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No. 87-5516 UNITED STATES COURT OF APPEALS FOR THE
NINTH CIRCUIT 833 F.2d 797; 1987 U.S. App. LEXIS 15656; 87-2 U.S. Tax Cas. (CCH) P9645; 60 A.F.T.R.2d (RIA) 6084; Bankr. L. Rep. (CCH) P72,123; 17 Collier Bankr. Cas. 2d (MB) 1246 August 4, 1987, Argued and Submitted November 30, 1987, Filed PRIOR
HISTORY: [**1] Appeal from
the Judgment of the Bankruptcy Appellate Panel for the Ninth Circuit, BAP No.
CC-86-1255-MoMeV, Mooreman, Meyers, and Volinn, Judges, Presiding. COUNSEL: Gary D. Gray, Assistant Attorney
General, Tax Division, for the Appellant. Philip D. Dapeer,
George & Dapeer, for the Appellee. JUDGES: J. Clifford Wallace, [**2] Cynthia Holcomb Hall and Edward Leavy, Circuit
Judges. OPINIONBY: LEAVY OPINION: [*798]
LEAVY, Circuit Judge: The United States appeals from an order of the bankruptcy appellate panel, upholding a bankruptcy court decision that permitted the debtor to designate how any payments it made after filing a petition for reorganization under Chapter 11 of the Bankruptcy Code would be used to pay off various federal taxes it owed 68 B.R. 463. The question
presented on appeal is whether a corporate debtor under a Chapter 11
reorganization can designate that tax payments made prior to confirmation of
its reorganization plan shall be applied first to satisfy the
corporation’s trust fund liabilities, thereby protecting the
corporation’s principals from potential personal liability. Because we
conclude that the debtor cannot designate allocation of such payments, we
reverse the decision of the bankruptcy appellate panel. [*799] I. Facts and Proceedings Below Technical Knockout Graphics, Inc. (TKO) defaulted on the payment of corporate income, Social Security, unemployment, and income withholding taxes during 1982 and 1983. On May 3, 1984, it filed a petition for reorganization [**3] under Chapter 11 of the Bankruptcy Code. The government filed a proof of claim in that proceeding for $491,634 in delinquent taxes and interest, of which approximately $290,000 was for taxes withheld from the wages of TKO’s employees and interest thereon. The Internal
Revenue Code (Code) provides that taxes required to be deducted by employers
from the wages paid to employees under 26 U.S.C. §§ 3102(a) and 3402(a), such as withholding and Social Security taxes,
“shall be held to be a special fund in trust for the United
States.” 26 U.S.C. § 7501(a). The withheld funds are commonly
referred to as “trust fund” taxes. Slodov v. United States, 436
U.S. 238, 242-43, 56 L. Ed. 2d 251, 98 S. Ct. 1778 (1978).
“Non-trust fund” taxes are those not collected from
employees’ wages. Under the Code, the employer is responsible for
collecting, and is personally liable for, the trust fund taxes. 26 U.S.C. §§ 3102(a), (b),
3402, 3403, 6672. If a
corporation is unable to pay its trust fund taxes, the United States [**4] Treasury suffers the loss because the employees
from whose wages the taxes are withheld are still credited with those amounts
as if they had in fact been paid to the government. United States v.
Huckabee Auto Co., 783
F.2d 1546, 1548 (11th Cir. 1986); Sorenson v. United States, 521 F.2d 325, 328 (9th Cir. 1975).
Congress has imposed personal liability on any officer or employee of the employer
responsible for the collection and payment of trust fund taxes who
“willfully fails to collect such tax, or truthfully account for and
pay over such tax, or willfully attempts in any manner to evade or defeat such
tax or the payment thereof.” 26 U.S.C. § 6672. These officers and employees are
termed the “responsible persons.” This is not true for
non-trust fund taxes. That the funds collected under Section 6672(a) are termed
a penalty “does not alter their essential character as
taxes.” United States v. Sotelo, 436
U.S. 268, 275,
56 L. Ed. 2d 275, 98 S. Ct. 1795 (1978). The Internal Revenue Service (IRS)
collects the amount of the unpaid trust fund taxes only once, whether collected
in part or in whole from each responsible [**5]
person and/or the corporate employer. USLIFE Title Ins. Co. v. Harbison, 784 F.2d 1238, 1243 & n.7 (5th
Cir. 1986). It is the
policy of the IRS that when a taxpayer submits a “voluntary”
payment, the taxpayer may designate the tax liability to which the payment will
be applied. Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983). However, where the
payment is “involuntary,” the IRS allocates the payments as
it sees fit, applying the payment first to non-trust fund taxes. Id. Because the personal liability of the
responsible persons offers an additional source for collection of trust fund
taxes, this policy increases the government’s opportunity to recover
in full the taxes due. Before
proposing a reorganization plan, TKO filed a motion in the bankruptcy court
asking that it be allowed to make payments to the IRS to reduce the trust fund
portion of its pre-petition tax liability. The government opposed the motion.
