Lead Opinion
At issuе in this Chapter 7 liquidation is whether the district court erred in holding that the estate of West Texas Marketing Corporation (WTMC), the debtor, (1) could not, for federal income tax purposes, accrue and deduct post-petition interest on undisputed and resolved general unsecured claims; and (2) was liable for a tax penalty, even though the Internal Revenue Service assessed it outside the period allowed by § 505(b) of the Bankruptcy Code. We AFFIRM.
I.
This case was tried on stipulated facts, which are developed more fully in In re West Texas Mktg. Corp.,
In 1991, Kellogg, as trustee for the estate, filed amended tax returns for 1988 and 1989, on the basis that the estate (1) failed previously to deduct post-petition interest on undisputed and resolved general unsecured claims for 1988 and 1989; and, (2) could deduct net operating loss carryforwards based, in part, on post-petition interest for
In addition, prior to the attempt to deduct post-petition interest, the IRS had assessed a penalty of approximately $23,000 against WTMC for 1989, because it'failed to make estimated tax payments. Eventually, , the IRS set off this penalty against a refund due WTMC for 1988.
As a result of, inter alia, both actions by the IRS, Kellogg filed this adversary proceeding. The bankruptcy court denied relief; the district court affirmed.
II.
A.
It goes without saying that, generally, pursuant to I.R.C. § 163, a corporation may deduct all interest paid or accrued within the taxable year on indebtedness. Kellogg maintains that WTMC’s liability vel non for post-petition interest is a question of state law: that, because the unsecured claims constitute a fixed liability when the petition was filed, the Texas statutory rate of 6% establishes a present and unconditional liability for interest on those claims; and that federal law determines only the priority of how assets of the estate are to be distributed in satisfaction of the claims against it.
In Vanston Bondholders Protective Comm. v. Green,
Sections 446(a) and 461(a) of the Internal Revenue Code provide that taxable income is computed, and deductions taken, under the accounting method that the taxpayer normally uses for his books. I.R.C. §§ 446(a), 461(a).
“[Although expenses may be deductible before they have become due and payable, liability must first be firmly established.... [A] taxpayer may not deduct a liability that is
The issue is not the ability vel non of WTMC to pay post-petition interest on the unsecured claims. See Fahs v. Martin,
Section 502 of the Bankruptcy Code sets forth a general rule that claims for post-petition interest are not allowed against the estate. 11 U.S.C. § 502(b)(2).
The Code provides, however, for several exceptions to this general rule. Section 726(a) establishes hierarchial priorities when distributing a debtor’s estate in a Chapter 7 liquidation. Included within the priorities is the payment of post-petition interest on claims against the estate if аny assets remain after distributions for prioritized claims, unsecured claims, and penalties, fines, and nonpecuniary damages. 11 U.S.C. § 726(a)(5). The only distribution occupying a lower position on the hierarchy is the return of any remaining assets to the debtor.
In Guardian Investment Corp. v. Phinney,
Although Guardian Investment addressed whether the principal due on the second mortgage was contingent, it still provides a framework to consider the contingent nature of an obligation for income tax purposes.
Implicit in the obligation under § 726 to pay post-petition interest on unsecured claims is the necessary condition that sufficient assets remain following distributions under § 726(a)(1)-(4). These distributions could not occur during the taxable years at issue, and there is no fixed or determinable date when these distributions will occur; the condition is in futuro. Because Kellogg seeks to deduct post-petition interest on undisputed claims, the amount of such liability can easily be determined. When taken in the aggregate, and based upon the principles of accrual accounting, we conclude that, under the all events tests, WTMC’s liability for post-petition interest has not been established. Our court recognized in Guardian Investment that, “if the proceeds from the sale of the mortgaged property [were] not sufficient to pay off the first mortgage, the taxpayer [would] not [be] under any obligation to pay any interest or principal of the second mortgage”. Id. at 331. Similarly, if, in the distribution of WTMC’s assets in accordance with § 726(a)(l)-(4), all assets are depleted, then the estate will not have incurred any obligation to pay interest on unsecured claims. This is not due to the fact that payment became impossible, but because the condition necessary to create the liability for the post-petition interest failed to occur.
Accordingly, Kellogg may not now deduct post-petition interest on undisputed and resolved, general unsecured claims against the estate.
B.
