 2009, trustee again contacted Ms. Hyde
25 regarding the return. She explained that work on the return had
26 stopped due to the lack of payment; however she agreed to do the
27 work. Thereafter, Ms. Hyde sent trustee an engagement letter.
28 On August 27, 2009, trustee requested the Financial Law

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 1 Group (FLG) to assist him in obtaining court approval for the
2 employment of SHCI nunc pro tunc.
3 On January 15, 2010, SHCI completed the return. On January
4 19, 2010, trustee signed the return. On January 28, 2010, IRS
5 received the return and thereafter notified trustee that it
6 would disallow approximately $1,950.84 of the $38,197 claimed
7 refund.
8 On March 3, 2010, trustee an application to have SHCI
9 employed nunc pro tunc as of March 12, 2007. On the same date,
10 trustee submitted the first and final fee application for SHCI.
11 On April 2, 2010, trustee filed an application to employ R.
12 Dean Johnson as an accountant for the estate. The application
13 stated that Johnson would, among other things, prepare the
14 fiduciary income tax returns.
15 In mid-June 2011, the bankruptcy estate received the tax
16 refund for the 2006 year from IRS in the amount of $36,150.33.
17 In mid-July 2011, Johnson completed debtor’s tax returns
18 for 2007, 2008, 2009 and 2010 and they were filed with IRS. The
19 2008 and 2010 returns, which are at issue in this appeal, stated
20 that debtor had nine shareholders and reported a zero tax
21 liability. After processing the returns, IRS assessed penalties
22 against debtor under IRC § 6699 in the amounts of $9,612 and
23 $8,775 for the 2008 and 2010 tax years, respectively. IRC
24 § 6699 imposes penalties against an S corporation which fails to
25 timely file its returns. Trustee sought to have the penalties
26 abated to no avail.3
27
3
28 Trustee sought abatement for the returns for 2008, 2009
(continued...)

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 1 On February 15, 2012, IRS filed a Request for Payment of
2 Internal Revenue Taxes in the bankruptcy court. The request for
3 payment in the amount of $18,667.17 was based on the 2008 and
4 2010 penalties assessed and was asserted as an administrative
5 priority expense.
6 On February 23, 2010, trustee objected to the claim,
7 contending that the penalties were not based on any unpaid tax
8 incurred by the bankruptcy estate as required by § 503(b)(1)(C)
9 and, therefore, trustee intended to treat the claim as a
10 subordinated penalty claim under § 726(a)(4).
11 IRS responded, arguing that the penalties should be
12 afforded administrative expense status under § 503(b)(1)(C)
13 because they constituted a penalty relating to a tax of a kind
14 specified in § 503(b)(1)(B). IRS also asserted that § 726(a)(4)
15 was inapplicable to its postpetition claim because that statute
16 applied to prepetition claims or those arising before the
17 appointment of a trustee.
18 On April 16, 2012, trustee filed a reply declaration,
19 stating that his failure to timely file the tax returns in
20 question did not result from willful neglect and was due to
21 reasonable cause. The asserted reasonable cause was the
22 estate’s insolvency during the tax years in question and
23 trustee’s belief that the estate would never be solvent.
24 Trustee also argued again that the penalties and interest were
25
26 3
(...continued)
and 2010 on the same grounds. For some reason, IRS abated the
27
penalties for the 2009 tax year, but not for 2008 and 2010.
28 There is no adequate explanation in the record as to why this
occurred.

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 1 not based on any unpaid tax incurred by the estate as required
2 by § 503(b)(1)(C).
3 On June 8, 2012, the bankruptcy court heard the matter.
4 At the hearing, IRS contended for the first time that the
5 penalties were entitled to administrative expense priority under
6 § 503(b)(1)(A) as an actual and necessary cost and expense of
7 preserving the estate, citing to Reading, 391 U.S. 471, the
8 Ninth Circuit’s decision in Tex. Comptroller of Pub. Accounts v.
9 Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d
10 1063, 1067 (9th Cir. 1998), which adopted the Reading rationale,
11 and this Panel’s decision in Gonzalez v. Gottlieb (In re Metro
12 Fulfillment, Inc.), 294 B.R. 306, 309 (9th Cir. BAP 2003).
13 According to IRS, the rationale of these cases applied under the
14 facts of this case because trustee had an obligation to comply
15 with the Tax Code by filing timely returns and he did not. In
16 addition, IRS argued that even though an estate may be
17 insolvent, trustee still had an obligation to file a tax return
18 and thus the estate’s insolvency did not constitute reasonable
19 cause to excuse the penalty. Due to IRS’s new arguments and
20 citations, the bankruptcy court continued the matter to July 20,
21 2012, and authorized the parties to file further pleadings.
22 On June 22, 2012, IRS submitted an amended response and
23 declaration with attached exhibits showing IRS account
24 transcripts for the 2008 and 2010 tax years.
25 On June 29, 2012, trustee submitted an amended response,
26 arguing that the fundamental fairness doctrine espoused in
27 Reading was inapplicable to a chapter 7 case when there was no
28 operating business. Trustee further maintained that

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 1 administrative priority under § 503(b)(1)(A) was not appropriate
2 when the tax penalties were purely punitive. Finally, trustee
3 again asserted that the estate’s insolvency gave him reasonable
4 cause not to timely file the tax returns.
5 The bankruptcy court issued a tentative ruling on July 19,
6 2012, requesting (1) an explanation from IRS regarding the
7 calculation of the penalties; and (2) a declaration by trustee,
8 providing further information on the filing of the 2006 tax
9 return for the refund. The court continued the hearing on the
10 claim objection until August 24, 2012.
11 On August 2, 2012, IRS filed a supplemental declaration
12 addressing the calculation of the penalties.
13 On August 8, 2012, trustee filed his supplemental
14 declaration setting forth in detail his communications with SHCI
15 regarding its preparation of the 2006 tax returns. The
16 declaration set forth the facts noted above regarding trustee’s
17 communications with Ms. Hyde, the eventual employment of her
18 firm, and the receipt of the refund. On the same date, trustee
19 submitted the declaration of Johnson. Johnson declared that he
20 and trustee “concurred” that tax compliance work, except for the
21 2006 prepetition return prepared by SHCI, should wait until it
22 became more certain that the tax refund would be received.
23 Johnson also provided his opinion as to why § 503(b)(1)(A) was
24 not applicable under the circumstances of the case.4
25
26 4
In this regard, Johnson stated that it was difficult for
him to believe that a “penalty for the late filing of a ‘zero’ S
27
corporation income tax return is a ‘necessary cost’ of preserving
28 the estate.” The admissibility of this legal opinion made by an
(continued...)

