IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-10665
IN THE MATTER OF: WILLIAM E. JOHNSON,
Debtor.
-------------------------------------------------
WILLIAM E. JOHNSON,
Appellant,
versus
INTERNAL REVENUE SERVICE,
Appellee.
Appeal from the United States District Court
for the Northern District of Texas
July 10, 1998
Before DAVIS, WIENER, and PARKER, Circuit Judges.
WIENER, Circuit Judge:
Plaintiff-Appellant William E. Johnson (“the Debtor”) appeals
the holding of the bankruptcy court, as affirmed by the district
court, that Defendant-Appellee Internal Revenue Service (“IRS”) is
entitled to collect post-petition interest accruing on the Debtor’s
nondischargeable taxes from the filing date of his initial
bankruptcy petition, regardless of when and what amount of pre-
petition nondischarged taxes are paid by the trustee, until all
such taxes and post-petition interest are paid in full. After a
review of the record, the appellate briefs, and the applicable law,
we affirm, concluding that the IRS is entitled to collect from the
Debtor post-petition interest on nondischargeable taxes, from the
date bankruptcy petition was filed; subject, however, to proper
crediting of any interim payments to the IRS and with interest
continuing to accrue on the remaining balance only.
I
FACTS AND PROCEEDINGS
In April 1988, the Debtor filed for protection under Chapter
11 of the Bankruptcy Code (“Code”). Prior to the filing of his
bankruptcy petition, the Debtor and the IRS were litigating the
Debtor’s tax liabilities for the tax years 1979, 1981, 1983, and
1984. During the month following the filing of Debtor’s petition,
the IRS filed a Proof of Claim (Proof of Claim number 4) for
$162,718.93. In November of that year, the Debtor’s case was
converted to a Chapter 7 proceeding, and a trustee was appointed.
All assets of the estate were turned over to the trustee.
The following April, the Debtor received a discharge of all
but his nondischargeable debts. Thus his tax liabilities were not
discharged. The Debtor maintains that he wrote to the trustee on
three occasions (January 4, 1990; January 16, 1990; and May 30,
1990), requesting a determination of the value of assets in the
2
trustee’s possession and the amount necessary to discharge the IRS
claim, but received no response.
In February 1990, after Tax Court determination, the IRS sent
the Debtor a statement of taxes due, requesting payment for the
1983 year in the amount of $911.07. The Debtor paid this amount.
In August 1990, the IRS filed a new Proof of Claim (Proof of Claim
number 22), for $87,553.94, covering tax years 1979 and 1981.
Three years later, in March 1993, the trustee filed his Objections
to Claims, including claim numbers 4 and 22. Thereafter, the IRS
filed a second amended Proof of Claim (Proof of Claim number 23) in
the amount of $92,070.67, comprising taxes for each tax year at
issue and identifying the tax liabilities as unsecured, priority
claims. In May 1993, the bankruptcy court disallowed Proof of
Claim number 4, but allowed number 22 in the amount of $64,086.28.
The trustee later filed his final report.
In November 1995, the Debtor received a letter from the IRS
informing him that no action could be taken on his deficiency until
the trustee made his distribution. The trustee ultimately made his
distribution to the IRS in January 1996, in the amount of
$37,634.47 (a little more than half of its claim). Thereafter, the
IRS sought to collect from the Debtor the unpaid balance of his
nondischargeable tax liabilities plus post-petition interest on his
entire tax liabilities from the date of the filing of his original
petition.
3
In July 1996, the Debtor brought an action in the bankruptcy
court to determine the amount of pre-petition nondischargeable tax
owed the IRS, as well as any post-petition interest and penalties
due. In September of that year, the Debtor paid all outstanding
pre-petition taxes, interest, and penalties for the tax years 1979,
1980, 1981, and 1983, but presumably nothing for post-petition
interest. The bankruptcy court then granted the IRS’s motion for
summary judgment, holding the Debtor liable for post-petition
interest on the entire amount of nondischargeable taxes from the
petition date, regardless of when and what amount of the pre-
petition nondischarged taxes had been paid by the trustee. The
district court affirmed, and this appeal followed.
II
ANALYSIS
A. Standard of Review
Acting as a second review court, we consider the bankruptcy
court’s findings of fact under the clearly erroneous standard, and
that court’s conclusions of law de novo.1
B. Arguments of the Parties
There now appears to be some disagreement as to the precise
issues on appeal. We address those points raised in the parties’
briefs, as amplified —— and somewhat modified —— by the oral
arguments of counsel.
