IRS Penalties for Late Filed Corporate Tax Returns are NotAdministrative Expenses

The Ninth Circuit Bankruptcy Appellate Panel has ruled that penalties imposed by the Internal Revenue Service for untimely filing corporate tax returns were not administrative expenses.  In Kipperman v. Internal Revenue Service (In re 800ideas.com), 13 C.D.O.S. 9790, BAP No. SC-12-1496-JuBaPa (9th Cir. BAP July 22, 2013), chapter 7 trustee Richard M. Kipperman appealed from the bankruptcy county's order allowing the penalties as an administrative expense necessary for preservation of the debtor's estate pursuant to Bankruptcy Code Section 503(b)(1)(A).  The BAP disagreed and remanded the case to bankruptcy court for determination of whether the penalties qualify as administrative expenses for other reasons.  

Specifically, the BAP noted that the case was a chapter 7 case.  Accordingly, the penalties were not incurred in the operation of a business and, as a result, the penalties were incurred neither to benefit the estate nor preserve it.  Moreover, the failure to timely file tax returns did not constitute a post-petition tort under Reading Co. v. Brown, 391 U.S. 471 (1968).

It is important to timely file estate tax returns or comply with procedure to excuse the filing requirement (the opinion has a good review of certain new procedures).  Nevertheless, the upshot of this case is that penalties for late filing are not entitled to administrative priority on the grounds advanced by the IRS and are apparently limited to general unsecured claims.

Holiday Reading

The holidays are approaching, so why not treat yourself to an education in the history of American bankruptcy law?  Last Christmas, my wife Laura gave me a copy of David A. Skeel, Jr.'s Debt's Dominion:  A History of Bankruptcy Law in America (Princeton University Press, 2001).  Skeel's book explores the development of bankruptcy law from the 1800's to the reforms proposed in the early 2000's, some of which were incorporated in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Debt's Domion gives a particularly enlightening treatment of railroad receiverships, which ultimately developed into modern Chapter 11 practice, and William Douglas' mid-century crack-down on the Wall Street reorganization bar.  We had the honor of hearing the author give a lecture as the keynote speaker at the California Bankruptcy Forum last May, and his insights into contemporary bankruptcy law and his preductions for the future were fascinating. - Reno Fernandez