The other issue is whether the IRS violated the tax liability discharge provision of 11 U.S.C. § 505(b) when it assessed the estimated tax penalty for 1989 and used it as a setoff against a refund due for 1988.
1.
The IRS contends that Kellogg’s reliance on § 505(b) is misplaced because this issue does not involve the IRS seeking to assess or collect taxes; rather, any tax liability for the penalty has been extinguished because it was used as a setoff against the refund due for 1988. Thus, the IRS maintains, this claim is instead for a refund, governed by § 505(a).
As noted, Kellogg filed a timely return for 1989, and requested a prompt determination pursuant to § 505(b). A month later, the IRS notified Kellogg that the return had been accepted as filed and issued a refund check. But, over three months after the 1989 return was filed, the IRS notified Kellogg of the penalty and, subsequently, used it as a setoff against the refund due for 1988. If WTMC had not had that refund due, the IRS would not have been able to collect the
2.
Under 505(b), the failure of the IRS to act in a timely manner discharges potential tax liability of, inter alia, the debtor and the trustee. At issue is whether this failure discharges the estate as well, under the section’s nomenclature of “any successor to the debtor”. This is an issue of first impression for any circuit court. Of the two lower courts to have considered directly this issue, both have held that the estate does not enjoy the discharge given to “any successor to the debtor”. In re Fondiller,
It goes without saying that our interpretation of a statute bеgins with its language. The Bankruptcy Code defines a debtor as a “person or municipality concerning which a case under this title has been commenced”, 11 U.S.C. § 101(13); and a “person” includes an “individual, partnership, and corporation”. 11 U.S.C. § 101(41). Thus, a “debtor” must be an individual, partnership or corporation, and it follows that any “successor to the debtor” must also be an individual, partnership or corporation. It becomes more obvious that the estate cannot be a “successor” when we consider what is an “estate”. An “estate” is created at the commencement of the bankruptcy case, and is “comprised” of, inter alia, “all legal and equitable interests of the debtor in property as of the commencement of the case”. 11 U.S.C. § 541(a), (a)(1).
Furthermore, § 505(c) uses the term “estate” as distinct from the terms “debtor” and “successor to the debtor”. Section 505(c) provides that, after the court makes a determination of tax under § 505, “the governmental unit charged with responsibility for collection of such tax may assess such tax against the estate, the debtor, or a successor to the debtor_” Thus, the clear distinction between the “estate” and “successor to the debtor” demonstrates that Congress did not intend for the discharge of tax liability under § 505(b) to apply to the estate.
In addition to the Code’s plain language, the situation faced by trustees prior to the enactment of the Bankruptcy Code illumines the purpose to be served by § 505. Prior to the Code, trustees lacked a mechanism for obtaining a prompt determination of the tax liability of the estate. Therefore, a trustee wishing to have the case closed was confronted with the choice of leaving the estate oрen until the IRS’s opportunity to review the estate’s tax expired, or proceed to have the ease closed and face the potential of personal liability for additional taxes that the IRS might determine subsequently were due. Section 505(b) provided the solution to this dilemma. 1A Collier on Bankr. (MB) ¶ 12.04[3].
Although [§ 505(b)] was envisioned as a mechanism to permit a determination of tax liability at the conclusion of the administration of an estate, i.e., a single request for a prompt determination of all the relevant tax periods, there is nothing in its language to prevent successive requests as each tax period is completed and a return filed apart from the obligation to pay the taxes shown on such returns.
Id.
III.
For the foregoing reasons, the judgment is
AFFIRMED.
Notes
. WTMC’s accounting period runs from October 1 to September 30. For example, taxable year 1988 represents October 1, 1987, to September 30, 1988.
. I.R.C. § 446(a) provides: "Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books”.
I.R.C. § 461(a) provides: "The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income”.
.The Treasury Regulation in force from 1982 to 1991 provided that "an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy”. Treas.Reg. § 1.461-1(a)(2) (1991). In 1992, the Regulation was modified to provide for the deduction of expenses "in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability”. Treas.Reg. § 1.461-1 (a)(2)(i) (1992).
. For all but one of the years at issue, the total undisputed and resolved claims against WTMC exceeded WTMC's assets. Thus, it was extremely unlikely that WTMC would be able to pay such claims. As noted, however, this fact is not dis-positive of the issue before us.