1
Matter of U.S. Abatement Corp., 79 F.3d 393, 397 (5th Cir.
1996).
4
In his appellate brief, the Debtor submits that he should only
be liable for post-petition interest on the unpaid balance of
nondischargeable taxes from the date of payment to the IRS by the
trustee, not from the petition date. Any holding to the contrary,
he contends, would be inconsistent with the Code’s “fresh start”
philosophy and would lead to situations in which a debtor emerges
from bankruptcy without any possessions and with more debt than
when he sought bankruptcy protection. Further explaining his
position, the Debtor urges that “it is the intent of Congress as
evidenced by the Bankruptcy Tax Act of 1980 . . . that interest not
accrue post-petition on non-discharged tax indebtedness until the
Chapter 7 trustee distributes funds in his possession or closes the
estate.”
At oral argument, the Debtor framed the issue somewhat
differently, as evidenced by the following colloquy between members
of the panel and the Debtor:
Panel Member: [O]n the monies that were paid by the
Trustee and subsequently by your client, has any interest
been charged from the date of payment on that amount?
Attorney: . . . The interest that’s been charged has
been on the entire amount of the Proof of Claim that was
allowed of $64,000 from the date of filing until today.
. . . .
Other Panel Member: Even though half of it was paid?
Attorney: That’s correct, even though the trustee made
a distribution.
Panel Member: So payment did not stop the running of any
5
interest or did not credit against accrued interest?
Attorney: That is what the Notice of Levy came to my
client on. That the payment was basically a payment of
the interest that was already being charged; it wasn’t
accredited [sic] back.
Panel Member: So if he had paid 100%, it would have
stopped the interest? If he had paid $1 less than 100%,
interest would have run on 100%?
Attorney: . . . [Y]ou’re correct, your Honor. Yes, that
is what the facts showed, your Honor. . . .
Panel Member: So this payment had no effect whatsoever
on accrued or future accruing interest?
Attorney: That is our problem, your Honor. That is the
sole issue that the court seems to be . . . .
Other Panel Member: Is your answer to that question yes?
Attorney: Yes, your Honor. And that’s that is our sole
issue here. The question that we are here is . . . .
Panel Member: Well now the issue you presented
originally was that because of bankruptcy there could be
no accruing of any interest, if I understood it
correctly?
Attorney: Well, I’m not sure that was correct, your
Honor.
Panel Member: Post-petition.
Attorney: Post-petition, that on nondischargeable taxes,
that the Trustee pays, our argument was there should be
no accrual of interest.
Panel Member: Well you made a broader statement than
that though. You said that if, and correct me if I
misunderstood your position as the plaintiff in this
thing . . . is that post-petition there would be no
accrual of interest on pre-petition taxes owed because of
the fresh start and all that business.
Attorney: That would be too broad a statement of what if
that’s how it came across, your Honor. That wasn’t what
the intention was.
6
Panel Member: So the only thing you’re complaining about
is that these interim payments had no effect on the
continuing accrual of pre-petition tax liabilities
accruing post-petition? Is that a fair statement?
Attorney: Right. The issue of whether the debtor is
liable for post-petition interest on the entire amount of
the Proof of Claim allowed of $64,000 from the date of
filing, which was April of 1988, until present, because
they’re still charging interest, your Honor, despite the
fact all pre-petition taxes, penalties, and interest have
been paid either by the trustee or the Debtor.
Other Panel Member: Let me see if I can understand it in
rounded off dollar amounts: 64,000 rounded off . . . was
the total Proof of Claim pre-petition tax liability . . .
37,600 is the amount that the trustee paid the IRS . . .
37 from 64 is 27, so you agree that you owe interest
. . . for the entire time period on the 27?
Attorney: No, your Honor. We agree that we owe interest
on the 27 from the date the Trustee made his distribution
until the date it was paid by the Debtor which was
September 96. The IRS has requested interest from 1988
to present on the whole 64. We have said . . . the IRS
is entitled to interest on the 27,000 . . . clearly
nondischargeable pre-petition debt, and I think that it’s
agreed that they’re entitled to post-petition interest on
that amount but only from time period the trustee made
the distribution until the Debtor made the final payment
which was in September of 96.
Panel Member: So you’re still maintaining that because
the trustee dillydallied, that you shouldn’t have to pay
interest?
Attorney: Yes.
