in re: 800ideas.com, inc., 9th cir. bap (2013)

7/25/2019 In re: 800ideas.com, Inc., 9th Cir. BAP (2013)

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* Hon. Nei l W. Bason, Uni t ed St at es Bankrupt cy J udge f or

t he Cent r al Di st r i ct of Cal i f or ni a, si t t i ng by desi gnat i on.

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. SC- 12- 1496- J uBaPa)

800I DEAS. COM, I NC. , ) Bk. No. 07- 00207)

Debt or . )______________________________)

)RI CHARD M. KI PPERMAN, Chapter )7 Tr ust ee, )

) Appel l ant , )

)v. ) O P I N I O N)

I NTERNAL REVENUE SERVI CE, )U. S. A. ; UNI TED STATES TRUSTEE; )800I DEAS. COM, I NC, )

) Appel l ees. )______________________________)

Ar gued and Submi t t ed on May 15, 2013at Pasadena, Cal i f or ni a

Fi l ed - J ul y 22, 2013

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Sout her n Di st r i ct of Cal i f or ni a

Honorabl e J ames W. Meyers, Bankr upt cy J udge, Presi di ng

_______________________

Appear ances: Ger al di ne A. Val dez, Esq. , Fi nanci al Law Gr oup,ar gued f or Appel l ant Ri char d M. Ki pper man,Chapt er 7 Tr ust ee; Anne E. Nel son, Esq. ,

U. S. Depar t ment of J ust i ce, ar gued f orAppel l ee I nt er nal Revenue Servi ce._________________________

Bef ore: J URY, BASON* and PAPPAS, Bankr upt cy J udges.

Opi ni on by J udge J ur yConcur r ence by J udge Bason

FILED

JUL 22 2013

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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1 Unl ess ot her wi se i ndi cat ed, al l chapt er , sect i on and r ul e

r ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532.Rul e r ef er ences ar e t o t he Feder al Rul es of Bankrupt cyPr ocedur e and Ci vi l Rul e r ef er ences are t o t he Feder al Rul es ofCi vi l Pr ocedur e.

2 The bankr upt cy cour t r ef erenced 503( b) and not( b) ( 1) ( A) i n i t s r ul i ng. However , i mpl i ci t l y t he cour t wasr ef er r i ng t o 503( b) ( 1) ( A) because i t f ound t hat t he penal t i eswere an admi ni st r at i ve expense as an actual and necessary costof pr eser vi ng t he est at e. Ther ef or e, we r ef er t o 503( b) ( 1) ( A)t hr oughout our di scussi on.

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J URY, Bankr upt cy J udge:

Ri chard M. Ki pperman, chapt er 71 t r ust ee i n t he case of

debt or 800I deas. com, appeal s t he bankrupt cy cour t s or deral l owi ng t he cl ai m of t he I nt er nal Revenue Ser vi ce ( I RS) wi t h

pr i or i t y as an act ual and necessar y cost and expense of

pr eservi ng t he est at e under 503( b) ( 1) ( A) . 2

I RS s cl ai m ar ose post pet i t i on when i t assessed penal t i es

agai nst debt or under 26 U. S. C. ( I RC) 6699 due to t r ust ee s

f ai l ur e t o t i mel y f i l e debt or s cor por at e t ax r et ur ns f or t he

years 2008 and 2010. The bankr upt cy cour t f ound t hat t r ust ee

had not pr oved r easonabl e cause f or t he l at e- f i l ed r et ur ns

wi t hi n t he meani ng of I RC 6699 and al l owed I RS s cl ai m as an

admi ni st r at i ve expense cl ai m wi t h f i r st pr i or i t y under

503( b) ( 1) ( A) .

We agr ee wi t h t he bankrupt cy cour t s deci si on t hat t r ust ee

f ai l ed t o demonst r at e r easonabl e cause f or hi s del ay i n f i l i ngt he t ax r et ur ns and AFFI RM on t hi s i ssue. However , i n t hi s case

of f i r st i mpr essi on, we di sagr ee wi t h t he cour t s deci si on t hat

t he penal t i es qual i f i ed as an admi ni st r at i ve expense under

503( b) ( 1) ( A) . The penal t i es di d not pr eser ve t he est at e as


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r equi r ed under t he pl ai n l anguage of 503( b) ( 1) ( A) nor do they

f al l wi t hi n t he f undament al f ai r ness doct r i ne espoused i n

Readi ng Co. v. Br own, 391 U. S. 471 ( 1968) and i t s progeny.

Al t hough we REVERSE t he bankr upt cy cour t s deci si on on t hepr i or i t y i ssue as i t per t ai ns t o 503( b) ( 1) ( A) , we REMAND t hi s

mat t er t o t he bankrupt cy cour t t o deci de i f t he penal t i es

qual i f y as an admi ni str at i ve expense f or ot her reasons.

I. FACTS AND PROCEDURAL BACKGROUND

The f act s ar e undi sput ed. On J anuar y 19, 2007, debtor , a

Cal i f or ni a S cor por at i on, f i l ed i t s chapt er 7 pet i t i on.

Ki pperman was appoi nt ed t he chapt er 7 t r ust ee. Debt or s

l i abi l i t i es gr eat l y exceeded i t s asset s, wi t h i t s mai n asset t he

pot ent i al r i ght t o an exci se t ax r ef und i n an unknown amount f or

t he 2006 t ax year .

On Mar ch 12, 2007, t r ust ee r equest ed debt or s pr epet i t i on

account ant s, Schai m, Hyde & Company, I nc. ( SHCI ) , t o pr epare the

t ax r etur n f or t he 2006 t ax year . SHCI began work on t he r etur nand Ms. Hyde, an account ant wi t h t he f i r m, advi sed t r ust ee that

t he r etur n woul d be compl eted by Apr i l 15, 2008. Over a year

af t er t he pr omi sed dat e f or t he r et ur n and t wo year s af t er t he

i ni t i al r equest , i n J une 2009, t r ust ee cont act ed Ms. Hyde t o

i nqui r e about t he st at us of t he r et ur n. Ms. Hyde expl ai ned t hat

t her e was a del ay because debt or s f i l es wer e i nadver t ent l y sent

t o st or age. I n J ul y 2009, t r ust ee agai n cont act ed Ms. Hyde

r egar di ng t he r et ur n. She expl ai ned t hat wor k on t he r et ur n had

st opped due t o t he l ack of payment ; however she agr eed t o do t he

wor k. Ther eaf t er , Ms. Hyde sent t r ust ee an engagement l et t er .

On August 27, 2009, t r ust ee request ed t he Fi nanci al Law


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283 Trust ee sought abatement f or t he r etur ns f or 2008, 2009

( cont i nued. . . )

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Gr oup ( FLG) t o assi st hi m i n obt ai ni ng cour t appr oval f or t he

empl oyment of SHCI nunc pr o t unc.

On J anuary 15, 2010, SHCI compl eted t he r etur n. On J anuary

19, 2010, t r ust ee si gned t he r et ur n. On J anuar y 28, 2010, I RSr ecei ved t he r et ur n and t her eaf t er not i f i ed t r ust ee t hat i t

woul d di sal l ow appr oxi matel y $1, 950. 84 of t he $38, 197 cl ai med

r ef und.

On March 3, 2010, t r ust ee an appl i cat i on t o have SHCI

empl oyed nunc pr o t unc as of Mar ch 12, 2007. On t he same dat e,

t r ust ee submi t t ed t he f i r st and f i nal f ee appl i cat i on f or SHCI .

On Apr i l 2, 2010, t r ust ee f i l ed an appl i cat i on t o empl oy R.

Dean J ohnson as an account ant f or t he est at e. The appl i cat i on

st at ed that J ohnson woul d, among ot her t hi ngs, pr epar e the

f i duci ar y i ncome t ax r et ur ns.

I n mi d- J une 2011, t he bankrupt cy est at e r ecei ved t he t ax

r ef und f or t he 2006 year f r om I RS i n t he amount of $36, 150. 33.

I n mi d- J ul y 2011, J ohnson compl et ed debt or s t ax ret ur nsf or 2007, 2008, 2009 and 2010 and t hey were f i l ed wi t h I RS. The

2008 and 2010 r et ur ns, whi ch ar e at i ssue i n t hi s appeal , st at ed

t hat debt or had ni ne shar ehol der s and r epor t ed a zero t ax

l i abi l i t y. Af t er pr ocessi ng t he r et ur ns, I RS assessed penal t i es

agai nst debt or under I RC 6699 i n t he amount s of $9, 612 and

$8, 775 f or t he 2008 and 2010 t ax year s, r espect i vel y. I RC

6699 i mposes penal t i es agai nst an S cor por at i on whi ch f ai l s t o

t i mel y f i l e i t s r et ur ns. Tr ust ee sought t o have t he penal t i es

abat ed t o no avai l . 3


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3( . . . cont i nued)and 2010 on t he same grounds. For some r eason, I RS abat ed t hepenal t i es f or t he 2009 t ax year , but not f or 2008 and 2010.Ther e i s no adequat e expl anat i on i n t he r ecor d as t o why t hi soccur r ed.

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On Febr uary 15, 2012, I RS f i l ed a Request f or Payment of

I nt er nal Revenue Taxes i n t he bankrupt cy cour t . The r equest f or

payment i n t he amount of $18, 667. 17 was based on t he 2008 and

2010 penal t i es assessed and was assert ed as an admi ni st r at i vepr i or i t y expense.

On Febr uar y 23, 2010, t r ust ee obj ect ed t o the cl ai m,

cont endi ng t hat t he penal t i es were not based on any unpai d t ax

i ncur r ed by t he bankrupt cy est at e as r equi r ed by 503( b) ( 1) ( C)

and, t her ef or e, t r ust ee i nt ended t o t r eat t he cl ai m as a

subor di nat ed penal t y cl ai m under 726( a) ( 4) .

