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?

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.

Kent L. Jones:

That’s right, any State, Federal, or local excise tax.

Subtitles B through E of the Internal Revenue Code are all excise taxes.

There’s the estate taxes, employment taxes, miscellaneous excise taxes, alcohol and tobacco taxes… Congress has a lot of excise taxes, but the common feature, what you can see if you go through them, is there are two common features.

They’re not universally present, but they’re the common characteristics of excises, and those are that it is imposed upon a specific act or event, in this case the act of maintaining an underfunded pension plan, and second is that it’s imposed of a portion of the value of that act or event, in this case a portion of the value of the underfunding.

Now, 4 years after this tax was enacted, Congress, in restructuring the Bankruptcy Code, enacted 507(a)(7)(E), which provides a specific, unqualified priority for any State, Federal, or local excise tax.

The court of appeals reasoned in this case that that priority could not reach this tax, because this tax was designed to enforce another law.

It was designed to deter the violation of another law, and the court regarded it as a penalty, and as a penalty the court concluded it wouldn’t come within the priority for an excise tax.

Sandra Day O’Connor:

Because it was a nonpecuniary loss–

Kent L. Jones:

A nonpecuniary loss penalty, which simply means that it’s a penalty that doesn’t recover money that would otherwise be owed, I guess.

Now, whether you look at the text of the statute, or its structure, or its history, the reasoning of the court of appeals cannot be sustained.

The text, of course, which under Ron Pair is what we’re supposed to look at, says unqualifiedly that any excise tax, State, Federal, or local, is entitled to this priority.

It doesn’t contain any suggestion that an excise–

David H. Souter:

–Well, Mr.–

Kent L. Jones:

–that has a regulatory purpose is not.

David H. Souter:

–Mr. Jones, it does have one qualification, and that is, it uses the word transaction, rather than act or event, and I mean, just in common uses that implies something more, doesn’t it, than the passage of the deadline without payment?

Would we normally describe that as a transaction?

Kent L. Jones:

The transaction language in that code is designed to key off the, if you will, statute of limitations that applies to excise tax claims.

Respondents agree–

David H. Souter:

Does it use the word transaction?

Kent L. Jones:

–Does which?

David H. Souter:

Does the statute of limitations?

Kent L. Jones:

No, I didn’t… I was not being precise.

I don’t mean to say a statute of limitations, but if you look at 507(a)(7)(A), (B), (C), (D), (E), all of which address various kinds of tax claims, each of them has a limitation as to the scope of a claim to fall within the priority.

For example, the language in (a)(7)(E), if I’m paraphrasing it properly, is that the tax has to be with respect to a transaction for which a report is due within 3 years of the filing of the petition.

The word transaction has a broad meaning, and couldn’t be reasonably understood to be a narrow meaning.

For example, estate taxes are excise taxes.

What’s the bargained for exchange if you think of transaction that way?

There’s no bargained for exchange there.

The transaction language is the act–

Antonin Scalia:

These taxes you say are excise taxes, that’s well established?

Kent L. Jones:

–Yes.

Estate gift taxes are excises.

William H. Rehnquist:

How is that established?

Kent L. Jones:

Well, it’s not addressed in the briefs, Your Honor, but I think it’s… it’s established in the case law and treatises.

William H. Rehnquist:

Well, what cases?

Kent L. Jones:

I’m sorry, I’m not prepared… I don’t have an answer to that question now.

I’m just speaking from, if you will, my general knowledge.

Excises are taxes that would include estate taxes, just as they include sales taxes.

They are at… this Court talked about the fact that excises, customs duties, and income taxes are really sort of the whole gamut, or as the Court said in the Steadman Machine case, the… all of the taxes appropriate to sovereignty, and you can track that through the way Congress–

William H. Rehnquist:

Are you saying that all taxes appropriate to sovereignty are excise taxes?

Kent L. Jones:

–No, sir.

I said that income, customs duties, and excises… the Court used the phrase, appropriate to sovereignty in the Steadman Machine case.

If you think about it, customs duties are in title 19, income taxes are in subtitle A of title 26, and as I said, subtitles B through E of title 26 are excises.

William H. Rehnquist:

So your theory is that the Court said customs, income, and excise taxes, and they were covering the waterfront there, and therefore if something isn’t a customs duty and isn’t an income tax, it is by definition an excise tax?

Kent L. Jones:

I think that the point the Court was making was that these are broad and flexible terms.

I don’t think the Court in the case that I referred to was trying to be specific in the way that you’re suggesting.

William H. Rehnquist:

Well, what if a State had structured its tax scheme differently than the Federal Government?

I mean, I take it we have to deal with State tax schemes here, too–

Kent L. Jones:

Yes.

William H. Rehnquist:

–and the Federal Government doesn’t get any bigger a break than the State does in trying to figure out whether it’s an excise tax or not.

Kent L. Jones:

Well, I wouldn’t say any bigger a break, but I do think that the Mansfield Tire court was probably right in saying that when Congress expressly designates something as an excise tax there’s no reason to think it didn’t intend to have its excises included within the priority that it adopted for excise taxes.

William H. Rehnquist:

Well, does that really make much sense?

I mean, the same committees of Congress don’t draft bankruptcy bills as draft tax bills.

Kent L. Jones:

It makes sense if you think about it from two perspectives.

It makes sense if you think about the fact that Congress is the one… I mean, if you’re trying to decide what is the excise tax, the best evidence of that is… would be to go through the Internal Revenue Code and to see what Congress has done.

I mean, when I suggested that there are two common characteristics for excises, I think that was correct, and that’s based on observation of what Congress has done.

Congress has probably enacted as many, if not more taxes than anybody.

John Paul Stevens:

Mr. Jones, the section doesn’t purport to include all excise taxes.

It includes an excise tax on a specific kind of transaction–

Kent L. Jones:

Well, on–

John Paul Stevens:

–and what is the transaction we’re talking about here?

Kent L. Jones:

–The transaction that we’re talking about here is the act of maintaining an underfunded pension plan.

John Paul Stevens:

Act of maintaining over a period of time.

Kent L. Jones:

That’s right.

John Paul Stevens:

Not a… it talks about a transaction occurring on a specific date.

Kent L. Jones:

Well, the report on that is due on a specific date.

It’s an end of year event.

There are other excise–

David H. Souter:

Isn’t it the failure to fund on by that date which is the event?

It is not the mere maintenance over some period of time, it’s the failure to bring it up to the proper level–

Kent L. Jones:

–It’s the maintaining on the reporting date–

David H. Souter:

–on that reporting date.