The Debtor acknowledges that the seminal case under the Code’s
predecessor, the Bankruptcy Act, on the question of the
dischargeability of post-petition interest —— the Supreme Court’s
decision in Bruning v. United States2 —— and its progeny stand for
2
376 U.S. 358, 84 S. Ct. 906, 11 L. Ed. 2d 772 (1964).
7
the proposition that post-petition interest on nondischarged taxes
continues to accrue against the Debtor.3 He contends, however,
that Bruning did not address the calculation of post-petition
interest and penalties or the question whether post-petition
payments must be deducted from the principal amounts used for such
calculations.4
Moreover, according to the Debtor, courts recently have been
trying to evaluate what should happen to post-petition interest
that accrues during the proceedings of a bankruptcy. Pointing to
In re Winchell5 and In re Heisson,6 the Debtor advances that in the
3
See e.g., In re Hanna, 872 F.2d 829 (8th Cir. 1989); In re
Burns, 887 F.2d 1541 (11th Cir. 1989). The Debtor further contends
that Bruning establishes that you must look at —— i.e., give credit
to —— what was paid by the estate, something he contends Hanna and
Burns “overjump.” Bruning, 376 U.S. at 362, 84 S. Ct. at 908 (“But
the instant case concerns the debtor’s personal liability for
postpetition interest on a debt for taxes which survives bankruptcy
to the extent that it is not paid out of the estate.”).
4
In re Quick, 152 B.R. 909 (Bankr. W.D. Va. 1993). The
bankruptcy court noted that “[t]he appropriateness of how the [IRS]
determined the amount of interest and penalty stated to be owing .
. . was left unresolved . . . .” Id. at 910. As such, an order
was entered directing the IRS to show its calculations. It was
then established that the IRS “calculated both post-petition
interest and failure to pay penalty on the declining principal
balance of the unpaid income tax and that the amount sought from
the debtors included failure to pay penalties that accrued while
the debtors’ chapter 13 case was pending.” Id. The court held
that “the debtors [were] not liable for accrued post-petition
penalties on their pre-petition tax debt which were incurred while
their chapter 13 case was pending.” Id. at 912.
5
200 B.R. 734 (Bankr. D. Mass. 1996) The bankruptcy court
analyzed Code §§ 1129(a)(9)(C) and 1141(d)(2) in concluding that
personal liability for interest on nondischargeable taxes does not
survive confirmation of the debtor’s plan of reorganization. Id.
at 739-40. The court’s ruling discharged the post-petition
8
Chapter 11 context interest is allowed only as to the unpaid
portion of the indebtedness.7 The Debtor submits that this unpaid
interest can be collected after the trustee has made his
distribution. He contends that the rationale of both these cases
is directly relevant to a Chapter 7 proceeding when the trustee
pays the debtor’s nondischargeable taxes from the debtor’s funds.
Applying both cases, the Debtor concludes that he is only liable
for interest on the unpaid portion of his obligation from the date
interest that accrued on the nondischarged taxes. Id. at 740.
6
192 B.R. 294 (Bankr. D. Mass. 1996), rev’d and vacated,
United States v. Heisson, 217 B.R. 1 (D. Mass. 1997). Similar to
In re Winchell, the bankruptcy court in In re Heisson concluded
that the IRS was not entitled to post-petition, pre-confirmation
interest on nondischargeable priority taxes following confirmation
of a Chapter 11 plan proposing to pay the taxes in full with
interest from the date of confirmation.
7
The Debtor also relies on Matter of Irvin, 95 B.R. 1014
(Bankr. W.D. Mo. 1989)(holding that Chapter 7 debtors had no
liability for post-petition interest and penalties on their
nondischargeable tax obligations which had been or would be wholly
paid from the bankruptcy estate), rev’d, In re Irvin, 129 B.R. 187
(W.D. Mo. 1990). The bankruptcy court declared that “[t]he amount
which may be collected subsequent to bankruptcy is the principal
amount which remains unpaid at the conclusion of the bankruptcy
proceedings and the interest thereon . . . . It makes little sense
to permit the collection of interest on amounts paid out of the
estate, but which are delayed through the necessities of estate
administration and through no fault of the debtor.” 95 B.R. at
1019. The IRS correctly observes that the district court reversed
the bankruptcy court’s ruling in In re Irvin, concluding that the
debtors were liable to the IRS for post-petition penalties and
interest on pre-petition tax liabilities. 129 B.R. at 191. The
court was unpersuaded by the fact that the trustee had paid the
unpaid taxes in full. The district court further commented that
the debtor was not being penalized for using the bankruptcy
process, but instead for his failure to pay prior to using that
process. Id. at 189.