I RS r esponded, ar gui ng t hat t he penal t i es shoul d be

af f or ded admi ni st r at i ve expense st at us under 503( b) ( 1) ( C)

because t hey const i t ut ed a penal t y r el at i ng t o a t ax of a ki nd

speci f i ed i n 503( b) ( 1) ( B) . I RS al so asser t ed t hat 726( a) ( 4)

was i nappl i cabl e t o i t s post pet i t i on cl ai m because t hat st at ut e

appl i ed t o pr epet i t i on cl ai ms or t hose ar i si ng bef or e t he

appoi nt ment of a t r ust ee.On Apr i l 16, 2012, t r ust ee f i l ed a r epl y decl ar at i on,

st at i ng t hat hi s f ai l ur e t o t i mel y f i l e t he t ax r et ur ns i n

quest i on di d not r esul t f r om wi l l f ul negl ect and was due t o

r easonabl e cause. The asser t ed r easonabl e cause was t he

est at e s i nsol vency dur i ng t he t ax year s i n quest i on and

t r ust ee s bel i ef t hat t he est at e woul d never be sol vent .

Tr ust ee al so ar gued agai n t hat t he penal t i es and i nter est wer e


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not based on any unpai d t ax i ncur r ed by the est ate as requi r ed

by 503( b) ( 1) ( C) .

On J une 8, 2012, t he bankr upt cy cour t hear d t he mat t er .

At t he hear i ng, I RS cont ended f or t he f i r st t i me t hat t hepenal t i es wer e ent i t l ed t o admi ni st r at i ve expense pr i or i t y under

503( b) ( 1) ( A) as an actual and necessary cost and expense of

pr eser vi ng t he est at e, ci t i ng t o Readi ng, 391 U. S. 471, t he

Ni nt h Ci r cui t s deci si on i n Tex. Compt r ol l er of Pub. Account s v.

Megaf oods St or es, I nc. ( I n r e Megaf oods St or es, I nc. ) , 163 F. 3d

1063, 1067 ( 9t h Ci r . 1998) , whi ch adopt ed t he Readi ng r at i onal e,

and t hi s Panel s deci si on i n Gonzal ez v. Got t l i eb ( I n r e Met r o

Ful f i l l ment , I nc. ) , 294 B. R. 306, 309 ( 9t h Ci r . BAP 2003) .

Accor di ng t o I RS, t he r at i onal e of t hese cases appl i ed under t he

f act s of t hi s case because t r ust ee had an obl i gat i on t o compl y

wi t h t he Tax Code by f i l i ng t i mel y r et ur ns and he di d not . I n

addi t i on, I RS ar gued t hat even t hough an est ate may be

i nsol vent , t r ust ee st i l l had an obl i gat i on t o f i l e a t ax r et ur nand t hus t he est at e s i nsol vency di d not const i t ut e reasonabl e

cause t o excuse t he penal t y. Due t o I RS s new argument s and

ci t at i ons, t he bankrupt cy cour t cont i nued t he mat t er t o J ul y 20,

2012, and aut hor i zed t he par t i es t o f i l e f ur t her pl eadi ngs.

On J une 22, 2012, I RS submi t t ed an amended r esponse and

decl ar at i on wi t h at t ached exhi bi t s showi ng I RS account

t r anscr i pt s f or t he 2008 and 2010 t ax year s.

On J une 29, 2012, t r ust ee submi t t ed an amended r esponse,

ar gui ng t hat t he f undament al f ai r ness doct r i ne espoused i n

Readi ng was i nappl i cabl e t o a chapt er 7 case when t here was no

oper at i ng busi ness. Tr ust ee f ur t her mai nt ai ned t hat


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4 I n t hi s regar d, J ohnson st at ed t hat i t was di f f i cul t f orhi m t o bel i eve t hat a penal t y f or t he l at e f i l i ng of a zer o Scor por at i on i ncome t ax ret ur n i s a necessar y cost of pr eser vi ngt he est at e. The admi ssi bi l i t y of t hi s l egal opi ni on made by an

( cont i nued. . . )

- 7-

admi ni st r at i ve pr i or i t y under 503( b) ( 1) ( A) was not appr opr i at e

when t he t ax penal t i es wer e pur el y puni t i ve. Fi nal l y, t r ust ee

agai n asser t ed t hat t he est at e s i nsol vency gave hi m r easonabl e

cause not t o t i mel y f i l e t he t ax r et ur ns.The bankrupt cy cour t i ssued a t ent at i ve r ul i ng on J ul y 19,

2012, r equest i ng ( 1) an expl anat i on f r om I RS r egar di ng t he

cal cul at i on of t he penal t i es; and ( 2) a decl ar at i on by t r ust ee,

pr ovi di ng f ur t her i nf or mat i on on t he f i l i ng of t he 2006 t ax

r et ur n f or t he r ef und. The cour t cont i nued t he hear i ng on t he

cl ai m obj ect i on unt i l August 24, 2012.

On August 2, 2012, I RS f i l ed a suppl ement al decl ar at i on

addr essi ng t he cal cul at i on of t he penal t i es.

On August 8, 2012, t r ust ee f i l ed hi s suppl ement al

decl ar at i on set t i ng f or t h i n det ai l hi s communi cat i ons wi t h SHCI

r egar di ng i t s pr epar at i on of t he 2006 t ax r et ur ns. The

decl ar at i on set f or t h t he f act s not ed above r egar di ng t r ust ee s

communi cat i ons wi t h Ms. Hyde, t he eventual empl oyment of herf i r m, and t he r ecei pt of t he r ef und. On t he same dat e, t r ust ee

submi t t ed t he decl ar at i on of J ohnson. J ohnson decl ar ed t hat he

and t r ust ee concur r ed t hat t ax compl i ance work, except f or t he

2006 pr epet i t i on r et ur n pr epar ed by SHCI , shoul d wai t unt i l i t

became more cer t ai n that t he t ax r ef und woul d be recei ved.

J ohnson al so provi ded hi s opi ni on as t o why 503(b) ( 1) ( A) was

not appl i cabl e under t he ci r cumst ances of t he case. 4


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4( . . . cont i nued)account ant i s quest i onabl e but t her e i s no i ndi cat i on i n t her ecor d t hat t he bankrupt cy j udge gave i t any wei ght .

5 Not hi ng i n t he r ecor d r ef l ect s an act t o make t hi st ent at i ve r ul i ng a f i nal one. However , because t he ent er ed or deri s consi st ent wi t h i t , we const r ue i t t o be a f i nal r ul i ng.

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On August 30, 2012, t he bankrupt cy cour t i ssued a t ent at i ve

rul i ng5 al l owi ng I RS s cl ai m as an admi ni st r at i ve expense cl ai m

under 503( b) ( 1) ( A) , as an act ual and necessary cost of

pr eservi ng t he est at e, and f i ndi ng t hat t r ust ee had nor easonabl e cause t o del ay t he f i l i ng of t he r et ur ns at i ssue

whi l e wai t i ng f or t he exci se t ax r ef und. The cour t not ed t hat

f ur t her ar gument woul d not be hel pf ul and took t he hear i ng of f

cal endar .

On Sept ember 18, 2012, t he bankr upt cy cour t ent ered t he

or der al l owi ng I RS s cl ai m as an admi ni st r at i ve cl ai m under

503( b) ( 1) ( A) .

On Sept ember 25, 2012, t r ust ee f i l ed a t i mel y not i ce of

appeal f r om t he or der .

II. JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on over t hi s proceedi ng

under 28 U. S. C. 1334 and 157( b) ( 2) ( B) . We have j ur i sdi ct i on

under 28 U. S. C. 158.III. ISSUES

A. Di d t he bankr upt cy cour t er r i n f i ndi ng t hat t r ustee

f ai l ed t o pr ove r easonabl e cause f or hi s f ai l ur e t o t i mel y f i l e

t he S cor por at i on t ax ret ur ns?

B. Di d t he bankr upt cy cour t er r i n al l owi ng I RS s cl ai m

as an admi ni st r at i ve expense cl ai m under 503( b) ( 1) ( A) ?


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286 I RC 6651 i mposes a penal t y agai nst an i ndi vi dual

t axpayer f or f ai l ur e t o f i l e a t ax r et ur n or pay t axes.

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IV. STANDARDS OF REVIEW

We revi ew de novo t he quest i on of what el ement s const i t ut e

r easonabl e cause f or t he l at e f i l i ng of t ax retur ns under I RC

6699. See Uni t ed St ates v. Boyl e, 469 U. S. 241, 249 n. 8( 1985) ( consi der i ng r easonabl e cause under I RC 6651) . 6

Whether t hose el ement s are pr esent i n a gi ven case i s a quest i on

of f act r evi ewed f or cl ear er r or . I d. ; see al so Knappe v.

Uni t ed St at es, 713 F. 3d 1164, 1169( 9t h Ci r . 2013) .

The bankrupt cy cour t s or der al l owi ng an admi ni st r at i ve

cl ai m i s gener al l y r evi ewed under t he abuse of di scr et i on

st andar d. I n r e Met r o Ful f i l l ment , I nc. , 294 B. R. at 309.

However , wher e t he f act s are undi sput ed, t he i ssue i s pur el y one

of l aw subj ect t o de novo r evi ew. See El l i ot t v. Four Seasons

Pr ops. ( I n r e Front i er Pr ops. ) , 979 F. 2d 1358, 1362 ( 9t h Ci r .

1992) .

V. DISCUSSION

An S cor por at i on i s an ent i t y whi ch el ect s t o be t axed as apart nershi p wi t h i ncome passed t hr ough t o t he sharehol ders on a

pr o r ata basi s. Di ng v. Comm r , 200 F. 3d 587, 589 ( 9t h Ci r .

1999) ; I RC 1363( a) , 1366( a) , 1371( a) ( 1) . Al t hough S

cor por at i ons gener al l y do not pay f eder al t axes at t he cor por at e

l evel , t hey st i l l must f i l e an annual t ax r et ur n. See I RC

6037 ( Ever y S cor por at i on shal l make a r et ur n f or each

t axabl e year . . . . ) ; see al so Ensyc Techs. v. Comm r , 2012 WL

2160435, at *3 ( T. C. 2012) .