Kent L. Jones:

–Yes.

It’s the act of, on that date, of maintaining that tax.

It is a specific event.

There are other excise–

John Paul Stevens:

It seems to me a more natural term would be to describe that as an omission rather than a transaction.

Kent L. Jones:

–Well–

John Paul Stevens:

Or a failure rather than a trans… normally, a transaction is the event of death, or you sell something.

I mean–

Kent L. Jones:

–Well–

John Paul Stevens:

–it’s an unusual use of the word transaction.

Let me put it that way–

Kent L. Jones:

–It’s a broad use of the word transaction, and you can only understand it in a broad context when you understand the broad concept of excises.

David H. Souter:

–Of course, maybe the point for your side is that no one has come up with a reason why Congress would want to draw the line between an excise payable, excise tax payable on a failure to do something as distinct from an excise tax payable because of some affirmative action.

Kent L. Jones:

Well–

David H. Souter:

At least, I don’t have an idea.

Kent L. Jones:

–I don’t think there’s any reason to think Congress thought it was drawing such a line.

It spoke quite broadly that it’s priority would extend to any State, Federal, or local tax expressly treated or generally considered to be an excise.

Sandra Day O’Connor:

Mr. Jones, there is an additional so called tax under the ERISA scheme.

Sandra Day O’Connor:

Where the initial tax isn’t corrected within a certain time, then there’s imposed a tax equal to 100 percent of the accumulated funding deficiency.

Now, what’s the transaction there?

Kent L. Jones:

The… there’s a lot of issues that I want to talk about in answering that question.

The first, of course, is that this Court isn’t going to be asked to decide that question, but I will–

Sandra Day O’Connor:

Well, come on, we have to have that in mind.

It’s in the very next section–

Kent L. Jones:

–I understand that.

Sandra Day O’Connor:

–and you know we’re going to face it.

Kent L. Jones:

The United States has never pursued in an appellate court the question of the priority of the subsection (b) tax, and there are reasons to think that the treatment to be accorded to those taxes is different than the treatment to be accorded to the 10-percent priority.

There are two differences that I think can be addressed at this point.

There are others that may also exist.

There is, of course, the facial difference between a 10-percent tax that conforms to the, if you will, ordinary concept of an excise as a tax on the portion of the value, and a 100-percent tax, which is–

Sandra Day O’Connor:

Which looks something like a penalty.

Kent L. Jones:

–Which would be, I suppose, a whopping big excise tax.

Whether Congress can enact a whopping big excise tax is something that I don’t think that there’s any reason to think it can’t, but I think it’s something we’d have to address if we ever argued that case.

William H. Rehnquist:

Well, if an estate tax is an excise tax, certainly estate taxes are whopping big, 65 percent.

Kent L. Jones:

That’s right, estate taxes can get very high.

Now, the other point that I think is a more problematic distinction between those two taxes–

Antonin Scalia:

More problematic than whopping big?

Kent L. Jones:

–Yes.

[Laughter]

More problematic even than whopping big is the fact that the (b) tax, unlike the (a) tax, and unlike, if you will, many other excise taxes in the Internal Revenue Code, is expressly subject to waiver by the Secretary of the Treasury on any grounds that he thinks is appropriate.

That’s a… that kind of discretionary enforcement would raise a question about whether Congress has treated this as a tax.

David H. Souter:

Is the (b) tax expressly labeled an excise tax?

Kent L. Jones:

No, it’s labeled… expressly labeled in the statute a tax.

David H. Souter:

But it doesn’t… the word excise is not in that section, is that right?

Kent L. Jones:

No, it’s… nor is it… nor is it within the (a)–

Sandra Day O’Connor:

It’s not in the other, the 10 percent, either.

Kent L. Jones:

–Nor is it within the section that imposes most congressional excise taxes.

Congress designates this as an excise tax both by its location within the code, of course, which Congress is cognizant of–

David H. Souter:

Which also applies to (b).

Kent L. Jones:

–Which also applies to (b).

David H. Souter:

So if we buy (a), I think we’re buying (b).

Kent L. Jones:

Well, I’m… what I’m trying to say is, I think there are reasons why you would certainly want to reserve the question, but even if you were later to address it, there are reasons why you might draw a distinction.

David H. Souter:

Okay.

In any event, your point is not that the designation is controlling.

The designation is important, but it’s not controlling–

Kent L. Jones:

It’s very important, and it’s the… in the words of the legislative history, which I think are useful guides, it says, if Congress has expressly treated it as an excise, or has… or if it’s commonly understood to be one, and so the question that I’m noting about the (b) tax is that, well, it hasn’t been expressly treated as an excise when it’s subject to waiver on any grounds the Secretary considers proper.

David H. Souter:

–Okay, but one thing we can’t do is adopt a rule of decision which says (a) has been designated by its location as an excise tax, end of issue.

We can’t decide on that basis.

Kent L. Jones:

You could, if you wished, use the language which the legislative history contains, which is what has been expressly treated as an excise by Congress.

David H. Souter:

Well, depending on how narrowly you read that, this either is or is not–

Kent L. Jones:

Yes.

David H. Souter:

–expressly treated, but we couldn’t take the designation rule without picking up (b) as well, is that–

Kent L. Jones:

I really don’t mean to try to use the word designation as, as the one court said, a label.

I think the labeling is important, but it’s the treatment of this as an excise tax, and the fact that it shares common–

John Paul Stevens:

–Mr. Jones, could you help me, because I frankly… I had thought it was… this was expressly described as an excise tax, but it really is not, is it?

What is the closest thing to express language in the Internal Revenue Code… forget about legislative history for a moment… that would say the label for this thing is an excise tax?

Kent L. Jones:

–Well, in terms of labeling, Congress located this within–

John Paul Stevens:

It just located in the particular section–

Kent L. Jones:

–In subtitle D, which is called Miscellaneous Excise Taxes.

The legislative history describes it as an excise tax.

John Paul Stevens:

–But your textual argument is that it’s in a section of the code that’s entitled Miscellaneous Excise Taxes.

Kent L. Jones:

I’m not sure.

Relatively few Federal excise taxes have the word excise in them.

I mean, it’s just not a legislative draftsmanship thing.

John Paul Stevens:

But this one doesn’t have the word excise in it.

Kent L. Jones:

No, it doesn’t, and very few do.

Most excise taxes are like this.

They’re taxes, like the estate and gift taxes.