9
of such distribution, not from the date he filed his bankruptcy
petition. The Debtor further advances that his position is
supported by the IRS’s letter acknowledging that the precise amount
owed by the Debtor could not be calculated until the trustee made
his distribution.
Additionally, the Debtor emphasizes that he bears no fault for
the long delay in making distributions; rather, because of
attrition and payments to the trustee, the trustee’s attorney, and
the trustee’s accountant, only about half of the IRS’s original
claim got paid and then only years later. The Debtor states that
he tried desperately to have the trustee inform him regarding the
IRS liability, but the trustee waited almost nine years to disburse
funds to the IRS. The Debtor also contends that he tried to
contact the IRS, which waited for over a year before informing him
that it was unable to proceed until it received its distribution
from the trustee.
In response, the IRS insists that the district court correctly
affirmed the bankruptcy court’s holding that the IRS can collect
from the Debtor all post-petition interest that accrued on the
Debtor’s nondischargeable tax debt during the administration of the
estate, i.e., from the date his petition was filed. Invoking the
language of § 727,8 the IRS notes that a debtor in Chapter 7
proceedings generally obtains a discharge from all debts arising
8
11 U.S.C.A. § 727 (West 1993).
10
before the petition was filed, except those debts provided in §
523. It further observes that § 523(a)(1)(A) excepts from
discharge debts for pre-petition income tax liabilities not yet
assessed but still assessable.9 Thus, urges the IRS, inasmuch as
the income tax liabilities asserted against the Debtor were
assessed after the petition date, they fell within the discharge
exception for income tax liabilities still assessable at the time
of filing.
The IRS takes the position that a debtor remains liable for
interest on a nondischargeable debt and that accrual of interest is
not interrupted by or suspended during the pending of the
bankruptcy proceedings. Indeed, urges the IRS, the interest that
accrues constitutes an integral part of the underlying tax claim
and is generally treated the same as the underlying claim.10 It
points out that, under § 502(b)(2), unmatured (i.e., post-petition)
interest is not allowed against the bankruptcy estate.11 The IRS
9
Specifically, § 523 excepts from discharge taxes entitled to
priority under §§ 507(a)(2) and 507(a)(8). 11 U.S.C.A. §
523(a)(1)(A) (West Supp. 1998). Under § 507, “[t]he following
expenses and claims have priority in the following order: . . .
(8) Eighth, allowed unsecured claims of governmental units, only to
the extent that such claims are for—— (A) a tax on or measured by
income or gross receipts . . . not assessed before, but assessable,
under applicable law or by agreement, after, the commencement of
the case . . . .” 11 U.S.C.A. (a)(8)(A)(iii)(West Supp. 1998).
10
Bruning, 376 U.S. at 360, 84 S. Ct. at 908; Hanna, 872 F.2d
at 830.
11
In re Fullmer, 962 F.2d 1463, 1467 (10th Cir. 1992); Hanna,
872 F.2d at 830.
11
contends, nevertheless, that the law is settled that if a debt is
not discharged, the interest accruing thereon post-petition
survives bankruptcy as a personal liability of the debtor.12
Furthermore, insists the IRS, the facts here are
indistinguishable from those of Bruning. In that case, the debtor
paid the IRS only a portion of the taxes owed. Following the
debtor’s discharge in bankruptcy, the IRS attempted to collect the
balance of its assessment, including interest accrued during the
bankruptcy case. The debtor contended that he was not liable for
interest accrued after his petition was filed. The Supreme Court
held that post-petition interest on an unpaid tax debt that is not
discharged remains, after bankruptcy, a personal liability of the
taxpayer.13 The IRS urges that even though Bruning was decided
under the predecessor Bankruptcy Act, its reasoning and its holding
remain viable under the Code and control this case.
The IRS also relies on In re Hanna, in which the Eighth
Circuit considered whether, under the Code, post-petition interest
could be enforced as a continuing nondischargeable obligation
against a Chapter 7 debtor following liquidation. Determining
that, when taken together, §§ 502 and 523 demonstrate Congress’s
intent to codify the general principle of Bruning, the Hanna court
12
Fullmer, 962 F.2d at 1468; Hanna, 872 F.2d at 830-31; Burns,
887 F.2d at 1543. See also, Bruning, 376 U.S. at 363 (same under
former Bankruptcy Act).