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 1 On August 30, 2012, the bankruptcy court issued a tentative
2 ruling5 allowing IRS’s claim as an administrative expense claim
3 under § 503(b)(1)(A), as an actual and necessary cost of
4 preserving the estate, and finding that trustee had no
5 reasonable cause to delay the filing of the returns at issue
6 while waiting for the excise tax refund. The court noted that
7 further argument would not be helpful and took the hearing off
8 calendar.
9 On September 18, 2012, the bankruptcy court entered the
10 order allowing IRS’s claim as an administrative claim under
11 § 503(b)(1)(A).
12 On September 25, 2012, trustee filed a timely notice of
13 appeal from the order.
14 II. JURISDICTION
15 The bankruptcy court had jurisdiction over this proceeding
16 under 28 U.S.C. §§ 1334 and 157(b)(2)(B). We have jurisdiction
17 under 28 U.S.C. § 158.
18 III. ISSUES
19 A. Did the bankruptcy court err in finding that trustee
20 failed to prove reasonable cause for his failure to timely file
21 the S corporation tax returns?
22 B. Did the bankruptcy court err in allowing IRS’s claim
23 as an administrative expense claim under § 503(b)(1)(A)?
24
25 4
(...continued)
accountant is questionable but there is no indication in the
26 record that the bankruptcy judge gave it any weight.
27 5
Nothing in the record reflects an act to make this
28 tentative ruling a final one. However, because the entered order
is consistent with it, we construe it to be a final ruling.

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 1 IV. STANDARDS OF REVIEW
2 We review de novo the question of what elements constitute
3 reasonable cause for the late filing of tax returns under IRC
4 § 6699. See United States v. Boyle, 469 U.S. 241, 249 n.8
5 (1985) (considering reasonable cause under IRC § 6651).6
6 Whether those elements are present in a given case is a question
7 of fact reviewed for clear error. Id.; see also Knappe v.
8 United States, 713 F.3d 1164, 1169(9th Cir. 2013).
9 The bankruptcy court’s order allowing an administrative
10 claim is generally reviewed under the abuse of discretion
11 standard. In re Metro Fulfillment, Inc., 294 B.R. at 309.
12 However, where the facts are undisputed, the issue is purely one
13 of law subject to de novo review. See Elliott v. Four Seasons
14 Props. (In re Frontier Props.), 979 F.2d 1358, 1362 (9th Cir.
15 1992).
16 V. DISCUSSION
17 An S corporation is an entity which elects to be taxed as a
18 partnership with income passed through to the shareholders on a
19 pro rata basis. Ding v. Comm’r, 200 F.3d 587, 589 (9th Cir.
20 1999); IRC §§ 1363(a), 1366(a), 1371(a)(1). Although S
21 corporations generally do not pay federal taxes at the corporate
22 level, they still must file an annual tax return. See IRC
23 § 6037 (“Every S corporation shall make a return for each
24 taxable year . . . .”); see also Ensyc Techs. v. Comm’r, 2012 WL
25 2160435, at *3 (T.C. 2012).
26 A chapter 7 trustee’s duty to file a chapter 7 corporate
27
6
28 IRC § 6651 imposes a penalty against an individual
taxpayer for failure to file a tax return or pay taxes.

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 1 debtor’s tax return is subject to little debate. IRC
2 § 6012(b)(4) provides that “[r]eturns of an estate . . . under
3 chapter 7 . . . of title 11 of the United States Code shall be
4 made by the fiduciary thereof.” (Emphasis added). When a
5 corporation files for bankruptcy relief and a trustee is
6 appointed, the trustee’s duty to file tax returns is governed by
7 IRC § 6012(b)(3), which states:
8 In a case where a receiver, trustee in a case under
Title 11 of the United States Code, or assignee, by
9 order of a court of competent jurisdiction, by
operation of law or otherwise, has possession of or
10 holds title to all or substantially all the property
or business of a corporation, whether or not such
11 property or business is being operated, such
. . . , trustee, . . . shall make the return of income
12 for such corporation in the same manner and form as
corporations are required to make such returns.
13
14 The trustee of a corporate debtor is required to file returns,
15 regardless of whether the trustee is an “operating trustee” or a
16 “liquidating trustee.” Holywell Corp. v. Smith, 503 U.S. 47,
17 53-54 (1992).7
18 When a corporation has no assets or income, a trustee may
19 make a request to IRS to be relieved of the reporting obligation
20
21
22
7
In contrast, a trustee’s obligation to file a tax return
23 in an individual’s chapter 7 case is different. Under IRC
24 § 6012(d)(8), “. . . every estate of an individual under Chapter
7 . . ., the gross income of which for the taxable year is not
25 less than the sum of the exemption amount plus the basic standard
deduction under [26 U.S.C.] § 63(c)(2)(D),” must file a tax
26 return on behalf of the bankruptcy estate. Accordingly, a
chapter 7 trustee has a general obligation to file tax returns on
27
behalf of the bankruptcy estate if it “realizes the threshold
28 amount of gross income required to trigger the filing of a
return.” In re Pflug, 146 B.R. 687, 689 (Bankr. E.D. Va.1992).

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 1 by following a simple procedure. See Rev. Rul. 84-123,8 1984-2
2 C.B. 244; see also 13 Mertens Law of Fed. Income Taxation
3 § 47.75 (the obligation of a trustee or receiver to file tax
4 returns may not apply if the corporation, although not formally
5 dissolved, has ceased operations and has no assets or income;
6 however, a liquidating corporation is deemed to continue as long
7 as its affairs are being settled and its assets are not actually
8
8
9 Rev. Proc. 84-59 (1984) at § 3 sets forth the procedure
for making such a request.
10
.01 The trustee, receiver, or assignee must file a
11 request with the district director for the district in
which the corporation has its principal place of
12 business.
13
.02 The request should state:
14
1 The name, address and employer identification number
15 of the corporation, and
16
2 The date on which the trustee, receiver, or assignee
17 filed the notice of appointment to act, as required
under section 301.6036-1(a) of the Regulations on
18 Procedure and Administration.
19 .03 As stated in Rev.Rul. 84-123, the request should
20 set forth the facts, with supporting documents if
necessary, as to why the relief from the filing
21 requirements is needed.

