607 B.R. 175
Bankr. D. Del.2019Background
- Debtors (Affirmative Insurance Holdings and affiliates) wrote nonstandard auto policies, suffered multi-year operating losses, and had sold most material assets before filing bankruptcy.
- Debtors filed Chapter 11 on October 14, 2015; operations were largely wound down and only limited administrative services produced revenue by the petition date.
- Cases were converted to Chapter 7 on March 10, 2016; Don A. Beskrone was appointed Chapter 7 Trustee.
- The IRS filed an administrative-expense claim for corporate income taxes for the 2015 calendar year (a “straddle” year that spanned pre- and post-petition periods).
- Trustee objected, arguing all material taxable events occurred pre-petition and the IRS claim should be disallowed or reclassified as a general unsecured claim.
- The Court sustained the Trustee’s objection: it reclassified the IRS claim as general unsecured but gave the government 90 days to file an amended claim allocating any tax liability attributable to the post-petition period.
Issues
| Issue | Trustee's Argument | IRS's Argument | Held |
|---|---|---|---|
| Whether the IRS claim is entitled to priority under §507(a)(8) | Straddle year does not end on/before petition date, so not §507(a)(8) priority | Claim is post-petition because assessment/return occurred after petition | Not entitled to §507(a)(8) priority (straddle year does not end pre-petition) |
| Whether the claim is an administrative expense under §503(b)(1)(B)(i) | Taxes arose from pre-petition events and were not "incurred by the estate" | Tax liability fixed at end of taxable year/assessment post-petition -> "incurred by the estate" | Court requires that only taxes "incurred by the estate" (post-petition portion) get administrative priority; pre-petition portion is unsecured (bifurcation) |
| When a tax is "incurred" for §503(b) purposes (accrual vs assessment) | Date tax accrues / becomes fixed under applicable state law controls; many taxable events pre-petition fix liability pre-petition | Liability is not fixed until end of taxable year/return/assessment, which occurred post-petition | Court follows accrual/fixed-liability approach: state law determines when liability is fixed; pre-petition accrual yields unsecured claim; post-petition accrual yields administrative claim |
| Appropriate remedy | Disallow or reclassify entire IRS administrative claim | Allow the IRS administrative claim for the full year | Court reclassified Claim No. 87-1 as general unsecured, but permitted the government 90 days to file an amended claim allocating any post-petition tax liability |
Key Cases Cited
- In re Columbia Gas Transmission Corp., 37 F.3d 982 (3d Cir. 1994) (tax liability is generally "incurred" when it accrues and becomes fixed)
- Calpine Corp. v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), 181 F.3d 527 (3d Cir. 1999) (party seeking administrative-expense priority bears the burden to prove actual, necessary benefit to the estate)
- In re L.J. O’Neill Shoe Co., 64 F.3d 1146 (8th Cir. 1995) (corporate straddle-year tax liabilities may be divided for bankruptcy-priority treatment)
- Hall v. United States, 566 U.S. 506 (2012) (Chapter-by-chapter distinctions matter in determining whether postpetition taxes are "incurred by the estate")
- Dewsnup v. Timm, 502 U.S. 410 (1992) (courts should not assume Congress intended major changes to pre-Code practice absent clear indication)