13
376 U.S. at 363, 84 S. Ct. at 909.
12
concluded that post-petition interest is nondischargeable and
remains a personal liability of the debtor subsequent to bankruptcy
proceedings.14 The Hanna court noted that, in balancing the
interests of creditors, debtors, and the government with regard to
taxes and interest on such, Congress “determined that the problems
of financing the government override granting debtors a wholly
fresh start.”15
The IRS maintains that the cases on which the Debtor relies
provide him no support. Specifically, the IRS contends that In re
Heisson and In re Winchell —— both Chapter 11 cases —— are
distinguishable and, in any event, were wrongly decided. In
Chapter 11, § 1129(a)(9)(C) requires that, within six years
following assessment, holders of allowed priority unsecured tax
claims receive deferred cash payments in an amount equal to the
allowed claim as of the effective date of the plan.16 The IRS
states that these payments include an adequate interest component.
The Heisson and Winchell courts reasoned that, with respect to
post-petition interest on nondischargeable debts, § 1129(a)(9)(C),
which authorizes payment of a claim over a six year period in
accordance with a plan, was in conflict with § 1141(d)(2), which
provides that confirmation of a Chapter 11 plan does not discharge
14
Hanna, 872 F.2d at 831.
15
Id.
16
11 U.S.C.A. § 1129(a)(9)(C)(West Supp. 1998).
13
a debtor from debts exempted from discharge under § 523.17
Concluding that the two provisions could not be reconciled, both
courts determined that post-petition interest on nondischargeable
taxes following confirmation of a Chapter 11 plan should be deemed
discharged.
The IRS posits that, as this is a Chapter 7 liquidation case
and not a Chapter 11 reorganization, § 1129(a)(9)(C) is
inapplicable.18 As such, these cases do not assist the Debtor.
That aside, the IRS insists that those two cases were incorrectly
decided. The IRS disagrees with the courts’ finding of
irreconcilable conflict in the two provisions, urging that they
merely operate in different spheres. On one hand, § 1129(a)(9)(C)
governs how the allowed amount of a priority unsecured tax claim is
to be paid under a Chapter 11 plan. This allowed amount excludes
post-petition interest accrued between the commencement of the case
and plan approval. The IRS contends, however, that disallowance of
such a claim in the bankruptcy case does not affect the debtor’s
continued personal liability if the interest is accruing on a
nondischargeable debt. Section 1141(d)(2), on the other hand,
preserves the debtor’s liability for post-petition interest and
other nondischargeable debts. According to the IRS,
§ 1129(a)(9)(C) does have meaning, as it governs payment on allowed
17
11 U.S.C.A. § 1141(d)(2)(West 1993).
18
See 11 U.S.C.A. § 103(f) (West 1993).
14
priority unsecured claims and is not meaningless simply because it
does not govern payment of undischarged debts that are not allowed.
As for the Debtor’s attempts to place blame on the trustee,
the IRS responds first that the Debtor could have sought his
removal. Similar to the Debtor here, the debtors in In re Irvin
argued that the IRS should not be allowed to collect interest from
their after-acquired property because it was the bankruptcy process
itself that was the cause for delay. The court rejected this
argument, stating:
where a debt is owed before the bankruptcy petition is
filed, as in Bruning, Benson, and the case at hand, it
cannot be said that the debtor is not responsible for the
delay. See Bruning, 376 U.S. at 360, 84 S. Ct. at 907.
The debtor is not being penalized for his assertion of
the bankruptcy process, but for his failure to pay before
the bankruptcy process was utilized.19
Finally, regarding the Debtor’s claims that liability for the
interest accumulated on his tax debt during the administration of
his bankruptcy case would prejudice his “fresh start,” the IRS
insists that a higher priority is placed on revenue collection than
on a debtor’s rehabilitation or fresh start.20
19
In re Irvin, 129 B.R. at 189.