22 .04 The request should contain the following statement
signed by the trustee, receiver, or assignee:
23
24 I hereby request relief from filing federal income tax
returns for tax year(s) ending -- for the above named
25 corporation and declare under penalties of perjury that
to the best of my knowledge and belief the information
26 contained herein is correct.
27
.05 The district director will inform the trustee,
28 receiver, or assignee within 90 days of receipt whether
the request is granted or denied.

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 1 distributed). Trustee did not make such a request here.9
2 A. Reasonable Cause Under IRC § 6699
3 Nonetheless, trustee argues that his failure to timely file
4 the S corporation returns should be excused because he had
5 reasonable cause.10 IRC § 6699 was added to the Tax Code in 2007
6 as part of the Mortgage Forgiveness Debt Relief Act of 2007,
7 Pub.L. No. 110–142, sec. 9(a), 121 Stat. at 1807. Ensyc Techs.,
8 2012 WL 2160435, at *3. The statute provides in relevant part:
9 (a) General rule.--In addition to the penalty imposed
by section 7203 (relating to willful failure to file
10 return, supply information, or pay tax), if any S
corporation required to file a return under section
11 6037 for any taxable year--
12 (1) fails to file such return at the time prescribed
therefor (determined with regard to any extension of
13 time for filing), or
14 (2) files a return which fails to show the information
required under section 6037, such S corporation shall
15 be liable for a penalty determined under subsection
(b) for each month (or fraction thereof) during which
16 such failure continues (but not to exceed 12 months),
unless it is shown that such failure is due to
17 reasonable cause. (Emphasis added).
18 . . . .
19
9
During oral argument before us, we learned that trustee
20 could have also filed a form to request an extension of time to
21 file the informational returns. Such a request would have given
trustee an additional six months to file the returns. The 2006
22 tax refund was received in mid-June 2011 and the returns for 2008
and 2010 were filed in mid-July 2011. Therefore, the six month
23 extension would have been inadequate.
24 10
On this point, trustee apparently does not seek
25 disallowance of the penalties but instead contests their
priority: he seeks allowance either on a par with general
26 unsecured claims or subordinated to them. “Mr. Kipperman hasn’t
asked for the claim to be disallowed. He’s just requesting that
27 it be subordinated on equitable grounds because there’s no
pecuniary loss to the IRS.” Trustee’s claim objection however
28
never requested equitable subordination nor do the pleadings
address whether subordination is appropriate under § 510(c).

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 1 In Ensyc Techs., 2012 WL 2160435, at *3, the tax court
2 considered the scope of “reasonable cause” under IRC § 6699.
3 There, the president of the S corporation challenged the IRS’s
4 assessment of a late-filing penalty, contending that he timely
5 mailed a Form 1120S for the corporation. After finding that the
6 president had not timely filed Form 1120S, the tax court
7 considered whether there was reasonable cause for not filing the
8 form on time. As a matter of first impression, the tax court
9 held that the failure of an S corporation to timely file its
10 annual return is due to reasonable cause if the S corporation
11 exercised ordinary business care and prudence and was
12 nevertheless unable to timely file its return. Id. at *3.
13 In reaching this conclusion, the court used the ordinary
14 business care and prudence test which applied to IRC § 6651.
15 Treas. Reg. § 301.6651–1(c)(1)11 states: “If the taxpayer
16 exercised ordinary business care and prudence and was
17 nevertheless unable to file the return within the prescribed
18 time, then the delay is due to a reasonable cause.” Ensyc
19 Techs., 2012 WL 2160435, at *3. In the end, the tax court found
20
21 11
This section provides in relevant part:
22
(c) Showing of reasonable cause. (1) Except as provided
23 in subparagraphs (3) and (4) of this paragraph (b), a
taxpayer who wishes to avoid the addition to the tax
24 for failure to file a tax return or pay tax must make
25 an affirmative showing of all facts alleged as a
reasonable cause for his failure to file such return or
26 pay such tax on time in the form of a written statement
containing a declaration that it is made under
27 penalties of perjury. . . . If the taxpayer exercised
ordinary business care and prudence and was
28
nevertheless unable to file the return within the
prescribed time, then the delay is due to a reasonable
cause. . . .

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 1 the president’s testimony credible and corroborated by the
2 documentary evidence with respect to the late filing.
3 Accordingly, the court concluded there was reasonable cause for
4 the delay and thus the penalties were excused. Id.
5 Although Ensyc Techs. is the only case to consider the
6 scope of reasonable cause under IRC § 6699, case law which has
7 construed the term in the context of IRC § 6651 is persuasive.
8 The IRS has articulated eight reasons for a late filing that it
9 considers to constitute reasonable cause under IRC § 6651.
10 “These reasons include unavoidable postal delays, the taxpayer’s
11 timely filing of a return with the wrong IRS office, the
12 taxpayer’s reliance on the erroneous advice of an IRS officer or
13 employee, the death or serious illness of the taxpayer or a
14 member of his immediate family, the taxpayer’s unavoidable
15 absence, destruction by casualty of the taxpayer’s records or
16 place of business, failure of IRS to furnish the taxpayer with
17 the necessary forms in a timely fashion, and the inability of an
18 IRS representative to meet with the taxpayer when the taxpayer
19 makes a timely visit to an IRS office in an attempt to secure
20 information or aid in the preparation of a return.” United
21 States v. Boyle, 469 U.S. at 243 n.1. These examples generally
22 illustrate factors beyond a taxpayer’s control. Id. at 249 n.6.
23 Furthermore, ordinary business care and prudence is only
24 one element of the “reasonable cause” necessary to excuse
25 penalty assessments for the untimely filing of tax returns.
26 Valen Mfg. Co. v. United States, 90 F.3d 1190, 1191 (6th Cir.
27 1996). In order to qualify for such relief, trustee must also
28 have satisfied that portion of Treas. Reg. § 301.6651–1(c)(1)