. Section 502 of the Bankruptcy Code provides, in pertinent part:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.
(b) ... if such an objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim ... and shall allow such claim in such amount, except to the extent that—
(2)such claim is for unmatured interest.
11 U.S.C. § 502.
. Section 726 of the Bankruptcy Code provides that:
(a) ... property of the estate shall be distributed—
(1) first, in payment of clаims of the kind specified in, and in the order specified in, section 507 of this title [ (prioritized claims) ];
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection ...;
(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title, other than a claim of the kind specified in paragraph 2(C) of this subsection;
(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;
(5) fifth, in payment of intеrest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
(6) sixth, to the debtor.
. We rely upon Guardian Investment to provide structure for our analysis of the contingent nature of WTMC's liability for post-petition interest, not to command of itself the result we reach on the basis of §§ 502(b) and 726(a). We need not, therefore, concern ourselves with factual distinctions between Guardian Investment and the present case.
. Of course, if assets remain after distributions are made pursuant to § 726(a)(1)-(4), then liability for post-petition interest will be established.
. As a preliminary matter, the IRS contends, erroneously, that, because the United States did not waive sovereign immunity, the district court lacked jurisdiction to consider whether WTMC was entitled to a refund for the penalty. It maintains that, as a statutory condition precedent to a refund suit, the taxpayer must file a claim for the refund.
Section 7422 of the Internаl Revenue Code provides that ‘‘[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax ... until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof". I.R.C. § 7422(a). Furthermore, Bankruptcy Code § 505(a)(2)(B) provides that a bankruptcy court may not determine
any right of the estate to a tax refund, before the earlier of—
(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or
(ii) a determination by such governmental unit of such request.
11 U.S.C. § 505(a)(2)(B).
Between submission of briefs and oral argument, however, Congress enacted the Bankruptcy Reform Act of 1994 by which it, inter alia,
Section 106 of title 11, United States Code, is amended to read as follows:
"§ 106. Waiver of sovereign immunity
"(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
"(1) Section!] ... 505 ... of this title.
"(2) The Court may hear and determine any issue arising with respect to the application of such sections to governmental units.
108 Stat. 4106, 4117-18. And, pursuant to § 702(b)(2)(B) of the Act, this amendment is made applicable to all pending cases:
The amendments made by sections 113 and 117 shall apply with respect to cases commenced under title 11 of the United States Code before, on, and after the date of the enactment of this Act.
108 Stat. 4106, 4150.
Although, in his rebuttal at oral argument, counsel for Kellogg noted the recent Act, neither side filed a letter citing supplemental authority as рermitted by Fed.R.App.P. 28(j). We note that the Government is obviously cognizant of Rule 28(j), in that it filed a 28© letter on a different issue in this case. Needless to say, supplemental briefs should have been filed.
.Section 505(b) of the Bankruptcy Code provides:
A trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the govem-mental unit charged with responsibility for collection or determination of such tax. Unless such return is fraudulent, or contains a material misrepresentation, the trustee, the debtor, and any successor to the debtor are discharged from any liability for such tax—
(1) upon payment of the tax shown on such return, if—
(A) such governmental unit does not notify the trustee, within 60 days after such request, that such return has been selected for examination; or
(B) such governmental unit does not complete such an examination and notify thе trustee of any tax due, within 180 days after such request or within such additional time as the court, for cause, permits;
(2) upon payment of the tax determined by the' court, after notice and a hearing, after completion by such governmental unit of such examination; or
(3) upon payment of the tax determined by such governmental unit to be due.
11 U.S.C. § 505(b).
. Kellogg challenges the underlying merits of the penalty. The only time Kellogg previously raised this issue was in a reply brief to the bankruptcy court. (It was not in the pretrial order.) It appears that the issue was not raised in, or considered by, the district court. In any event, we consider it waived.
. Section 505(a)(1) of the Bankruptcy Code provides that
the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicаted by a judicial or administrative tribunal of competent jurisdiction.
11 U.S.C. § 505(a)(1).
Dissenting Opinion
dissenting:
Ever since this circuit decided Fahs v. Martin,
A.