20
See Bruning, 376 U.S. at 361, 84 S. Ct. at 908 (“[Section]
17 is not a compassionate section for debtors. Rather, it
demonstrates congressional judgment that certain problems —— e.g.,
those of financing government —— override the value of giving the
debtor a wholly fresh start. Congress clearly intended that
personal liability for unpaid tax debts survive bankruptcy.”);
Matter of Fein, 22 F.3d 631, 633 (5th Cir. 1994)(“[I]n the case of
individual debtors, Congress consciously opted to place a higher
priority on revenue collection than on debtor rehabilitation or
15
At oral argument, counsel for the IRS assured the panel that,
although she had no personal knowledge whether the payments made by
the trustee and the Debtor had been credited to interest, she was
certain that proper credit had been given the Debtor for these
payments. We cannot determine from the record, however, whether
the Debtor received credit for these payments; we have located no
document in the record that purports to be an accounting by the IRS
of what was owed, what has accrued, what has been paid, or what is
now owed and accruing interest. Counsel for the IRS further made
clear, however, that while she had never understood the nature of
this case to be misapplication or nonapplication of payments by the
IRS, a Debtor is liable for interest up to the time that the entire
amount of indebtedness is paid, but is entitled to credit for
interim payments. Illustrating this concept, a member of the panel
inquired, “Let’s say there’s a $100,000 in principal and interest
due the Service and the taxpayer comes in and pays $50,000. Well,
are you telling us that until the second 50 is paid, he has to pay
interest on the entire 100?” Counsel responded, “[n]o sir, he pays
interest on the [remaining] 50 [only].”
Following oral argument, the IRS filed a supplemental letter
brief, asserting that the issue of the calculation of the Debtor’s
liability by the IRS was resolved to the satisfaction of the
parties in the bankruptcy court. As support, the IRS points to
ensuring a ‘fresh start.’”).
16
(1) the government’s motion for summary judgment filed in the
bankruptcy court, and (2) the stipulated final judgment.
In its motion for summary judgment, the IRS stated:
At the status conference held on August 26, 1996,
debtor’s counsel requested an expedited adversary
proceeding and indicated he would not dispute the
calculation of debtor’s liability at such proceeding and
would, instead, solely assert that debtor’s liability, as
computed by the IRS, should be discharged under legal or
equitable grounds. Accordingly, the resolution of this
motion in favor of the Service should resolve the
adversary proceeding in full.21
In his response to the IRS’s motion, the Debtor listed the
following as disputed issues:
a. Did the Debtor’s payment of tax year 1983 tax
pursuant to the IRS tax bill eliminate all taxes for
1983?
b. Has the IRS credited Debtor’s account for the
$1,500.00 payment made in 1991?
c. From what date is the IRS entitled to seek post-
petition interest from the Debtor?
d. On what amount is the IRS entitled to seek post-
petition interest from the Debtor?
Next, the IRS points to the agreed judgment entered by the
bankruptcy court, which addresses the remainder of the Debtor’s
complaint for declaratory judgment not resolved by the court’s
grant of the IRS’s motion for summary judgment. The court stated
that “[t]he parties have advised the Court that they have reached
a final agreement regarding the remainder of this Complaint as set
21
ROA, vol. 2, p. 13 (emphasis added).
17
forth below. The Court has concluded that the parties’ agreement
as set forth in [the] Agreed Judgment should be approved.” As
such, the court ruled as follows:
1. The Internal Revenue Service assessments for income
taxes, interest and penalties on debtor’s 1979, 1981,
1983 and 1984 income tax years are correct, except that
the assessments made on debtor’s 1983 income tax year in
the amounts of $597.40, $83.77 and $474.91, said
assessments reflected on debtor’s 1983 income tax account
as of October 24, 1989, shall be abated, and any
resulting credits shall be applied to offset other items
on such account or to debtor’s other tax liabilities.
2. The Internal Revenue Service has properly credited
all payments made by debtor prior to the date of the
Complaint. (emphasis added).
3. All relief not specifically granted in this Agreed
Judgment is denied.
The IRS contends that at no time between entry of the
stipulated final judgment and oral argument on appeal had the
Debtor ever disputed the calculation of his tax liabilities;
rather, he merely challenged the propriety of having interest
accrue “post-petition on non-discharged tax indebtedness until the
Chapter 7 trustee distributed funds in his possession or closes the
estate.” The IRS urges that, as the Debtor did not dispute, either
in the district court or on appeal to this court, whether the IRS
properly credited his and the trustee’s payments, any
representations at oral argument by the Debtor’s counsel to the
contrary are inconsistent with the agreed judgment. Finally, the
IRS insists that under the “consent-to-judgment” waiver doctrine,
the Debtor cannot now question the IRS’s crediting of his payment,
18
which he previously acknowledged as being proper.22
C. Conclusion
Joining the other circuits that have addressed the issue,23
we begin by holding that for this circuit the Bruning rule
continues to apply under the Code, i.e., post-petition interest
accruing on nondischargeable tax debts is itself nondischargeable
and the debtor remains personally liable for that interest
following completion of bankruptcy proceedings. Stated
differently, “creditors may accrue as to the debtor personally
post-petition interest on nondischargeable debts while a bankruptcy
22
Tel-Phonic Servs., Inc. v. TBS Intern., Inc., 975 F.2d 1134,
1137 (5th Cir. 1992)(“A party will not be heard to appeal the
propriety of an order to which it agreed.”); Hunt v. Bankers Trust
Co., 799 F.2d 1060, 1066 (5th Cir. 1986). Moreover, the IRS
asserts that we should not review any error which was waived by
consent, and if all errors complained of come within the waiver,
the judgment must be affirmed. Pacific R.R. v. Ketchum, 101 U.S.