John Paul Stevens:

Most of them are on a… you know, you can say you’re being taxed on a specific event, like a death or a transaction or something, but this is a nonevent.

I mean, if you’re right on whether a nonevent is the same as event–

Kent L. Jones:

There are–

John Paul Stevens:

–of course, you don’t–

Kent L. Jones:

–There are… there’s an excise tax on maintaining a trust with excessive amounts of undistributed income.

There are other kinds of excise that follow this pattern.

John Paul Stevens:

–But again… again, I don’t want to just lose this one thought.

The only language in the code, other than looking at the tax and trying to decide whether it fits the category, is the title of this section says miscellaneous excise taxes, and it’s in that section, is that right?

Kent L. Jones:

That would be the only language, if you will, in the code.

John Paul Stevens:

Yes.

Kent L. Jones:

Now, in answering that question, let me point out something that we haven’t addressed.

We don’t think it’s relevant, but I do want to point it out.

In 7806 of the code, it says that in interpreting statutes you’re not to look at captions, basically.

I’m summarizing.

John Paul Stevens:

Right.

Kent L. Jones:

We’re not suggesting that this is a question of interpreting the statute.

It’s a question of understanding how Congress has treated this statute to determine whether it’s an excise.

Antonin Scalia:

Yes, but you’re not willing to stand by the proposition, which sort of makes doubtful whether the proposition is correct… you’re not willing to stand by the proposition that everything included within that title is an excise tax.

Kent L. Jones:

I think everything–

Antonin Scalia:

It happens to bear that title, but you’re… well, the 100 percent tax you’re willing to say is not.

Kent L. Jones:

–Justice Scalia, what I’ve said is that to the extent that possible distinctions exist elsewhere, we’re not trying to answer those questions,–

Antonin Scalia:

Well, you have answered it–

Kent L. Jones:

–and I’ve answered–

Antonin Scalia:

–if you’re going to rely on the fact that this in a title that bears the caption, Excise Tax.

If that is going to be the… you know, the North Star of your argument, the 100 percent is covered.

Otherwise, you have to abandon that and say, well, it’s not determinative.

Kent L. Jones:

–We have to look for some evidence to answer the question of what is an excise tax.

Antonin Scalia:

Okay.

I mean, so you say this is just part of the evidence.

This alone isn’t enough to get you there.

Kent L. Jones:

If Congress has expressly treated it as an excise, then it is, and all I’m–

David H. Souter:

No, but that begs the question.

It has not expressly treated it.

In the section itself, the closest to express treatment, as I understand your argument, is its placement in subsection D, which has an excise tax label, and therefore, if we use the placement in subsection D as the ground of decision, then we’re going to pick up the (b) tax as well as the (a), and you don’t want us, I take it, to be forced to decide on that ground.

If I’m wrong, if you say look, I’ll take… I want the whole hog, and you should decide on the ground of that placement, then I want you to tell me.

Kent L. Jones:

–Congress has done more than just locating it in this section.

It’s made it a fixed and determinate excise tax, and to understand why I’m emphasizing that, I want to point out that under the Bankruptcy Act the decision… our position in this case was endorsed by this Court in the case of United States v. New York.

David H. Souter:

No, but may I just interrupt you, because I want to get clear on one thing.

It’s the same thing that Justice Scalia and Justice Stevens wants to get clear on.

Yes or no.

You should decide this case under a rule of decision that says, if it’s placed under D, it’s an excise tax, end of issue.

Is that the position that you take, or is it not the position that you take?

Kent L. Jones:

I have two answers to that.

One is, you make take that–

David H. Souter:

No, it’s yes or no.

You can only have one answer.

[Laughter]

Kent L. Jones:

–The Court could reach that decision.

I think that the Court could also have an analysis that also looked to the question of whether the treatment of the tax is–

David H. Souter:

So I guess the answer is no.

Kent L. Jones:

–an excise–

David H. Souter:

I guess the answer is no.

But see, Mr. Jones, the court of appeals seemed to think it really is clearly labeled an excise tax, but they said, we apply a four part test from Cassidy or some earlier case, and you’re saying don’t apply a four part test, apply an act or event test.

You’re just saying they applied the wrong test.

Kent L. Jones:

–I think that’s the test that Congress applies–

John Paul Stevens:

But it is correct, in your view–

Kent L. Jones:

–in creating excise taxes.

John Paul Stevens:

–to apply a test to decide whether we think it’s an excise tax.

Kent L. Jones:

I think in deciding what’s an excise tax, we should apply the test Congress applies, but may I please–

Antonin Scalia:

Wait, but what test does Congress apply?

Antonin Scalia:

They have included the 100-percent tax within this section entitled Excise Taxes.

Kent L. Jones:

–And then they made it waivable.

I’m simply saying that in a future case, not in this case, the Court might want to consider whether that’s relevant.

I don’t think the Court has to address it here.

I wouldn’t expect it to.

Antonin Scalia:

It seems to me once you abandon… once you’re not willing to answer yes to Justice Souter’s question, we’re just quibbling about what the test ought to be, whether it’s the four part test used here, or we should make up another one.

Kent L. Jones:

There’s really another point–

Antonin Scalia:

And there’s really no alternative.

You–

Kent L. Jones:

–There’s another–

Stephen G. Breyer:

–Can I ask a question… at some point, when you can… a technical question.

Kent L. Jones:

–May I just make one more point?

Stephen G. Breyer:

Yes.

You bet.

Kent L. Jones:

Thank you.

In United States v. New York, the court addressed the same question that it has to address here.

It did it under the Bankruptcy Act.

The question in that case was whether an excise tax that is designed to enforce some other law is no longer an excise tax.

It’s no longer qualified to the priority as a tax, it’s a penalty, and what the Court said in United States v. New York is that the mere fact that a tax is designed to enforce some other, in this case State law doesn’t make it, in the words of the Court, any the less a tax, doesn’t remove it from the statutory priority.

If this case were being decided under the Bankruptcy Act, that analysis in United States v. New York would prevail here, because–

Stephen G. Breyer:

That was a State tax.

Kent L. Jones:

–No, sir, that was a Federal tax–

Antonin Scalia:

That was a… in this same section?

Kent L. Jones:

–That was a Federal employment tax that was designed to enforce a State unemployment contribution law.

The tax did not apply if the State law had been complied with.

Antonin Scalia:

Was it included in this same section of the code?

Kent L. Jones:

I believe the Federal employment taxes are in subtitle C, the immediately preceding section, which is also an excise tax.

The Court specifically said this excise tax does not lose its priority.

