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United States v. Servint Corp. (In re Servint Corp.)
Citations: 298 B.R. 579; 2003 Bankr. LEXIS 1037; 92 A.F.T.R.2d (RIA) 5886; 41 Bankr. Ct. Dec. (CRR) 250; 2003 WL 22133420Docket: No. 01-10304-RGM
Court: United States Bankruptcy Court, E.D. Virginia; July 25, 2003; Us Bankruptcy; United States Bankruptcy Court
The court is addressing cross motions for summary judgment regarding the debtor's objection to an administrative expense claim by the IRS, which seeks $22,534.03 for penalties and interest due to the debtor's non-compliance with electronic fund transfer (EFT) requirements for payroll taxes post-petition. The IRS claims this penalty is justified under Title 26 of the U.S. Code, which mandates the Secretary of the Treasury to establish regulations for EFT systems. The IRS is authorized to impose penalties for improper tax deposits, as specified in 26 U.S.C. 6656. The debtor argues that the penalty does not qualify as an administrative expense under 11 U.S.C. 503(b)(1)(C), while the IRS contends it does. The court determines that the penalty meets the criteria for administrative expense status as it is indeed a penalty imposed for failing to comply with tax deposit requirements, despite the debtor having paid the taxes on time via check. To qualify as an administrative expense, three requirements must be satisfied: first, the amount must be a fine or penalty under 503(b)(1)(C); second, it must relate to a tax specified in 503(b)(1)(B); and third, the penalty must be connected to the tax in question. The court finds that the penalty is indeed a fine related to a payroll tax incurred post-petition, and it does not fall under the exceptions listed in section 507(a)(8). The debtor, however, argues that the penalties are not punitive but serve administrative purposes to enforce EFT compliance. A reasonable relationship is required between a penalty and a tax to advance the objectives of the tax code. In the case of Unitcast, Inc. v. Schottenstein, Zox and Dunn, the IRS aimed to impose a penalty under 26 U.S.C. 4971 for accumulated funding deficiencies in employee benefit plans governed by 26 U.S.C. 412 and 29 U.S.C. 1082. The debtor contended that the penalties under 4971 did not qualify as a tax as mandated by 11 U.S.C. 503(b)(1)(B). The Bankruptcy Appellate Panel clarified that simply labeling a payment as a tax does not classify it as such, referencing precedent cases. It concluded that the 412 payment did not constitute a tax. The IRS attempted to link the 4971 penalty, stemming from non-compliance with the 412 funding requirement, to other taxes like income and employment taxes on post-petition wages. However, the Panel determined that no connection existed between the 4971 penalty and the taxes identified by the IRS. A penalty typically relates to a tax when it is imposed due to a taxpayer's failure to comply with tax obligations. This relationship was found lacking in Unitcast but was deemed present in this case. Consequently, the IRS's motion for summary judgment regarding liability was granted, while the debtor's motion was denied, with a subsequent hearing scheduled to ascertain the amount of tax to be treated as an administrative expense.