United States Court of Appeals
For the First Circuit
____________________
No. 00-9012
IN RE: PAUL D. WEINSTEIN,
Debtor.
____________________
UNITED STATES,
Appellant,
v.
JONATHAN YELLIN,
Trustee, Appellee.
____________________
APPEAL FROM A JUDGMENT OF THE UNITED STATES
BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
____________________
Before
Lynch and Lipez, Circuit Judges,
and Doumar*, Senior District Judge.
____________________
Thomas J. Clark, Attorney, Tax Division, Department of
Justice, with whom Claire Fallon, Acting Assistant Attorney General,
and Michelle C. France and Donald B. Tobin, Attorneys, were on brief
for appellant.
*
Of the Eastern District of Virginia, sitting by
designation.
Craig J. Ziady with whom Riemer & Braunstein LLP was on brief
for appellee.
____________________
November 30, 2001
____________________
LYNCH, Circuit Judge. The Internal Revenue Service
appeals from the judgment of this circuit's Bankruptcy Appellate
Panel, United States v. Yellin (In re Weinstein), 251 B.R. 174
(B.A.P. 1st Cir. 2000), affirming the judgment of the
bankruptcy court, In re Weinstein, 237 B.R. 4 (Bankr. D. Mass.
1999), in favor of Jonathan D. Yellin, the trustee in this
bankruptcy case. The parties contest the interpretation of 11
U.S.C. §§ 503, 507, and 726; the IRS argues that the Bankruptcy
Code requires treatment of interest on postpetition taxes owed
by the estate as a first-priority administrative expense, and
Yellin responds that the interest should receive a mere fifth
priority. The Panel and the bankruptcy court agreed with
Yellin, and in so doing disagreed with all four circuit courts
that have previously considered the issue. To answer the
question presented, we must consider the text of the statute,
the context of prior caselaw against which Congress wrote the
Bankruptcy Code, the legislative history of that Code, and the
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policies and purposes of priority treatment for postpetition
taxes. We conclude that the IRS offers the correct
interpretation, and reverse.
I.
The legal question presented by this case does not turn
on the case's facts, and a brief summary of those facts suffices
to illustrate the circumstances under which that question
arises. Paul D. Weinstein, the debtor in this case, filed a
bankruptcy petition under Chapter 7 of the Bankruptcy Code in
1992. Paul Grella, Weinstein's first trustee, sold assets from
the estate, but did not file the required yearly income tax
return. Grella later filed income tax returns for the years
1992 through 1995 in 1996. The IRS subsequently determined that
the estate owed, in addition to taxes, a total of $9,195.43 in
penalties and $5,529.67 in interest. Grella requested that this
amount be reduced, and the IRS agreed to forgo the penalties and
to reduce the estate's interest obligation.
On November 6, 1997, the IRS filed a request for
payment of the remaining interest, which then amounted to
$4,593.83. Grella offered to pay this amount at first priority
under 11 U.S.C. § 726(a)(1). After Grella resigned as trustee,
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however, he was replaced by the current trustee, Jonathan D.
Yellin. Yellin suggested paying the IRS at fifth priority under
11 U.S.C. § 726(a)(5) -- that is, not at all, because the
estate's funds were insufficient to pay in full even the
unsecured creditors who took second priority under § 726(a)(2).
The IRS argued for first priority.
The bankruptcy court ruled in Yellin's favor, and the
Panel affirmed. We discuss their arguments below, after placing
the problem in context.
II.
Because Weinstein's is a Chapter 7 bankruptcy, his
estate must pay its debts in the order prescribed by § 726.
Section 726(a)(1) gives first priority to those types of claims
listed in § 507, which in turn gives first priority to those
listed in § 503(b).1 Section 503(b) claims stem from the costs
1 Section 503(b)(1) states:
(b) After notice and a hearing, there shall be allowed,
administrative expenses, other than claims allowed under section
502(f) of this title, including --
(1) (A) the actual, necessary costs and expenses of
preserving the estate, including wages, salaries, or
commissions for services rendered after the
commencement of the case;
(B) any tax --
(i) incurred by the estate, except a tax of a kind
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of administering the bankruptcy estate itself. Among these
claims are most taxes "incurred by the estate," 11 U.S.C.
