MEMORANDUM OPINION ON DISTRIBUTION OF PROPERTY OF THE ESTATE
STATEMENT OF THE CASE AND FINDINGS OF FACT
Hirsсh-Franklin Enterprises, Inc. (Debt- or), filed a petition under Chapter 7 of the Bankruptcy Code on January 26, 1982. On January 29, 1982, Debtor’s case was converted to Chapter 11, and this Court confirmed Debtor’s plan of reorganization on July 26, 1983. On July 24, 1984, Debtor’s case was converted back to Chapter 7, and William M. Flatau was appointed as the trustee. Mr. Flatau, as trustee (Plaintiff), filed an adversary proceeding on January 25,1985, against F. Ray Jackson, Tax Commissioner for Bibb County and the City of Macon (Defendant), and the State of Georgia, Department of Revenue. 1 In this adversary proceeding, Plaintiff requests the Court to declare the relative rights of certain claim holders to proceeds which he holds from the sale of certain real estate of Debtor.
The parties filed a “Stipulation of Facts” on August 16, 1985. On June 6, 1984, during the time Debtor’s case was pending under Chapter 11, Defendant filed a prоof of claim for $10,053.48. This claim includes the following taxes, penalties, interest, and costs assessed against Debtor from 1980 to 1984:
*867 [[Image here]]
On May 7, 1985, this Court awarded the law firm of Sell & Melton attorney’s fees in the amount of $18,800 for services rendered in connection with its representation *868 of Debtor while the case was under Chapter 11. The attorney’s fees constitute administrative expenses incurred during the pendency of Debtor’s Chapter 11 case.
Debtor’s real estate locatеd at 476 Second Street, Macon, Georgia, was sold by Plaintiff. Plaintiff presently holds in a bank account $15,852.95 of the proceeds from the sale of this real estate. V.J. Adams, Jr., the attorney for the real estate’s purchaser, holds in trust $4,676.11, which represents escrowed sales proceeds to insure that any taxes owed to Defendant on the real estate are paid in full. None of the proceeds held by Plaintiff or Mr. Adams constitute proceeds from the sale of Debtor’s personal property. The total anticipated receipts in Debtor’s Chapter 7 case will total $20,529.06.
CONCLUSIONS OF LAW
In determining the priority of liens, Defendant first asserts that Georgia law, not the Bankruptcy Code, is applicable because state law traditionally governs the priority of liens, giving absolute priority to tax liens. For the reasons recently set forth by this Court in Flatau v. Jackson (In re The Cropper Co.), 2 the Court holds that the Bankruptcy Code governs in determining the priority of liens in Debtor’s bankruptcy case.
Having determined that the Bankruptcy Code’s priority scheme is applicable, the Court next addresses Defendant’s argument that a subordination of city, county, and state tax liens under the Bankruptcy Code violates the tenth amendment to the United States Constitution
3
because it interferes with a state’s ability to fulfill its governmental responsibilities. The court in
Forell v. Kent County Treasurer & City of Grand Rapids Treasurer (In re Kamstra),
4
recently addressed the samе argument in considering section 724(b) of the Bankruptcy Code.
5
The court held that section 724(b) does not violate the tenth amendment.
In reviewing Garcia, the court in In re Kamstra noted that:
According to Garcia a court may place a substantive restraint on an exercise of the Congress’s delegated powers that impinges upon the sovereignty of the states, but only if such a restraint is justified by the procedural nature of the federal structure of the Constitution, and only if such a restraint is tailored to compensate for possible failings in the national political process. This Court understands that to mean it could impose a substantive restraint, such as holding subordination under § 724(b) unconstitutional when it precludes payment of local taxes, only if it were satisfied that the interests of local and state government in their tax revenues inherently could not have been represented in Congress or *869 “the national political process” and that such a holding compensated for that failure of the process to consider the need of local and state government for tax revenues.
After applying this standard, the court in
In re Kamstra
found that Congress drew no distinction between local, state, or federal tax liens, allowing all of them to be subordinated under the Bankruptcy Code. The court was persuaded that to the extent that the interest of the federal government in revenue is identical with that of the state and local governments, the state’s interests were reрresented in Congress and not discriminated against or ignored. The court, therefore, held that section 724(b) does not violate the tenth amendment based upon the standards set forth in
Garcia.