I begin by examining the source of the interest at issue. The obligation to pay interest for debts owed on contracts and accounts is a creation of the law of contract. Generally, contract law among private parties in our federalist system is state law. Under the state law of contract here, Texas law, the background rule for debts owed on accounts and contracts is that interest at six percent will be imposed thirty days after the debt was due, unless the parties agree otherwise. Tex.Rev.Civ.Stat.Ann. art. 5069-1.03 (West 1987). The majority does not doubt that such a property right and its obligations existed prior to the imposition of bankruptcy.
The majority, however, believes that, post-petition, federal law controls. See Vanston Bondholders Protective Comm. v. Green,
The federal law of bankruptcy is not designed to create debts among parties but to determine how existing debts should be distributed to creditors fairly. Justice Frankfurter’s concurrence in Vanston explains as much:
The business of bankruptcy administration is to determine how existing debts should be satisfied out of the bankrupt’s estate so as to deal fairly with the various creditors. The existence of a debt between the parties to an alleged creditor-debtor relation is independent of bankruptcy and precedes it. Parties are in a bankruptcy court with their rights and duties already established, except insofar as they subsequently arise during the course of bankruptcy administration or as part of its conduct. Obligations to be satisfied out of the bankrupt’s estate thus arise, if at all, out of tort or contract or other relationship created under applicable law. And the law that fixes legal consequences to transactions is the law of the several States.
Vanston,
This point bears stressing. Nothing in the Bankruptcy Code awards damages for failure to deliver goods or injury from the negligent operation of a vehicle. Nor does it create the right to collect interest from an unpaid debt.
Bankruptcy law does control in the sense that courts ultimately may not enforce such rights in carrying out their constitutional and statutory obligations. As Justice Frankfurter continued:
Of course a State may affix to a transaction an obligation which the courts of other States or the federal courts need not enforce because of overriding considerations of policy. And so, in the proper adjustment of the rights of creditors and the desire to rehabilitate the debtor, Congress under its bankruptcy power may authorize its courts to refuse to allow existing debts to be proven.
Vanston,
B.
I have stressed the distinction between state property law and federal bankruptcy law in some detail, as that distinction is critical in understanding how federal bankruptcy law “controls” here. Kellogg’s state law obligation to pay interest on its overdue debts pre-dates the imposition of bankruptcy. Now, the question we must answer is when, in the bankruptcy proceedings, such a state law right is extinguished.
Turning to the Bankruptcy Code, I note that section 502(a), 11 U.S.C. § 502(a), provides, in pertinent part, that a claim is allowed unless a party in interest objects. Upon objection, section 502(b) provides, in relevant part, thаt “the court, after notice and a hearing, shall determine the amount of such a claim ... and shall allow such a claim in such amount except to the extent that— ... (2) such a claim is for unmatured interest.” This section is a codification of the pre-Code rule that courts need not recognize the accrual of interest during the pendency of bankruptcy.
A court’s duty in interpreting the Bankruptcy Code, however, is to read the statute holistically. United Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd.,
property of the estate shall be distributed—
(5) fifth, in payment of interest at the legal rate from the date of the filing оf the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection. ...
This rule, like that codified in § 502(b)(2), claims an impressive pedigree from a long line of pre-Code decisions. See, e.g., 2 William Blaokstone, Commentaries *488 (“[T]hough the usual rule is, that all interest on debts carrying interest shall cease from the time of issuing the commission, yet, in the case of a surplus left after payment of every debt, such interest shall revive, and be chargeable to the bankrupt or his representatives.”).
Accordingly, throughout bankruptcy, the debtor retains the obligation to pay its creditors interest. When sufficient assets remain upon distribution, the court must provide for the payment of interеst. No doubt the creditors would insist on as much. And, while actual payment may be unlikely, the obligation to pay is not. Such an obligation, therefore, is not extinguished, but, for purposes of the bankruptcy proceedings, is ignored until the time the court determines whether the debtor’s assets can meet the obligation.
This result occurs because § 502(b)(2) is a matter of convenience, not substantive law.
Accrual of simple interest on unsecured claims in bankruptcy was prohibited in order that the administrative inconvenience of continuous reeomputation of interest causing recomputation of claims could be avoided. Moreover, different creditors whose claims bore diverse interest rates or were paid by the bankruptcy court on different dates would suffer neither gain nor loss caused solely by delay.