§ 503(b)(1)(B)(i), including fines or penalties related to those
taxes, id. § 503(b)(1)(C). No one disputes that the language of
§ 503(b)(1)(B)(i) refers to postpetition taxes such as those
Grella failed to pay. The parties disagree, however, whether
that language includes interest on those taxes.
The IRS maintains that § 503(b)(1)(B)(i) does include
interest, and relies for this proposition primarily on Nicholas
v. United States, 384 U.S. 678 (1966). Nicholas preceded the
current Bankruptcy Code, but the Supreme Court has given
considerable weight to pre-Code caselaw in interpreting the
current code. See Dewsnup v. Timm, 502 U.S. 410, 419 (1992)
("When Congress amends the bankruptcy laws, it does not write
'on a clean slate.'" (quoting Emil v. Hanley, 318 U.S. 515, 521
(1943))). The IRS contends that Nicholas stands for a rule of
pre-Code practice and that, as the Court held was true in
specified in section 507(a)(8) of this title; [and]
. . .
(C) any fine, penalty, or reduction in credit relating
to a tax of a kind specified in subparagraph (B) of
this paragraph.
11 U.S.C. § 503(b)(1) (2000).
-5-
Dewsnup, nothing in the Code or the legislative history provides
a sufficiently strong indication of congressional intent to
change that rule.
Yellin, however, argues that this case is governed by
§ 726(a)(5), which provides that the estate shall pay at fifth
priority "interest at the legal rate from the date of the filing
of the petition" on claims paid under §§ 726(a)(1)-(4).2 Because
the tax claim at issue here is being paid under § 726(a)(1) --
due to the incorporation of § 507 into § 726(a)(1) and of
§ 503(b) into § 507 -- Yellin claims that § 726(a)(5) applies
and provides a sufficiently clear directive from Congress that
the courts may not consider Nicholas, much less legislative
2 Section 726(a) states:
(a) Except as provided in section 510 of this title, property of
the estate shall be distributed--
(1) first, in payment of claims of the kind specified in,
and in the order specified in, section 507 of this
title . . .;
(2) second, in payment of any allowed unsecured claim, other
than a claim of a kind specified in paragraph (1), (3), or
(4) of this subsection . . .;
. . .
(5) fifth, in payment of interest at the legal rate
from the date of the filing of the petition, on any
claim paid under paragraph (1), (2), (3), or (4) of
this subsection . . . .
11 U.S.C. § 726(a).
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history or policy rationales. This position the bankruptcy
court and Bankruptcy Appellate Panel took as well.
The position of the IRS has much support. Four
circuits have considered the question whether § 503(b)(1)(B)(i)
includes interest on postpetition taxes, and each has concluded
that it does. See United States v. Flo-Lizer, Inc. (In re Flo-
Lizer, Inc.), 916 F.2d 363 (6th Cir. 1990); United States v.
Cranshaw (In re Allied Mechanical Serv., Inc.), 885 F.2d 837
(11th Cir. 1989); United States v. Ledlin (In re Mark Anthony
Constr., Inc.), 886 F.2d 1101 (9th Cir. 1989); United States v.
Friendship College, Inc. (In re Friendship College, Inc.), 737
F.2d 430 (4th Cir. 1984).3 The same is true of a leading
treatise in bankruptcy. See 4 Collier on Bankruptcy ¶ 503.08,
at 503-56 (L. King et al. eds., 15th rev. ed. 2001) ("[T]he
courts generally and properly treat interest on postpetition
3 This circuit has issued a decision denying interest on
postpetition taxes in the context of a railroad reorganization.
See In re Boston and Maine Corp., 719 F.2d 493, 498-502 (1st
Cir. 1983). In that case, however, the court distinguished
Nicholas by relying entirely on the unique characteristics of a
railroad reorganization -- specifically, on the district court's
power to defer the payment of taxes. Id. at 498, 500. No such
considerations relate to this case; as we discuss, it is crucial
to the outcome of this case that Grella was required to pay
taxes in a timely fashion.
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taxes as an administrative expense."). These cases did not,
however, arise entirely under Chapter 7. See Flo-Lizer, 916
F.2d at 364 (arising wholly under Chapter 11); Cranshaw, 885
F.2d at 837-38 (dealing with interest accrued during a Chapter
11 phase after conversion to Chapter 7); Ledlin, 886 F.2d at
1102 (same); Friendship College, 737 F.2d at 430-31 (same).