It’s not any the less a tax because it’s designed to do something else.

William H. Rehnquist:

What’s the caption of subsection C, if subsection D is Miscellaneous Excise–

Kent L. Jones:

I think it’s called Employment Taxes.

William H. Rehnquist:

–Not Excise Taxes.

Kent L. Jones:

That’s not its caption.

Ruth Bader Ginsburg:

Mr. Jones, one characteristic of many excise taxes is that they are deductible from income, and then that might be one way you could distinguish an excise tax from a penalty.

This is not deductible, this… whatever you want to call the–

Kent L. Jones:

It’s hard for me to answer that question.

This is a tax owed by the pension.

No, this is a tax owed by the employer.

Ruth Bader Ginsburg:

–By the company, because it didn’t make the contribution.

Kent L. Jones:

This is owed by the employer.

I… you’re asking me whether it’s deductible.

I don’t know.

I have no reason to think it would… would not be.

Ruth Bader Ginsburg:

But how… is that something that can help us distinguish an excise tax from a penalty, excise taxes or–

Kent L. Jones:

Yes, I agree, that would be some evidence.

If Congress… Congress as a general proposition doesn’t allow the deduction of penalties, allows the deduction of ordinary necessary business expenses.

I don’t know how the… I don’t know what the treatment is here.

In Mansfield Tire, the Sixth Circuit made the point that many, if not most Federal excises have a punitive or regulatory purpose.

If Congress had intended to exclude all of its excises like excises on gambling, on green mail, on unregistered securities dealings, you would reasonably expect to see some evidence of that in the text or the legislative history.

But the text and the legislative history contain the unqualified statement that any excise, Federal, State, or local, that has been expressly treated or generally accepted as an excise is entitled to priority, and as the Court said in United States v. New York, the fact that this excise is designed to enforce a penalty doesn’t make it any the less a tax.

Justice Breyer–

–Thank you.

Kent L. Jones:

–I’m sorry.

Stephen G. Breyer:

Thank you… that’s all right.

Suppose, just for the sake of argument that I thought because it’s regulatory in nature, it’s object is zero dollars, it doesn’t want to collect revenue, and because it doesn’t seem to be on an activity, though there are things on your side, too, which you very well argued, but suppose for the sake of argument that I were to say it was an excise tax, then we’d get to the next part of the case.

Now, the technical question on the next part of the case, assuming that for the sake of argument that we got there, under section 7 priorities, I would have decided that this was a penalty, right?

Kent L. Jones:

Under Chapter 7 priorities?

Stephen G. Breyer:

Yes.

Yes, under Chapter 7 I would have decided this was a penalty.

Kent L. Jones:

If you deny the priority on the grounds it was a penalty–

Stephen G. Breyer:

Yes, okay.

Kent L. Jones:

–and you’re now in a 7–

Stephen G. Breyer:

Then it would have come in the fourth priority after unsecured creditors, is that right?

Kent L. Jones:

–It’s a prepetition claim.

Stephen G. Breyer:

Yes.

Kent L. Jones:

Yes.

Stephen G. Breyer:

All right.

So why in this section, in this Chapter 11 case didn’t the bankruptcy judge just say, this is a penalty, therefore I put it in a different class.

I put it in a class which would be the class it would be in if this were a Chapter 7.

I put it in a class below unsecured creditors, and therefore I don’t have to worry about equitable subordination or not, and since he could have just as easily done that, which would have come to the identical thing, he just used the wrong words to describe what he did, and therefore that issue drops out of the case.

That’s my question.

Kent L. Jones:

Right.

Of course, as you’ve already pointed out, that question isn’t presented here.

Stephen G. Breyer:

Yes, but what are we supposed to do–

Kent L. Jones:

If it had been presented–

Stephen G. Breyer:

–Yes.

Kent L. Jones:

–If it had been presented, what the answer that some courts have given which we think would be correct is that when you cram down, if you will, the priorities from the 7 into the 11, what the courts have pointed out is that you don’t do that to the extent that Congress expressly intended that the rules that are applicable to 7 should not apply to 11.

Stephen G. Breyer:

But wait, we’ve assumed in this, we’ve assumed in this for the sake of my question that this is nothing other than a simple penalty–

Kent L. Jones:

Right.

Stephen G. Breyer:

–of a nonpecuniary nature.

Kent L. Jones:

Yes, sir, and in… and my point is that in a Chapter 11, Congress made the express determination that pecuniary… nonpecuniary loss, prepetition penalties would be treated as general unsecured claims–

Stephen G. Breyer:

Oh–

Kent L. Jones:

–and not be treated as–

Stephen G. Breyer:

–Where does it do that?

Kent L. Jones:

–We discuss that in our brief.

I’m sorry, I don’t remember the page, but if you compare the bills as they progressed through Congress–

Stephen G. Breyer:

No, but where in the language of the statute does it do that?

Anywhere?

Kent L. Jones:

–It’s in the history of the statute.

Stephen G. Breyer:

Is there any case… is there any case which has said that we lack the power in Chapter 11 to treat–

Kent L. Jones:

Yes.

Yes, sir.

In two cases that we cite in a footnote addressing this in our reply brief–

Stephen G. Breyer:

–Thank you.

Kent L. Jones:

–that general point is made, and we also point out the history in our opening brief.

I would like to reserve the balance of my time for rebuttal.

William H. Rehnquist:

Yes, Mr. Jones.

Mr. McCardell.

Is that the correct pronunciation?

Steven Jack McCardell:

It is, Your Honor.

William H. Rehnquist:

Mr. McCardell.

Steven Jack McCardell:

Mr. Chief Justice, and may it please the Court:

The IRS claim to tax priority in this case rests on the single assumption identified in the questions of the last argument.

That is, that every exaction labeled a tax in section 4971, because of its placement under the heading, Miscellaneous Excise Taxes, is automatically and without further consideration entitled to the tax priority in bankruptcy.

The questioning in the last argument I think revealed that the 100-percent exaction imposed under sub (b) of section 4971 is indistinguishable from the exaction under sub (a) on the basis of its labels, and if the IRS can concede that the label alone does not control with regard to sub (b), that concedes the case, if label is the IRS’ sole argument, which it must be in this case, because of the concessions that the IRS made in the lower court.

Antonin Scalia:

Is there anything else that comes under sub (b) and therefore bears the label, Miscellaneous Excise Taxes, which you would assert is obviously not an excise tax, as you do the 100 percent, and as you do the 10 percent, for that matter?