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 1 which requires a taxpayer to show that it has been rendered
2 unable to meet its responsibilities despite the exercise of such
3 care and prudence. Id. at 1192. Accordingly, to establish
4 reasonable cause, trustee had the burden of proving that he
5 exercised ordinary business care and prudence and was
6 nevertheless unable to file the return within the prescribed
7 time.
8 Here, although the bankruptcy court did not mention the
9 ordinary business care and prudence test, the record supports
10 the court’s conclusion that trustee failed to prove reasonable
11 cause. Trustee declared that the late filing was based on his
12 mistaken belief that the insolvency of the estate automatically
13 relieved him of filing returns. However, as noted above, a
14 trustee is not automatically exempted from filing tax returns
15 when a corporation is insolvent. Rather, IRS has adopted a
16 procedure which may relieve a trustee of the burden of filing
17 such returns when a corporate debtor is insolvent, but trustee
18 did not pursue this relief.12
19 Further, trustee points to no factors that were beyond his
20 control with respect to the late-filed 2008 and 2010 tax
21 returns. Indeed, in its July 19, 2012 tentative ruling, the
22 bankruptcy court opined that had trustee timely filed the 2006
23 tax return for the refund, it followed that the refund would
24
25 12
At oral argument, IRS’s attorney suggested that trustee
26 could complete and file the informational returns without the
help of a professional when the estate is insolvent. IRS has not
27 established this is a viable option for a trustee. Rather, the
better solution is for the trustee to seek relief from the burden
28
of filing the returns or, if appropriate, seek an extension of
time.

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 1 have been obtained in 2007, the estate distributed and the tax
2 returns for 2008, 2009 and 2010 would have been unnecessary.
3 Our review of trustee’s supplemental declaration shows that the
4 bankruptcy court could reasonably infer from the undisputed
5 facts that the delay surrounding the filing of 2006 tax return
6 was not caused by events beyond trustee’s control. Anderson v.
7 City of Bessemer City, N.C., 470 U.S. 564, 575 (1985) (Where
8 there are two permissible views of the evidence, the
9 factfinder’s choice between them cannot be clearly erroneous.).
10 In sum, trustee’s lack of diligence in supervising his
11 accountants, coupled with his deliberate decision to delay
12 filing the returns until he was convinced this would be an
13 “asset case,” provided an ample basis for the bankruptcy court
14 to reject trustee’s reasonable cause argument and to sustain
15 IRS’s decision to assess the penalties.
16 B. Administrative Expense Priority Under § 503(b)(1)(A)
17 We now turn to the thornier priority question. Section
18 507(a)(2) accords administrative expenses of a bankruptcy estate
19 second priority. Section 503(b)(1)(A) states that
20 administrative expenses include “the actual, necessary costs and
21 expenses of preserving the estate including . . .” and then
22 lists specific categories. Under § 102(3) “includes” and
23 “including” are not limiting. Therefore, the use of “including”
24 in the preamble of § 503(b)(1)(A) means that actual and
25 necessary costs and expenses of preserving the estate may
26 include types of claims other than those listed under
27 § 503(b)(1)(A) which may be given administrative priority.
28 Traditionally, to be deemed an administrative expense under

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 1 the “actual and necessary” rubric in § 503(b)(1)(A), two
2 requirements must be met under Ninth Circuit case law
3 requirements:13 the claim must have arisen from a transaction
4 with the debtor in possession and must directly and
5 substantially benefit the estate. Abercrombie v. Hayden Corp.
6 (In re Abercrombie), 139 F.3d 755, 757 (9th Cir. 1998) (quoting
7 Microsoft Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091,
8 1094 (9th Cir. 1995). Years ago, the Ninth Circuit addressed
9 the parameters of § 503(b)(1)(A) in Burlington N. R.R. Co. v.
10 Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700
11 (9th Cir. 1988), which established the following guidelines:
12 First, the statute is to be narrowly construed.
Second, [a]n actual [not potential] benefit must
13 accrue to an estate. In either a Chapter 11
liquidation or a Chapter 7 the court should be more
14 concerned with maximizing the size of the estate for
the creditors than with inducing third parties to
15 contribute towards the continued operations of the
business. Third, the court should consider allowing a
16 claim under § 503(b)(1)(A) for costs incurred if the
expense results in a preservation of estate assets for
17 the benefit of creditors. Finally, courts are not
free to establish their own priorities of payment
18 within the Bankruptcy Code.
19 In re Allen Care Ctrs., Inc. 163 B.R. 180, 185 (Bankr. D. Or.
20 1994) (citing In re Dant & Russel, Inc.), aff’d 175 B.R. 397 (D.
21 Or. 1994), aff’d 96 F.3d 1328 (9th Cir. 1996).
22 When we apply these guidelines to the facts of this case,
23 IRS’s claim based on penalties does not qualify as an
24 administrative expense. This case is a chapter 7 case where the
25 primary goal is to keep costs to a minimum to preserve the
26 limited assets. The penalties were not incurred in the
27
28 13
There is no dispute that IRS’s claim for the penalties
arose postpetition.

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 1 operation of a business and, as a result, the penalties were
2 incurred neither to benefit the estate nor preserve it. Under
3 these facts, affording administrative expense priority to IRS’s
4 claim would be to the detriment of the unsecured creditors.
5 The Supreme Court carved out an exception to the “actual
6 and necessary” requirements in Reading by holding that “[i]n the
7 interests of ‘fairness to all persons having claims against the
8 insolvent’ . . . tort claims arising post-petition [are] ‘actual
9 and necessary expenses’ of preserving the estate.” Boeing N.
10 Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018, 1025 n. 10
11 (9th Cir. 2005) (quoting Reading, 391 U.S. at 477); In re
12 Megafoods Stores, Inc., 163 F.3d at 1071 (Reading survived the
13 enactment of the Bankruptcy Code); see also In re Metro
14 Fulfillment, Inc., 294 B.R. at 310.
15 In Reading, the debtor corporation filed a petition for
16 arrangement under chapter XI of the Bankruptcy Act. The same
17 day, a receiver was appointed and authorized to conduct the
18 debtor’s business, which consisted principally of leasing the
19 debtor’s only asset, an eight story industrial structure. Not
20 long after the receiver was appointed, the debtor’s building was
21 destroyed by a fire which spread to adjoining premises and
22 damaged real and personal property of Reading Company and
23 others. Reading filed a claim for over $550,000 as an
24 administrative expense in the arrangement, based on the asserted
25 negligence of the receiver. After the debtor was voluntarily
26 adjudicated a bankrupt and the receiver elected the trustee in
27 bankruptcy, the claims of Reading and others became claims for
28 administration expenses in bankruptcy with first priority under