While the government had no objection to being paid, it objected to
TKO’s attempt to designate the application of payments to the trust
fund portion of its liability. The government
contended that payments made by [**6]
a debtor in Chapter 11 proceedings are involuntary, and thus the IRS is
entitled to apply the payments as it sees fit. TKO argued that the proposed
payments were voluntary, because TKO had no obligation to make any payments at
all prior to filing a reorganization plan. On March 18,
1986, the bankruptcy court granted TKO’s motion, stating: [The] debtor in possession is permitted to pay to the Internal
Revenue Service for and on account of pre-filing employment taxes due and owing
by debtor, such amounts in the discretion of debtor in possession by way of
reduction of such pre-filing indebtedness and debtor in possession shall be
permitted to designate [*800]
such payment or payments … as it so desires, by way of application to
the trust fund portion of the employment taxes due, or any other portion of the
employment taxes due. The Internal Revenue Service shall accept such payments
made by debtor in possession … and shall accept and be bound by the
designation by debtor in possession as to how such payments are to be applied. The government
appealed this decision to the bankruptcy appellate panel. In a split decision,
the panel affirmed the bankruptcy [**7]
court. The majority stated that the issue was not whether the debtor could
designate its payments to the IRS, but whether the bankruptcy court had the
power to order such an allocation. The majority found that Section 505 of the
Bankruptcy Code, which authorizes bankruptcy courts to determine the tax
liability of the debtor, included the power to allocate repayment among various
liabilities. 11 U.S.C. § 505. The panel concluded that
“the bankruptcy court … determined that an equitable
allocation would result from directing all of the payment to reduce the
‘trust fund’ portion of the tax liability.” The dissent
rejected TKO’s contention that pending confirmation of a
reorganization plan, payments made in Chapter 11 proceedings are voluntary or
may be designated at the debtor’s discretion. The government timely
appealed this decision. By July 23,
1986, TKO had paid to the United States an amount equal to its trust fund
liability, designating that it be applied to that liability. On September 16,
1986, the bankruptcy court confirmed TKO’s reorganization plan. Under
it, 100% of TKO’s tax liability is to be repaid, with 11% interest,
over six years. II. [**8] Discussion A.
Appealability and Mootness On July 24,
1987, this court, sua sponte, ordered the parties to file letter briefs discussing two issues:
(1) whether the interlocutory order of the bankruptcy court was appealable, and
(2) whether the confirmed reorganization plan renders this appeal moot. 1. Appealability The court of
appeals has jurisdiction over final orders, judgments, and decrees of the
bankruptcy courts, whether on appeal from a district court or bankruptcy
appellate panel. 28 U.S.C. § 158(d); Mason v. Integrity Ins. Co.
(In re Mason), 709
F.2d 1313, 1315 (9th Cir. 1983). In bankruptcy
proceedings, this court has cautioned against applying with “blind
adherence” the rules of finality developed under the general grant of
appellate jurisdiction contained in 28 U.S.C. § 1291. Id. at 1316. Instead, the court has
adopted a pragmatic approach to deciding whether a bankruptcy court’s
order is final, recognizing that “certain proceedings in a bankruptcy
case are so distinct and [**9]
conclusive either to the rights of individual parties or the ultimate outcome
of the case that final decisions as to them should be appealable as of
right.” Id.