Moreover, none addressed the relevance or irrelevance of
§ 726(a)(5) -- perhaps because of their less direct relationship
to Chapter 7. Several bankruptcy courts of this circuit have
dealt with the problem prior to this case, and have disagreed on
the proper outcome. Compare In re Gould & Eberhardt Gear Mach.
Corp., 80 B.R. 614 (D. Mass. 1987) (according first-priority
status to interest on postpetition taxes), appeal dismissed, 852
F.2d 26 (1st Cir. 1988), and In re Goodrich, 215 B.R. 638, 642
(Bankr. D. Mass. 1997) (same), with In re Hospitality Assocs.,
212 B.R. 188 (Bankr. D.N.H. 1997) (relegating such interest to
fifth priority).4
4 Many district and bankruptcy courts in other circuits
have also addressed the question presented by this case. See
generally E.L. Black, Annotation, What Are "Administrative
Expenses" Under § 503(b) of Bankruptcy Code (11 U.S.C.A. §
503(b)) Granted First Priority for Payment Pursuant to §
507(a)(1) of Code (11 U.S.C.A. § 507(a)(1)), 140 A.L.R Fed. 1,
-8-
III.
A question of the interpretation of the Bankruptcy
Code, like any other question of statutory interpretation, is a
question of law that we review de novo. Travelers Ins. Co. v.
Cambridge Meridian Group, Inc. (In re Erin Food Servs., Inc.),
980 F.2d 792, 799 (1st Cir. 1992).
A.
We consider first the text of the statute. If
sufficiently clear, that text assumes overriding importance.
Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530
U.S. 1, 6, 10 (2000); United States v. Ron Pair Enters., Inc.,
489 U.S. 235, 241 (1989) ("[W]here . . . the statute's language
is plain, 'the sole function of the courts is to enforce it
according to its terms.'" (quoting Caminetti v. United States,
242 U.S. 470, 485 (1917))). The bankruptcy court and the Panel
felt that § 726(a)(5) was clear in precisely this way, because
it refers expressly to postpetition interest and assigns that
interest fifth priority. We disagree with their analysis.
at § 42 (1997) (collecting cases).
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Section 503(b)(1), examined in isolation, does not
mention interest, either to include or to exclude it from the
definition of a "tax." Similarly, § 507 does not mention
interest. Accordingly, these provisions alone do not resolve
the question whether interest on postpetition taxes should
receive the same priority status as the taxes themselves. If
these were the only relevant provisions, we could conclude
easily that Congress had not spoken to the question and turn to
auxiliary sources of statutory meaning. This approach was taken
by the Ninth Circuit in Ledlin, the most thorough of the prior
circuit court opinions addressing the priority treatment of
interest on postpetition taxes. 886 F.2d at 1107 ("[W]e avoid
the 'treacherous' course of inferring from Congress' silence any
affirmative intentions." (quoting NLRB v. Plasterers' Local
Union No. 79, 404 U.S. 116, 129 (1971))).
A fair review of the Panel's decision, however,
requires us to discuss the different provisions within § 726.
Section 726(a)(1) does not mention interest, but § 726(a)(5)
does -- specifically, "interest at the legal rate from the date
of the filing of the petition" -- and assigns it a fifth
priority. Section 726(a)(5) could control the outcome of this
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case in one of two ways. First, it might be that although
§ 503(b)(1)(B)(i) includes interest as a general matter,
§ 726(a)(5) overrides § 503(b)(1)(B)(i) in the specific context
of Chapter 7 and directs that interest on postpetition taxes,
like all other interest, be paid at fifth priority rather than
at first priority. This reading would apply the principle that
in statutory interpretation courts give specific language
precedence over general language. See, e.g., Varity Corp. v.
Howe, 516 U.S. 489, 511 (1996) (describing this approach as a
"warning against applying a general provision when doing so
would undermine limitations created by a more specific
provision").
Second, it might be that although § 503(b)(1)(B)(i)
read in isolation would include interest, § 726(a)(5) provides
textual evidence that § 503(b)(1)(B)(i) should not, in fact, be
read to include interest, because the two provisions are meant
to work in concert -- at least in Chapter 7 cases -- and because
Congress's mention of interest in the one demonstrates that
Congress mentioned interest when interest was relevant. This
reading would apply the principle that courts will seldom imply
mention of an item in one statutory provision if another
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statutory provision expressly mentions the same item. See,
e.g., City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338
(1994) ("'[I]t is generally presumed that Congress acts
intentionally and purposely' when it 'includes particular
language in one section of a statute but omits it in another.'"
