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11020-11027 Pre-Petition Claim for Priority Unsecured Taxes

11020. CONCEPT OVERVIEW
Tax claims of any governmental entity that are assessed before bankruptcy and not secured by a tax lien are classified as eighth priority under Bankruptcy Code section 507(a)(8), if the tax was assessed within the statutory time limitations of the Bankruptcy Code. Pre-petition priority taxes include:

1) Gross receipts taxes (including city payroll taxes measured as a percentage of payroll expense) for a taxable year ending on or before the date of the filing of the petition (11 U.S.C. §507(a)(8)(A)); and,

2) Property taxes incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition (11 U.S.C. §507(a)(8)(B)).

NOTE: Real estate taxes are always secured by the tax lien and therefore are not included in this section. Unsecured taxes becoming delinquent after the petition is filed can be secured by a post-petition certificate of delinquency and also filed as secured tax claims. The only reason for filing an unsecured personal property tax claim under this section would be the absence of property in the estate to which the lien would attach (Rev. & Tax. Code §107).

3) Taxes that the debtor is required to collect from others and remit to the taxing authority, e.g., transient occupancy taxes. No time limit applies (11 U.S.C. §507(a)(8)(C)).

11021. FILING SCHEDULE
Chapter 7 and Chapter 13 cases:

A governmental claim for pre-petition taxes is timely if it is filed not later than 180 days after the date of the order for relief (Bankruptcy Rule 3002(c)). A government agency may make a motion to extend the time before the 180-day period has expired.

Chapter 11 cases:

All pre-petition claims must be filed within the time established by the court upon due notice to all interested parties (Bankruptcy Rule 3003(c)(3)). This time can be extended by motion upon the showing of good cause.

11022. ASSESSMENT DATE
Although the unsecured tax bill may have been issued after the filing of bankruptcy, if the lien date is prior to the date the petition in bankruptcy was filed, the unsecured tax bill is considered as assessed before the filing of the petition for purposes of filing a pre-petition claim for priority-six treatment.

11023. PAYMENT PRIORITY AMONG OTHER TAXING AUTHORITIES
The Bankruptcy Code makes no provision for priority among different taxing agencies. The principle bankruptcy priorities come from the classification of the claim itself; e.g., secured versus unsecured, administrative expense versus pre-petition priority, rather than the identity of the governmental agency holding the claim. However, as between competing secured claimants holding equally non-avoidable liens, the non-bankruptcy law in the state where the property is located applies when a trustee is liquidating property of a Chapter 7 debtor (Cowans, Bankruptcy Law and Practice, 6th ed. 1994, section 12.33). Thus, the senior priority status of the real estate tax lien under Revenue and Taxation Code section 2192.1 would be applied in a Chapter 7 case where other taxing agencies recorded liens subsequently. In Chapter 11 and 13 cases, municipal tax claims must be treated equally, with the tax claims of other taxing agencies having the same bankruptcy classification.

11024. DELINQUENCY PENALTIES
Post-petition delinquency penalties cannot be collected as a priority pre-petition claim in a Chapter 7 or 11 bankruptcy case (11 U.S.C. §726 (a)(4)).

True penalties, i.e., penalties assessed for punitive purposes, on pre-petition tax claims are not included in pre-petition tax classification (In re Paar Meadows Racing Association (2nd Cir., 1989) 880 RF. 2d 1540). The Bankruptcy Code makes the distinction between a tax penalty related to actual identifiable pecuniary loss suffered by the government because of the debtor's misfeasance, which is given priority status (along with the underlying tax), and penalties in excess of actual loss imposed to vilify and punish the debtor for fiscal misconduct. If the latter penalties are imposed on pre-petition tax claims– (both secured and unsecured), they are not afforded priority status but are classified fourth-priority status after general unsecured claims (11 U.S.C §507(a)(8)(G); §726(a)(4); In re Paar Meadows Racing Association, supra).

Post-petition penalties assessed on pre-petition taxes are not allowable claims in a bankruptcy case (In re California Wholesale Electric (Bkrtcy. C.D. Cal. 1990) 121 B.R. 360).

11025. INVOLUNTARY GAP
If a lien date for property tax occurs between the filing of an involuntary petition in bankruptcy by a creditor and the subsequent confirmation of the bankruptcy of the debtor by the court, the tax is not entitled to treatment as a first-priority administrative expense. However, it is eligible for seventh-priority treatment if it met the requirements for property taxes. See M-11020.

Bankruptcy Code section 502(i) allows tax claims coming into existence during the period after an involuntary petition has been filed, but before an order adjudicating the debtor bankrupt, to be treated the same as pre-petition priority tax claims.

11026. SECURED CLAIMS FOR UNSECURED TAXES
The Internal Revenue Service (IRS) is filing secured tax claims for pre-petition taxes where it has filed a lien or attachment. This gives the pre-petition tax claim the higher status of a secured claim. Where a lien has been filed for pre-petition unsecured taxes before the filing date, a tax collector should file a secured claim instead of a seventh-priority tax claim. A copy of the lien should be attached to the bankruptcy claim to substantiate its secured status.

Any claim for secured taxes (excepting mobilehomes and possessory interests) should be filed as a secured claim, not as a priority tax claim. See M-1230.

11027. SECURED TAX CLAIMS
Taxes secured by a lien are allowed in bankruptcy as secured claims (United States v. Ron Pair Enterprises (1989) 489 U.S. 235; 109 S. Ct. 1026).

As a general rule, property of the bankruptcy estate that is encumbered by a tax lien is unaffected by the order of discharge, which is limited to the debtor's personal liability, and the lien survives the ensuing administration of the estate. An exception is when the lien is specifically voided, subordinated, or dealt with by a bankruptcy court order confirming a plan under the Bankruptcy Code for distributing property of the estate in a manner inconsistent with the tax lien (Bkrtcy. Code §1141 (Chapter 11 cases), §1327 (Chapter 13 cases)).