A chapt er 7 t r ust ee s dut y to f i l e a chapt er 7 cor por at e


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7 I n cont r ast , a t r ust ee s obl i gat i on t o f i l e a t ax r et ur ni n an i ndi vi dual s chapt er 7 case i s di f f er ent . Under I RC

6012( d) ( 8) , . . . ever y est at e of an i ndi vi dual under Chapt er7 . . . , t he gr oss i ncome of whi ch f or t he t axabl e year i s notl ess t han the sum of t he exempt i on amount pl us t he basi c st andar ddeduct i on under [ 26 U. S. C. ] 63( c) ( 2) ( D) , must f i l e a t axr et ur n on behal f of t he bankrupt cy est at e. Accor di ngl y, achapt er 7 t r ust ee has a gener al obl i gat i on t o f i l e t ax r et ur ns onbehal f of t he bankr upt cy est at e i f i t r eal i zes t he t hr eshol damount of gr oss i ncome r equi r ed t o t r i gger t he f i l i ng of ar et ur n. I n r e Pf l ug, 146 B. R. 687, 689 ( Bankr. E. D. Va. 1992) .

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debt or s t ax r et ur n i s subj ect t o l i t t l e debat e. I RC

6012( b) ( 4) pr ovi des t hat [ r ] et ur ns of an est at e . . . under

chapt er 7 . . . of t i t l e 11 of t he Uni t ed St at es Code shal l be

made by t he f i duci ary t hereof . ( Emphasi s added) . When acor por at i on f i l es f or bankr upt cy r el i ef and a t r ust ee i s

appoi nt ed, t he t r ust ee s dut y t o f i l e t ax r et ur ns i s gover ned by

I RC 6012( b) ( 3) , whi ch st at es:

I n a case wher e a r ecei ver , t r ust ee i n a case underTi t l e 11 of t he Uni t ed Stat es Code, or assi gnee, byor der of a cour t of compet ent j ur i sdi ct i on, byoper at i on of l aw or ot her wi se, has possessi on of orhol ds t i t l e t o al l or substant i al l y al l t he pr oper t y

or busi ness of a cor por at i on, whet her or not suchpr oper t y or busi ness i s bei ng oper at ed, such. . . , t r ust ee, . . . shal l make t he r et ur n of i ncomef or such corporat i on i n t he same manner and f orm ascor por at i ons ar e requi r ed to make such r et ur ns.

The t r ust ee of a cor por at e debtor i s r equi r ed t o f i l e r et urns,

r egar dl ess of whet her t he t r ust ee i s an oper at i ng t r ust ee or a

l i qui dat i ng t r ust ee. Hol ywel l Cor p. v. Smi t h, 503 U. S. 47,

53- 54 ( 1992) .7

When a cor porat i on has no asset s or i ncome, a t r ust ee may

make a r equest t o I RS t o be r el i eved of t he r epor t i ng obl i gat i on


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8 Rev. Pr oc. 84- 59 ( 1984) at 3 sets f or t h t he pr ocedur ef or maki ng such a r equest .

. 01 The t r ust ee, r ecei ver , or assi gnee must f i l e ar equest wi t h t he di str i ct di r ect or f or t he di str i ct i nwhi ch t he cor por at i on has i t s pr i nci pal pl ace ofbusi ness.

. 02 The r equest shoul d st at e:

1 The name, addr ess and empl oyer i dent i f i cat i on numberof t he cor por at i on, and

2 The dat e on whi ch t he t r ust ee, r ecei ver , or assi gneef i l ed t he not i ce of appoi nt ment t o act , as r equi r edunder sect i on 301. 6036- 1( a) of t he Regul at i ons onProcedur e and Admi ni st r at i on.

. 03 As st at ed i n Rev. Rul . 84- 123, t he r equest shoul dset f or t h t he f act s, wi t h suppor t i ng document s i fnecessar y, as t o why t he r el i ef f r om t he f i l i ngr equi r ement s i s needed.

. 04 The r equest shoul d cont ai n t he f ol l owi ng st at ementsi gned by t he t r ust ee, r ecei ver , or assi gnee:

I her eby r equest r el i ef f r om f i l i ng f eder al i ncome t axr et ur ns f or t ax year ( s) endi ng - - f or t he above namedcor por at i on and decl ar e under penal t i es of per j ur y t hatt o t he best of my knowl edge and bel i ef t he i nf or mat i oncont ai ned her ei n i s cor r ect .

. 05 The di str i ct di r ect or wi l l i nf or m t he t r ustee,r ecei ver , or assi gnee wi t hi n 90 days of r ecei pt whet hert he r equest i s gr ant ed or deni ed.

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by f ol l owi ng a si mpl e pr ocedur e. See Rev. Rul . 84- 123, 8 1984- 2

C. B. 244; see al so 13 Mert ens Law of Fed. I ncome Taxat i on

47. 75 ( t he obl i gat i on of a t r ust ee or r ecei ver t o f i l e t ax

r et ur ns may not appl y i f t he cor por at i on, al t hough not f or mal l ydi ssol ved, has ceased operat i ons and has no asset s or i ncome;

however , a l i qui dat i ng cor por at i on i s deemed t o cont i nue as l ong

as i t s af f ai r s ar e bei ng set t l ed and i t s asset s ar e not actual l y


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9 Dur i ng or al ar gument bef or e us, we l ear ned t hat t r ust eecoul d have al so f i l ed a f or m t o r equest an ext ensi on of t i me t of i l e t he i nf or mat i onal r et ur ns. Such a r equest woul d have gi vent r ust ee an addi t i onal si x mont hs t o f i l e t he r et ur ns. The 2006t ax r ef und was r ecei ved i n mi d- J une 2011 and t he retur ns f or 2008and 2010 wer e f i l ed i n mi d- J ul y 2011. Ther ef or e, t he si x mont hext ensi on woul d have been i nadequate.

10 On t hi s poi nt , t r ust ee appar ent l y does not seekdi sal l owance of t he penal t i es but i nst ead cont est s t hei rpr i or i t y: he seeks al l owance ei t her on a par wi t h gener alunsecur ed cl ai ms or subordi nated t o t hem. Mr . Ki pperman hasn tasked f or t he cl ai m t o be di sal l owed. He s j ust r equest i ng t hati t be subor di nat ed on equi t abl e gr ounds because t her e s nopecuni ar y l oss t o t he I RS. Tr ust ee s cl ai m obj ect i on howevernever r equest ed equi t abl e subor di nat i on nor do t he pl eadi ngsaddr ess whet her subor di nat i on i s appr opr i at e under 510( c) .

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di st r i but ed) . Tr ust ee di d not make such a r equest her e. 9

A. Reasonable Cause Under IRC 6699

Nonet hel ess, t r ust ee ar gues t hat hi s f ai l ur e t o t i mel y f i l e

t he S cor porat i on r etur ns shoul d be excused because he hadr easonabl e cause. 10 I RC 6699 was added t o t he Tax Code i n 2007

as par t of t he Mor t gage Forgi veness Debt Rel i ef Act of 2007,

Pub. L. No. 110142, sec. 9( a) , 121 St at . at 1807. Ensyc Techs. ,

2012 WL 2160435, at *3. The st at ut e pr ovi des i n r el evant par t :

( a) Gener al r ul e. - - I n addi t i on t o t he penal t y i mposedby sect i on 7203 ( r el at i ng t o wi l l f ul f ai l ur e t o f i l er et ur n, suppl y i nf or mat i on, or pay t ax) , i f any S

cor por at i on r equi r ed t o f i l e a r et ur n under sect i on6037 f or any t axabl e year - -

( 1) f ai l s t o f i l e such r et ur n at t he t i me pr escri bedt her ef or ( det er mi ned wi t h r egar d t o any extensi on oft i me f or f i l i ng) , or

( 2) f i l es a r et ur n whi ch f ai l s t o show t he i nf or mat i onr equi r ed under sect i on 6037, such S cor por at i on shal lbe l i abl e f or a penal t y det er mi ned under subsect i on( b) f or each mont h ( or f r act i on t her eof ) dur i ng whi chsuch f ai l ur e cont i nues ( but not t o exceed 12 mont hs) ,unl ess i t i s shown t hat such f ai l ur e i s due t o

r easonabl e cause. ( Emphasi s added) .. . . .


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11 Thi s sect i on pr ovi des i n r el evant par t :

( c) Showi ng of r easonabl e cause. ( 1) Except as pr ovi dedi n subpar agr aphs ( 3) and ( 4) of t hi s par agr aph ( b) , a

t axpayer who wi shes t o avoi d t he addi t i on t o the taxf or f ai l ur e t o f i l e a t ax r et ur n or pay t ax must makean af f i r mat i ve showi ng of al l f act s al l eged as ar easonabl e cause f or hi s f ai l ur e t o f i l e such r et ur n orpay such t ax on t i me i n t he f or m of a wr i t t en st at ementcont ai ni ng a decl ar at i on t hat i t i s made underpenal t i es of per j ur y. . . . I f t he t axpayer exer ci sedordi nary busi ness car e and pr udence and wasnever t hel ess unabl e t o f i l e t he r et ur n wi t hi n t hepr escr i bed t i me, t hen t he del ay i s due to a r easonabl ecause. . . .

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I n Ensyc Techs. , 2012 WL 2160435, at *3, t he t ax cour t

consi dered t he scope of r easonabl e cause under I RC 6699.

Ther e, t he presi dent of t he S cor por at i on chal l enged t he I RS s

assessment of a l at e- f i l i ng penal t y, cont endi ng t hat he t i mel ymai l ed a For m 1120S f or t he cor por at i on. Af t er f i ndi ng t hat t he

pr esi dent had not t i mel y f i l ed For m 1120S, t he t ax cour t

consi der ed whet her t her e was r easonabl e cause f or not f i l i ng t he

f or m on t i me. As a mat t er of f i r st i mpr essi on, t he t ax cour t

hel d t hat t he f ai l ur e of an S cor por at i on t o t i mel y f i l e i t s

annual r et ur n i s due t o r easonabl e cause i f t he S cor por at i on

exerci sed ordi nary busi ness care and pr udence and was

never t hel ess unabl e t o t i mel y f i l e i t s r et ur n. I d. at *3.