at 1317. Thus, the
court has “‘adopted a test that emphasizes the need for
immediate review, rather than whether the order is technically interlocutory,
in determining what is appealable as a final judgment in bankruptcy
proceedings.’” Farber v. 405 N. Bedford Dr. Corp. (In re
405 N. Bedford Dr. Corp.), 778 F.2d 1374, 1377 (9th Cir. 1985) (quoting White v. White
(In re White), 727
F.2d 884, 885 (9th Cir. 1984)). Bankruptcy orders that “‘may
determine and seriously affect substantive rights’ and ‘cause
irreparable harm to the losing party if he had to wait to appeal to the end of
the bankruptcy case,’” Mason, 709 F.2d at 1316 (quoting R. Levin, Bankruptcy
Appeals, 58 N.C.L.
Rev. 967, 985-86 & n.140 (1980)), are immediately appealable, if the orders
“finally determine the discreet [sic] issue to which [they are]
addressed.” Four Seas Center, Ltd. v. Davres, Inc. (In re Four Seas
Center, Ltd.), 754
F.2d 1416, 1418 (9th Cir. 1985). [**10]
However, if “‘further proceedings in the bankruptcy court
will affect the scope of the order, the order is not subject to
review’” by this court under 28 U.S.C. § 158. In
re 405 N. Bedford Dr. Corp., 778 F.2d at 1377 (quoting Four Seas, 754 F.2d at 1418). [*801] We hold that the bankruptcy
court’s decision is appealable as a final judgment. The order finally
determined the discrete issue of the debtor’s right to designate
allocation of its tax payments. This order may seriously affect the substantive
rights of the government and cause it irreparable harm. If the
debtor’s reorganization plan fails after the debtor has paid off some
or all of the trust fund debt, the government will be precluded from proceeding
against the responsible persons for the full trust fund liability to the extent
of the payments that have already been made, leaving the government exposed.
When the bankruptcy court entered the payment designation order, it was not
certain that further proceedings of the bankruptcy court would affect the scope
of that order. In fact, the court’s later order affirming the
reorganization plan did not affect the [**11] payment designation order. 2. Mootness We hold that
this appeal is not rendered moot by confirmation of the debtor’s
reorganization plan. The reorganization plan provides for complete payment of
the debtor’s tax liabilities, plus interest, over a six year period.
However, this does not guarantee the plan will succeed, raising the possibility
of injury to the IRS. Thus, the government’s need for recourse to the
responsible persons under 26 U.S.C. § 6672 remains important after
confirmation of the reorganization plan. B. Designation
of Payments 1. Standard
of Review We review the
decisions of the bankruptcy court and the bankruptcy appellate panel in the
same manner: findings of fact for clear error, conclusions of law de novo. United
States v. Camino Real Landscape Maintenance Contractors, Inc. (In re Camino
Real Landscape Maintenance Contractors, Inc.), 818 F.2d 1503, 1505 (9th Cir. 1987). 2. Decision
of Bankruptcy Court A taxpayer
[**12] who makes voluntary payments to
the IRS has the right to designate to which liability the payment will be
applied. In re Ribs-R-Us, Inc., 828 F.2d 199, 201 (3rd Cir. 1987); United States v. A & B
Heating & Air Conditioning, Inc. (In re A & B Heating & Air
Conditioning), 823
F.2d 462, 463 (11th Cir. 1987); Muntwyler, 703 F.2d at 1032; O’Dell v. United States, 326 F.2d 451, 456 (10th Cir. 1964); Avildsen
v. United States (In re Avildsen Tools & Machines, Inc.), 40 Bankr. 253, 255 (N.D. Ill. 1984), aff’d
on other grounds, 794
F.2d 1248 (7th Cir. 1986). When payments are involuntary, it is the policy of
the IRS to apply the payments to whatever liability it chooses. Slodov, 436 U.S. at 252 n.15; Ribs-R-Us, 828 F.2d at 201; A & B Heating, 823 F.2d at 463; Muntwyler, 703 F.2d at 1032. The issue here
is whether payment of taxes after the debtor has filed a petition for
reorganization under Chapter 11, but prior to confirmation of the
reorganization plan, is voluntary. TKO argues
that its payments were voluntary [**13]
because it was under no obligation to make any payments to any creditor prior
to confirmation of its reorganization plan. TKO contends that therefore, its
payments were not due to any enforced collection procedures or the
participation of the government in the bankruptcy proceedings. TKO readily
