|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
MITCHELL LUKE PATIN, No. 94-12623
Memorandum of Decision
The Internal Revenue Service has objected to the debtor's Chapter 13 plan because it
proposes to separately classify tax penalties and pay nothing on them, while paying 100% to
other unsecured claims. While the issue does not seem to be completely resolvable based on
briefs, the court will do as much as it can.
The court first notes that section 1322(a)(2) of the Bankruptcy Code requires that a Chapter
13 plan must provide for all priority claims to be paid in full. Section 507(a)(8)(G) provides
that tax penalties are entitled to priority if in compensation for actual pecuniary loss. The court
therefore assumes that the penalties at issue here are pure penalties, and in no way required to
make the IRS whole.
The issue is simple to state. Given that the debtor can only afford a fixed amount to be paid
to creditors, may he elect to pay all creditors in full and nothing on a pure penalty, or must the
penalty be paid from the same pot so that all creditors receive less than full payment?
The court disagrees with the IRS that the Chapter 7 provisions of the Code are irrelevant.
Section 1325(a)(4) of the Code requires the court to consider each claimant's dividend in
Chapter 7 in determining whether a plan should be confirmed. The fact that the penalty claim
of the IRS would be subordinated to the other claims pursuant to section 726(a)(4) is therefore
very relevant to a Chapter 13 proceeding.
Section 1322(b)(1) of the Code permits the debtor to separately classify claims, so long as
such classification does not unfairly discriminate against the claimant. It is difficult for the
court to see how the discrimination against the penalty claims proposed by the debtor is unfair
to the IRS, since the Bankruptcy Code, in at least the two places discussed above, itself
discriminates against penalty claims. Moreover, the result of such discrimination is not the
enrichment of the debtor, but rather the ability of the debtor to pay all claims based on
pecuniary losses in full.
Contrary to the position taken by the IRS in this case, a Chapter 13 plan may discriminate
against nonpecuniary tax penalty claims. Burden v. U.S.
, 917 F.2d 115, 119 (3rd Cir.1990).
The court finds that the purpose of discrimination in this case - to pay pecuniary loss claims in
full - is a valid and equitable purpose. Therefore, if all of the other provisions of Chapter 13
are met, the plan will be confirmed.
Because the court is unclear whether there are any disputed factual issues related to the plan,
it will set a final confirmation hearing for July 24, 1995, at 9:00 A.M. At that hearing, it will
be deemed without controversy that the nonpecuniary tax penalty claims of the IRS may be
separately classified and paid nothing if the plan meets the requirements of the Bankruptcy
Code. If the IRS does not desire a final hearing, and if the Chapter 13 trustee recommends
confirmation, the plan will be confirmed without a further hearing.
Counsel for the debtor shall submit an appropriate form of order after consulting with
counsel for the IRS and the Chapter 13 trustee.
Dated: June 13, 1995 _______________________