I n r eachi ng t hi s concl usi on, t he cour t used t he or di nar y

busi ness car e and pr udence test whi ch appl i ed t o I RC 6651.

Tr eas. Reg. 301. 66511( c) ( 1) 11 st at es: I f t he t axpayer

exerci sed ordi nary busi ness care and pr udence and was

never t hel ess unabl e t o f i l e t he r et ur n wi t hi n t he pr escr i bedt i me, t hen t he del ay i s due t o a r easonabl e cause. Ensyc

Techs. , 2012 WL 2160435, at *3. I n t he end, t he t ax cour t f ound


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t he pr esi dent s t est i mony credi bl e and cor r obor at ed by the

document ar y evi dence wi t h r espect t o the l at e f i l i ng.

Accor di ngl y, t he cour t concl uded t her e was r easonabl e cause f or

t he del ay and t hus the penal t i es wer e excused. I d.Al t hough Ensyc Techs. i s t he onl y case t o consi der t he

scope of r easonabl e cause under I RC 6699, case l aw whi ch has

const r ued t he t er m i n t he cont ext of I RC 6651 i s per suasi ve.

The I RS has ar t i cul at ed ei ght r easons f or a l at e f i l i ng t hat i t

consi der s t o const i t ut e r easonabl e cause under I RC 6651.

These r easons i ncl ude unavoi dabl e post al del ays, t he t axpayer s

t i mel y f i l i ng of a r et ur n wi t h t he wr ong I RS of f i ce, t he

t axpayer s r el i ance on t he er r oneous advi ce of an I RS of f i cer or

empl oyee, t he deat h or ser i ous i l l ness of t he t axpayer or a

member of hi s i mmedi ate f ami l y, t he t axpayer s unavoi dabl e

absence, dest r uct i on by casual t y of t he t axpayer s r ecor ds or

pl ace of busi ness, f ai l ur e of I RS t o f ur ni sh t he t axpayer wi t h

t he necessar y f or ms i n a t i mel y f ashi on, and t he i nabi l i t y of anI RS repr esent at i ve t o meet wi t h the t axpayer when t he t axpayer

makes a t i mel y vi si t t o an I RS of f i ce i n an at t empt t o secur e

i nf or mat i on or ai d i n t he pr epar at i on of a r et ur n. Uni t ed

St at es v. Boyl e, 469 U. S. at 243 n. 1. These exampl es gener al l y

i l l ust r at e f actor s beyond a t axpayer s cont r ol . I d. at 249 n. 6.

Fur t her mor e, or di nar y busi ness car e and pr udence i s onl y

one el ement of t he r easonabl e cause necessary t o excuse

penal t y assessment s f or t he unt i mel y f i l i ng of t ax r et ur ns.

Val en Mf g. Co. v. Uni t ed St at es, 90 F. 3d 1190, 1191 ( 6t h Ci r .

1996) . I n or der t o qual i f y f or such r el i ef , t r ust ee must al so

have sat i sf i ed t hat por t i on of Tr eas. Reg. 301. 66511( c) ( 1)


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12 At or al ar gument , I RS s at t or ney suggest ed t hat t r ust eecoul d compl et e and f i l e the i nf or mat i onal r et ur ns wi t hout t hehel p of a pr of essi onal when t he est at e i s i nsol vent . I RS has notest abl i shed t hi s i s a vi abl e opt i on f or a t r ust ee. Rat her , t hebet t er sol ut i on i s f or t he t r ust ee t o seek r el i ef f r om t he bur denof f i l i ng t he r et ur ns or , i f appr opr i at e, seek an ext ensi on oft i me.

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whi ch r equi r es a t axpayer t o show t hat i t has been r endered

unabl e t o meet i t s r esponsi bi l i t i es despi t e t he exer ci se of such

car e and pr udence. I d. at 1192. Accor di ngl y, t o est abl i sh

r easonabl e cause, t r ust ee had t he bur den of pr ovi ng t hat heexerci sed ordi nary busi ness care and pr udence and was

never t hel ess unabl e t o f i l e t he r et ur n wi t hi n t he pr escr i bed

t i me.

Her e, al t hough the bankrupt cy cour t di d not ment i on the

or di nary busi ness car e and pr udence t est , t he r ecor d suppor t s

t he cour t s concl usi on t hat t r ust ee f ai l ed t o pr ove r easonabl e

cause. Tr ust ee decl ar ed t hat t he l at e f i l i ng was based on hi s

mi st aken bel i ef t hat t he i nsol vency of t he est at e aut omat i cal l y

r el i eved hi m of f i l i ng r et ur ns. However , as not ed above, a

t r ust ee i s not aut omat i cal l y exempt ed f r om f i l i ng t ax r et ur ns

when a cor por at i on i s i nsol vent . Rat her , I RS has adopt ed a

pr ocedur e whi ch may rel i eve a t r ust ee of t he bur den of f i l i ng

such r et ur ns when a cor por at e debt or i s i nsol vent , but t r ust eedi d not pur sue t hi s r el i ef . 12

Fur t her , t r ust ee poi nt s t o no f act or s t hat wer e beyond hi s

cont r ol wi t h r espect t o the l at e- f i l ed 2008 and 2010 t ax

r et ur ns. I ndeed, i n i t s J ul y 19, 2012 t ent at i ve r ul i ng, t he

bankrupt cy cour t opi ned t hat had t r ust ee t i mel y f i l ed t he 2006

t ax r et ur n f or t he r ef und, i t f ol l owed t hat t he r ef und woul d


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- 16-

have been obt ai ned i n 2007, t he est at e di st r i but ed and t he t ax

r et urns f or 2008, 2009 and 2010 woul d have been unnecessary.

Our r evi ew of t r ust ee s suppl ement al decl ar at i on shows t hat t he

bankrupt cy cour t coul d r easonabl y i nf er f r om t he undi sput edf act s t hat t he del ay sur r oundi ng t he f i l i ng of 2006 t ax r et ur n

was not caused by event s beyond t r ust ee s cont r ol . Anderson v.

Ci t y of Bessemer Ci t y, N. C. , 470 U. S. 564, 575 ( 1985) ( Wher e

t her e ar e t wo per mi ssi bl e vi ews of t he evi dence, t he

f act f i nder s choi ce bet ween t hem cannot be cl ear l y er r oneous. ) .

I n sum, t r ust ee s l ack of di l i gence i n super vi si ng hi s

account ant s, coupl ed wi t h hi s del i ber at e deci si on t o del ay

f i l i ng t he r et ur ns unt i l he was convi nced t hi s woul d be an

asset case, provi ded an ampl e basi s f or t he bankrupt cy cour t

t o rej ect t r ust ee s r easonabl e cause ar gument and t o sust ai n

I RS s deci si on t o assess t he penal t i es.

B. Administrative Expense Priority Under 503(b)(1)(A)

We now t ur n t o t he t hor ni er pri or i t y quest i on. Sect i on507( a) ( 2) accor ds admi ni st r at i ve expenses of a bankrupt cy est at e

second pr i or i t y. Sect i on 503( b) ( 1) ( A) st at es t hat

admi ni st r at i ve expenses i ncl ude t he act ual , necessary cost s and

expenses of pr eser vi ng t he est at e i ncl udi ng . . . and t hen

l i st s speci f i c cat egor i es. Under 102( 3) i ncl udes and

i ncl udi ng ar e not l i mi t i ng. Ther ef or e, t he use of i ncl udi ng

i n t he pr eambl e of 503( b) ( 1) ( A) means t hat actual and

necessary cost s and expenses of pr eser vi ng the est ate may

i ncl ude t ypes of cl ai ms ot her t han t hose l i st ed under

503( b) ( 1) ( A) whi ch may be gi ven admi ni st r at i ve pr i or i t y.

Tr adi t i onal l y, t o be deemed an admi ni st r at i ve expense under


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28 13 Ther e i s no di sput e t hat I RS s cl ai m f or t he penal t i esar ose post pet i t i on.

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t he act ual and necessar y r ubr i c i n 503( b) ( 1) ( A) , t wo

r equi r ement s must be met under Ni nt h Ci r cui t case l aw

r equi r ement s: 13 t he cl ai m must have ar i sen f r om a t r ansact i on

wi t h t he debt or i n possess i on and must di r ect l y andsubst ant i al l y benef i t t he est at e. Aber cr ombi e v. Hayden Cor p.

( I n r e Aber cr ombi e) , 139 F. 3d 755, 757 ( 9t h Ci r . 1998) ( quot i ng

Mi cr osof t Cor p. v. DAK I ndus. ( I n r e DAK I ndus. ) , 66 F. 3d 1091,

1094 ( 9t h Ci r . 1995) . Year s ago, t he Ni nt h Ci r cui t addr essed

t he par amet er s of 503( b) ( 1) ( A) i n Bur l i ngt on N. R. R. Co. v.

Dant & Russel l , I nc. ( I n r e Dant & Russel l , I nc. ) , 853 F. 2d 700

( 9t h Ci r . 1988) , whi ch est abl i shed t he f ol l owi ng gui del i nes:

Fi r st , t he st at ut e i s t o be nar r owl y const r ued.Second, [ a] n act ual [ not pot ent i al ] benef i t mustaccr ue t o an est at e. I n ei t her a Chapt er 11l i qui dat i on or a Chapt er 7 t he cour t shoul d be mor econcer ned wi t h maxi mi zi ng t he si ze of t he est at e f ort he credi t or s t han wi t h i nduci ng t hi r d par t i es t ocont r i but e t owar ds t he cont i nued oper at i ons of t hebusi ness. Thi r d, t he cour t shoul d consi der al l owi ng acl ai m under 503( b) ( 1) ( A) f or cost s i ncur r ed i f t heexpense r esul t s i n a pr eser vat i on of est at e asset s f or

t he benef i t of cr edi t or s. Fi nal l y, cour t s ar e notf r ee t o est abl i sh t hei r own pr i or i t i es of paymentwi t hi n t he Bankr upt cy Code.

I n r e Al l en Car e Ct r s. , I nc. 163 B. R. 180, 185 ( Bankr. D. Or .