acknowledges that by designating application of the payments first to the trust
fund portion of its liability, it is attempting to reduce the personal
liability of its responsible persons under 26 U.S.C. Section 6672. The government
contends that the presence of judicial action renders payments by a taxpayer
involuntary, and thus that TKO’s payments were involuntary because
they were made in the course of a bankruptcy proceeding. The government also
argues that the bankruptcy court does not have equitable jurisdiction to allow
TKO’s responsible persons to extinguish their Section 6672 liability
because this undermines the purpose of Section 6672. Federal courts
have struggled with the voluntary/involuntary distinction in the [*802] bankruptcy context and have come to different
conclusions. n1 We conclude that [**14]
payments made by a debtor in possession after filing a petition for
reorganization under Chapter 11, but prior to confirmation of a reorganization
plan, are involuntary and the bankruptcy court does not have equitable
jurisdiction to order otherwise. - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n1 Examples of
cases holding that payments pursuant to a reorganization plan under Chapter 11
are voluntary include: Ducharmes & Co., Inc. v. Michigan, 75 Bankr. 71 (E.D. Mich. 1987); Tom
LeDuc Enterprises, Inc. v. United States (In re Tom LeDuc Enterprises, Inc.), 47 Bankr. 900 (W.D. Mo. 1984); In
re Energy Resources Co., Inc., 59 Bankr. 702 (Bankr. D. Mass. 1986); In re Lifescape, Inc., 54 Bankr. 526 (Bankr. D. Colo. 1985).
Examples of cases holding that payments pursuant to a reorganization plan under
Chapter 11 are involuntary include: In re Frost, 47 Bankr. 961 (D. Kan. 1985); In
re Mister Marvins, Inc.,
48 Bankr. 279 (E.D. Mich. 1984). - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - In Amos v.
Commissioner of Internal Revenue, 47 T.C. 65, 69 (1966), [**15] the tax court defined involuntary payment: An involuntary payment of Federal taxes means any payment received
by agents of the United States as a result of distraint or levy or from a legal
proceeding in which the Government is seeking to collect its delinquent taxes
or file a claim therefor. The Seventh
Circuit in Muntwyler
observed that Amos
and the cases decided after it “uniformly define an involuntary
payment as one made pursuant to judicial action or some form of administrative
seizure, like a levy.” 703 F.2d at 1033. In Muntwyler, the court held that payments to the
IRS made by the trustee of an assignment for the benefit of creditors were
voluntary because the only IRS action was the filing of a claim with the
trustee, and therefore payments could be directed by the debtor to its trust
fund liabilities. The court distinguished the assignment for the benefit of
creditors from payments made in bankruptcy, because “court action is
involved” in the latter. Id. The court stated that “the Government might have
been correct in its claim if the corporation had been in bankruptcy, which it
was not.” Id. at 1034 n.2. [**16] The Third
Circuit followed the reasoning of Muntwyler in In re Ribs-R-Us. There, the court held that
“payments on pre-petition federal tax liabilities by a debtor pursuant
to a plan of reorganization under Chapter 11 are involuntary [and therefore]
the debtor cannot direct the allocation of such payments between the trust fund
and non-trust fund portions of the debtor’s tax liabilities.”
828 F.2d at 199. In so doing, the Third Circuit relied on the opinion of the
dissenting judge of the bankruptcy appellate panel in this case, quoting: Debtors who file under any chapter of the bankruptcy code have few, if any, options.
As a practical matter, they file bankruptcy because it is a last chance for a
relatively ordered financial liquidation or rehabilitation rather than the
out-of-control financial debacle facing them on the eve of bankruptcy. Id. at 203 (quoting In re Technical
Knockout Graphics, Inc.,
68 Bankr. 463, 469 (Bankr. 9th Cir. 1986) (Volinn, Bankr. J., dissenting)). Other courts
have held that payments to the IRS by a debtor during a Chapter 11
reorganization are involuntary, and therefore [**17] the debtor cannot designate to which liability its
payments will be allocated. See, e.g., In re Frost, 47 Bankr. 961, 964-65 (D.C. Kan.