Vanston,
Moreover, our precedent and Supreme Court caselaw conclude that § 502(b) does not void the state property interests, but only ignores it until distribution as a matter of policy. In Fahs, we stated that
[t]he Vanston case seems to us to establish a rule only for the distribution of a bankrupt’s assets. It did not hold that such a claim was void, but only that the claimant should not participate in the distribution of assets until all claims superior in conscience and fairness were paid.
Likewise, the Supreme Court has continued to adhere to Vanston.
While the majority does not say so explicitly, it treats section 502(b) as a substantive rule. According to the majority, the non-contingent, state-law obligation to pay pen-dency interest becomes “contingent” upon the filing of the bankruptcy petition. The majority does not mean that payment is contingent, as sufficient funds must remain in order for the debt to be paid. Rather, reasoning that the ultimate distribution of any interest is contingent upon there being assets remaining in the estate to pay it, the majority holds that “the condition necessary to create the liability for the post-petition interest failed to occur.” (Emphasis added). See also 2 Jaoob MERTENS, Jr., Mertens Law op Federal Income Tax § 12A.138, at 253 (1994) (“The liability ceases to exist when the property of the corporation passes into the receiver’s hands.”).
In effect, the majority snuffs out the state-law obligation to pay interest and reimposes it at the end of distribution only upon the contingency that assets remain. The majority thus presents two difficult conceptual problems that it does not address. First, the majority does not explain what the source of this interest would be upon distribution. Does the majority believe that § 726(a)(5) is an independent source for a federal property right? Second, if the source of the right is Texas state property law, how is the risk of ultimate distribution under § 726(a)(5) different from the risk of distribution of any debt in bankruptcy?
The majority’s non-аnswer to these difficult questions is to resort to one case, Guardian Inv. Corp. v. Phinney,
Rather than wander so far afield and out of time, I would turn to the current Bankruptcy Code and interpret the interplay between §§ 502(b)(2) and 726(a)(5) as settling a scheme for distribution of the fixed obligation to pay interest. Section 502(b)(2), which directs courts to ignore pendency interest, codifies a rule of convenience in order to ease the administration of the bankruptcy process. Section 726(a)(5) preserves the debtor’s obligation to pay this debt as a matter of fairness to the creditors.
This interpretation of the Bankruptcy Code is consistent with the language of the statute, pre-Code caselaw, the legislative history, the view of the leading commentary on bankruptcy, and, not least of all, our precedent.
C.
Finally, I return to an application of Fahs, in which a bankruptcy trustee attempted to
Contrary to the holding of the bankruptcy court here, Fahs remains the law of this circuit.
The justification for the Fahs rule is simple. As every debt is subject to the risk of non-payment, a rule requiring absolute certainty of repayment as a prerequisite to accruing and deducting interest would make I.R.C. § 163 a nullity. No one could rely upon the accrual method. The Fahs court accordingly focused instead upon the obligation to pay. To be able to deduct a debt under the accrual method and the “all events” test, there only must be a fixed and unconditional obligation to pay.
Here, there is no dispute that the unsecured debts are valid obligations to which Texas state law attaches the obligation to pay interest after they are thirty days overdue. While the imposition of bankruptcy is probative of the uncertainty concerning the payment of the pendency interest, there is no
. In Fahs, we further explained our position, stating:
The majority opinion [in Vanston ] may be reconciled with [the concurrence's] unquestionably correct principles only if it is regarded, as we regard it, as not declaring the obligation (regardless of validity under state law) void, but merely as subordinating it.
. See Sexton v. Dreyfus,
.In fact, the Code provides at least three exceptions. Section 726(a)(5) is discussed in the text. Section 506(b) allows interest to a secured creditor to the extent the secured property is greater than the amount of the claim. See United States v. Ron Pair Enters., Inc.,
. Thus, while pre-Code precedent supports the argument that interest stops running when a bankruptcy petition is filed, Sexton,
. Because § 726(a)(5) states that the interest should be set "at the legal rate,” Texas state law determines the existence and amount of interest. See generally Chaim J. Fortgang & Lawrence P. King, The 1978 Bankruptcy Code: Some Wrong Policy Decisions, 56 N.Y.U.L.Rev. 1148, 1151-52 (1981) (discussing whether "legal rate” means statutory rate or rate set by contracts). As no rate was set by the contracts here, this problem is not presented.