1994) ( ci t i ng I n r e Dant & Russel , I nc. ) , af f d 175 B. R. 397 ( D.

Or . 1994) , af f d 96 F. 3d 1328 ( 9t h Ci r . 1996) .

When we appl y these gui del i nes t o t he f acts of t hi s case,

I RS s cl ai m based on penal t i es does not qual i f y as an

admi ni st r at i ve expense. Thi s case i s a chapt er 7 case wher e t he

pr i mar y goal i s t o keep cost s t o a mi ni mum t o pr eserve t he

l i mi t ed asset s. The penal t i es wer e not i ncur r ed i n t he


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oper at i on of a busi ness and, as a r esul t , t he penal t i es wer e

i ncur r ed nei t her t o benef i t t he est at e nor pr eser ve i t . Under

t hese f act s, af f or di ng admi ni st r at i ve expense pr i or i t y t o I RS s

cl ai m woul d be to the det r i ment of t he unsecur ed cr edi t or s.The Supreme Cour t car ved out an except i on t o t he act ual

and necessar y r equi r ement s i n Readi ng by hol di ng t hat [ i ] n t he

i nt er est s of f ai r ness t o al l per sons havi ng cl ai ms agai nst t he

i nsol vent . . . t or t cl ai ms ar i s i ng post- pet i t i on [ ar e] act ual

and necessar y expenses of pr eservi ng t he est ate. Boei ng N.

Am. , I nc. v. Ybar r a ( I n r e Ybar r a) , 424 F. 3d 1018, 1025 n. 10

( 9t h Ci r . 2005) ( quot i ng Readi ng, 391 U. S. at 477) ; I n r e

Megaf oods Stor es, I nc. , 163 F. 3d at 1071 ( Readi ng survi ved t he

enactment of t he Bankr upt cy Code) ; see al so I n r e Met r o

Ful f i l l ment , I nc. , 294 B. R. at 310.

I n Readi ng, the debt or cor por at i on f i l ed a pet i t i on f or

ar r angement under chapt er XI of t he Bankr upt cy Act . The same

day, a r ecei ver was appoi nt ed and aut hor i zed t o conduct t hedebt or s busi ness, whi ch consi st ed pr i nci pal l y of l easi ng t he

debt or s onl y asset , an ei ght st or y i ndust r i al st r uctur e. Not

l ong af t er t he r ecei ver was appoi nt ed, t he debt or s bui l di ng was

dest r oyed by a f i r e whi ch spread t o adj oi ni ng pr emi ses and

damaged r eal and per sonal proper t y of Readi ng Company and

ot her s. Readi ng f i l ed a cl ai m f or over $550, 000 as an

admi ni st r at i ve expense i n t he arr angement , based on t he asser t ed

negl i gence of t he r ecei ver . Af t er t he debt or was vol unt ar i l y

adj udi cat ed a bankrupt and t he r ecei ver el ect ed t he t r ust ee i n

bankr upt cy, t he cl ai ms of Readi ng and others became cl ai ms f or

admi ni st r at i on expenses i n bankrupt cy wi t h f i r st pr i or i t y under


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14 Sect i on 64( a) ( 1) and 503( b) ( 1) ( A) cont ai n si mi l arl anguage. Sect i on 64( a) ( 1) of t he Bankrupt cy Act pr ovi des i n

part:

The debt s t o have pr i or i t y, i n advance of t he paymentof di vi dends t o credi t or s, and t o be pai d i n f ul l outof bankrupt est at es, and t he or der of payment , shal l be( 1) t he cost s and expenses of admi ni st r at i on, i ncl udi ngt he act ual and necessary cost s and expenses ofpr eser vi ng t he est at e subsequent t o f i l i ng t hepet i t i on. . . . ( emphasi s added) .

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64( a) ( 1) 14 of t he Bankrupt cy Act . The t r ust ee di sal l owed t he

cl ai m f or admi ni st r at i on expenses. On appeal , t he di st r i ct

cour t and appel l at e cour t hel d t hat admi ni st r at i ve t r eat ment was

not warr ant ed. The Supr eme Cour t di sagr eed, hol di ng t hatdamages r esul t i ng f r om negl i gence of a r ecei ver act i ng wi t hi n

t he scope of hi s aut hor i t y as r ecei ver gi ve r i se t o act ual and

necessar y cost s of a Chapt er XI ar r angement .

The Supreme Cour t essent i al l y engaged i n a t wo- st ep

anal ysi s to r each i t s concl usi on. The Cour t f i r st addr essed

whet her t he t r ust ee br eached some l egal dut y t hat gave r i se t o a

cor r espondi ng r i ght t o payment under st ate l aw. Because Readi ng

suf f er ed t he f i nanci al i nj ur y f r om t he negl i gence of t he t r ust ee

and a workman, t he Cour t not ed t hat Readi ng woul d have a r i ght

t o recover under t he common l aw r ul e of r espondeat super i or .

Ther ef or e, i n pr i nci pl e, t he Cour t f ound t hat Readi ng had a

ri ght t o r ecover f or t hat i nj ur y f r om t hei r empl oyer , t he

busi ness under ar r angement . I d. at 477. Li abi l i t y was t husest abl i shed.

I n a f oot not e, t he Cour t poi nt ed out t hat 28 U. S. C.


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15 Thi s sect i on pr ovi des:

[ A] t r ust ee, r ecei ver or manager appoi nt ed i n any cause

pendi ng i n any cour t of t he Uni t ed St at es, i ncl udi ng adebt or i n possessi on, shal l manage and oper at e t hepr oper t y i n hi s possessi on as such t r ust ee, r ecei ver ormanager accor di ng t o t he r equi r ement s of t he val i d l awsof t he St at e i n whi ch such pr oper t y i s si t uat ed, i n t hesame manner t hat t he owner or possessor t hereof woul dbe bound t o do i f i n possessi on t her eof .

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959( b) 15 r equi r es a t r ust ee t o manage and operate t he busi ness

i n accordance wi t h l ocal st at e l aw, i n t he same manner t hat t he

owner woul d be bound t o do. I mpl i ci t l y, t he t r ust ee i n Readi ng

di d not compl y wi t h st at e l aw when he f ai l ed t o exer ci se thedut y of r easonabl e car e i n oper at i ng t he busi ness. The Cour t

t her ef or e consi der ed the pol i cy embedded i n 28 U. S. C. 959( b)

of ensur i ng a t r ust ee s compl i ance wi t h st at e l aw when t he

t r ust ee i s aut hor i zed under bankrupt cy l aw t o oper at e the

debt or s busi ness. However , t he Cour t observed t hat [ t ] hi s

pr ovi si on of cour se est abl i shes onl y t he pr i nci pl e of l i abi l i t y

under st ate tort and agency l aw, and does not deci de f r omwhom

or wi t h what pri or i t y t or t cl ai ms may be col l ect ed. I d. at 478

n. 7.

Next , t he Cour t addr essed t he pr i or i t y i ssue. The Cour t

f i r st consi der ed t he st at ut or y obj ect i ve of f ai r ness t o al l

per sons havi ng cl ai ms agai nst an i nsol vent . The Cour t t hen

bal anced t he obj ect i ve of t he debt or s r ehabi l i t at i on agai nstt he desi r abi l i t y of al l owi ng t hose i nj ur ed by the oper at i on of

t he busi ness dur i ng t he bankr upt cy pr ocess t o recover ahead of

t hose f or whose benef i t t he busi ness was car r i ed out .


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At t he moment when an ar r angement i s sought , t hedebt or i s i nsol vent . I t s exi st i ng credi t or s hope t hatby par t i al or compl ete post ponement of t hei r cl ai mst hey wi l l , t hr ough successf ul r ehabi l i t at i on,event ual l y r ecover f r om t he debt or ei t her i n f ul l ori n l ar ger pr opor t i on t han t hey woul d i n i mmedi at e

bankrupt cy. Hence t he pr esent pet i t i oner di d notmer el y suf f er i nj ur y at t he hands of an i nsol ventbusi ness: i t had an i nsol vent busi ness t hr ust upon i tby oper at i on of l aw. That busi ness wi l l , i n anyevent , be unabl e t o pay i t s f i r e debt s i n f ul l . Butt he quest i on i s whet her t he f i r e cl ai mant s shoul d besubor di nat ed t o, shoul d shar e equal l y wi t h, or shoul dcol l ect ahead of t hose cr edi t or s f or whose benef i t t hecont i nued oper at i on of t he busi ness ( whi chunf or t unat el y l ed t o a f i r e i nst ead of t he hoped- f orr ehabi l i t at i on) was al l owed.

I d. at 478. The Cour t concl uded on bal ance t hat t or t cl ai ms

ar i si ng dur i ng a Chapt er XI pr oceedi ng wer e cost s ordi nar i l y

i nci dent t o oper at i on of a busi ness, and t her ef or e qual i f i ed as

admi ni st r at i ve expenses ent i t l ed t o pr i or i t y under 503( b) .

I d. at 483- 84. I n sum, t he Cour t s pr i or i t y deci si on was

l ar gel y based on equi t abl e pr i nci pl es and a f ai r ness r at i onal e.

On appeal , t r ust ee ar gues t hat Readi ng i s not appl i cabl e

under t he f act s of t hi s case because (1) t he penal t i es wer epuni t i ve and ( 2) t he penal t i es coul d not be consi der ed cost s

or di nar i l y i nci dent t o t he oper at i on of a busi ness as r equi r ed

by t he l anguage i n Readi ng because t he t r ust ee was not operat i ng

t he busi ness. Whi l e I RS acknowl edges t hat most cases have

appl i ed Readi ng i n t he cont ext of a chapt er 11 where t he debt or -

i n- possessi on or t r ust ee was oper at i ng t he debt or s busi ness,

I RS ar gues t hat pol i cy consi der at i ons f avor an extensi on of

Readi ng under t he f act s of t hi s case. Those pol i ci es i ncl ude

t he Uni t ed St at es i nt er est i n mai nt ai ni ng a wor kabl e t ax

syst em, whi ch the I RS cont ends shoul d out wei gh any cost t o

debt or s ot her credi t or s, and di scour agi ng t r ust ees f r om


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shi r ki ng t hei r dut y t o t i mel y f i l e bankr upt cy est at e t ax

r et ur ns.