1985); Avildsen, 40
Bankr. at 256. TKO seeks to
distinguish its case on grounds that its proposed payments were not made under a
reorganization plan, and the involvement of the IRS and the bankruptcy court
was slight. However, this argument glosses over the responsibilities and
protections Congress created for debtors who enter into a judicially supervised
bankruptcy proceeding. Once a debtor
files a bankruptcy petition, the property it then possesses, as well as funds
acquired thereafter, become the property of the estate. 11 U.S.C. §
541(a). The debtor-in-possession is not free to deal with this property as it
chooses, but rather holds it in trust for the benefit of creditors, just as
would a trustee. 11 U.S.C. § 1107; S. Rep. No. 989, 95th Cong., 2d Sess.
116, reprinted in
1978 U.S. Code Cong. & Admin. News 5787, 5902. The property is not held for
the benefit of [**18] the responsible persons, [*803] who, in this action, are not even parties. By
filing a bankruptcy petition, the debtor enjoys the protection of an injunction
barring secured and unsecured creditors from pursuing the debtor without court
intervention. A debtor-in-possession is required to obtain the court’s
permission to make payments other than in the ordinary course of business, and
notice of this must be given to creditors. 11 U.S.C. 363(b), (c); Institutional Creditors of
Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air
Lines, Inc.), 780 F.2d
1223, 1225-26 (5th Cir. 1986). To approve a reorganization plan, the court must
find that the proposed plan is “fair and equitable,” meaning
that the payment priorities of the Bankruptcy Code are met. United States v.
AWECO, Inc. (In re AWECO), 725 F.2d 293, 298 (5th Cir.), cert. denied, 469 U.S. 880, 83 L. Ed. 2d 182, 105
S. Ct. 244 (1984). The debtor-in-possession is not free to pay whomever it
chooses before the plan is confirmed, as this could defeat the priority scheme
established by Congress. Thus, by
filing a bankruptcy [**19] petition under Chapter 11, TKO
used the authority of the court to keep its creditors at bay while it
reorganized and regained financial stability. TKO is not free to abuse this
system by designating its payments in a way that benefits only its responsible
persons, and possibly harms other creditors, including the IRS, without the
scrutiny of the court or other creditors. The IRS is entitled to apply
TKO’s payments as the IRS sees fit, to preserve the right of the IRS
to pursue the responsible persons under 26 U.S.C. § 6672. 3. Decision
of the Bankruptcy Appellate Panel The bankruptcy
appellate panel held that the bankruptcy court had the authority to order the
IRS to apply TKO’s payments to its trust fund liability pursuant to 11 U.S.C. § 505 or under its equitable jurisdiction.
There are several problems with the panel’s decision. First, it
mischaracterizes the bankruptcy court’s decision. The bankruptcy court
did not order the IRS to apply TKO’s payments to the trust fund
liability, rather it ordered the IRS to apply the payments in whatever way TKO
desired. Second, the bankruptcy court did not act under 11 U.S.C. § 505. [**20] Section 505 allows the bankruptcy court to determine the
amount of a tax liability. However, the amount owed was not disputed here, and
the court made no such determination. Thus, the record does not support the
bankruptcy appellate panel’s affirmance of the order based on the
bankruptcy court’s power under Section 505. Third, to the
extent the bankruptcy appellate panel’s decision rested on the
bankruptcy court’s equitable jurisdiction, this, too, is misplaced.
While a bankruptcy court is a court of equity, “its broad equitable
powers may only be exercised in a manner which is consistent with the
provisions of the Code.” Johnson v. First Nat’l Bank of
Montevideo, 719 F.2d
270, 273 (8th Cir. 1983), cert. denied, 465 U.S. 1012, 79 L. Ed. 2d 245, 104 S. Ct. 1015 (1984).
As discussed earlier, to allow TKO, while in a bankruptcy proceeding, to
designate how its payments are to be applied, without notice to creditors or
court approval, would subvert the Bankruptcy Code. Such a decision is not
within the bankruptcy court’s equitable jurisdiction. The IRS is
entitled [**21] to apply TKO’s payments
as it sees fit, to safeguard its own position as a creditor. III.
CONCLUSION The decision
of the bankruptcy appellate panel is reversed. REVERSED. |