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 1 § 64(a)(1)14 of the Bankruptcy Act. The trustee disallowed the
2 claim for administration expenses. On appeal, the district
3 court and appellate court held that administrative treatment was
4 not warranted. The Supreme Court disagreed, holding that
5 damages resulting from negligence of a receiver acting within
6 the scope of his authority as receiver give rise to “actual and
7 necessary costs” of a Chapter XI arrangement.
8 The Supreme Court essentially engaged in a two-step
9 analysis to reach its conclusion. The Court first addressed
10 whether the trustee breached some legal duty that gave rise to a
11 corresponding right to payment under state law. Because Reading
12 suffered the financial injury from the negligence of the trustee
13 and a workman, the Court noted that Reading would have a right
14 to recover under the common law rule of respondeat superior.
15 Therefore, in principle, the Court found that Reading had a
16 “right to recover for that injury from their ‘employer,’ the
17 business under arrangement.” Id. at 477. Liability was thus
18 established.
19 In a footnote, the Court pointed out that 28 U.S.C.
20
21
22
14
Section 64(a)(1) and § 503(b)(1)(A) contain similar
23 language. Section 64(a)(1) of the Bankruptcy Act provides in
part:
24
25 The debts to have priority, in advance of the payment
of dividends to creditors, and to be paid in full out
26 of bankrupt estates, and the order of payment, shall be
(1) the costs and expenses of administration, including
27 the actual and necessary costs and expenses of
preserving the estate subsequent to filing the
28
petition. . . . (emphasis added).

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 1 § 959(b)15 requires a trustee to manage and operate the business
2 in accordance with local state law, in the same manner that the
3 owner would be bound to do. Implicitly, the trustee in Reading
4 did not comply with state law when he failed to exercise the
5 duty of reasonable care in operating the business. The Court
6 therefore considered the policy embedded in 28 U.S.C. § 959(b)
7 of ensuring a trustee’s compliance with state law when the
8 trustee is authorized under bankruptcy law to operate the
9 debtor’s business. However, the Court observed that “[t]his
10 provision of course establishes only the principle of liability
11 under state tort and agency law, and does not decide from whom
12 or with what priority tort claims may be collected.” Id. at 478
13 n.7.
14 Next, the Court addressed the priority issue. The Court
15 first considered the statutory objective of “fairness to all
16 persons having claims against an insolvent.” The Court then
17 balanced the objective of the debtor’s rehabilitation against
18 the desirability of allowing those injured by the operation of
19 the business during the bankruptcy process to recover ahead of
20 those for whose benefit the business was carried out.
21
15
This section provides:
22
23 [A] trustee, receiver or manager appointed in any cause
pending in any court of the United States, including a
24 debtor in possession, shall manage and operate the
property in his possession as such trustee, receiver or
25 manager according to the requirements of the valid laws
26 of the State in which such property is situated, in the
same manner that the owner or possessor thereof would
27 be bound to do if in possession thereof.

28 -20-
 1 At the moment when an arrangement is sought, the
debtor is insolvent. Its existing creditors hope that
2 by partial or complete postponement of their claims
they will, through successful rehabilitation,
3 eventually recover from the debtor either in full or
in larger proportion than they would in immediate
4 bankruptcy. Hence the present petitioner did not
merely suffer injury at the hands of an insolvent
5 business: it had an insolvent business thrust upon it
by operation of law. That business will, in any
6 event, be unable to pay its fire debts in full. But
the question is whether the fire claimants should be
7 subordinated to, should share equally with, or should
collect ahead of those creditors for whose benefit the
8 continued operation of the business (which
unfortunately led to a fire instead of the hoped-for
9 rehabilitation) was allowed.
10 Id. at 478. The Court concluded on balance that tort claims
11 arising during a Chapter XI proceeding were “costs ordinarily
12 incident to operation of a business,” and therefore qualified as
13 administrative expenses entitled to priority under § 503(b).
14 Id. at 483-84. In sum, the Court’s priority decision was
15 largely based on equitable principles and a fairness rationale.
16 On appeal, trustee argues that Reading is not applicable
17 under the facts of this case because (1) the penalties were
18 punitive and (2) the penalties could not be considered “costs
19 ordinarily incident to the operation of a business” as required
20 by the language in Reading because the trustee was not operating
21 the business. While IRS acknowledges that most cases have
22 applied Reading in the context of a chapter 11 where the debtor-
23 in-possession or trustee was operating the debtor’s business,
24 IRS argues that policy considerations favor an extension of
25 Reading under the facts of this case. Those policies include
26 the United States’ interest in maintaining a workable tax
27 system, which the IRS contends should outweigh any cost to
28 debtor’s other creditors, and discouraging trustees from

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 1 shirking their duty to timely file bankruptcy estate tax
2 returns.
3 We initially note that the holding in Reading is a narrow
4 one. In re Abercrombie, 139 F.3d at 758 (“Reading created a
5 venerable but limited exception” to the traditional requirements
6 for administrative priority). The Ninth Circuit first suggested
7 that the rule of Reading applies only in cases involving
8 “‘postpetition tort-like conduct,’. . . .” Or. v. Witcosky (In
9 re Allen Care Ctrs., Inc.), 96 F.3d 1328, 1331 (9th Cir. 1996)
10 (citing Nat’l Labor Relations Bd. v. Walsh (In re Palau Corp.),
11 18 F.3d 746, 751 (9th Cir. 1994)); see also In re Lazar, 207
12 B.R. 668, 683–84 (Bankr. C.D. Cal. 1997).
13 However, in another line of cases, the Ninth Circuit and
14 this Panel expanded the Reading doctrine beyond tort-like
15 conduct when the “costs” at issue arose out of the debtor-in-
16 possession’s (or trustee’s) violation of 28 U.S.C. § 959(b)
17 while operating a business. See In Megafoods Stores, Inc., 163
18 F.3d at 1072 (holding postpetition interest on unremitted state
19 and local sales taxes collected prepetition were entitled to
20 administrative priority when interest charges resulted from
21 debtors’ mismanagement of their estates, i.e., failure to comply
22 with their duties under 28 U.S.C. §§ 959(b) and 960 (mandating
23 compliance with state tax laws), and that the Reading exception
24 applied); In re Metro Fulfillment, Inc., 294 B.R. at 311-12
25 (holding claims filed by employees who were employed in the
26 debtor’s packing and shipping department at minimum wage and
27 were never paid in violation of California Labor Code §§ 203 and
28 203.1 were administrative claims within Reading’s rationale when