289, 295, 11 Otto 289, 25 . Ed. 932 (1880).
23
See Pardee v. Great Lakes Higher Educ. Corp., 218 B.R. 916,
921 (9th Cir. 1998); Leeper v. Pennsylvania Higher Educ. Assistance
Agency, 49 F.3d 98, 101-02 (3d Cir. 1995); Fullmer v. United
States, 962 F.2d 1463, 1468 (10th Cir. 1992); Burns v. United
States, 887 F.2d 1541, 1543 (11th Cir. 1989); Hanna, 872 F.2d 829,
831 (8th Cir. 1989); Bradley v. United States, 936 F.2d 707, 709-10
n.3 (2d Cir. 1991)(stating in dictum that the weight of authority
supports the view that a debtor is personally liable for post-
petition interest on unpaid taxes). But see In re Reich, 66 B.R.
554, 557-58 (Bankr. D. Colo. 1986), rev’d, 107 B.R. 299 (D. Colo.
1989) and In re Frost, 19 B.R. 804, 810 (Bankr. D. Kan.
1982)(stating that “[t]he notion that any creditor can show up at
the debtors’ doorstep after discharge is granted and attempt to
collect a discharged debt is . . . offensive to the concept of the
debtor’s fresh start . . . .” and concluding that “the IRS cannot
collect . . . post-petition interest from the debtors after receipt
of a discharge.”), vacated on relevant ground as unripe, 47 B.R.
961 (D. Kan. 1985).
19
is pending.”24 We agree with the Eighth Circuit’s conclusion in
Hanna, also a Chapter 7 case, that
[t]aken together, sections 502 and 523 simply demonstrate
Congress’ intent to codify the general principle that
applied under Bruning. Post-petition interest is
disallowed against the bankruptcy estate under section
502. Priority tax claims remain nondischargeable for
individual debtors. Under both the Act and the Code,
Congress attempted to balance the interests of the
debtor, creditors and the government, and in the instance
of taxes and interest on such, Congress has determined
that the problems of financing the government override
granting debtors a wholly fresh start. H.R. Rep. No.
595, 95th Cong., 2d Sess. at 274 (1978), reprinted in
1978 U.S. Code Cong. and Admin. News 5963, 6231. Thus,
post-petition interest is nondischargeable, and [the
debtors] remain personally liable for that interest
subsequent to bankruptcy proceedings.25
We note that two of the bankruptcy court cases on which the
Debtor relies —— Matter of Irvin and In re Heisson —— were
subsequently reversed by the district courts that reviewed them.
The district court in Heisson reasoned that, as there was no
dispute that the underlying debt to the IRS was nondischargeable
and the IRS did not seek to collect gap interest from the estate,
the reasoning in Bruning applied.26 Similarly, the district court
24
Leeper, 49 F. 3d at 102 (3d Cir. 1995).
25
Hanna, 872 F.2d at 831.
26
Heisson, 217 B.R. at 4 (relying on a number of Bankruptcy Act
cases, including: United States v. River Coal Co., Inc., 748 F.2d
1103, 1106-07 (6th Cir. 1984) (extending Bruning to gap interest ——
i.e., post-petition, pre-confirmation interest —— on
non-dischargeable tax debts in Chapter 11 proceedings where the tax
claim was paid in full under the plan); In re Jaylaw Drug, Inc.,
621 F.2d 524, 528 (2d Cir. 1980) (same); Hugh H. Eby Co. v. United
States, 456 F.2d 923, 925 (3d Cir. 1972) (same); and In re Johnson
Electrical Corp., 442 F.2d 281, 283-84 (2nd Cir. 1971)(same))(also
20
rejected the bankruptcy court’s distinguishing of Bruning based on
the fact that it dealt with nondischargeable claims that were only
partially paid in the bankruptcy proceeding, whereas, in the case
at hand, the claims were to be fully paid in the bankruptcy
proceedings.27 The district court concluded that, “[t]he nature and
purpose of interest does not change simply because the underlying
debt is satisfied or fully provided for under the plan.”28
As to the precise point at which post-petition interest begins
to accrue, we understand “post-petition interest” to mean exactly
that —— i.e., interest that accrues immediately from and after the
filing of the bankruptcy petition. We find no authority for the
relying on a number of decisions under the Code, including:
Leeper, 49 F.3d at 104; Fullmer, 962 F.2d at 1468; Burns, 887 F.2d
at 1543; Hanna, 872 F.2d at 831; In re Willauer, 192 B.R. 796, 801
n.4 (Bankr. D. Mass. 1996); JAS Enters., 143 B.R. 718, 719 (Bankr.