We i ni t i al l y not e t hat t he hol di ng i n Readi ng i s a nar r ow

one. I n r e Abercr ombi e, 139 F. 3d at 758 ( Readi ng cr eat ed avener abl e but l i mi t ed except i on t o t he t r adi t i onal r equi r ement s

f or admi ni st r at i ve pr i or i t y) . The Ni nt h Ci r cui t f i r st suggest ed

t hat t he r ul e of Readi ng appl i es onl y i n cases i nvol vi ng

post pet i t i on t or t - l i ke conduct , . . . . Or . v. Wi t cosky ( I n

r e Al l en Car e Ct r s. , I nc. ) , 96 F. 3d 1328, 1331 ( 9t h Ci r . 1996)

( ci t i ng Nat l Labor Rel at i ons Bd. v. Wal sh ( I n r e Pal au Cor p. ) ,

18 F. 3d 746, 751 ( 9t h Ci r . 1994) ) ; see al so I n r e Lazar , 207

B. R. 668, 68384 ( Bankr . C. D. Cal . 1997) .

However , i n anot her l i ne of cases, t he Ni nt h Ci r cui t and

t hi s Panel expanded t he Readi ng doct r i ne beyond t or t - l i ke

conduct when t he cost s at i ssue ar ose out of t he debt or - i n-

possessi on s ( or t r ust ee s) vi ol at i on of 28 U. S. C. 959( b)

whi l e oper at i ng a busi ness. See I n Megaf oods St or es, I nc. , 163F. 3d at 1072 ( hol di ng post pet i t i on i nt er est on unr emi t t ed st at e

and l ocal sal es t axes col l ect ed pr epet i t i on wer e ent i t l ed t o

admi ni st r at i ve pr i or i t y when i nt er est char ges r esul t ed f r om

debt or s mi smanagement of t hei r est at es, i . e. , f ai l ur e t o compl y

wi t h t hei r dut i es under 28 U. S. C. 959( b) and 960 ( mandat i ng

compl i ance wi t h st at e t ax l aws) , and t hat t he Readi ng except i on

appl i ed) ; I n r e Met r o Ful f i l l ment , I nc. , 294 B. R. at 311- 12

( hol di ng cl ai ms f i l ed by empl oyees who were empl oyed i n the

debt or s packi ng and shi ppi ng depar t ment at mi ni mum wage and

wer e never pai d i n vi ol at i on of Cal i f or ni a Labor Code 203 and

203. 1 wer e admi ni st r at i ve cl ai ms wi t hi n Readi ng s r at i onal e when


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16 Fur t her mor e, t he Panel i n Met r o Ful f i l l ment , I nc. madecl ear t hat whet her t he penal t y wages at i ssue wer e puni t i ve orcompensat or y was not di sposi t i ve because the debt or f ai l ed t ocompl y wi t h i t s post pet i t i on obl i gat i ons under st at e l aw. 494B. R. at 312. For t hi s r eason, t r ust ee s ar gument s r egar di ng t hepuni t i ve nat ur e of t he penal t i es ar e not per suasi ve.

17 We have not f ound any case t hat has ext ended t hef undament al f ai r ness doct r i ne to penal t i es assessed f or f ai l ur et o t i mel y f i l e t ax r et ur ns nor have t he par t i es ci t ed a case t hatt angent i al l y t ouches upon t hi s i ssue. Ther ef or e, we do not f i nd

t he out - of - j ur i sdi ct i on cases t hat ar e ci t ed by t he par t i eshel pf ul t o our anal ysi s.

18 Thi s t ype of conduct i s si mi l ar t o t he wi l l f ul negl ect st andar d under I RC 6651. The t er m wi l l f ul negl ect means aconsci ous, i nt ent i onal f ai l ur e or reckl ess i ndi f f er ence. Boyl e,469 U. S. at 245.

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t he debt or was oper at i ng t he busi ness and f ai l ed t o compl y wi t h

st at e l aw under 28 U. S. C. 959( b) ) 16; see al so Al a. Sur f ace

Mi ni ng Comm n v. N. P. Mi ni ng Co. , I nc. ( I n r e N. P. Mi ni ng Co. ,

I nc. ) , 963 F. 2d 1449 ( 11t h Ci r . 1992) ( puni t i ve ci vi l penal t i esassessed f or post pet i t i on mi ni ng act i vi t i es qual i f i ed f or

admi ni str at i ve pr i or i t y) .

Whi l e none of t hese cases addr essed t he cat egory of

expenses i nvol ved here, 17 we ar e per suaded that I RS s penal t y

cl ai m i s not t he t ype of cl ai m cover ed by Readi ng under ei t her

l i ne of r easoni ng. I RS s penal t y cl ai m di d not ar i se f r om

t r ust ee s post pet i t i on t or t i ous or act i ve wr ongdoi ng. These

t erms i mpl y some wr ongf ul conduct and, here, t he bankr upt cy

cour t di d not f i nd t hat t r ust ee had engaged i n any wr ongf ul

conduct . 18 I ndeed, t he r ecor d shows t hat t r ust ee was under t he

mi st aken bel i ef t hat he di d not need t o f i l e t he i nf or mat i onal


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r et ur ns whi l e t he est at e remai ned i nsol vent .

Any f ocus on 28 U. S. C. 959( b) i n t hi s cont ext i s

mi spl aced because t he st at ut e est abl i shes onl y t he pr i nci pl e of

l i abi l i t y under st at e tor t and agency l aw, and does not deci def r om whom or wi t h what pr i or i t y t or t cl ai ms may be col l ect ed.

Readi ng, 391 U. S. at 475. I t i s doubt f ul 28 U. S. C. 959( b)

appl i ed t o t r ust ee when he was not oper at i ng t he busi ness. See

I n r e N. P. Mi ni ng Co. , 963 F. 2d at 1460 ( ci t i ng cases t hat hol d

t hat 28 U. S. C. 959( b) i s i nappl i cabl e t o l i qui dat i on cases) .

Mor eover , 28 U. S. C. 959( b) r equi r es an oper at i ng t r ust ee t o

compl y wi t h st at e l aw ver sus t r ust ee s noncompl i ance wi t h t he

f eder al t ax code i n t hi s case. Accor di ngl y, f or pur poses of

est abl i shi ng onl y t he pr i nci pl e of l i abi l i t y, we concl ude t hat

t he Tax Code i s up t o t he t ask by r equi r i ng t r ust ee t o f i l e

cor por at e tax ret ur ns dur i ng t he case, whet her or not t he

busi ness i s bei ng oper at ed. See I RC 6012( b) ( 3) and ( 4) .

The bankrupt cy est at e s l i abi l i t y i s onl y one par t of t heanal ysi s under Readi ng. Anot her r equi r ement f or admi ni st r at i ve

expense st at us i s t hat t he cost must be one ordi nar i l y i nci dent

t o operat i on of a busi ness . The Readi ng Cour t concl uded t hat

t he wor ds pr eser vi ng t he est at e [ i n 64( a) of t he Bankrupt cy

Act ] i ncl ude t he l ar ger obj ect i ve, common t o arr angement s, of

oper at i ng t he debt or s busi ness wi t h a vi ew t o r ehabi l i t at i ng

i t . 391 U. S. at 47677. Appl yi ng Readi ng i n t he cont ext of an

oper at i ng busi ness i s not onl y consi st ent wi t h t he wor ds

pr eser vi ng t he est at e under 503( b) ( 1) ( A) , but i t i s al so

consi st ent wi t h t he under l yi ng r at i onal e f or t he f undament al

f ai r ness doct r i ne espoused i n t he case. Pr i or i t y f or t he f i r e


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cl ai mant s over t he unsecur ed cr edi t ors was based upon t he qui d

pr o quo f or t he cont i nued oper at i on of t he busi ness.

We t hus concl ude t hat Readi ng does not appl y f or t he same

r easons t hat t he pl ai n l anguage of 503( b) ( 1) ( A) i si nappl i cabl e. Tr ust ee was not oper at i ng t he busi ness of debt or

under t he common meani ng of t he t erm. Treat i ng I RS s cl ai m as

an admi ni st r at i ve expense i n t hi s case wi l l al l ow t hat cl ai m t o

be pai d t o t he excl usi on of , and out of t he r esour ces other wi se

avai l abl e f or , cl ai ms of other credi t or s. The pr act i cal r esul t

woul d be t hat t he penal t i es woul d be pai d by i nnocent t hi r d

per sons, t he cr edi t or s, who di d not der i ve any benef i t f r om t he

cont i nued oper at i on of any busi ness. Under t he r easoni ng i n

Readi ng, t hat r esul t does not seem f ai r especi al l y i n l i ght of

t he f act t hat as a gener al mat t er , 503( b) ( 1) ( A) i s const r ued

nar r owl y i n or der t o maxi mi ze and pr ot ect t he l i mi t ed asset s of

t he bankrupt cy est at e f or t he benef i t of unsecur ed cr edi t or s.

See I n r e Pal au Cor p. , 139 B. R. at 942, 944 ( 9t h Ci r . BAP 1992) ,af f d, 18 F. 3d 746 ( 9t h Ci r . 1994) ; I n r e Dant & Russel l , I nc. ,

853 F. 2d 700 ( 9t h Ci r . 1988) . Because an unsecur ed cr edi t or i n

a chapt er 7 l i qui dat i on case cannot expect t o i mpr ove i t s

posi t i on t hr ough t he oper at i on of a busi ness, a nar r ow

const r uct i on of 503( b) ( 1) ( A) wei ghs heavi l y under t hese

ci r cumst ances.

