Joe Thomas Turner and Ru Than Turner

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
JOE THOMAS TURNER and
RU THAN TURNER,
Debtors. 	No. 7-03-10672 SA
FINDINGS OF FACT AND CONCLUSIONS OF LAW
ON INTERNAL REVENUE SERVICE’S
CHAPTER 11 ADMINISTRATIVE CLAIMS
This matter is before the Court on the Trustee’s objections
to two claims made by the Internal Revenue Service (“IRS”)(docs
904 and 905). 	The Trustee Philip J. Montoya is represented by
his attorneys Moore, Berkson & Gandarilla, P.C. (George Moore and
Bonnie Gandarilla). 	The IRS is represented by Manuel Lucero,
Assistant United States Attorney. 	This is a core proceeding. 	28
U.S.C. § 157(b)(2)(A).
THE PROCEEDINGS TO DATE
1. 	Debtors filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on January 29, 2003. 	Debtors continued the
operation of their sole proprietorship business post-petition.
2. 	IRS filed a priority proof of claim for taxes in the amount
of $1,000.00 based on an unfiled 2002 income tax return.
3. 	The last operating report on file is for the month of
August, 2004. (Doc 576). 	Page 11 of the operating report is a
schedule of federal withholding taxes unpaid by the Debtor since
the filing of the Chapter 11 in the approximate amount of
$147,000 (exclusive of interest or penalties). 	Income tax
liability (if any) was not included on the operating reports.
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4. 	On December 15, 2004 the Debtors and the Unsecured Creditors
Committee entered a stipulation to terminate business actions
that would result in any more tax liability to the estate. 	(Doc
645).
5. 	On January 10, 2005, the Court converted the case to one
under Chapter 7. 	(Doc 661).
6. 	Debtor did not comply with Bankruptcy Rule 1019(5)(A), which
requires a debtor-in-possession to file a schedule of unpaid
debts incurred after the filing of the petition and before
conversion not later than fifteen days after conversion.
Consequently the Clerk never gave notice to post-petition
claimants to file a request for payment of administrative
expenses under Bankruptcy Rule 1019(6).
7. 	On February 25, 2005, the Trustee filed a Notice of Assets
(doc 721), and the Clerk issued a Notice of Possible Dividends on
February 27, 2005 fixing May 30, 2005, as the last day for filing
proofs of claim (doc 722). 	IRS was on the mailing list for the
Notice of Possible Dividends.
8. 	On April 27, 2006, the Trustee filed a Motion for Order
Establishing Claims Bar Date for Chapter Eleven Administrative
Claims. (Doc 835). 	This motion was evidently intended to create
a bar date for filing all administrative claims. 	However, ¶ 3 of
the Motion asks the Court to order the Trustee to “serve notice
thereof, in the form attached hereto as Exhibit 2, to all
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professionals employed in the chapter eleven case from which the
case was converted.” 	(Emphasis added.) 	Exhibit 2 is the
proposed notice; its first line reads: “TO ALL PROFESSIONALS
EMPLOYED IN THE CHAPTER ELEVEN CASE:”. 	(Emphasis in original.)
9. 	On May 9, 2006, the Trustee filed the Notice of the April
27, 2006 motion and in it restated the actual text of the motion.
(Doc 842). 	It called for objections within 20 days of the
service of the notice.
10. 	No objections were filed, and on June 23, 2006, the Court
entered its Order Establishing Claims Bar Date for Chapter Eleven
Administrative Claims. 	(Doc 844). 	The Order tracked the April
27, 2006 motion and ordered the Trustee to serve Notice of the
Bar Date in the form attached to the Motion as Exhibit 2 to all
parties on the limited mailing matrix and to all professionals
employed in the chapter eleven case from which the case was
converted. 	(IRS was on the limited mailing matrix.)
