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Volume 9 - Opinions of Counsel SBEA No. 80

Opinions of Counsel index

Bankruptcy (compromise of delinquent taxes); Taxes (collection) (partial payments) - Real Property Tax Law, § 924:

A Federal court has the authority to order a compromise of real property taxes that is binding on State and local governments. When a Federal court orders a compromise, a tax collecting officer may accept a partial payment of taxes.

We have been asked whether a county may accept partial payments of delinquent taxes from taxpayers who are involved in bankruptcy proceedings.

The general rule is that partial payments of taxes may not be accepted absent specific statutory authority (In Re Wadham’s Estate, 249 A.D. 271, 292 N.Y.S. 102 (4th Dept. 1936); 2 Op.Counsel SBEA No. 86). In 4 Op.Counsel SBEA No. 5, we concluded that the Bankruptcy Court has jurisdiction to order a compromise of delinquent taxes, and that a taxing jurisdiction may lawfully accept a payment thus ordered. That Opinion, written in 1974, was based upon the Bankruptcy Act of 1898, which was subsequently repealed. A new Title 11 for bankruptcy was added to the United States Code in 1978 (H.R. 8200). However, the provisions of new Title 11 do not alter our conclusion that the Bankruptcy Court, as part of the Federal judiciary, has the jurisdiction to issue orders based on the Bankruptcy Code which are binding on State and local governments (11 U.S.C. § 505).

Real property taxes which became a lien prior to the filing of the bankruptcy petition have status as “secured claims” and are normally paid from the bankrupt’s estate assets (11 U.S.C. § 506; In re Parr Meadows Racing Assoc., 880 F.2d 1540 (2d Cir. 1989), cert. den. sub nom. Suffolk County Treasurer v. Barr, 493 U.S. 1058, 110 S.Ct. 869, 107 L.Ed.2d 953 (1989)). In fact, in Parr Meadows, the Second Circuit held that it is not lien date (RPTL, § 900), but rather taxable status date (RPTL, § 302), which is determinative with respect to the status of a particular year’s taxes as a secured claim. Thus, real property taxes levied on an assessment roll, which is prepared on the basis of a taxable status date which preceded the filing of the bankruptcy petition, are considered to be pre-petition taxes, even though the tax lien does not come into existence until after the filing of the petition. (We note that the 4th Circuit has reached a contrary conclusion, holding that liens may not be perfected subsequent to the filing of the petition (In re Maryland Glass Corporation, 723 F.2d 1138 (4th Cir. 1983)). Since New York is in the Second Circuit, the Parr Meadows case is controlling for our purposes.)

Section 503(b)(1)(B) provides that post-petition taxes are afforded a first priority for payment as an administrative expense of the debtor (In re Venable, 48 B.R. 853 (Bankr. S.D. N.Y. 1985); In re Carlisle Court Inc., 36 B.R. 209 (Bankr. D.C., 1983)).

Shortly after the codification of Title 11 in 1982 and repeal of the Bankruptcy Act of 1898 (H.R. 8200), the author of one treatise on the subject expressed the view that, despite the provision in section 503(b)(1)(B), giving post-petition real property taxes a first priority as an administrative expense, section 502(i) relegates all post-petition real property taxes to pre-petition status (Collier on Bankruptcy, § 502.09 (15th edition 1981)). At least one Court followed this interpretation, citing the treatise (In re New England Carpet, 26 B.R. 934 (Bankr. D. Vt. 1983)).

However, in both In re Westholt Manufacturing, Inc., 20 B.R. 368 (Bankr. D. Kan. 1982) and In re Carlisle Court, supra, the Bankruptcy Courts found that post-petition real property taxes were entitled administrative expense status. In Carlisle Court the conflict with both the Collier treatise and the New England Carpet decision was noted and analyzed. The analysis resulted in the conclusion that while the provisions in sections 502(i), 503(b) and 507(a)(6)[7] may be somewhat confusing, they must be read in pari materia, and, therefore, section 502(i) applies only to pre-petition taxes described in section 507(a)(6)[7]. Other reported cases follow this precedent (In re Wendy’s Food Systems, Inc., 117 B.R. 333, Bankr. S.D. Ohio 1990); In re Stack Steel and Supply Co., 28 B.R. 151 (Bankr. W.D. Wash. 1983); In re Trowbridge, 74 B.R. (Bankr. E.D. Pa. 1987); In re Spruill, 78 B.R. 766 (Bankr. E.D. N.C. 1987)), and the Collier treatise evidently changed its position (albeit without comment) in its 17th edition published in 1987. Another authority has noted the apparent anomalous provisions in this regard and the prevailing weight of authority as indicated above (98 Am.Jur.2d § 2812).

Therefore, it appears that post-petition real property taxes are entitled to administrative expense status. However, given the split of authority, it may be necessary for higher level Federal courts to finally resolve the matter.

Where a tax levied against a bankrupt debtor falls within the post-petition category, the tax levying body must present a claim for payment of such taxes to the Bankruptcy Court before which the debtor’s case is pending (11 U.S.C. 502). We note that section 362(b)(9) excepts notices of “tax deficiency” from the automatic stay provisions discussed above.

As noted above, pursuant to 11 U.S.C. section 505(a)(1), the Bankruptcy Court may determine the amount or legality of any tax, “whether or previously assessed,” including a real property assessment (In re Ishpeming Hotel Co., 70 B.R. 629 (Bankr. W.D. Mich 1986)). This authority to determine taxes even extends to a situation where the debtor fails to take advantage of his remedy of administrative review of his assessment (In re Fiedel Country Day School, 55 B.R. 229 (Bankr. E.D. N.Y. 1985); In re Palm Beach Resort Properties, Inc., 51 B.R. 363 (Bankr. S.D. Fla. 1985)).

Pursuant to the grant of authority in section 505, the Court may determine that taxes be allowed as an expense in an amount less than one initially levied, or confirm a stipulation between the debtor and a taxing jurisdiction reducing the amount of tax. In such case, the stay of tax enforcement provisions of section 362 is lifted (11 U.S.C. § 505(c)), and once the amount ordered by the Court is paid, the debtor is discharged from the entire amount of the tax liability (11 U.S.C. § 505(b)). We also note that section 1129 authorizes a Court to confirm an installment plan for tax payments in Chapter 11 reorganization cases.

Where a county and the debtor agree upon a stipulated amount to be paid to satisfy a tax lien or tax claim (where the automatic stay provisions of section 362 prevent the creation of a lien), we suggest that they jointly petition the Bankruptcy Court to approve this and order that the taxes be paid in the agreed upon amount. Such an order would give the County Treasurer the authority to accept what would otherwise be a partial payment.

March 29, 1991