Al t hough we do not condone t r ust ee s apparent l ack of

di l i gence i n compl et i ng t he 2006 t ax ret ur ns so t hat t he r ef und

f or t hat year woul d have been r ecei ved by t he est ate i n a more

t i mel y manner , we al so do not bel i eve t hat Ni nt h Ci r cui t case

l aw al l ows us t o expand t he Readi ng except i on t o al l


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19 I ndeed, i f a di r ect benef i t t o t he est at e wer e r equi r edf or 503( b) ( 1) ( A) st at us, i t woul d be di f f i cul t f or t r ust ee t oj ust i f y payment of t he f ees f or t he accountant s he r et ai ned t opr epar e and f i l e t he t ar dy t ax r et ur ns.

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post pet i t i on cost s and f i nd t hey ar e ent i t l ed t o admi ni st r at i ve

expense pr i or i t y si mpl y because t he chapt er 7 t r ust ee had a

dut y t o compl y wi t h t he Tax Code despi t e an i nsol vent est at e.

We ar e rel uct ant t o r ead t he pr eservat i on of t he est at el anguage out of 503( b) ( 1) ( A) and est abl i sh a per se r ul e f or

post pet i t i on penal t i es such as t hi s. Such an i nt er pr et at i on of

Readi ng woul d swal l ow t he gui del i nes set f or t h i n Dant & Russel l

maki ng al l post pet i t i on cl ai ms el i gi bl e f or admi ni st r at i ve

pr i or i t y as a cost of admi ni st r at i on.

We do acknowl edge, however , t hat pr i or i t y st at us f or t he

t ax penal t i es under 503( b) ( 1) ( A) i s a cl ose cal l . I RS makes a

ver y near l y per suasi ve case t hat , i n t he i nt er est of f ai r ness t o

t axpayer s ever ywhere, and t o pr omote the pubi c pol i cy embodi ed

i n t he Tax Code t hat r equi r es bankrupt cy t r ust ees t o t i mel y f i l e

al l t ax r et ur ns due dur i ng t he cour se of admi ni st r at i on of a

bankrupt cy est at e, t he penal t i es her e const i t ut e act ual ,

necessar y cost s of pr eservi ng t he est at e under 503( b) ( 1) ( A)as t hat phr ase has been i nt er pr et ed i n t he case l aw. As not ed,

i t i s not di sposi t i ve t hat t he t ax penal t i es i n t hi s case

conf er r ed no di r ect benef i t on t he bankrupt cy est at e; a l egi on

of cour t s, f r omt he Supr eme Cour t i n Readi ng on down, have

car ved out j udi ci al except i ons t o t hat st r i ct r equi r ement over

t he year s t o appl y 503( b) ( 1) ( A) f ai r l y, consi st ent wi t h publ i c

pol i cy. 19 Unf or t unat el y f or I RS, t hough, none of t he deci si ons

r ecogni zi ng Readi ng f ai r ness except i ons deal wi t h a non-


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oper at i ng chapt er 7 est at e. I nst ead, t he f ai r ness except i on has

near l y al ways appl i ed when debt ors and t r ust ees were operat i ng a

busi ness, i n many cases t o abi de by 28 U. S. C. 959( b) s command

t hat t hey f ol l ow t he same st at e r ul es as ot her s. The absence ofany aut hor i t y appl yi ng t he Readi ng except i on i n a l i qui dat i on

scenar i o i s suf f i ci ent t o t i p t he scal es i n t r ust ee s f avor .

C. Administrative Expense Priority For Other Reasons

Never t hel ess, t he t ax penal t i es may be ent i t l ed t o

admi ni st r at i ve expense st at us f or other r easons. Fi r st ,

503( b) st at es t hat [ a] f t er not i ce and a hear i ng, t her e shal l

be al l owed admi ni st r at i ve expenses, ot her t han cl ai ms al l owed

under secti on 502( f ) of t hi s t i t l e, i ncl udi ng . . . .

( Emphasi s added) . By usi ng t he wor d i ncl udi ng i n t he

i nt r oduct i on t o 503( b) , Congr ess makes cl ear t hat , t o be

al l owed, t he t ax penal t i es need onl y const i t ut e admi ni st r at i ve

expenses; i t i s not necessar y that t he t ax penal t i es pr eci sel y

mat ch one of t he i l l ust r at i ve cat egor i es l i st ed i n subsect i ons( 1) t hr ough ( 9) .

Because t her e i s no def i ni t i on of admi ni st r at i ve expense

i n t he Bankr upt cy Code, pr esumabl y, Congr ess i nt ended t hat t he

bankrupt cy cour t s f ashi on a def i ni t i on f or t hi s t er m based upon

t he f act s of t he case gui ded by the gener al pol i ci es of t he

Code. As a r esul t , i f t he bankrupt cy cour t her e wer e t o f i nd

t hat , even t hough t hey di d not const i t ut e a cost of pr eservi ng

t he bankrupt cy est at e, t he t ax penal t i es wer e nonet hel ess

expenses i ncur r ed i n t he admi ni st r at i on of t hi s bankrupt cy

est at e ( i . e. , admi ni st r at i ve expenses), I RS s cl ai m may st i l l

be ent i t l ed t o admi ni st r at i ve pr i or i t y under 503( b) . The


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bankr upt cy cour t shoul d have t he oppor t uni t y on r emand to make

t hat deci si on.

Secondl y, I RS i ni t i al l y ar gued t o t he bankrupt cy cour t t hat

t he penal t i es shoul d be deemed admi ni st r at i ve expenses under 503( b) ( 1) ( C) as a penal t y . . . r el at i ng t o a t ax of a ki nd

speci f i ed i n subpar agr aph ( B) of [ 503( b) ] . Tr ust ee ar gued i n

r esponse that t he penal t y di d not r el at e t o a t ax of a ki nd

speci f i ed i n subpar agr aph ( B) because no t ax was actual l y

i mposed under subparagr aph ( B) . The bankr upt cy cour t di d not

addr ess t hi s i ssue because i t made i t s deci si on under

subpar agr aph ( A) . For t hi s reason, r emand i s appr opr i at e so

t hat t he bankrupt cy cour t can eval uat e the i ssues under

503( b) ( 1) ( B) and ( C) .

Fi nal l y, a remand i s mandat ed to addr ess t he quest i on that

begs t o be answer ed: i f t hese t ax penal t i es, i ncur r ed i n t he

or di nar y cour se of t he t r ust ee s admi ni st r at i on of t he

bankrupt cy est at e ar e not al l owed admi ni st r at i ve expenses, t henwhat ar e t hey? Presumabl y, t he penal t i es may not be al l owed as

unsecur ed cl ai ms because t hey di d not ar i se pr i or t o the

pet i t i on dat e. See 501( a) and 502( a) ( i n t andem, pr ovi di ng

t hat a cr edi t or may f i l e a cl ai m, and i n gener al , such cl ai ms

are al l owed based upon t he amount [ due] . . . as of t he date of

t he f i l i ng of t he pet i t i on) ; 101( 5) , ( 10) ( i n t andem,

pr ovi di ng t hat a cl ai m i s a r i ght t o payment , and a cr edi t or

i s an ent i t y t hat has a cl ai m agai nst t he debt or t hat ar ose at

t he t i me of or bef ore t he commencement of a vol unt ary chapt er 7

case) . Whi l e t he Code expr essl y t r eat s some post - bankrupt cy

cl ai ms as t hough t hey ar ose bef or e t he f i l i ng of t he pet i t i on,


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t ax penal t i es of t he sor t I RS cl ai ms her e ar e not . See e. g. ,

502( f ) ( cer t ai n cl ai ms i n i nvol unt ar y cases) ; 502( g) ( cl ai ms

f or post - pet i t i on l ease r ej ect i on damages) ; 502( h) ( cl ai ms f or

avoi ded t r ansf er s) ; 502( i ) ( cl ai ms f or cer t ai n pr i or i t yt axes) .

I n sum, al t hough we hol d t hat t he tax penal t i es ar e not

ent i t l ed t o admi ni st r at i ve expense st at us under 503( b) ( 1) ( A)

as cost s of pr eservi ng t he est at e, we remand t hi s mat t er t o

t he bankrupt cy cour t t o deci de i f t he penal t i es qual i f y as

admi ni st r at i ve expenses f or ot her r easons.

VI. CONCLUSION

We concl ude that t he bankr upt cy cour t pr oper l y f ound

t r ust ee f ai l ed t o pr ove r easonabl e cause f or hi s f ai l ur e t o

t i mel y f i l e t he 2008 and 2010 t ax ret ur ns at i ssue i n t hi s

appeal and AFFI RM on t hi s i ssue. However , we REVERSE on t he

pr i or i t y i ssue under 503( b) ( 1) ( A) f or t he r easons di scussed

above and REMAND t hi s mat t er t o t he bankr upt cy court t o deci dei f t he penal t i es qual i f y as admi ni st r at i ve expenses f or ot her

r easons.

Concur r ence begi ns on next page.


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- 1-

BASON, Bankr upt cy J udge, concur r i ng:

As a mat t er of nonbankr upt cy l aw I agr ee wi t h t he

maj or i t y s i nt er pr et at i on of r easonabl e cause f or not t i mel yf i l i ng a t ax r et ur n. The t r ust ee had t he bur den t o pr ove t hat

t he est ate exer ci sed ordi nary busi ness car e and pr udence and was

never t hel ess unabl e t o f i l e t he r et ur n wi t hi n t he pr escr i bed

t i me.

As a mat t er of bankr upt cy l aw I agr ee wi t h t he maj or i t y

t hat t ax penal t i es ar e not cost s of pr eser vi ng t he est at e

under 503( b) ( 1) ( A) . I al so agr ee t hat t hi s mat t er shoul d be

r emanded t o t he bankrupt cy cour t f or t wo r easons: f i r st , t o

deci de i f t he penal t i es qual i f y as admi ni st r at i ve expenses f or

any ot her r easons and, second, t o deci de how t o deal wi t h t he

penal t i es i f t hey ar e not admi ni st r at i ve expenses.

I wr i t e separ at el y t o emphasi ze t he nar r owness of t he

panel s r ul i ng. Many of t he j ust i f i cat i ons pr esent ed by t het r ust ee ar e, i n concept , r easonabl e cause f or not t i mel y f i l i ng

t ax ret ur ns, r egar dl ess of whet her t he evi dence i n t hi s

par t i cul ar case i s compel l i ng. I n addi t i on, t her e ar e numer ous

i ssues t hat we ar e not deci di ng t oday.

