3.26 Duty To Pay Postpetition Taxes

• Jurisdiction: United States

3.26 EQUITABLE SUBORDINATION OF PENALTIES

See also remarks at ¶ 6.4(a)(2), 6.11(c)

The Bankruptcy Code allows the court to equitably subordinate (place at a lower level of priority or order of payment) any claim. 11 U.S.C. § 510(c), § 726(a)(4).

There is an increasing trend in Chapter 11 and Chapter 13 cases to subordinate tax penalties to allow a greater dividend or payment to other creditors at the expense of the tax claim.

The court in In re Merwede, 84 B.R. 11, 18 CBC2d 815 (Conn. 1988), a Chapter 13 case, subordinated the IRS penalties on prepetition claims to the other unsecured creditors in the plan. In that case the IRS argued that equitable subordination should be limited to those situations where the creditor is guilty of misconduct, the traditional basis for imposing the...