Steven Jack McCardell:

If I understand Your Honor’s question, the only exaction under sub (b) is the 100 percent item designated as a tax.

Antonin Scalia:

Whatever comes within that section of the code that bears the caption, Miscellaneous Excise Taxes.

Now, there are a lot of things embraced within that, are there not?

Steven Jack McCardell:

Yes, there are, Your Honor.

Antonin Scalia:

What else besides this 10 percent and 100 percent strikes you as obviously not an excise tax?

Steven Jack McCardell:

Well, there are other tiered penalties.

For example, section 4941 tiered tax on self dealing.

It imposes a first tier penalty and a second tier penalty.

Both of them are designated as taxes.

Those are the exactions that the Fourth Circuit and the Fifth Circuit ruled under the Bankruptcy Act were not entitled to tax priority.

Sandra Day O’Connor:

Well, do you say that every exaction adopted under 26 U.S. Code section 4971, subtitle D, is a penalty, not a tax?

Steven Jack McCardell:

We do, Your Honor, because both were asserted in this case.

The (a) provision which is before the Court today is in the amount of approximately $1.2 million, the (b) provision for about another $40 million, was in the amount emphasized… asserted in this case.

The reason the IRS must rely on its labels govern argument is that the IRS conceded in the lower court that it would not be able to sustain the position that these exactions are not penalties.

Steven Jack McCardell:

That concession is found at pages 48 and 49.

William H. Rehnquist:

To what extent are we bound by a concession like that?

We do not accept, for example, concessions on points of law as being conclusive, ordinarily.

Steven Jack McCardell:

Your Honor, the IRS did not come forward with any evidence in the bankruptcy court to satisfy the court’s traditional test for the tax priority in bankruptcy.

Having failed to meet its burden to prove its entitlement to the priority, I think the IRS is bound by that failure.

William H. Rehnquist:

Well, it’s one thing to be bound by a failure to offer proof, another thing to be bound by a concession.

Steven Jack McCardell:

And both occurred in this case.

The traditional test for tax priority requires that the exaction have the purpose of supporting the Government.

Sandra Day O’Connor:

But that can’t be the case.

Suppose it’s a tax on alcohol or cigarettes.

It’s a tax designed to encourage people not to smoke or not to drink, some kind of a sin tax.

Do you say that those aren’t excise taxes?

Steven Jack McCardell:

We do not, Your Honor.

The rule adopted by the–

Sandra Day O’Connor:

I mean, aren’t there plenty of excise taxes that are designed for the very purpose of encouraging certain behavior, or discouraging certain behavior?

Steven Jack McCardell:

–There are, and in the cases of those taxes they have a mixed purpose, both regulatory and to raise revenue.

Section 4971 is distinct in that regard, in that it has only a function of coercing and punishing the failure to–

Sandra Day O’Connor:

Well, it raises revenue for Uncle Sam.

Steven Jack McCardell:

–If it’s ever paid, it certainly goes into the Treasury.

However, it’s not used to fund pensions or to otherwise address the question of retiree claims.

Now–

Sandra Day O’Connor:

But I think what–

–Well, but we’ve never required that.

That would be constructing some other new–

–What Justice O’Connor is suggesting is, how can we tell whether the purpose of… it’s easy to say that this tax has a, you know, an encouraging or discouraging function.

How can we say that it isn’t for the purpose of raising tax revenue?

I don’t know how to figure out whether it is or isn’t.

I know that it does raise tax revenue.

Steven Jack McCardell:

–Certainly.

First, if I might address the end of Justice O’Connor’s question, which I think addresses the question of what the Bankruptcy Code does with regard to penalty claims, subsection (G) of section 507(a)(7) the Court has before it today distinguishes between penalties that have a pecuniary loss, and penalties that are not based on a pecuniary loss.

Steven Jack McCardell:

Now, it’s clear that if there could never be… if the simple fact that it’s paid into the Treasury of the Government always made it a tax simply because the Government receives revenue, then there never could be such a thing as a nonpecuniary loss penalty, but (G) demonstrates that there is such a distinction, and that’s why, in looking at section 4971, to answer Your Honor’s question, the Court can look at objective characteristics of this tax that demonstrate that it does not satisfy the traditional test for taxes.

It was… first, the United States is not liable for the pensions that are guaranteed.

They are guaranteed by the Pension Benefit Guaranty Corporation, which operates on private funds.

The penalty, if paid, goes to the IRS, but not to the PBGC or to the plans or to the retirees.

If the section 4971 penalty is paid, the underlying obligation to fund the plan remains, and in that regard it’s different from the responsible officer penalty addressed in the prior case, which can only be collected once.

This one is collected twice.

It says to the employer, you fund your pension plan, or if you don’t you’re still going to have to fund it, or the next year you’re going to have to fund it at 110 percent, you have to pay 110 percent penalty, or the next year 220 percent, and so on.

Sandra Day O’Connor:

Well, it doesn’t call it a penalty.

Steven Jack McCardell:

That’s correct.

Sandra Day O’Connor:

I mean, you’re calling it a penalty.

That’s what we have to decide, and what’s the test?

Steven Jack McCardell:

The test, Your Honor, is whether it qualifies as a tax.

The Court has distinguished taxes from penalties by defining it–

Sandra Day O’Connor:

Well, yes.

What is the test for determining that?

Steven Jack McCardell:

–The test is that stated in United States v. New York, that a tax is a pecuniary burden laid upon individuals or property for the purpose of supporting the Government, by whatever name it may be called.

That’s the test.

John Paul Stevens:

Mr. McCardell, I don’t know why the issue isn’t… forgetting these general tests about taxes and penalties, why isn’t the issue simply whether it’s a… whether you call it a tax or a penalty, it is imposed on a transaction occurring on a certain date.

If that is the test, do you win or lose?

Steven Jack McCardell:

If the Court addresses the question of transaction, which we think it should, because that is encompassed within the question before the Court today, it’s an element of qualifying for tax priority, the IRS loses.

There was no transaction.

John Paul Stevens:

Well, they would say… I think Mr. Jones would say, well, the statute imposed an obligation to file… make a determination as of the end of the plan year and know exactly what the underfunding was, and I suppose the transaction might be described as making a determination with red figures in it… bing… and then you pay 10 percent of the red figure.

Steven Jack McCardell:

The IRS’s proof of claim in this case identified when this tax arose, and that date was September 15, 1990, at the end of that day, when no payment was made… at midnight on September 15, 1990.

At 11:59 p.m. on that day, there was no tax.