11. 	On June 29, 2006, the Trustee sent a Notice of the Order
Establishing a Bar Date of July 31, 2006, and addressed it: “TO
ALL PROFESSIONALS EMPLOYED IN THE CHAPTER ELEVEN CASE:”. 	(Doc
845).
12. 	On July 16, 2007, IRS filed a proof of claim for taxes of
$1,355,411.31, consisting of a $70,568.07 unsecured nonpriority
claim for penalties and a $1,284,843.24 unsecured priority claim
for income taxes for the periods ending 12/31/2003 ($168,476.50
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tax and $5,891.74 interest to petition date) and 12/31/2004
($1,110,475.00 tax and no interest). 	(Claim 102). 	The claim
states that the taxes were assessed on October 9, 2006 (2003
taxes) and January 8, 2007 (2004 taxes).
13. 	On August 7, 2007, IRS filed a Request for Payment of
Internal Revenue Taxes in the amount of $307,013.14. (Doc 901).
This request for administrative expenses is for withholding taxes
and FICA taxes for the tax periods ending 3/30/2004, 6/30/2004,
9/30/2004, and 12/31/2004 and FUTA taxes for 12/31/2004 in the
total amounts of $179,156.89. 	The request computes interest due
at $55,029.85 and penalties due of $72,826.40.
14. 	On August 28, 2007, the Trustee filed an Objection to IRS’s
Application for Allowance of Chapter 11 Administrative Claim (doc
904) on the basis that it was filed after the July 31, 2006 bar
date.
15. 	Also on August 28, 2007, the Trustee filed an Objection to
IRS’s Proof of Claim number 102 on the grounds that it was filed
after the May 30, 2005 bar date. (Doc 905).
16. 	On September 28, 2007, IRS responded to both of Trustee’s
objections (docs 909, 910). 	The Court’s docket sheet indicates
that September 28, 2007 was the first date that IRS became
represented by an attorney in this case.
17. 	The parties submitted briefs (IRS, doc 982; Trustee, doc
989) at the request of the Court. 	The Court has reviewed the
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1Pursuant to Federal Rule of Bankruptcy Procedure 9028 I
certify familiarity with the record to the extent it involves the
IRS, the IRS’s claims, the conversion, and subsequent bar dates.
No witnesses have been called in this matter.
2Section 510 deals with subordination and is not relevant to
this case.
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briefs, the files, and the applicable authorities and issues
these findings of fact and conclusions of law.
18. 	On December 22, 2009, Judge McFeeley’s involvement with this
case terminated and it was assigned to the undersigned. 1
19. 	As of March 1, 2010, the Trustee has not mailed to creditors
the summary of the Trustee’s final report or commenced final
distribution. 	See docket.
CONCLUSIONS OF LAW
1. 	The priority of claims in distribution is determinated by
the law existing on the petition date. 	Solow v. United States
(In re Johnson Rehabilitation Nursing Home, Inc.), 239 B.R. 168,
172 (Bankr. N.D. Ill. 1999).
2. 	In 2003, when this case was filed, 11 U.S.C. § 726(a)(1)
read as follows:
(a) Except as provided in section 510 2 of this title,
property of the estate shall be distributed--
(1) first, in payment of claims of the kind specified
in, and in the order specified in, section 507 of this
title, proof of which is timely filed under section 501
of this title or tardily filed before the date on which
the trustee commences distribution under this section.
3. 	In 2003, 11 U.S.C. § 507 provided, in part:
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3Section 502(f) involves involuntary cases.
4Section 507(a)(8) taxes are income or gross receipts taxes
for a taxable year ending on or before the date of the petition.
The taxes at issue in this case arose post-petition, so section
507(a)(8) is not implicated.
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(a) The following expenses and claims have priority in
the following order:
(1) First, administrative expenses allowed under
section 503(b) of this title...
4. 	In 2003, 11 U.S.C. § 503 provided, in part:
(a) An entity may timely file a request for payment of
an administrative expense, or may tardily file such
request if permitted by the court for cause.