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 1 the debtor was operating the business and failed to comply with
2 state law under 28 U.S.C. § 959(b))16; see also Ala. Surface
3 Mining Comm’n v. N.P. Mining Co., Inc. (In re N.P. Mining Co.,
4 Inc.), 963 F.2d 1449 (11th Cir. 1992) (punitive civil penalties
5 assessed for postpetition mining activities qualified for
6 administrative priority).
7 While none of these cases addressed the category of
8 expenses involved here,17 we are persuaded that IRS’s penalty
9 claim is not the type of claim covered by Reading under either
10 line of reasoning. IRS’s penalty claim did not arise from
11 trustee’s postpetition tortious or active wrongdoing. These
12 terms imply some wrongful conduct and, here, the bankruptcy
13 court did not find that trustee had engaged in any wrongful
14 conduct.18 Indeed, the record shows that trustee was under the
15 mistaken belief that he did not need to file the informational
16
17 16
Furthermore, the Panel in Metro Fulfillment, Inc. made
18 clear that whether the penalty wages at issue were punitive or
compensatory was not dispositive because the debtor failed to
19 comply with its postpetition obligations under state law. 494
B.R. at 312. For this reason, trustee’s arguments regarding the
20
punitive nature of the penalties are not persuasive.
21 17
We have not found any case that has extended the
22 fundamental fairness doctrine to penalties assessed for failure
to timely file tax returns nor have the parties cited a case that
23 tangentially touches upon this issue. Therefore, we do not find
the out-of-jurisdiction cases that are cited by the parties
24
helpful to our analysis.
25 18
This type of conduct is similar to the “willful neglect”
26 standard under IRC § 6651. The term “willful neglect” means “a
conscious, intentional failure or reckless indifference.” Boyle,
27 469 U.S. at 245.
28 -23-
 1 returns while the estate remained insolvent.
2 Any focus on 28 U.S.C. § 959(b) in this context is
3 misplaced because the statute “establishes only the principle of
4 liability under state tort and agency law, and does not decide
5 from whom or with what priority tort claims may be collected.”
6 Reading, 391 U.S. at 475. It is doubtful 28 U.S.C. § 959(b)
7 applied to trustee when he was not operating the business. See
8 In re N.P. Mining Co., 963 F.2d at 1460 (citing cases that hold
9 that 28 U.S.C. § 959(b) is inapplicable to liquidation cases).
10 Moreover, 28 U.S.C. § 959(b) requires an operating trustee to
11 comply with state law versus trustee’s noncompliance with the
12 federal tax code in this case. Accordingly, for purposes of
13 establishing “only the principle of liability,” we conclude that
14 the Tax Code is up to the task by requiring trustee to file
15 corporate tax returns during the case, whether or not the
16 business is being operated. See IRC § 6012(b)(3) and (4).
17 The bankruptcy estate’s “liability” is only one part of the
18 analysis under Reading. Another requirement for administrative
19 expense status is that the cost must be one “ordinarily incident
20 to operation of a business.” The Reading Court concluded that
21 “the words ‘preserving the estate’ [in § 64(a) of the Bankruptcy
22 Act] include the larger objective, common to arrangements, of
23 operating the debtor’s business with a view to rehabilitating
24 it.” 391 U.S. at 476–77. Applying Reading in the context of an
25 operating business is not only consistent with the words
26 “preserving the estate” under § 503(b)(1)(A), but it is also
27 consistent with the underlying rationale for the fundamental
28 fairness doctrine espoused in the case. Priority for the fire

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 1 claimants over the unsecured creditors was based upon the quid
2 pro quo for the continued operation of the business.
3 We thus conclude that Reading does not apply for the same
4 reasons that the plain language of § 503(b)(1)(A) is
5 inapplicable. Trustee was not operating the business of debtor
6 under the common meaning of the term. Treating IRS’s claim as
7 an administrative expense in this case will allow that claim to
8 be paid to the exclusion of, and out of the resources otherwise
9 available for, claims of other creditors. The practical result
10 would be that the penalties would be paid by innocent third
11 persons, the creditors, who did not derive any benefit from the
12 continued operation of any business. Under the reasoning in
13 Reading, that result does not seem fair especially in light of
14 the fact that as a general matter, § 503(b)(1)(A) is construed
15 narrowly in order to maximize and protect the limited assets of
16 the bankruptcy estate for the benefit of unsecured creditors.
17 See In re Palau Corp., 139 B.R. at 942, 944 (9th Cir. BAP 1992),
18 aff’d, 18 F.3d 746 (9th Cir. 1994); In re Dant & Russell, Inc.,
19 853 F.2d 700 (9th Cir. 1988). Because an unsecured creditor in
20 a chapter 7 liquidation case cannot expect to improve its
21 position through the operation of a business, a narrow
22 construction of § 503(b)(1)(A) weighs heavily under these
23 circumstances.
24 Although we do not condone trustee’s apparent lack of
25 diligence in completing the 2006 tax returns so that the refund
26 for that year would have been received by the estate in a more
27 timely manner, we also do not believe that Ninth Circuit case
28 law allows us to expand the Reading exception to all

-25-
 1 postpetition costs and find they are entitled to administrative
2 expense priority simply because the chapter 7 trustee had a
3 “duty” to comply with the Tax Code despite an insolvent estate.
4 We are reluctant to read the “preservation of the estate”
5 language out of § 503(b)(1)(A) and establish a per se rule for
6 postpetition penalties such as this. Such an interpretation of
7 Reading would swallow the guidelines set forth in Dant & Russell
8 making all postpetition claims eligible for administrative
9 priority as a “cost of administration.”
10 We do acknowledge, however, that priority status for the
11 tax penalties under § 503(b)(1)(A) is a close call. IRS makes a
12 very nearly persuasive case that, in the interest of fairness to
13 taxpayers everywhere, and to promote the pubic policy embodied
14 in the Tax Code that requires bankruptcy trustees to timely file
15 all tax returns due during the course of administration of a
16 bankruptcy estate, the penalties here constitute “actual,
17 necessary costs of preserving the estate” under § 503(b)(1)(A)
18 as that phrase has been interpreted in the case law. As noted,
19 it is not dispositive that the tax penalties in this case
20 conferred no direct benefit on the bankruptcy estate; a legion
21 of courts, from the Supreme Court in Reading on down, have
22 carved out judicial exceptions to that strict requirement over
23 the years to apply § 503(b)(1)(A) fairly, consistent with public
24 policy.19 Unfortunately for IRS, though, none of the decisions
25 recognizing Reading fairness exceptions deal with a non-
26
19
Indeed, if a direct benefit to the estate were required
27
for § 503(b)(1)(A) status, it would be difficult for trustee to
28 justify payment of the fees for the accountants he retained to
prepare and file the tardy tax returns.