This Court agrees with the reasoning set forth by the court in
In re Kamstra
and holds that section 726 does not violate the tenth amendment to the United States Constitution.
Cf. Richardson v. First Federal Savings & Loan Association (In re Stroud Wholesale, Inc.),
The Court now turns to the issue of what priority Defendant’s claim, consisting of taxes, penalties, interest, and costs, is entitled to under the Bankruptcy Code. 8 In determining the priority of Defendant’s claim, the Court will divide the claim into four time periods. The first time period is from July 24, 1984, through the present, the time during which the case has been pending under Chapter 7. 9 The second time period is frоm January 29, 1982, through July 25, 1983, the time during which the case was pending under Chapter 11 until confirmation. The third time period is from July 26, 1983, through July 23, 1984, the time period during which Debt- or’s Chapter 11 plan was confirmed until the case’s conversion to Chapter 7. The last time period is before January 26,1982, the time period prior to the filing of the bankruptcy case.
A. Claims Arising During Chapter 7
Section 726(b) provides that “administrative expenses incurred under this chapter after such conversion have priority over
*870
administrative expenses incurred under any other chapter of this title or under this chapter before such conversion....” 11 U.S.C.A. § 726(b) (West 1979). Section 503(b) of the Bankruptcy Code
10
sets forth what type of claims constitute administrative expenses. Pursuant to this section, Plaintiff concedes that Defendant’s tax claim in the sum of $255.01, arising from taxes assessed against Debtor’s real property while the case was pending under Chapter 7, qualifies as аn administrative expense under section 503(b)(l)(B)(i)
11
and is to be accorded first priority under section 726(b).
12
Section 503(b)(1)(C) provides that “any fine, penalty, or reduction in credit, relating to a tax of a kind specified in [section 503(b)(1)(B) ]” is also an allowed administrative expense.
13
The language of the statute expressly provides that penalties assessed against a debtor’s property while a debtor’s case is pending under Chapter 7 are an administrative expense accorded priority under section 726(b).
See United States v. Friendship College, Inc. (In re Friendship College, Inc.),
As Collier notes “[t]he Code does not expressly provide for interest on postpetition taxes to be treated as an administrative expense. The Senate vеrsion of the bill, which did so provide, was not adopted. Nevertheless, the courts have split over whether to treat interest on postpetition taxes as an administrative expense.” 3 Collier on Bankruptcy 11503.04[1][c] (15th ed. 1986) (footnotes and accompanying citations omitted). In In re Lumara Foods of America, Inc., 14 the court noted the following:
[T]he only reference to interest as an administrative expense is found in the Senate bill’s version of section 503(b)(l)(B)(i).... The express provision was later deletеd during the compromise debates on the final bill which eventually became law. That a deletion, instead of a revision, occurred is no legislative oversight. It represents a “deliberate and significant” indication of the drafters’ intent following the debates.... Where there were two opposing views on post-petition interest, there evolved only one. Unmistakably, it was the House’s exclusionary version of section 503(b)(l)(B)(i) which prevailed. The allowance of interest on post-petition taxes therefore would require the reinsertion of statutory language which was clearly left out beforehand. Such practice is more properly the role of the legislature than the court’s.
Based upon the express statutory language of the statute as finally enacted by Congress, the Court concludes that interest on section 503(b)(1)(B) taxes is not an administrative expense under section 503(b)(1)(C) and therefore does not qualify for priority treatment under section 726(b).
See In re Lumara Foods of America, Inc.,
B. Chapter 11 Preconfirmation Claims
After all of the Chapter 7 administrative expenses are satisfied, distribution is made to claims in accordance with section 726(a) of the Bankruptcy Code.
15
Section 726(a)(1) provides for distribution to claims in the order specified in section 507. Section 507(a)(1) confers first priority status to administrative expenses allowable under section 503(b).
See
11 U.S.C.A. § 507(a)(1) (West 1979). The parties stipulate that attorney’s fees awarded to the law firm of Sell & Melton for services rendered to Debtor while its case was pending under Chapter 11 qualify as an administrative expense entitled to priority under section 507(a)(1).