(quoting Keene Corp. v. United States, 508 U.S. 200, 208 (1993))
(alternation in original)).
Neither of these readings, however, finds such strong
support in the statute's text as to preclude use of nontextual
means of interpretation. The first reading, under which
§ 726(a)(5) overrides § 503(b)(1)(B)(i) in Chapter 7, supposes
a conflict between two provisions of the statute -- a conflict
with which neither provision deals expressly. Such a conflict
provides a reason to move beyond the text and to examine a
statute's legislative history and apparent purpose. Nor is it
clear which provision is the more specific: § 503(b)(1)(B)(i)
applies to all bankruptcies, and § 726(a)(5) only to Chapter 7;
but § 726(a)(5) applies to many different claims against the
bankruptcy estate,5 and § 503(b)(1)(B)(i) only to a specific type
5 We emphasize that our reading of § 726(a)(5) in this case
leaves intact many unambiguous applications of its language. For one
example, prepetition taxes do not include postpetition interest as a
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of administrative expense. The second reading, under which
§ 726(a)(5) influences the proper reading of § 503(b)(1)(B)(i)
-- a reading which would then apply to all bankruptcies and not
merely to Chapter 7 -- relies on too remote an inference to be
fairly called a matter of plain meaning. Section 503(b), after
all, is incorporated in § 726(a) only indirectly through § 507;
it is not inevitable that a drafter had or that a reader will
have one section's precise language firmly in mind while
contemplating the other. Section 726(a)(5)'s express inclusion
of interest does provide some legitimate evidence that
§ 503(b)(1)(B)(i) should not be read to contain an implied
inclusion; but that evidence is not so strong that we can end
our analysis here.
B.
Accordingly, we consider second the context of the
statute in bankruptcy caselaw. A large body of bankruptcy
caselaw predates the 1978 Bankruptcy Code, and the Supreme Court
in interpreting that Code has assumed that Congress meant to
part of the claim, see Cal. State Bd. of Equalization v. Taxel (In re
Del Mission Ltd.), 998 F.2d 756, 757-58 (9th Cir. 1993), although they
too are incorporated into § 726(a)(1) through § 507(a)(8).
Postpetition interest on those taxes would therefore be payable, if at
all, only at fifth priority under § 726(a)(5).
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preserve some measure of continuity with the earlier cases.
Dewsnup, 502 U.S. at 419-20; Kelly v. Robinson, 479 U.S. 36, 44-
47 (1986). We have followed the Court's lead quite recently.
See IRS v. Cousins (In re Cousins), 209 F.3d 38, 41 (1st Cir.
2000) (holding that the rule of Bruning v. United States, 376
U.S. 358 (1964), survived the Code's enactment).
The 1966 case of Nicholas v. United States, 384 U.S.
678, dominates the context of the statutory provisions in
question. That case involved facts more complex than those we
face today. In Nicholas, the debtor went through subsequent
phases of arrangement (the procedure now governed by Chapter 11
of the Code) and bankruptcy (now governed by Chapter 7). During
the arrangement phase, the trustee in Nicholas failed to file
tax returns or pay taxes due. During the bankruptcy phase, the
IRS requested payment of the underlying taxes together with
penalties and interest accumulated from the time the taxes were
due to the time of the request -- a period which encompassed
part of the arrangement phase and all of the bankruptcy phase.
Nicholas, 384 U.S. at 679-81.
The Court held that the government should receive
payment for interest that accrued on the tax claim during the
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period from the time the taxes were due to the time that the
arrangement phase ended and the bankruptcy phase began. Id. at
689-90. On this point eight Justices agreed; Justice Harlan did
not, and commented that although the case was close he would
prefer to see the government receive payment for interest over
the entire period covered by its request, including the
bankruptcy phase. Id. at 696 (Harlan, J., concurring in part
and dissenting in part). Thus, all nine Justices agreed6 that a
postpetition tax claim included postpetition interest within the
same phase of a bankruptcy proceeding, which is the less
sophisticated point at stake in the present case. This view
accords with language in the Court's caselaw prior to Nicholas
itself. See Bruning v. United States, 376 U.S. 358, 360 (1964)
("In most situations, interest is considered to be the cost of
the use of the amounts owing a creditor and an incentive to
prompt repayment and, thus, an integral part of a continuing
6 Justice White, joined by Justices Douglas and Fortas,
dissented on another point but joined the part of the Court's opinion
relevant here. Id. at 696 (White, J., concurring in part and
dissenting in part).
