496 B.R. 165
9th Cir. BAP2013Background
- Debtor 800Ideas.com, an S corporation, filed Chapter 7 in 2007 with a likely excise tax refund as its principal asset.
- Trustee Richard Kipperman oversaw the estate and engaged SHCI to prepare the 2006 return; delays occurred due to file storage and nonpayment.
- The 2006 return was completed in January 2010; the 2008 and 2010 returns were later filed by Johnson, reporting zero tax liability.
- IRS issued postpetition penalties under IRC § 6699 for late filing of 2008 and 2010 returns, totaling $18,667.17.
- Trustee moved to abate penalties; IRS asserted administrative priority under § 503(b)(1)(A) as costs of preserving the estate.
- Bankruptcy court concluded trustee had no reasonable cause and awarded penalties as an administrative expense; appellate court reversed on the priority issue and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trustee had reasonable cause for late filing | Kipperman: estate insolvency justified delay; relied on ordinary care and prudence. | IRS: penalties not excused; delays show lack of reasonable cause. | trustee failed to prove reasonable cause |
| Whether penalties qualify as an administrative expense under § 503(b)(1)(A) | Kipperman: penalties may be ‘actual and necessary costs of preserving the estate’ under Reading and related cases. | IRS: penalties meet Reading-based priority as postpetition costs of preserving estate. | penalties do not qualify under § 503(b)(1)(A); remanded for other grounds |
| Whether penalties may be administrative expenses for other reasons | Remand to consider § 503(b)(1)(B) or (C) or other administrative exp. grounds. | IRS may argue alternative administrator grounds; proceed on remand. | remand appropriate to decide other grounds |
Key Cases Cited
- Reading Co. v. Brown, 391 U.S. 471 (Supreme Court 1968) ( Reading exception for postpetition tort-like costs as administrative expenses)
- In re Megafoods Stores, Inc., 163 F.3d 1063 (9th Cir. 1998) (expanded Reading rationale to certain postpetition costs)
- In re Metro Fulfillment, Inc., 294 B.R. 306 (9th Cir.BAP 2003) (administrative priority in non-operating contexts under Reading line)
- In re Dant & Russell, Inc., 853 F.2d 700 (9th Cir. 1988) (Dant & Russell guidelines for 503(b)(1)(A) narrowly construed, estate-benefit focus)
- In re Abercrombie, 139 F.3d 755 (9th Cir. 1998) (limits of 503(b)(1)(A) and application of Reading fairness)
- United States v. Boyle, 469 U.S. 241 (Supreme Court 1985) (reasonable cause standard for failure to file under IRC 6651 context)
- In re Palau Corp., 18 F.3d 746 (9th Cir. 1994) (contours of 503(b)(1)(A) interpretation and priority concerns)