Bankruptcy court cannot partially disallow penalties.

• Author: Friedman, Steven M.
• Position: U.S. Court of Appeals for the 11th Circuit's decision in Sanford

The Eleventh Circuit recently held that penalties assessed by the IRS for failure to file, failure to pay and failure to pay estimated tax must either be sustained in full or disallowed in full when reviewed by the courts. According to the appeals court, a bankruptcy court erred in disallowing two-thirds of the penalties the Service asserted; the Code allows only a full waiver or none at all, depending on whether the taxpayer satisfies the statutory requirements for waiver (Sanford, 11th Cir., 1992, vac'g and rem'g unreported DC).

In Sanford, an elderly and ailing taxpayer had relied on his ex-wife and her accountant to handle his personal business and tax matters. In 1989, the taxpayer was forced into bankruptcy, and the IRS asserted an unsecured priority claim for taxes, interest and penalties for 1983 through 1988, including penalties under Secs. 6651(a)(1) (failure to file), 665 1 (a) (2) (failure to pay) and 6654 (failure to pay estimated tax).

The taxpayer did not dispute his tax liability, but he did urge the bankruptcy court to eliminate or reduce the penalties, arguing that he had shown good cause for failing to file the returns and to pay tax for the years at issue. The bankruptcy court ordered payment of all the tax liabilities, but reduced the amount of the penalties by two-thirds. After the district court upheld the bankruptcy court's decision, the Service appealed.

As the Eleventh Circuit noted, a claim against a bankruptcy estate is to be allowed only if the claim would be enforceable outside of...