(1) The trustees justifications

Taxes can be compl i cat ed. I n a busi ness bankrupt cy case i t

i s of t en pr udent t o have t he assi st ance of an account ant .

What i f t here are no f unds t o pay an account ant ? That

mi ght not be a suf f i ci ent excuse f or a t axpayer out si de of

bankrupt cy, but i n my vi ew t he si t uat i on i s di f f er ent f or

chapt er 7 bankr upt cy t r ust ees. They have a st r ong argument t hat


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t hey act wi t h ordi nar y busi ness car e and pr udence i n def er r i ng

t he f i l i ng of t ax r et ur ns unt i l t her e ar e f unds wi t h whi ch t o

pr epar e t hose r et ur ns. What ot her cour se of act i on woul d be

pr udent f or chapt er 7 t r ust ees?I n t hi s case, t he onl y sour ce of such f unds was a

cont i ngent cl ai m f or a 2006 t ax r ef und i n an unknown dol l ar

amount . At t empt i ng t o r ecover t hat r ef und was not easy f or

sever al r easons.

Appar ent l y i t was di f f i cul t t o r et r i eve t he debt or s

r ecor ds. I t was al so di f f i cul t t o per suade t he debt or s

account ant s t o pr epare t he 2006 r etur n. Those account ant s had

not been pai d f or past work. They had uncer t ai n pr ospect s of

ever bei ng pai d f or f ut ur e wor k. The est at e essent i al l y had no

f unds t o pay them, and t he t r ust ee s uncont r adi ct ed asser t i on i s

t hat I RS mi ght have deni ed t he hoped- f or 2006 r ef und f or a

myr i ad of r easons . . . . The t r ust ee al so descr i bes numer ous

communi cat i ons wi t h t he account ant s i n whi ch he at t empt ed t oassi st or expedi t e the pr ocess.

The t r ust ee coul d have appl i ed t o t he I RS f or an ext ensi on

t o f i l e t he 2006 t ax ret ur n, but at or al ar gument we wer e t ol d

t hat t he maxi mum aggr egate ext ensi on woul d be si x mont hs. The

I RS has not argued t hat si x mont hs woul d be anywher e near

suf f i ci ent , and as t he t r ust ee poi nt s out i t t ook t he I RS i t sel f

appr oxi matel y sevent een mont hs t o pr ocess t he 2006 r etur n once

i t was f i l ed.

The t r ust ee was char ged wi t h l i qui dat i ng a mor i bund

busi ness wi t h mi ssi ng r ecor ds. That si t uat i on i s anal ogous to

some wel l accept ed gr ounds f or not t i mel y f i l i ng a r et ur n, such


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- 3-

as t he t axpayer s deat h or ser i ous i l l ness, or t he dest r uct i on

by casual t y of t he t axpayer s recor ds. Uni t ed St at es v. Boyl e,

469 U. S. 241, 243 n. 1 ( 1985) . Ther ef or e, f or a t i me at l east ,

t he t r ust ee had good r easons f or not f i l i ng t he 2006 r et ur n.But i t i s one thi ng t o mi ss a deadl i ne by a f ew mont hs and

anot her t hi ng t o mi ss i t by appr oxi mat el y thi r t y- t hr ee mont hs,

whi ch i s what happened i n t hi s case. The 2006 r etur n was due i n

Apr i l of 2007 and was not f i l ed unt i l J anuar y of 2010.

Even t hat degr ee of del ay mi ght have sat i sf i ed t he

ordi nar y busi ness car e and pr udence st andar d i f t her e wer e

suf f i ci ent evi dence of t he r easons f or t he del ay. But t he

t r ust ee s evi dence was not necessar i l y compel l i ng. On t hi s

appeal he has not est abl i shed t hat t he bankrupt cy cour t

commi t t ed cl ear er r or i n f i ndi ng a l ack of r easonabl e cause f or

a del ay of t hi r t y t hr ee mont hs.

(2) Some undecided issues

Fi r st , we ar e not asked t o al l ocat e bl ame, nor i s i t cl eart hat t here i s any bl ame. The account ant s underst andabl y were

r el uct ant t o i nvest mor e t i me on a pr oj ect f or whi ch t hey mi ght

never be pai d. The t r ust ee underst andabl y may have been unabl e

t o r et ai n al t er nat i ve account ant s or t o accel er at e t he

pr epar at i on of r et ur ns by the exi st i ng account ant s.

Second, because t her e wer e essent i al l y no f unds i n t he

est ate we are not asked t o revi ew t he t r ust ee s choi ces among

compet i ng demands f or use of such f unds. For exampl e, t hi s case

does not i nvol ve a choi ce bet ween pr epar i ng tax r et ur ns or

addr essi ng heal t h and saf et y i ssues. We gener al l y def er t o t he

t r ust ee s busi ness j udgment i n managi ng a bankr upt cy est at e s


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l i mi t ed r esour ces. See Agar wal v. Pomona Val l ey Med. Gr p. , I nc.

( I n r e Pomona Val l ey Med. Gr p. , I nc. ) , 476 F. 3d 665, 669- 71 ( 9t h

Ci r . 2007) ( def i ni ng cont our s of busi ness j udgment r ul e i n

bankrupt cy cont ext ) . That i ssue i s not bef or e us, nor do weneed t o deci de how t he busi ness j udgment t est mi ght i nt eract

wi t h t he or di nary busi ness care and pr udence st andard.

Thi r d, t he maj or i t y quest i ons ( i n par t V. C. of t he opi ni on)

whet her t he t ax penal t i es may be ent i t l ed t o admi ni st r at i ve

expense st atus f or r easons other t han what was ar gued on appeal .

I agr ee wi t h t he maj or i t y t hat we shoul d r emand r at her t han

si mpl y reverse, and t hat i n expl ai ni ng why we are r emandi ng i t

i s hel pf ul t o of f er exampl es of i ssues t hat mi ght need t o be

consi der ed on r emand.

The maj or i t y of f er s t wo such exampl es: whet her t he t ax

penal t i es ar e ent i t l ed t o an admi ni st r at i ve pr i or i t y under t he

i nt r oduct or y cl ause of 503( b) , or al t er nat i vel y under

503( b) ( 1) ( C) . I agr ee t hat t hose i ssues may be appr opr i at ef or consi derat i on on r emand.

Four t h, t he maj or i t y asks ( at t he end of par t V. C. of t he

opi ni on) : i f t he t ax penal t i es ar e not admi ni st r at i ve cl ai ms

t hen what ar e t hey? The maj or i t y t hen quest i ons whether t he t ax

penal t i es coul d be consi der ed pr epet i t i on cl ai ms.

I do not di sagr ee wi t h pr ovi di ng t hi s exampl e ( t o cl ar i f y

why we are r emandi ng) . But I par t company wi t h t he maj or i t y

when i t st ates t hat pr esumabl y the penal t i es cannot be general

unsecur ed cl ai ms because t hey di d not ar i se pr i or t o the

pet i t i on dat e.

The l aw i s not f ul l y devel oped on when a cl ai m i s t r eated


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as post pet i t i on and when i t i s t r eat ed as a cont i ngent ,

unl i qui dat ed pr epet i t i on cl ai m ( of any pr i or i t y) . Compar e,

e. g. , Cent r e I ns. Co. v. SNTL Cor p. ( I n r e SNTL Cor p. ) , 380 B. R.

204, 220- 22 ( 9t h Ci r . BAP 2007) , af f d, 571 F. 3d 826 ( 9t h Ci r .2009) ( at t or neys f ees i ncur r ed post pet i t i on can be t r eat ed as

cont i ngent , unl i qui dat ed por t i on of pr epet i t i on gener al

unsecur ed cl ai m) , wi t h Gor don v. Hi nes ( I n r e Hi nes) , 147 F. 3d

1185, 1191- 92 & n. 9 ( 9t h Ci r . 1998) ( an at t or ney s r i ght t o

payment t hat ar i ses onl y on per f or mance of post pet i t i on servi ces

i s beyond t he t ype of cont i ngent pr epet i t i on cl ai m

cont empl at ed by st at ut e) ( al t er nat i ve hol di ng on whi ch maj or i t y

and concur r ence agr ee) .

I t i s possi bl e t hat t he t ax penal t i es i n t hi s case coul d be

t r eat ed as cont i ngent , unl i qui dat ed cl ai ms as of t he pet i t i on

dat e ( and coul d be i ncl uded i n an amendment t o t he I RS cl ai m i f

i t s asser t ed admi ni st r at i ve pr i or i t y wer e t o be r ej ect ed) . The

penal t i es do have pr epet i t i on aspect s: t hey ar i se f r oml i qui dat i ng t he pr epet i t i on busi ness and t he unt i mel y f i l i ng of

t he pr epet i t i on 2006 t ax r et ur n whi ch l ed t o t he unt i mel y f i l i ng

of t he 2008 and 2010 i nf ormat i onal r etur ns. On t he other hand,

perhaps t he t ax penal t i es ar e more pr oper l y vi ewed as

post pet i t i on cl ai ms t hat are beyond what t he st atut e means by

cont i ngent and unl i qui dat ed pr epet i t i on cl ai ms. I n ei t her

event , t he cl ai ms pr i or i t y i s uncl ear .

I expr ess no vi ews on t he cor r ect out come. My poi nt i s

t hat al t hough we are expl ai ni ng our deci si on t o r emand by

pr ovi di ng exampl es of pot ent i al i ssues, I do not i nt er pr et our

di scussi on of t hese par t i cul ar i ssues as l i mi t at i ons on t he


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bankrupt cy cour t : on r emand i t can appl y i t s own anal ysi s t o

what ever i ssues ar e pr oper l y pr esent ed.

(3) Conclusion

Wi t h t he l i mi t ed caveat s expr essed above, I j oi n i n t hemaj or i t y s wel l r easoned opi ni on.

in re: 800ideas.com, inc., 9th cir. bap (2013)

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