United States v. Reorganized CF& I Fab. of UT

PETITIONER: United States
RESPONDENT: Reorganized CF& I Fab. of UT
LOCATION: Seminole Tribe

DOCKET NO.: 95-325
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 518 US 213 (1996)
ARGUED: Mar 25, 1996
DECIDED: Jun 20, 1996

ADVOCATES:
Kent L. Jones - Argued the cause for the petitioner
Steven Jack McCardell - Argued the cause for the respondents

Facts of the case

The Employee Retirement Income Security Act of 1974 obligated CF&I Steel Corporation (CF&I) to make annual funding contributions to pension plans they sponsored. The required contribution for the 1989 plan totaled $12.4 million. CF&I failed to make the payment and petitioned the Bankruptcy Court for Chapter 11 reorganization. The Government filed a proof of claim for tax liability arising under the Internal Revenue Code, 26 U.S.C. Section 4971(a), which imposes a 10 percent "tax" on any "accumulated funding deficiency" of plans such as CF&I's. The court allowed the claim, but rejected the Government's argument that the claim was entitled to priority as an "excise tax" under the Bankruptcy Code. The Bankruptcy Court also subordinated the Section 4971 claim to those of all other general unsecured creditors under the Bankruptcy Code's provision for equitable subordination. The court later approved a reorganization plan for CF&I giving lowest priority (and no money) to claims for non-compensatory penalties. The District Court and the Court of Appeals affirmed.

Question

Is the Internal Revenue Code's 10% tax liability claim on any "accumulated funding deficiency" in pension plans an "excise tax" under the Bankruptcy Code? May the Government's tax claims be given a lower priority than competing claims by other creditors in bankruptcy proceedings?

Media for United States v. Reorganized CF& I Fab. of UT

Audio Transcription for Oral Argument - March 25, 1996 in United States v. Reorganized CF& I Fab. of UT

William H. Rehnquist:

We'll hear argument next in Number 95-325, United States v. Reorganized CF&I Fabricators of Utah.

Mr. Jones, you're a bear for punishment.

You're up again.

Kent L. Jones:

And I'm getting it, too, Your Honor.

[Laughter]

Antonin Scalia:

Either you or we.

[Laughter]

Kent L. Jones:

Well, I take comfort in the thought that we're all suffering together here.

This case presents two questions.

The first question is whether the tax imposed by section 4971 of the Internal Revenue Code is within the priority that Congress has established for excise taxes in section 507(a)(7)(E) of the Bankruptcy Code.

The second question is whether, if this tax is not entitled to that statutory priority, it may then be subordinated to the claims of general unsecured creditors under the principles of equitable subordination that we've been discussing.

I would like to briefly discuss the second question first.

The case that was just argued could be said to stand, or present the question of whether the principles of equitable subordination on grounds of fairness alone, would permit a court to deviate from what is known as the absolute priority rule.

That rule, as discussed by this Court in the Norwest Bank case, is that all claims of a higher priority have to be paid before any claim of a lower priority is paid.

In the case that was just argued, the higher priority was the first priority for postpetition tax penalty claims.

This case, the second question in this case, if it is reached, could be said to present the question of whether the principles of equitable subordination permit a court, again on grounds of fairness alone, to deviate from what is called the equality of distribution rule.

That rule, as discussed by this Court in the Begier case, is that all claims of the same rank must be paid pro rata, without discrimination among them.

Now, because, in our view, the principles of equitable subordination are the same in both contexts, and in the absence of creditor misconduct don't permit subordination either of claims of the same or of a different rank, the court of appeals erred in this case in subordinating the innocent claim of the United States.

Thus, if the court was right that the claim of the United States didn't have a statutory priority, it was wrong in then saying that the innocent claim of the United States could be subordinated to other general, unsecured claims.

That violates the principle of equality of distribution and it also--

William H. Rehnquist:

So you're saying, in effect, even if you lose on the first question, you're entitled to some sort of relief on the second question?

Kent L. Jones:

--Yes.

The relief that we would be entitled to would be to be treated pro rata with other general unsecured claims, if we're not a priority claim.

Now, the first question in this case is whether we are a priority claim.

Section 4971 of the Internal Revenue Code was enacted in 1974 as part of ERISA.

It imposes a tax of 10 percent on underfunded pension plans.

Congress expressly designated and described this tax as an excise tax, and it--

Sandra Day O'Connor:

Well, do you agree that language doesn't always control, that something can be called a tax and, in fact, be a penalty?

Kent L. Jones:

--I agree that something can be called a tax that isn't, but there are two reasons why we think the designation of this tax as an excise tax is important, which I'll soon address, but I did want to make the point here that this tax does have the two features which are common to excise taxes, and by the way, excise taxes are probably the most common kind of tax there is.

William H. Rehnquist:

This section deals not just with the Federal Government, but with all governmental entities.