At 12:01 the next day, there was a tax.

What happened in between?

John Paul Stevens:

I take it that’s the end of the plan year, that–

Steven Jack McCardell:

That’s the end of the period within which the debtor could have made that final payment, and in between those two–

John Paul Stevens:

–Was that the end of the plan year?

I want to be–

Steven Jack McCardell:

–Yes.

John Paul Stevens:

–Because they use the term plan year, I think, in the statute.

Steven Jack McCardell:

Yes.

Your Honor, the end of the plan year was December 31, 1989, but ERISA allows the funding payments for that year to be made up until September 15 of the following year.

John Paul Stevens:

So they treated the transaction date as the date the payment was due, rather than the date the determination was made.

Steven Jack McCardell:

That’s what their proof of claim says, Your Honor.

David H. Souter:

Why would Congress want to draw that distinction between a tax which becomes payable as a result of nonaction and the expiration of time, and the tax which becomes payable because of an affirmative act, or perhaps even an affirmative agreement, if that’s applied by one sense, a transaction.

Why draw that kind of line?

Steven Jack McCardell:

I’m not sure, Your Honor, but it’s apparent from the language of section 507(a)(7)(E) that that line, indeed, was drawn because of the language, transaction occurring, and perhaps it’s based on the distinction the Solicitor General points to that most excise taxes are based on an act or event, or a transaction.

Antonin Scalia:

Well now, wait, act or event or transaction, you’re willing to read transaction to include event?

Steven Jack McCardell:

We are not.

Antonin Scalia:

You’re not willing to include it.

Or act?

Can it be an act?

Steven Jack McCardell:

Nor–

Antonin Scalia:

Not an act.

Steven Jack McCardell:

–Nor an act, Your Honor.

Antonin Scalia:

It has to be… a transaction involves… you then do not think that estate taxes are excise taxes.

Steven Jack McCardell:

I wondered that as I studied for this case, Your Honor, and although it’s not cited in the briefs and I don’t have the statute here today, my recollection of the estate tax statute is that it’s imposed on the transfer into the estate, which is a transaction.

Antonin Scalia:

If I impose a tax on the sale of, or the purchase of jewelry, that would be an excise tax, but if I impose a tax on the ownership of jewelry, that would not be an excise tax.

Steven Jack McCardell:

Under the ordinary standard–

Antonin Scalia:

I mean, above a certain amount.

If you own more than a certain amount of jewelry, that would–

Steven Jack McCardell:

–Ordinarily, it would be understood as a property tax.

William H. Rehnquist:

–A property tax.

How about a stamp tax on documents?

Steven Jack McCardell:

I don’t know, Your Honor.

David H. Souter:

How is the transfer of property into an estate the result of a transaction?

It’s the result of a disposition by someone who is now dead, and it’s the result of an acceptance, I suppose, by an administrator, but the two in their respective capacities never meet, so there isn’t any real transaction in the sense of the characteristically consensual act of two parties.

Steven Jack McCardell:

There is an exchange in the sense of the death creates an estate, and to the estate goes the decedent’s property, and that is described in the code as a transfer.

David H. Souter:

But we’re getting a little bit attenuated.

Steven Jack McCardell:

Yes, Your Honor, and with regard to the section 4971 imposition, it’s made not based on any transaction, simply in this case on the failure to make a payment.

Ruth Bader Ginsburg:

Mr. McCardell, do you know the answer to my question about the deductibility of this?

Steven Jack McCardell:

I do, Your Honor.

These impositions are not deductible, and the cross reference in section 4971 is to section 275.

Ruth Bader Ginsburg:

There’s a whole slew under these miscellaneous excise taxes, and I know one has to do with charitable foundations.

It seems to operate the same way this one does.

You’re supposed to do something that doesn’t relate to tax.

You do it, and there’s what’s called an excise tax.

Steven Jack McCardell:

That’s true.

Ruth Bader Ginsburg:

I’m trying to understand what else, since this is… there are many, many things that come under this huge title, would be affected by our answer to the question in the context of 4971, what other animals there are like it in this collection.

Steven Jack McCardell:

There are very few just like this one, because this one is imposed only when another statute is violated.

Section 302 of ERISA requires that a plan sponsor fund its pension plan, and it’s only in violating that statutory obligation that this exaction is imposed, so that many of the other excise taxes imposed under the code which may have a regulatory or a deterrent effect simply wouldn’t be covered by this case because they’re not based on… they’re not exacted on unlawful conduct.

Sandra Day O’Connor:

May I ask you this, are all taxes deductible by the person paying the taxes if they’re engaged in business?

Steven Jack McCardell:

Section 162 of the Internal Revenue Code, which we have addressed in our brief, generally provides for the deductibility of taxes but not penalties.

Sandra Day O’Connor:

And penalties are not.

Steven Jack McCardell:

That’s correct.

Sandra Day O’Connor:

And it’s your position that neither the 10-percent exaction nor the 100-percent exaction in this ERISA section are deductible.

Steven Jack McCardell:

That’s correct.

They are expressly made not deductible.

Anthony M. Kennedy:

The Government suggested that as to the 100-percent tax it has an equitable component within the tax.

That is to say, the Government is free to waive the collection of the tax.

Steven Jack McCardell:

That is a distinction–

Anthony M. Kennedy:

Are there any other taxes that are in the excise subtitle that have this equitable waiver, or equitable feature built into them?

Steven Jack McCardell:

–I don’t know, Your Honor.

It seems to me, however, that the capacity of a creditor to waive its claim always exists with regard to any claim, and that applying that as a distinction really would allow a creditor to determine–

Anthony M. Kennedy:

Well, I don’t… I think the Government would tell you that it has no discretion to waive its taxes, other than in the one instance we’re discussing, the 100-percent tax, and so it would seem to me plausible enough for the bankruptcy court to say, well, there’s an equitable component to this tax which can be waived, and I am going to equitably subordinate it.

Steven Jack McCardell:

–And that, in fact, did occur in this case.

The bankruptcy court–

Anthony M. Kennedy:

As to the 100 percent.

Steven Jack McCardell:

–did subordinate under section 510(c) both the 100-percent and the 10-percent penalties.

Anthony M. Kennedy:

But that would at least be an excise tax that has an equitable component, which is not like other excise taxes.

Steven Jack McCardell:

It’s true that the… only the (b) portion of this exaction is waivable by the Government.

Stephen G. Breyer:

Can I ask the same question I asked the Solicitor General, because assuming that I agreed with you, assuming for the sake of argument that I agreed it was not a tax, but rather it was a penalty, because it collects zero dollars as its objective.

