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11030-11035 Post-Petition Claim for Taxes as an Administrative Expenses

11030. CONCEPT OVERVIEW
An actual necessary cost or expense of preserving a bankruptcy estate is entitled to the second priority of payment, as an administrative expense (Bkrtcy. Code §503(b)(1)(A)). Taxes, whether secured or unsecured, pertaining to tax periods occurring after the date of petition are given the same second priority as administrative expenses (Bkrtcy. Code §503(b)(1)(B), 507(a)(1), In re Mark Anthony Construction, Inc. (9th Cir. 1989) 886 F. 2d 1101).

Also, Title 28 U.S.C. section 960, provides that any federal officer conducting a business is responsible for taxes, just as the business entity would be. This applies to trustees and debtors in possession managing an estate in bankruptcy cases.

Property taxes that accrued (as of the lien date) after the filing of a bankruptcy petition are generally the responsibility of the bankruptcy trustee or debtor in possession, whether the bankruptcy is in a Chapter 11 or 13 debtor-relief proceeding or in a liquidation of assets under Chapter 7.

Prior-year escape assessments whose lien date is before the filing of the petition are pre-petition claims, even though the bill was issued after the filing of the petition.

11031. FILING OF POST-PETITION CLAIMS
Before a trustee or debtor in possession can terminate a bankruptcy case, all formal claims must be paid or objected to. If the claim is objected to, a hearing date is usually set for the court to rule on the claim and the objection. Therefore, if a formal claim is filed, the bankruptcy case is not terminated without notice or payment to the tax collector.

However, a county's failure to file a claim could result in distribution of the bankruptcy estate without payment, unless the debtor scheduled the tax obligation and filed a claim for the tax collector.

The time, form, and number of copies to be filed for administrative expense claims are contained in the local rules of the bankruptcy court and should be determined for each bankruptcy court division. Usually, one copy is sufficient.

If no time limit is specified, the tax collector is still subject to "laches" for any unreasonable delay in providing notice of the assessment. Some tax collectors routinely request the assessor to put the administrative expense unsecured tax bill in the name of the trustee, if one has been appointed, in addition to filing an administrative claim, as an aid in collecting administrative expense taxes.

11032. PAYMENT OF CLAIMS FOR POST-PETITION TAXES
It is the practice of many debtors in possession under Chapter 11 proceedings and trustees under Chapter 7 liquidations to postpone payment of administrative expense taxes, even when a separate claim identifying the taxes as administrative claims has been filed. It is good practice to send a special demand letter to the debtor or trustee, explaining that the bill is an administrative expense and that the debtor or trustee is obligated to pay now.

A trustee or debtor in possession who is operating a business is obligated to observe all federal, state and local tax laws (28 U.S.C. §960). In the event of default, the taxing authority's only remedy is to file a motion for an order converting the case to Chapter 7. There is no motion to order the debtor in possession to pay administrative taxes.

If the estate is carrying on a business or has made regular administrative expense payments to suppliers, employees, etc., and refuses to pay administrative expense taxes, the tax collector can request the county legal counsel to file a motion in the bankruptcy court demanding payment. Often, if legal counsel merely notifies the attorney for the debtor or trustee that the county intends to file such a motion, this is sufficient to produce a timely payment.

11033. PENALTIES IN POST-PETITION TAX CLAIMS
Delinquency penalties are collectible with proper post-petition tax claims, because the debtor in possession or the trustee incurred the penalty by not making the payment in a timely manner. Citations to support such claims are Ingels v. Boteller, 100 F. 2d 915; Nichols v. U.S., 384 U.S. 678, In re Mark Anthony Construction, Inc. (9th Cir. 1989) 886 F. 2d. 1101; and United States v. Noland (1996) 517 U.S. 535 [134 L.Ed.2d 748].

However, penalties cannot be collected as unsecured taxes after a trustee has discontinued business operations and has commenced liquidation of the estate's assets.

11034. PRIORITY OF ADMINISTRATIVE EXPENSE BETWEEN CHAPTERS 7 & 11
Where there are outstanding administrative expenses for a prior Chapter 11 proceeding and a subsequent Chapter 7 liquidation, the expenses of administering the Chapter 7 liquidation have precedence over the prior Chapter 11 administrative expenses. This potential loss of administrative expense taxes makes it good practice to pursue payment of a Chapter 11 administrative tax claim before the bankrupt's estate is converted to a Chapter 7 liquidation.

11035. LIMITATION OF ADMINISTRATIVE EXPENSE TREATMENT TO THE EQUITABLE VALUE OF THE ASSET TAXED
Where the taxable asset is encumbered by prior liens or a secured creditor, the trustee may be able to avoid administrative expense tax claims that exceed the equitable value of the asset to the bankruptcy estate. In other words, the bankruptcy estate (i.e., trustee or debtor in possession) is liable only for taxes on the equitable value of the assessed asset. This usually involves the abandonment of an asset by the trustee to the secured creditor or lienholder. However, the debtor remains liable for the entire amount of taxes as a pre-petition claim in these cases (accord, In re Carolina Triangle Limited Partnership (9th Cir. B.A.P. 1994) 166 B.R. 411).