16
The parties also stipulate that Defendant’s tax claim for $774.82, arising from taxes assessed during this period, was an actual and necessary expense incurred by Debtor’s estate and is an administrative expense allowed under section 503(b), and thus entitled to priority under section 507(a)(1).
See Waldschmidt v. Commissioner (In re Lambdin),
C. Postconfirmation Claims
Plaintiff asserts that Defendant’s claim for taxes assessed аfter Debtor’s Chapter 11 confirmation but prior to Debt- or’s conversion to Chapter 7 is not entitled to priority treatment under section 507(a)(1), but is entitled to treatment under section 507(a)(6).
19
In
In re Westholt Manufacturing, Inc.,
20
the court addressed the issue of what priority tax claims are entitled to under section 507(a) after a Chapter
*872
11 plan has been confirmed and prior to its consummation. The court noted that upon confirmation of a debtor’s Chapter 11 plan, the property of the bankruptcy estate vests in the debtor thereby terminating the estate’s existence.
See
11 U.S.C.A. § 1141(b) (West 1979). As a consequence, the court concluded that taxes incurred by a debtor subsequent to confirmation of a Chapter 11 plan are not taxes “incurred by the estate” as required under section 503(b) and thus are not entitled to be treated as administrative expenses. The court concluded that such taxes incurred by the dеbtor in possession are to be treated as prepetition tax claims in a subsequent conversion of the case and, as such, are entitled to priority under section 507(a)(6).
The Court now must determine to what priority Defendant's claim for penalties, interеst, and costs is entitled. Section 507(a)(6)(G) confers priority status to a penalty related to a tax claim under section 507(a)(6) if the penalty is in compensation for actual pecuniary loss. 11 U.S.C.A. § 507(a)(6)(G) (West 1979). As noted by Senator Dennis DeConcini in the Congressional Record:
For purposes of the above priority rules, the House amendment adopts the provision of the Senate bill that any tax liability which, under otherwise applicablе tax law, is collectible in the form of a “penalty,” is to be treated in the same manner as a tax liability. In bankruptcy terminology, such tax liabilities are referred to as pecuniary loss penalties. Thus, any tax liability which under ... State or local tax law is payable as a “penalty,” ... will be entitled to the priority which the liability would receive if it were expressly labeled as a “tax” under the applicable tax law. However, a tax pеnalty which is punitive in nature is given subordinated treatment under section 726(a)(4).
1978 U.S. Code & Cong. Admin. News 5787, 6505, 6567-68 (emphasis added).
See also In re Palmer,
The Court notes that there has been a split among the courts on the issue of whether interest on a tax claim under section 507(a)(6) is to be accorded priority along with the section 507(a)(6) tax claim. Some courts allow claims for interest to be accorded the same priority as the underlying tax when the interest appears to be assessed against the debtor’s property solely for compensatory purposes.
See In re Keller & Katkowsky,
Those courts refusing to accord interest the same priority as the underlying tax claim under section 507(a)(6) justify their position by stating that the statutory language does not expressly provide for “interest” to be accorded such priority. These courts state that while interest is a part of a tax claim, the interest portion of a claim is given a different classification for purposes of distribution and priority status because the statutory language in section 507(a)(6)(G) does not expressly include interest.
See In re Razorback Ready-Mix Concrete Co.,
This Court is persuaded that the express language of the statute itself resolves the issue. To determine whether interest is entitled to priority under section 507(a)(6)(G), the statutory language expressly requires first, the claim to be a “penalty,” secondly, the claim to be compensation for pecuniary loss, not a punitive penalty, and thirdly, the claim to be related to a tax allowed under section 507(a)(6).
See In re Ayala,
The Court finds that the interest assessed during this period is a type of “penalty” and is related to a claim of a kind set forth in section 507(a)(6). The determinative question is whether the interest is a pecuniary loss penalty or a punitive penalty. As the court in
In re New England Carpet
Co.
24
noted, in situations in which penalties
and
interest are assessed by a taxing entity, it is questionable that a compensatory role can be assigned to both the penalties and interest.
Accordingly, the Court concludes that the claim for interest in the sum of $53.51 is entitled to priority along with the underlying section 507(a)(6) taxes because the interest is a pecuniary loss penalty related to a tax claim under section 507(a)(6).