Assume that.

Now, on that assumption, I found it very difficult to reach the question of equitable subordination without deciding whether or not the bankruptcy judge would have the power to create a subcategory that would rank this kind of penalty below the unsecured creditors, or you raised that.

They replied, I take it, in footnote 14 of their reply brief, and they cite a bunch of cases, but they cite them for the proposition that you cannot set up a subclassification of claims within a class of equal priority.

Of course that’s true–

Steven Jack McCardell:

It’s–

Stephen G. Breyer:

–but I would like to know what you think of that particular argument.

Namely, they deny that the bankruptcy judge would have the power in Chapter 11 to create a subclass of the penalties below the unsecured creditor, and I don’t know if these cases stand for that specific application of the general proposition, or if they do not, and I don’t know enough about bankruptcy law to know how well settled that kind of question is, and that kind of question seems to me to be prior to a definition of the word equitable.

Steven Jack McCardell:

–Those cases do not stand for that proposition, Your Honor, and I should acknowledge that this… in this case, the IRS’s claim was subordinated in two independent ways, not just equitable subordination under 510(c), but also was subordinated under the plan.

There was a subordinated class created for nonpecuniary loss penalties.

Into that class the IRS’s claims were placed, so that the IRS, by never objecting to that class, really left the issue as having been resolved by the–

Stephen G. Breyer:

All right.

If, in fact, since I’m… I have to… we have to decide this case, and if you win on the first issue, and then I get to that, and I read the cases, and I think they’re indeterminate, what am I, or what would you think this Court should do?

Shouldn’t we… I mean, to answer the question of what’s equitable without hanging in the air seems difficult.

Should we remand the case?

Should we then say, go back and work this out, because we don’t need to decide whether it’s equitable or not when you have a perfectly good ground for reaching the same result.

What is it, in your opinion, we should do?

Steven Jack McCardell:

–Your Honor, the Court need not look to equitable grounds if it reaches that question, because two statutes in Chapter 11 both permitted and required the subordination that occurred here.

Stephen G. Breyer:

You didn’t really argue… I mean, it’s come up here under this other pretense.

That is, the question presented was… so it would be rather hard to affirm on that ground, wouldn’t it?

Wouldn’t we have to send it back?

Steven Jack McCardell:

The court of appeals affirmed the confirmation order, which is one of the three orders.

The order approving the plan is one of the three orders on appeal today, so that by affirming the confirmation order, the Court will approve the subordination that’s provided for in the plan.

It’s difficult for us to understand why the IRS doesn’t want to address it, but it is an independent ground for subordination that really does exist in the plan, and really was… really occurred in this case, so that by reaching… by simply considering the confirmation order as one of the three orders, the Court does have that issue before it.

The two statutes which provide for that subordination are section 1122, which provides that claims may not be placed in a class unless they’re substantially similar.

Well, these claims are not substantially similar to the general unsecured claims, first because they don’t represent a pecuniary loss, and second, because they have different priorities in the liquidation.

Further, section 1129(a)(7) of the code gives them… requires that the Bankruptcy Code consider, in confirming a plan, what the liquidation results would be, and as the IRS has conceded in the Chapter 7 case, penalty claims not entitled to priority would be subordinated.

Steven Jack McCardell:

Thus, that result is required in a case of this nature, and those two statutory grounds, rather than any outside equitable factors, would be appropriate grounds for affirmance in this case.

Ruth Bader Ginsburg:

Mr. McCardell, do I understand correctly that you are not making the argument that was made in the prior case?

That is, if you lose on the first question, if this is characterized in the bankruptcy context as an excise tax and therefore would have priority, you’re not saying that even though it has priority status it can be subordinated.

Steven Jack McCardell:

We’re not saying that, Your Honor, and that’s because Chapter 11 has a specific requirement that a Chapter 11 plan pay in full all taxes, which this plan says it will do.

That’s found in section 1129(a)(9)(C) of the code, so that we are not making that argument.

Our argument, then, simply rests on the Court’s traditional longstanding, well accepted test for the definition of taxes.

The IRS has never explained why Congress intended to legislatively overrule the Court’s precedents defining taxes.

There’s no definition for tax in the Bankruptcy Code.

Where the Bankruptcy Code intends to incorporate a specific definition from the Internal Revenue Code or any other Federal statute, it does so expressly so that… and a further significant factor in this case is that the kinds of claims we’re dealing with in this case were simply disallowed entirely under the Bankruptcy Act, and to suggest that by saying nothing Congress intended to suddenly elevate those claims to the seventh priority is quite a stretch, as we view the development of the law.

The legislative history on which the IRS relies time after time in its brief simply says that exactions that are taxes may… are covered by this priority if they’re excises, but they must be taxes first, and so we ask the Court to consider with regard to this exaction the traditional test, which the IRS conceded in the lower courts it did not satisfy, and did not… never came forward with any evidence that it satisfied that test, which was its burden as the claimant in this case.

Stephen G. Breyer:

You know, Sheppard’s Tax Dictionary does have a definition for minimum funding excise tax which, it refers to this particular provision, so the tax community as reflected by the tax dictionary calls it an excise tax.

Steven Jack McCardell:

Your Honor, it certainly has been treated in various ways as an excise tax, but not even the tax practitioners would agree that a tax of this nature is a tax for all purposes under the Internal Revenue Code.

We’ve cited the conflicting line of cases on similar taxes in the Third Circuit and the Eighth Circuit, the Latterman case and the Rockefeller case, where there is disagreement that taxes like this may not even be taxes for purposes of the Internal Revenue Code, so that in view of that kind of a disagreement in a tax of this nature, it’s difficult to say that you then import that concept into the Bankruptcy Code when the tax code does not settle bankruptcy priorities.

That’s settled by the statute and the court’s decisions interpreting the meaning of the statute.

Ruth Bader Ginsburg:

Mr. McCardell, I understand the big difference it makes in the bankruptcy context whether it’s classified as one or the other.

In terms of the IRC, does it make any difference whether it’s labeled excise or penalty, since, as you have said, there’s a specific provision that makes this particular excise tax nondeductible.

Steven Jack McCardell:

I don’t know that it does make a difference, Your Honor, although, as I said in addressing taxes of this… penalty excise taxes of this nature, the Third and Eighth Circuits have disagreed on the question of whether they are taxes even for purposes of the Internal Revenue Code’s provisions calculating interest on those taxes.