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debt. Interest on a tax debt would seem to fit that
description.").7
This point has weighed heavily with several of the
other circuit courts to reach the present question before us.
See Cranshaw, 885 F.2d at 839 (noting that, in light of
Nicholas, "Congress may have reasoned that it was unnecessary to
specify that post-petition interest would receive administrative
priority"); Ledlin, 886 F.2d at 1107. Congress, in writing the
Bankruptcy Code, would have taken into account that the courts
would preserve the rule of Nicholas unless otherwise directed.
Although § 726(a)(5) could potentially be read to provide such
a directive, the import of that section is -- as discussed above
-- unclear when read in full context. Therefore, we best follow
the intended statutory scheme by treating postpetition interest
as part of a postpetition tax claim. Because the postpetition
7 Bruning concerned a prepetition tax debt --
specifically, one exempted from discharge in bankruptcy by a
provision of the old Bankruptcy Act -- and is thus relevant here
only for its language, rather than for its holding. Prepetition
tax debts, like most prepetition debts, generally cease to
accrue interest when a bankruptcy petition is filed. See
generally Cousins, 209 F.3d at 40-42 (stating the rule in the
course of discussing the exception under Bruning for
nondischargeable debts).
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tax claim itself receives first priority as an administrative
expense, so should the interest on that claim. This argument is
persuasive, but not conclusive, and so we continue our analysis
to consider other sources of statutory meaning.
C.
We consider third the legislative history of the
statute. The 1978 Bankruptcy Code emerged from the
reconciliation of bills passed by the House, H.R. 8200, 95th
Cong. (1977), and the Senate, S. 2266, 95th Cong. (1978). The
House and Senate Judiciary Committees prepared reports regarding
their bills, H.R. Rep. No. 95-595 (1977), reprinted in 1978
U.S.S.C.A.N. 5963; S. Rep. No. 95-989 (1978), reprinted in 1978
U.S.S.C.A.N. 5787, but the only legislative history explaining
the results of the reconciliation is the statements of the
relevant subcommittee leaders in the Congressional Record, see
124 Cong. Rec. H11,089 (1978) (statement of Rep. Edwards),
reprinted in 1978 U.S.C.C.A.N. 6436 [hereinafter Edwards
statement]; id. at S17,406 (statement of Sen. DeConcini),
reprinted in 1978 U.S.C.C.A.N. 6505 [hereinafter DeConcini
statement]; see also Begier v. IRS, 496 U.S. 53, 64 n.5 (1990)
("Because of the absence of a conference and the key roles
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played by Representative Edwards and his counterpart floor
manager Senator DeConcini, we have treated their floor
statements on the Bankruptcy Reform Act of 1978 as persuasive
evidence of congressional intent.").
The Senate bill contained language that would have
expressly given first priority treatment to interest on
postpetition taxes. S. 2266, sec. 101, § 503(b)(1)(B) (1978)
(giving priority to "taxes, including interest thereon"),
reprinted in C Collier, supra, at App. Pt. 4-1728, 4-1776. The
House bill did not. H.R. 8200, sec. 101, § 503(b)(1) (1977),
reprinted in B Collier, supra, at App. Pt. 4-874, 4-916. As
discussed above, the law as enacted contains no such express
reference. The leaders explained that the language for § 503
represents a compromise. Edwards statement, supra, at 6450;
DeConcini statement, supra, at 6519. One might infer from this
sequence of events that Congress decided to exclude interest
from the first priority, and indeed some courts have drawn this
inference. E.g., In re Stack Steel & Supply Co., 28 B.R. 151,
156 (Bankr. W.D. Wa. 1983).