(b) After notice and a hearing, there shall be allowed
administrative expenses, other than claims allowed
under section 502(f) 3 of this title, including—
(1)(A) the actual, necessary costs and expenses of
preserving the estate, including wages, salaries, or
commissions for services rendered after the
commencement of the case;
(B) any tax—
(i) incurred by the estate, except a tax of a kind
specified in section 507(a)(8) 4 of this; or
(ii) attributable to an excessive allowance of a
tentative carryback adjustment that the estate
received, whether the taxable year to which such
adjustment relates ended before or after the
commencement of the case; and
(C) any fine, penalty, or reduction in credit relating
to a tax of a kind specified in subparagraph (B) of
this paragraph[.]
5. 	The claims at issue in this case are post-petition, pre-
conversion taxes incurred by the estate, plus interest on those
taxes and the penalties accrued on those taxes. 	They are
therefore Section 503(b)(1)(B)(i) (taxes incurred by the estate)
and Section 503(b)(1)(C) (penalties on subparagraph (B) taxes)
claims. 	Interest on administrative taxes that accrues during a
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Chapter 11 case is paid at the same priority as the underlying
administrative tax. 	Rupp v. United States (In re Rocky Mountain
Refractories), 208 B.R. 709, 714 (10 th Cir. BAP 1997).
Therefore, the claims are entirely 503(b) claims.
6. 	IRS’s claims were filed before the Trustee commenced
distribution.
7. 	These 503(b) claims are 507(a)(1) claims, and under section
726(a)(1) receive first priority in distribution.
8. 	Although tardiness of filing is irrelevant to section
726(a)(1) since the Trustee had not commenced distribution under
the 2003 statute, the Court finds that the IRS claims were not
tardy in any event. 	First, the Administrative Bar Date motion,
notice and order are fatally flawed. 	The only clear result of
the Bar Date papers was to put professionals that had worked in
the Chapter 11 portion of the case on notice that they had to
file their administrative claims. 	The IRS does not fit in this
category and had no reason to know that it had to file its
administrative claim by any particular date. 	Second, the Debtors
failed to file a schedule of unpaid chapter 11 liabilities, so
IRS never received timely notice that it even had a claim. 	The
income taxes at issue in Proof of Claim 102 were not even
assessed by IRS until October, 2006 and January, 2007, well after
the purported bar date. 	Although IRS should be deemed to be a
sophisticated creditor, the situation in this case was caused by
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a series of omissions by other parties and the IRS should not be
held accountable. 	Finally, IRS did not have counsel until
September 28, 2007, well after the purported bar date. 	And, with
respect to section 503, the Court finds that tardiness in filing
(if any) should be excused and that the filing should be allowed.
The taxes due on these claims were generated by the Debtors’
operation of a business post-petition. 	The taxes were reported
on the monthly operating reports, so do not come as a surprise to
anyone that had followed the case. 	In fact, it was the Unsecured
Creditors Committee that forced conversion to stop further
accruals of tax liability. 	To deny IRS the taxes that are justly
due would unjustly enrich the estate at the expense of the
government.
9. 	11 U.S.C. § 348 (2003) is not relevant to this case. 	That
section deals with the effect of conversion. 	The general rule is
that post-petition pre-conversion claims are treated for all
purposes as if the claim had arisen immediately before the date
of the filing of the petition. 	The exception to this general
rule is for section 503(b) claims. 	The taxes in this case are
section 503(b) claims.
CONCLUSIONS
For the reasons above, the Court finds that IRS has two
valid, timely requests for payment of administrative expenses.
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The Trustee’s objections will be overruled. 	A separate Order
will enter.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	March 11, 2010
Copies to:
Jim Foy
Attorney for Debtors
PO Box 2615
Silver City, NM 88062-2615
Bonnie Bassan Gandarilla
Attorney for Trustee
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
Manuel Lucero
Assistant US Attorney
PO Box 607
Albuquerque, NM 87103-0607
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