D. Neb. 1992); and In re Fox, 130 B.R. 571, 575 (Bankr. W.D. Wash.
1991). But see In re Wasson, 152 B.R. 639, 642 (Bankr. D. N.M.
1993)).
27
Id. (relying on River Coal, 748 F.2d at 1107; Eby, 456 F.2d
at 925 (“That the underlying taxes were later paid in full here
does not affect the fact that appellant had the use of the
Government's money during the period of the reorganization
proceeding, and that since the underlying debt is not discharged by
operation of Section 17 of the Bankruptcy Act, 11 U.S.C. § 35
(1964), neither is the interest which accrues by reason of the use
of such money during the pendency of the proceedings.”); Johnson
Electrical, 442 F.2d at 284 (stating that the distinction between
post-petition interest where the underlying tax is partially paid
and where it is fully paid "is not sufficiently substantial to
warrant a different result. Either the filing of the petition
stops the running of interest on federal tax claims against a
bankrupt or it does not.").
28
Heisson, 217 B.R. at 4.
21
Debtor’s position that post-petition interest does not begin to
accrue until disbursement of funds by the trustee.
Finally, with regard to credit for the interim payments, we
observe that, while the IRS’s argument that the Debtor waived any
right to challenge its calculation of the debt may be attractive in
that it would pretermit that consideration, counsel for the IRS
assured the panel that, although she did not know whether the
payments were credited to interest, she would assume they were; she
also stated that a taxpayer should be credited for partial payments
and that she was certain that the money has been credited to the
Debtor for the Trustee’s payment and the Debtor’s subsequent
payment. Any amounts paid by the trustee or the Debtor in the way
of partial, interim payments, must reduce either accrued interest
or the principal tax debt, or both, depending on the discrete
facts,29 and, to the extent that principal tax debt is reduced,
29
Regarding the application of the payments, we note in passing
that “[u]nder [a] long-standing IRS policy, taxpayers may designate
the application of tax payments that are voluntarily made, but may
not designate the application of involuntary payments.” United
States v. Pepperman, 976 F.2d 123, 127 (3d Cir. 1992)(citing
Rev.Rul. 79-284, 1979-2 C.B. 83; Rev.Rul 73-304, 1973-2 C.B. 42;
Matter of Ribs-R-Us, 828 F.2d 199, 201 (3d Cir. 1987)). “An
involuntary payment traditionally has been defined as ‘any payment
received by 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.’” Id.
(citing Amos v. Commissioner, 47 T.C. 65, 69 (1966)(emphasis in
Pepperman)). “Most courts . . . have concluded that payments made
in the bankruptcy context are involuntary.” Id. (citations
omitted). The Third Circuit “conclude[d] . . . that payments made
to the IRS out of a Chapter 7 debtor’s estate are involuntary.”
Id. In so determining, the court took into consideration the fact
that “the trustee was not free to withhold payment for taxes.” Id.
22
interest will thereafter accrue only on the remaining balance due.
III
CONCLUSION
For the foregoing reasons, we affirm the district court’s
decision to the extent that it holds (1) post-petition interest is
nondischargeable, (2) it accrues from the filing of the petition,
and (3) the Debtor has continuing liability for such interest. We
hold in addition that the Debtor is entitled to credit for any
payments made, as of the dates paid, applicable first against
accrued interest and then against principal, with interest
continuing to accrue only on the net balance remaining unpaid; and
we remand this cause to the district court for the limited purpose
of its verifying that the appropriate credits were given and, if
not, amending its judgment to effectuate such credits and reflect
their effect on the amount of the post-petition interest remaining
due and payable.
AFFIRMED and REMANDED with instructions.
23
Johnson v. Internal Revenue Service
Court: Court of Appeals for the Fifth Circuit
Date filed: 1998-07-13
Citations: 146 F.3d 252
Copy Citations