It is not clear, however, whether the House language
was adopted because it represented a different policy choice or
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because the conference committee viewed a specific reference to
interest as unnecessary. With regard to § 726(a)(6), the
leaders stated that language referring to prepetition interest
on prepetition claims had been removed because the general
definition of "claim" in what would become 11 U.S.C. § 101(4)
(since renumbered § 101(5)) was sufficiently broad to include
interest. Edwards statement, supra, at 6459; DeConcini
statement, supra, at 6528.8
Other arguments have been made based on the Code's
legislative history. The IRS calls to our attention the
citation in the House Report of a pre-Code bankruptcy case
decided by the Ninth Circuit that allowed postpetition interest
as part of a postpetition tax claim. H.R. Rep. No. 95-595, at
193 & n.123 (citing Sec.-First Nat'l Bank v. United States, 153
F.2d 563 (9th Cir. 1946)), reprinted in 1978 U.S.C.C.A.N. at
6153-54. But that case does not discuss or reason out the
8 We explained earlier that the indirect relationship
between §§ 503 and 726 tends to weaken inferences based on the
textual relationship of the two. This logic applies equally, of
course, to the leaders' statements about the meaning of an
omission in § 726 when used to assess the meaning of an omission
in § 503. The relative weakness of the inference is one reason
why we do not rely primarily on legislative history in this
opinion.
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question of interest, and so we hesitate to infer that its
inclusion in the report carries much meaning. All in all, we
think the legislative history of the relevant provisions are
inconclusive, but tend to support the IRS's position due to the
sponsors' statements regarding § 726.
D.
We consider fourth, and finally, the policies
underlying the statute. A court must not, of course, impose its
own views of proper bankruptcy policy in place of those of the
legislature. However, an understanding of the congressional
policies underlying a statute, including the Bankruptcy Code,
can help to reconcile otherwise indeterminate parts of the
statutory text.
This case revolves around a dispute between creditors
of the same debtor. Bankruptcy law generally follows the
principle that creditors with similar relationships to the
debtor should receive similar treatment. See, e.g., In re
Hemingway Transp., Inc. (Juniper Dev. Group v. Kahn), 993 F.2d
915, 923 (1st Cir. 1993) (discussing "the fundamental Code
policy fostering equitable distribution among all creditors of
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the same class"). This approach is important to prevent both
the waste and confusion that would result from similarly
situated creditors jockeying for priority and the unfairness --
with attendant disruption of reasonable expectations based on
the norms of commercial interaction -- that would result from,
for example, a race to obtain judgments against an ailing
debtor's remaining assets. Such considerations may have
influenced the decisions from which the government now appeals,
although it is clear that those courts rested their judgments
primarily on the statute's text. The bankruptcy court mentioned
in passing that "the goal of equality of distribution in
bankruptcy cases" favored the result it reached, Weinstein, 237
B.R. at 7; and the Panel noted that "the government is not
unlike other creditors -- it wants to be paid, in full, with
interest, sooner rather than later," Yellin, 251 B.R. at 184
n.16.
These concerns of equity have little significance in
the present case. The concept of priority, integral to
relations between creditors in bankruptcy, carries with it the
idea that only those creditors who are similarly situated should
receive similar treatment from the bankruptcy court. The
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Bankruptcy Code does not generally presume that a taxing
authority is situated similarly to an unsecured private
creditor. See 11 U.S.C. § 507(a)(8) (according priority to
various types of tax claims). Even assuming the government's
interest in pursuing a prepetition tax claim to be similar to
that of an unsecured prepetition creditor, as in some respects
it may be, the interest in a postpetition tax claim is
different. The government was entitled to claim payment of the
estate's taxes promptly in 1993 and 1995 for the 1992 and 1994
tax years; prepetition creditors were not, after the bankruptcy
filing, entitled to claim such prompt payment. The other
creditors will therefore suffer no inequity if the government
now claims the present value of prompt payment -- payment with
interest.
More relevant to this case than is the need for equity
among creditors is the need to ensure that trustees pay
postpetition tax claims promptly. To be sure, penalties exist
to deter intentional misconduct. Some failures will, however,
occur, whether intentional or unintentional. Penalties are
limited by a statutory cap and can reach the maximum amount
quite quickly if, as in this case, no return is timely filed.