Anthony M. Kennedy:

There’s some discussion in the briefs… I think it’s 507(a)(7)(G)… relating to a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.

Steven Jack McCardell:

Yes.

Anthony M. Kennedy:

Can you give me an example–

Steven Jack McCardell:

Yes, I can.

Anthony M. Kennedy:

–of a tax to which that would apply?

Steven Jack McCardell:

I can, Your Honor.

An example would be the responsible officer penalty exacted under 6672.

It represents an assessment of 100 percent against the officer, responsible officer, of the taxes that should have been paid by the corporation.

The Government gets what it would have received if the law had been obeyed and, indeed, the Senate Finance Committee report, which we’ve cited in our brief, in describing pecuniary loss penalties, describes them as any fine or penalty, however denominated, which actually represent the collection of a tax.

That’s the concept we believe is codified in section 50–

Stephen G. Breyer:

Is… withholding taxes, that’s… is that… the corporation withholds its employees taxes, then it doesn’t pay them, and the person who owes the tax is the employee, and the code refers to the money that the corporation should have withheld, which, of course, is the tax that the employee owed, as a penalty, is that right?

Steven Jack McCardell:

–That’s correct.

Stephen G. Breyer:

And that’s the idea of pecuniary penalties?

Steven Jack McCardell:

It’s what the Government would have received if the law had been… the tax that would have been collected if the law had been obeyed.

Stephen G. Breyer:

And so the only things that are pecuniary penalties are these instances where a corporation is to withhold a tax that somebody else owes, and the code refers to that as a penalty, or those as penalties?

Steven Jack McCardell:

I can think of another example of possible pecuniary loss penalty, and that is an exaction under the Internal Revenue Code that simply represents interest on a tax that should have been paid and compensates–

Stephen G. Breyer:

Yes.

Steven Jack McCardell:

–for the delay in payment.

That would be a… but this kind of exaction is distinct.

–It doesn’t compensate any delay in payment.

It doesn’t compensate any tax that was not collected.

Congress did not enact section 4971(a) with the idea that individuals would not fund their pension plans and that the IRS would then collect revenue.

Instead, it passed the statute with the idea that individuals who had sponsored pension plans would fund them, and that that funding would go to pay retirees.

Antonin Scalia:

They’re required to fund them?

Steven Jack McCardell:

Yes, they are.

That’s found in section 302 of ERISA.

Antonin Scalia:

Is there any other penalty for not funding them?

Steven Jack McCardell:

They… there’s no criminal penalty, Your Honor, but that under section 502 of ERISA the failure to fund may be enforced by a civil action, including injunctive proceedings, so that it is a statutory obligation which, if violated, gives rise to these escalating penalties.

Now, in this case, the… not only did the IRS fail to meet the traditional test for taxes, fail to establish that a transaction had occurred, but in asserting these claims, would have taken funds right out of the pockets of the creditors, and many of those creditors include the very retirees who are intended to be protected by this statute.

We don’t think, all other things being considered in this case, it makes sense for the Court to adopt a rule which would reach that result.

Nothing in the statue requires that the court read section 507 to require that any label in a nonbankruptcy statute governs priority in bankruptcy.

The Court’s cases, from the Embassy Restaurant case, to the Nathanson case, to the Simonson case, all clearly specify that the Court’s mode of analysis over many years has been to say that it’s bankruptcy law that establishes bankruptcy priorities, and labels or meanings or understandings in nonbankruptcy statutes while, perhaps, evidence, are not controlling.

That was the basis of the court of appeals decisions in this case, and we believe the Court should affirm the court of appeals.

William H. Rehnquist:

Thank you, Mr. McCardell.

Mr. Jones, you have 2 minutes remaining.

Kent L. Jones:

I have two brief points I want to make.

The claim that a tax that effects a penalty loses its priority was exactly what this Court rejected in United States v. New York under the Bankruptcy Act.

The Bankruptcy Code simply makes it easier to understand that that’s the correct answer, because knowing full well that many of its excises are penalty or regulatory in nature, Congress adopted an unqualified priority for excise taxes.

We have to establish only that it’s an excise tax.

Whether it’s also regarded as a penalty is not relevant for applying the plain language of the statute, and the court held in United States v. New York it was not relevant under the Bankruptcy Act.

The other point–

Ruth Bader Ginsburg:

Mr. Jones, do you know whether it makes any difference for the IRC purposes alone, forgetting bankruptcy, whether something is labeled excise or penalty, assuming… forgetting about the deductibility, because this one is not deductible.

Kent L. Jones:

–You mean, in applying the excise tax priority?

Ruth Bader Ginsburg:

That… no.

No, not–

Kent L. Jones:

I’m sorry.

Ruth Bader Ginsburg:

–Forget bankruptcy.

Just for the purposes of the Internal Revenue Code, does it make any difference whether something is labeled an excise tax or a penalty?

Kent L. Jones:

Other than what we’ve already discussed, I’m not familiar with any circumstances.

I hate to make categorical statements, but I’m not familiar with any.

And the other point that I want to address very briefly is the suggestion that this… the priority for this excise tax is unfair because it comes in front of claims of employees for residual retirement benefits.

In saying that, the court of appeals looked at only the cost of the tax, and utterly ignored its benefit.

These employees not only get the promise of insurance, they get the fact of insurance.

The Pension Benefit Guaranty Corporation comes in and pays benefits, guaranteed benefits.

The employees are much better off with this guarantee system in effect, including the priority tax, than they would be without it.

No one doubts–

Stephen G. Breyer:

They don’t insure all of them.

They don’t insure all.

There are a lot of people who have pensions whose pensions won’t be paid, right?

Kent L. Jones:

–That’s… but for the insurance, they wouldn’t be paid at all.

Stephen G. Breyer:

Without insurance.

Kent L. Jones:

Oh, without–

Stephen G. Breyer:

That is to say, aren’t there some people here, employees, who won’t get paid, and the reason they won’t get paid their promised benefit is because the IRS is going to collect this tax?

Kent L. Jones:

–No, sir.

They’re getting paid the guaranteed benefits under the pension benefit system.

The IRS tax, which is designed to enforce the ability of the United States to honor the promise to ensure benefits, only comes in in front of residual claims.

The employees, on balance, are better off.

They’re going to get millions of dollars in benefits by the insurance function.

William H. Rehnquist:

Thank you, Mr. Jones.

Kent L. Jones:

Thank you.

William H. Rehnquist:

The case is submitted.

The Honorable Court is now adjourned until tommorow at ten o’clock.