See In re Keller & Katkowsky,
D. Prepetition Claims
Section 507(a)(6)(B) gives priority to taxes assessed against a debtor’s property 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.A. § 507(a)(6)(B) (West 1979). Pursuant to section 507(a)(6)(B), the Court finds that Defendant’s claim for pre-petition taxes in the sum of $1118.10 is entitled to priority under section 507(a)(6)(B). For the reasons previously stated, the Court finds that the claim for interest in the sum of $503.23 and the claim for costs in the sum of $35.21 assessed along with the underlying section 507(a)(6)(B) tax claim are entitled to priority under section 507(a)(6)(G). The claim for penalties in the sum of $62.87 is treated under section 726(a)(4).
Notes
. The State of Georgia, Department of Revenue, failed to file an answer within 30 days of Plaintiffs complaint. R.Bankr.P. 7012(a). The State of Georgia, Department of Revenue, therefore, is in default. R.Bankr.P. 7055.
.
. U.S. Const. amend. X.
.
. 11 U.S.C.A. § 724(b) (West 1979).
.
. The court in In re Stroud Wholesale, Inc. noted:
If Congress has the authority to enact uniform laws on the subject of bankruptcies, it must be empowered to determine how the funds of the estate will be distributed. Otherwise, the authority is meaningless, for the states will consistently enact legislation to provide for paymеnt of its claims ahead of all other obligations of the debtor, including the cost of administering the estate itself.
. The proceeds that Plaintiff holds for distribution are proceeds derived only from the sale of Debtor’s real property. Any claim that Defendant has for taxes, penalties, interest, and costs assessed against Debtor’s personal property cannot be asserted against these proceeds, and these сlaims became unsecured against Debtor's bankruptcy estate when Plaintiff abandoned the personal property. If Defendant has a valid claim against the personal property, then that claim is secured by the personal property itself.
See In re Skinner Lumber Co.,
.The Court notes that Debtor’s case was also pending under Chapter 7 from January 26, 1982, through January 28,1982. The parties did not include this as part of the Chapter 7 time period when Defendant's claim was broken down into time periods, so the Court will not treat this time period separately because it is de minimis.
. 11 U.S.C.A. § 503(b) (West 1979).
. 11 U.S.C.A. § 503(b)(1)(B)(i) (West 1979).
. No ad valorem taxes, however, are owed by the estate for 1985 because the purchaser of the real estate assumed the 1985 tax liability.
. 11 U.S.C.A. § 503(b)(1)(C) (West 1979).
.
. 11 U.S.C.A. § 726(a) (West 1979).
. The law firm of Sell & Melton was awarded $18,800 as attorney’s fees.
. See supra note 13 and accompanying text, at 869-70.
. See supra, at 870-71.
. With the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 358 (1984), Congress amended section 507 of the Bankruptcy Code. Under this amendment, section 507(a)(6) was redesignated as section 507(a)(7). The Court notes that no substantive changes occurred to section 507(a)(6) under this amendment. The amendment applies only to cases filed 90 days after July 10, 1984. This case was filed on January 26, 1982, so the Court’s opinion will refer to the present section 507(a)(7) as section 507(a)(6).
.
. As Collier notes:
Certain tax liabilities may, under otherwise applicable tax law, be collectible in the form of a penalty. The Code thus provides that such "penaltiеs" are to be treated in the same manner as a tax liability. In bankruptcy terminology, such tax liabilities are to be referred to as pecuniary loss penalties. However, if such fines or penalties are punitive in nature and not for actual pecuniary loss, they are not given priority but rather are subordinated in order of payment under section 726(a)(4).
3 Collier on Bankruptcy ¶ 507.04[7][h] (15th ed. 1986) (emphasis added) (footnotes and accompanying citations omitted).
. 11 U.S.C.A. § 101(4) (West 1979).
. Section 726(a)(4) provides:
(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
[[Image here]]
(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim....
11 U.S.C.A. § 726(a)(4) (West 1979) (emphasis added).
.
. In that decision, the court stated that "[i]nter-est is intended to ‘compensate the government for the delay in payment of the tax,’ ...”
. See supra note 21, at 871-872.