I. Background
CF & I Fabricators of Utah, Inc. and various related entities (collectively, “CF & I”) sponsored two qualified pension plans established for the benefit of their employees and retireеs. Under the plans, CF & I was obligated to make annual plan funding contributions. On September 15, 1990, CF & I failed to make a required $12.4 million plan funding payment for the year ending December 31, 1989. Two months latеr, CF & I petitioned for reorganization under Chapter 11 of the Bankruptcy Code. The larger of the two pension plans was subsequently terminated by the Pension Benefit Guaranty Corporation (“PBGC”), a wholly-owned government corporation that guarantees payment of certain pension benefits. See 29 U.S.C. §§ 1321-1322b.
In its proof of claim, the IRS asserted that CF & I’s section 4971(a) liability was entitled to priority as an excise tax under Bankruptcy Code seсtion 507(a)(7) (now codified at 11 U.S.C. § 507(a)(8)).
In its appeal, the IRS argues that the bankruptcy and district courts erred (1) by concluding that the exaction imposed by IRC section 4971(a) was not entitled to priority under section 507(a)(7), and (2) by subordinating the IRS’s claim to all other unsecured creditors under the doctrine of equitablе subordination. In addition, the government suggests that we reconsider, in an en banc hearing, our decision in United States v. Dumler (In re Cassidy),
II. Discussion
We review determinations of law by the bankruptcy court de novo. Davidovich v. Welton (In re Davidovich),
A. Priority Under Section 507(a)(7)
The IRS contends that CF & I’s section 4971(a) liability is a governmental claim entitled to priority under subsection 507(a)(7)(E) or, in the alternative, subsection 507(a)(7)(G). Sеction 507(a)(7)(E) accords priority to “an excise tax on ... a transaction occurring before the date of the filing of the petition for which a return ... is last due ... after three years before the date of the filing of the petition.” 11 U.S.C. § 507(a)(7)(E)®. The same priority is accorded to “a penalty related to a claim of a kind specified in this paragraph and in сompensation for actual pecuniary loss.” Id. § 507(a)(7)(G). The tax at issue here, IRC section 4971(a), is included in Subtitle D of the IRC, entitled “Miscellaneous Excise Tax.” The IRS argues that, because the tax is labeled an “excise tax” under the IRC, it must be considered an excise tax under the Bankruptcy Code as well.
On December 7,1992, after the bankruptcy court issued its first order in this case, wе decided Cassidy,
In the present case, the government vigorously argues that Cassidy was wrongly decided, agаin contending that a court should defer to Congress’s designation of an exaction rather than look beyond the statutory label to the nature of the exaction. Cassidy binds this panel, howеver, because it is the law of this circuit. See In re Smith,
Instead, the bankruptcy court looked beyond the IRC’s label and analyzed the nature of the exaction using the Lorber test. The court concluded that CF & I’s section 4971(a) liability was not entitled to priority. We agree with thе bankruptcy court’s analysis and therefore affirm the order of the district court for substantially the reasons given by the bankruptcy court. See In re CF & I Fabricators,
B. Equitable Subordination
The government’s first argument against equitable subordinatiоn of its claim is that a bankruptcy court may not subordinate a claim under section 510(c)(1) if that claim is entitled to priority under section 507. Because we have determined that the IRS’s clаim here is a nonpecuniary loss penalty not entitled to section 507 priority, we need not discuss the merits of this argument.
The government next contends that the phrase “under principlеs of equitable subordination” in section 510(c) prohibits the bankruptcy court from subordinating a claim without a finding of misconduct on the part of the subordinated claimant. In this case, the bankruрtcy court expressly found that “there [had] been no inequitable conduct on the part of the Internal Revenue Service.”
The Bankruptcy Code neither defines the doctrine оf equitable subordination, see United States v. Noland,
In general, equitable subordination is imposed only when a creditor has committed some kind of wrongful conduct. In re Virtual Network Servs. Corp.,
The question was addressed first by the Seventh Circuit in Virtual Network. After a thorough analysis of the legislative history of section 510(c)(1), the court decided that Congress intended courts to continue developing the principles of equitable subordination. Virtual Network,
In subsequent cases addressing this issue, other courts have employed substantially the same analysis as the Virtual Network court. See Noland,
The bankruptcy сourt considered the equities in this case and determined that subordination of the IRS’s section 4971 claim to all other unsecured claims was appropriate. After noting that the faсts in the case were undisputed, the bankruptcy court observed that general unsecured creditors of CF & I will receive only a small percentage of their claims. One of CF & I’s unsecured creditors is the PBGC, which will be paying the pension benefits due under CF & I’s terminated pension plan. Declining to subordinate the IRS’s penalty claim would harm innocent creditors rather than рunish the debtor for failing to fund the pension plan. Thus, the bankruptcy court reasoned, allowing the IRS’s penalty claim would not advance the purposes of either IRC section 4971 or thе Bankruptcy Code. We conclude that the bankruptcy court correctly addressed the equities in this ease and therefore affirm the orders subordinating the IRS’s section 4971 claims.
III. Conclusion
For thе reasons stated in this opinion, the judgment of the district court is AFFIRMED. In addition, the government’s suggestion for hearing en banc to reconsider our decision in In re Cassidy,
Notes
. Most of the funds from which the PBGC pays pension benefits come from insurance premiums paid by sрonsors of qualified pension, plans. See 29 U.S.C. § 1305. The PBGC filed proofs of claims against the debtors in the bankruptcy court. The bankruptcy court ruled that these claims are unsecured and are not entitled to
. Congress amended section 507 on October 22, 1994. Former subsection 507(a)(7) is currently located at subsection 507(а)(8). Other than the change in priority of governmental claims, the text of the subsection is unchanged. In this opinion we will refer to the provision as it was codified at the time the IRS asserted its claim.
. In addition, a number of district and bankruptcy courts have subordinated nonpecuniary loss tax penalties under section 510(c)(1). See, e.g., In re Juvenile Shoe Corp. of Am.,