-26-
 1 operating chapter 7 estate. Instead, the fairness exception has
2 nearly always applied when debtors and trustees were operating a
3 business, in many cases to abide by 28 U.S.C. § 959(b)’s command
4 that they follow the same state rules as others. The absence of
5 any authority applying the Reading exception in a liquidation
6 scenario is sufficient to tip the scales in trustee’s favor.
7 C. Administrative Expense Priority For Other Reasons
8 Nevertheless, the tax penalties may be entitled to
9 administrative expense status for other reasons. First,
10 § 503(b) states that “[a]fter notice and a hearing, there shall
11 be allowed administrative expenses, other than claims allowed
12 under section 502(f) of this title, including —. . . .”
13 (Emphasis added). By using the word “including” in the
14 introduction to § 503(b), Congress makes clear that, to be
15 allowed, the tax penalties need only constitute “administrative
16 expenses”; it is not necessary that the tax penalties precisely
17 match one of the illustrative categories listed in subsections
18 (1) through (9).
19 Because there is no definition of “administrative expense”
20 in the Bankruptcy Code, presumably, Congress intended that the
21 bankruptcy courts fashion a definition for this term based upon
22 the facts of the case guided by the general policies of the
23 Code. As a result, if the bankruptcy court here were to find
24 that, even though they did not constitute a cost of preserving
25 the bankruptcy estate, the tax penalties were nonetheless
26 expenses incurred in the administration of this bankruptcy
27 estate (i.e., “administrative expenses”), IRS’s claim may still
28 be entitled to administrative priority under § 503(b). The

-27-
 1 bankruptcy court should have the opportunity on remand to make
2 that decision.
3 Secondly, IRS initially argued to the bankruptcy court that
4 the penalties should be deemed administrative expenses under
5 § 503(b)(1)(C) as a “penalty . . . relating to a tax of a kind
6 specified in subparagraph (B) of [§ 503(b)].” Trustee argued in
7 response that the penalty did not relate to “a tax of a kind
8 specified in subparagraph (B)” because no tax was actually
9 imposed under subparagraph (B). The bankruptcy court did not
10 address this issue because it made its decision under
11 subparagraph “(A).” For this reason, remand is appropriate so
12 that the bankruptcy court can evaluate the issues under
13 § 503(b)(1)(B) and (C).
14 Finally, a remand is mandated to address the question that
15 begs to be answered: if these tax penalties, incurred in the
16 ordinary course of the trustee’s administration of the
17 bankruptcy estate are not allowed administrative expenses, then
18 what are they? Presumably, the penalties may not be allowed as
19 unsecured claims because they did not arise prior to the
20 petition date. See §§ 501(a)and 502(a) (in tandem, providing
21 that a creditor may file a claim, and in general, such claims
22 are allowed based upon “the amount [due] . . . as of the date of
23 the filing of the petition”); § 101(5),(10) (in tandem,
24 providing that a “claim” is a right to payment, and a creditor
25 is an entity that “has a claim against the debtor that arose at
26 the time of or before” the commencement of a voluntary chapter 7
27 case). While the Code expressly treats some post-bankruptcy
28 claims as though they arose before the filing of the petition,

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 1 tax penalties of the sort IRS claims here are not. See e.g.,
2 § 502(f) (certain claims in involuntary cases); § 502(g) (claims
3 for post-petition lease rejection damages); § 502(h) (claims for
4 avoided transfers); § 502(i) (claims for certain priority
5 taxes).
6 In sum, although we hold that the tax penalties are not
7 entitled to administrative expense status under § 503(b)(1)(A)
8 as “costs of preserving the estate”, we remand this matter to
9 the bankruptcy court to decide if the penalties qualify as
10 administrative expenses for other reasons.
11 VI. CONCLUSION
12 We conclude that the bankruptcy court properly found
13 trustee failed to prove reasonable cause for his failure to
14 timely file the 2008 and 2010 tax returns at issue in this
15 appeal and AFFIRM on this issue. However, we REVERSE on the
16 priority issue under § 503(b)(1)(A) for the reasons discussed
17 above and REMAND this matter to the bankruptcy court to decide
18 if the penalties qualify as administrative expenses for other
19 reasons.
20
21
22
23 Concurrence begins on next page.
24
25
26
27
28

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 1 BASON, Bankruptcy Judge, concurring:
2
3 As a matter of nonbankruptcy law I agree with the
4 majority’s interpretation of “reasonable cause” for not timely
5 filing a tax return. The trustee had the burden to prove that
6 the estate exercised ordinary business care and prudence and was
7 nevertheless unable to file the return within the prescribed
8 time.
9 As a matter of bankruptcy law I agree with the majority
10 that tax penalties are not “costs of preserving the estate”
11 under § 503(b)(1)(A). I also agree that this matter should be
12 remanded to the bankruptcy court for two reasons: first, to
13 decide if the penalties qualify as administrative expenses for
14 any other reasons and, second, to decide how to deal with the
15 penalties if they are not administrative expenses.
16 I write separately to emphasize the narrowness of the
17 panel’s ruling. Many of the justifications presented by the
18 trustee are, in concept, reasonable cause for not timely filing
19 tax returns, regardless of whether the evidence in this
20 particular case is compelling. In addition, there are numerous
21 issues that we are not deciding today.
22 (1) The trustee’s justifications
23 Taxes can be complicated. In a business bankruptcy case it
24 is often prudent to have the assistance of an accountant.
25 What if there are no funds to pay an accountant? That
26 might not be a sufficient excuse for a taxpayer outside of
27 bankruptcy, but in my view the situation is different for
28 chapter 7 bankruptcy trustees. They have a strong argument that