. Courts in applying the general rule of 502(b)(2) have used various terms to describe its effect: Interest is "suspended," Nicholas v. United States,
.The leading commentary on bankruptcy has recognized as much:
[C]are must be taken not to confuse tax accrual concepts and payment in a title 11 context. Section 502(b)(2) of the Bankruptcy Code prescribes the grounds for objecting to claims in a title 11 case. By itself, it does not change the legal rights of the holder of ah obligation against the debtor. Put another way, the general rule in title 11 cases that there is no accrual of postpetition interest is a rule of convenience governing distributions to creditors. It is not a rule of substantive law that converts an interest-bearing indebtedness to a nonenforceable, non-interest-bearing indebtedness. Even In re Continental Vending Mach. Corp., [77-1 U.S.Tax Cas. (CCH) ¶ 9,121, at 86,093,1976 WL 913 (E.D.N.Y.1976)], which is often cited for the opposite position against tax accrual of post-petition interest, state unequivocally:
A bankruptcy petition, whether straight or a corporate reorganization, ... suspends or postpones the accrual of interest еven though the "claim has not lost its interest-bearing quality.”
Id. at 86,097-98 (citing 6A Colliers on Bankruptcy ¶ 9.08, at 194 (14th ed.)).
1A Eliot G. Freier et al., Colliers on Bankruptcy ¶ 22.05, at 22-40 (Lawrence P. King ed., 15th ed.
. Indeed, the legislative history in the Senate and House reports accompanying the Bankruptcy Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, shows that the current Bankruptcy Code enacted much of the pre-Code rules regarding pendency interest. See S.Rep. No. 989, 95th Cong., 2d Sess. 62-63 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5848-49 (stating that § 502(b)(2) contains "two principles of current law,” including rule that unmatured interest is disallowed); H.Rep. No. 595, 95th Cong., 1st Sess., 352-53 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6308 (same); S.Rep. No. 989, 95th Cong., 2d Sess. 97 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5883 (stating that § 726(a)(4) provides that punitive penalties are subrogated to all other claims, "except interest accruing during the case”; § 726(a)(5) provides for post-petition interest where assets remain); H.Rep. No. 595, 95th Cong., 1st Sess. 383 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6339 (same); see also Report of the Committee оf Finance, S.Rep. No. 95-1106, 95th Cong., 2d Sess. 22-23 (1978), reprinted in 3 app. Colliers on Bankruptcy, supra, at Tab VI (recognizing "subordination rule” for post-petition interest and recommending that tax liens and interest be "non-dischargeable”). A search of the Congressional Record reveals no discussion or even language suggesting that the pre-Code rules should be discarded or Vanston legislatively overturned. See 124 Cong.Rec. 1783 (1978); 124 Cong.Rec. 32,383 (1978); 124 Cong. Rec. 34,143 (1978); 124 Cong.Rec. 28,257 (1978). Finally, the suggested bill contained in the report of the Commission of the Bankruptcy Laws of the United States, which provided much of the legislative impetus for the 1978 Act, provided an explicit provision for the payment of interest. McCoid, supra, at 8-9 (citing Report of the Commission on the Bankruptcy Laws of the United States § 4-405(a)(8), H.R.Doc. No. 137, 93d Cong. 1st Sess., Part II, at 110 (1973)).
I have examined the legislative history to show that the majority’s reliance upon the Senate and House reports discussing § 502(b)(2) is incomplete. That section must be read in context with the other sections of the Code, their legislative history, and the pre-Code practice that the Code adopted.
. See Nicholas v. United States,
. Even the Tax Court has recognized the continuing validity of Fahs. See Southeastern Mail Trans. Inc. v. Commissioner,
. See, e.g., Tampa & Gulf Coast R.R. v. Commissioner,
. Even the Tax Court, at tunes, appears to apply an approach similar to, but more restrictive than, Fahs. See Cohen v. Commissioner,
The Eighth Circuit, the Eleventh Circuit, and the Court of Federal Claims, however, follow the rule we adopted in Fahs. See Keebey’s Inc, v. Paschal,
.See I.R.C. §§ 163, 461; Treas.Reg. § 1.461-1(a)(2); see abo, e.g., United States v. Hughes Properties, Inc.,
. As this result would moot the 11 U.S.C. § 505(b) issue, I do not address it.