United States v. Noland, 517 U.S. 535, 3 (1996)

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Cite as: 517 U. S. 535 (1996)

Opinion of the Court

After the conversion, the IRS filed claims for taxes, interest, and penalties that accrued after the Chapter 11 filing but before the Chapter 7 conversion, and although the parties agreed that the claims for taxes and interest were entitled to priority as administrative expenses, 503(b), 507(a)(1), and 726(a)(1),1 they disagreed about the priority to be given tax penalties. The Bankruptcy Court determined that the penalties (like the taxes and interest) were administrative expenses under 503(b) but held them to be subject to equitable subordination under 510(c).2 In so doing, the court read that section to provide authority not only to deal with inequitable conduct on the Government's part, but also to adjust a statutory priority of a category of claims. The Bankruptcy Court accordingly weighed the relative equities that seemed to flow from what it described as "the Code's preference for compensating actual loss claims," and subordinated the tax penalty claim to those of the general unsecured creditors. In re First Truck Lines, Inc., 141 B. R. 621, 629 (SD Ohio 1992). The District Court affirmed. Internal Revenue Service v. Noland, 190 B. R. 827 (SD Ohio 1993).

After reviewing the legislative history of the 1978 revision to the Bankruptcy Code and several recent appeals cases on equitable subordination of tax penalties, the Sixth Circuit affirmed, as well. In re First Truck Lines, Inc., 48 F. 3d 210 (1995). The Sixth Circuit stated that it did

1 Section 507(a)(1) provides, in relevant part: "(a) The following expenses and claims have priority in the following order: (1) First, administrative expenses allowed under section 503(b) of this title . . . ." Under 503(b)(1), administrative expenses include "any tax . . . incurred by the estate" (with certain exceptions not relevant here), as well as "any fine [or] penalty . . . relating to [such] a tax . . . ." Section 726(a)(1) adopts the order of payment specified in 507 for Chapter 7 proceedings.

2 Section 510(c) provides that "the court may . . . under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim . . . ."

537

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