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See I.R.C. § 6651(a) (1994 & Supp. II 1996). Once the cap is
reached, whether the penalty is exacted or abated a trustee will
have little incentive to pay promptly except that provided by
postpetition interest.9
These observations lead to a problem with the
interpretation of the statute advanced by the bankruptcy court
and the Panel. The statute expressly provides that postpetition
tax penalties, which would not even arguably be a part of the
tax claim under Nicholas, do receive priority treatment as
administrative expenses. The reasons for giving priority
treatment to interest on such taxes are at least as strong as,
and probably stronger than, those for giving priority treatment
to penalties. There are two such reasons, each of which applies
at least somewhat both to interest and to penalties: to supply
an incentive for trustees to pay taxes promptly, and to
9 We note that in an earlier phase of this case Grella
argued before the bankruptcy court that his decision not to pay
the taxes in a timely fashion was justified by the relative
expense of filing -- we assume he referred to accountant's fees
-- and that it made more sense for the estate to pay its taxes
later, in a lump sum, even after taking penalties and interest
into account. Whether this explanation was his rationale at the
time or a rationalization after the fact, it demonstrates that
our concern regarding the incentives facing a trustee is not
wholly far-fetched.
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compensate the taxing authority for delayed payment. As we have
discussed, however, penalties may have little effect in cases of
unintentional delay, where a trustee discovers tax liability
only after the applicable penalties have reached the statutory
cap; interest lacks this defect. As to compensation for delayed
payment, interest is the general measure of the cost of delay,
and penalties are not. We therefore think it relatively
unlikely that Congress chose to give priority treatment to
penalties, but not to interest. See Ledlin, 886 F.2d at 1108;
Cranshaw, 885 F.2d at 839.10
IV.
After holding the text of the Bankruptcy Code ambiguous
as to the proper result in this case, we have considered
inferences to be drawn from the text of the statute, its
10 The Panel noted this difficulty but addressed it by referring
to the Supreme Court's recent decision in Hartford Underwriters Ins.
Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000). See id. at
13 ("[W]e do not sit to assess the relative merits of different
approaches to various bankruptcy problems. It suffices that the
natural reading of the text produces the result we announce."), quoted
in Yellin, 251 B.R. at 182. That approach is sound only if the text
has but one natural reading. As discussed above, we disagree with the
bankruptcy court and the Panel on this key point. Moreover, the Court
in Hartford Underwriters did indeed discuss the policy implications of
its holding, although it did not consider them conclusive. 530 U.S. at
11-13.
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historical context, its legislative history, and the underlying
policies that animate its provisions. Of these sources of
meaning we find most useful the Code's historical context and
its underlying policies, both of which run in favor of the
government's position and against that of Yellin, the Panel, and
the bankruptcy court. We note as well the additional weight of
the decisions rendered by four other circuits on the question
presented.
We conclude that a proper reading of § 503(b)(1)(B)(i)
includes interest on postpetition taxes incurred by a bankruptcy
estate. Accordingly, the IRS should receive payment of the
interest on the estate's taxes as a first-priority
administrative expense under § 726(a)(1).11 The judgment of the
11 Yellin offers an additional ground in defense of the
Panel's judgment: that the IRS failed to inform Grella as
required by 11 U.S.C. § 505(b) that it had selected his return
for examination. Section 505(b) provides in relevant part that
[a] trustee may request a determination of any unpaid
liability of the estate for any tax incurred during the
administration of the case by submitting a tax return for
such tax and a request for such a determination to the
governmental unit charged with responsibility for
collection or determination of such tax. Unless such
return is fraudulent, or contains a material
misrepresentation, the trustee, the debtor, and any
successor to the debtor are discharged from any liability
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Bankruptcy Appellate Panel is reversed and the case remanded for
proceedings consistent with this opinion.
for such tax --
(1) upon payment of the tax shown on such return, if
--
(A) such governmental unit does not notify the
trustee, within 60 days after such request, that
such return has been selected for examination; or
(B) such governmental unit does not complete such
an examination and notify the trustee of any tax
due, within 180 days after such request or within
such additional time as the court, for cause,
permits . . . .
Id. According to the bankruptcy court, Grella submitted a
request under § 505(b) on July 9, 1996, received a determination
of the estate's tax liability as to tax year 1992 on August 19,
and received a determination as to tax year 1994 on September 2.
Weinstein, 237 B.R. at 5. Both arrived within the sixty-day
period specified by § 505(b)(1)(A), and we perceive no cause for
him to complain.
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