-1-
 1 they act with “ordinary business care and prudence” in deferring
2 the filing of tax returns until there are funds with which to
3 prepare those returns. What other course of action would be
4 prudent for chapter 7 trustees?
5 In this case, the only source of such funds was a
6 contingent claim for a 2006 tax refund in an unknown dollar
7 amount. Attempting to recover that refund was not easy for
8 several reasons.
9 Apparently it was difficult to retrieve the debtor’s
10 records. It was also difficult to persuade the debtor’s
11 accountants to prepare the 2006 return. Those accountants had
12 not been paid for past work. They had uncertain prospects of
13 ever being paid for future work. The estate essentially had no
14 funds to pay them, and the trustee’s uncontradicted assertion is
15 that IRS might have denied the hoped-for 2006 refund “for a
16 myriad of reasons . . . .” The trustee also describes numerous
17 communications with the accountants in which he attempted to
18 assist or expedite the process.
19 The trustee could have applied to the IRS for an extension
20 to file the 2006 tax return, but at oral argument we were told
21 that the maximum aggregate extension would be six months. The
22 IRS has not argued that six months would be anywhere near
23 sufficient, and as the trustee points out it took the IRS itself
24 approximately seventeen months to process the 2006 return once
25 it was filed.
26 The trustee was charged with liquidating a moribund
27 business with missing records. That situation is analogous to
28 some well accepted grounds for not timely filing a return, such

-2-
 1 as the taxpayer’s death or serious illness, or the destruction
2 by casualty of the taxpayer’s records. United States v. Boyle,
3 469 U.S. 241, 243 n.1 (1985). Therefore, for a time at least,
4 the trustee had good reasons for not filing the 2006 return.
5 But it is one thing to miss a deadline by a few months and
6 another thing to miss it by approximately thirty-three months,
7 which is what happened in this case. The 2006 return was due in
8 April of 2007 and was not filed until January of 2010.
9 Even that degree of delay might have satisfied the
10 “ordinary business care and prudence” standard if there were
11 sufficient evidence of the reasons for the delay. But the
12 trustee’s evidence was not necessarily compelling. On this
13 appeal he has not established that the bankruptcy court
14 committed clear error in finding a lack of reasonable cause for
15 a delay of thirty three months.
16 (2) Some undecided issues
17 First, we are not asked to allocate blame, nor is it clear
18 that there is any blame. The accountants understandably were
19 reluctant to invest more time on a project for which they might
20 never be paid. The trustee understandably may have been unable
21 to retain alternative accountants or to accelerate the
22 preparation of returns by the existing accountants.
23 Second, because there were essentially no funds in the
24 estate we are not asked to review the trustee’s choices among
25 competing demands for use of such funds. For example, this case
26 does not involve a choice between preparing tax returns or
27 addressing health and safety issues. We generally defer to the
28 trustee’s business judgment in managing a bankruptcy estate’s

-3-
 1 limited resources. See Agarwal v. Pomona Valley Med. Grp., Inc.
2 (In re Pomona Valley Med. Grp., Inc.), 476 F.3d 665, 669-71 (9th
3 Cir. 2007) (defining contours of business judgment rule in
4 bankruptcy context). That issue is not before us, nor do we
5 need to decide how the business judgment test might interact
6 with the “ordinary business care and prudence” standard.
7 Third, the majority questions (in part V.C. of the opinion)
8 whether the tax penalties may be entitled to administrative
9 expense status for reasons other than what was argued on appeal.
10 I agree with the majority that we should remand rather than
11 simply reverse, and that in explaining why we are remanding it
12 is helpful to offer examples of issues that might need to be
13 considered on remand.
14 The majority offers two such examples: whether the tax
15 penalties are entitled to an administrative priority under the
16 introductory clause of § 503(b), or alternatively under
17 § 503(b)(1)(C). I agree that those issues may be appropriate
18 for consideration on remand.
19 Fourth, the majority asks (at the end of part V.C. of the
20 opinion): if the tax penalties are not administrative claims
21 then what are they? The majority then questions whether the tax
22 penalties could be considered prepetition claims.
23 I do not disagree with providing this example (to clarify
24 why we are remanding). But I part company with the majority
25 when it states that presumably the penalties cannot be general
26 unsecured claims because they did not arise prior to the
27 petition date.
28 The law is not fully developed on when a claim is treated

-4-
 1 as postpetition and when it is treated as a contingent,
2 unliquidated prepetition claim (of any priority). Compare,
3 e.g., Centre Ins. Co. v. SNTL Corp. (In re SNTL Corp.), 380 B.R.
4 204, 220-22 (9th Cir. BAP 2007), aff’d, 571 F.3d 826 (9th Cir.
5 2009) (attorneys’ fees incurred postpetition can be treated as
6 contingent, unliquidated portion of prepetition general
7 unsecured claim), with Gordon v. Hines (In re Hines), 147 F.3d
8 1185, 1191-92 & n.9 (9th Cir. 1998) (an attorney’s right to
9 payment that arises only on performance of postpetition services
10 is beyond the type of “contingent” prepetition claim
11 contemplated by statute) (alternative holding on which majority
12 and concurrence agree).
13 It is possible that the tax penalties in this case could be
14 treated as contingent, unliquidated claims as of the petition
15 date (and could be included in an amendment to the IRS claim if
16 its asserted administrative priority were to be rejected). The
17 penalties do have prepetition aspects: they arise from
18 liquidating the prepetition business and the untimely filing of
19 the prepetition 2006 tax return which led to the untimely filing
20 of the 2008 and 2010 informational returns. On the other hand,
21 perhaps the tax penalties are more properly viewed as
22 postpetition claims that are beyond what the statute means by
23 “contingent” and “unliquidated” prepetition claims. In either
24 event, the claims’ priority is unclear.
25 I express no views on the correct outcome. My point is
26 that although we are explaining our decision to remand by
27 providing examples of potential issues, I do not interpret our
28 discussion of these particular issues as limitations on the

-5-
 1 bankruptcy court: on remand it can apply its own analysis to
2 whatever issues are properly presented.
3 (3) Conclusion
4 With the limited caveats expressed above, I join in the
5 majority’s well reasoned opinion.
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