UNITED STATES OF AMERICA, PETITIONER V. ENERGY RESOURCES CO., INC. UNITED STATES OF AMERICA, PETITIONER V. NEWPORT OFFSHORE, LTD. No. 89-255 In the Supreme Court of the United States October Term, 1989 The Solicitor General, on behalf of the United States of America, /1/ petitions for writs of certiorari to review the judgments of the United States Court of Appeals for the First Circuit in these cases. Petition for Writs of Certiorari to the United States Court of Appeals for the First Circuit TABLE OF CONTENTS Opinions below Jurisdiction Question Presented Statutes involved Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-23a) is reported at 871 F.2d 223. In the Energy Resources case, the opinion of the district court (App., infra, 24a-26a) is unreported; the opinion of the bankruptcy court (App., infra, 31a-41a) is reported at 59 Bankr. 702. In the Newport Offshore case, the oral opinion of the district court (App., infra, 27a-30a) is unreported; the opinion of the bankruptcy court (App., infra, 42a-50a) is reported at 75 Bankr. 919. JURISDICTION The judgments of the court of appeals (App., infra, 51a-52a) were entered on March 31, 1989. On June 19, 1989, Justice Brennan extended the time to petition for writs of certiorari to and including August 8, 1989. The jurisdiction of this Court is invoked under 28 U.S.C. 1254( 1). STATUTES INVOLVED Section 105 of the Bankruptcy Code, 11 U.S.C. 105 (Supp. V 1987), provides in pertinent part: Power of Court (a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. * * * * * Section 507 of the Bankruptcy Code, 11 U.S.C. 507 (Supp. V 1987), provides in pertinent part: Priorities (a) The following expenses and claims have priority in the following order: * * * * * (7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for -- * * * * * (C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity; * * * * * Section 1129 of the Bankruptcy Code, 11 U.S.C. 1129 (Supp. V 1987), provides in pertinent part: Confirmation of plan (a) The court shall confirm a plan only if all of the following requirements are met: * * * * * (9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that -- * * * * * (C) with respect to a claim of a kind specified in section 507(a)(7) of this title, the holder of such claim will receive on account of such claim deferred cash payments, over a period not exceeding six years after the date of assessment of such claim, of a value, as of the effective date of the plan, equal to the allowed amount of such claim. * * * * * QUESTION PRESENTED Whether a bankruptcy court may require the Internal Revenue Service to apply tax payments made by a corporate debtor pursuant to its Chapter 11 plan of reorganization first to the trust fund portion of the corporation's tax liability, thereby relieving the corporation's responsible persons of their separate liability for those taxes. STATEMENT These two cases were consolidated for purposes of argument and decision in the court of appeals. Both cases involve corporations that are in reorganization under Chapter 11 of the Bankruptcy Code (11 U.S. C. 1101 et seq.) and that owe the government both trust fund and non-trust fund taxes. Trust fund taxes are those taxes withheld from the wages of employees and held by the employer in trust for the government under Section 7501 of the Internal Revenue Code (26 U.S.C.). /2/ If the persons responsible to collect, account for, and pay over trust fund taxes to the government willfully fail to do so, they each become personally liable under 26 U.S.C. 6672 for a penalty in the full amount of the unpaid trust fund taxes. Since the government collects the amount of the unpaid trust fund taxes only once (see USLIFE Title Insurance Co. v. Harbison, 784 F.2d 1238, 1243 (5th Cir. 1986)), the Section 6672 liability of each "responsible person" is reduced to the extent that the trust fund taxes are paid by the corporation. 1. In January 1983, respondent Energy Resources Company and its affiliates filed petitions for reorganization under Chapter 11 of the Bankruptcy Code (11 U.S.C. 1101 et seq.). At that time, respondent owed about $1 million in taxes, most of which were trust fund taxes. App., infra, 5a. Under Chapter 11 as in effect at that time, these taxes were entitled to a "sixth priority" (11 U.S.C. 507(a)(6)). /3/ Chapter 11 requires as a condition of confirmation that a reorganization plan provide for the payment of all priority tax liabilities over a period not to exceed six years (11 U.S.C. 1129(a)( 9)(C)). a. The bankruptcy court confirmed Energy Resources' third amended plan of reorganization. That plan provided that most of the debtor's assets would be transferred to the ERCO Liquidation Trust, and thereafter liquidated under the supervision of a liquidation trustee for payment to creditors of the estate. The plan provided for the payment of pre-petition tax claims, with interest, from the liquidation trust in four annual installments beginning on the anniversary of the confirmation date, October 1, 1984. The trustee could prepay the taxes at any time. App., infra, 5a, 32a. On November 6, 1985, the trustee made a payment of the pre-petition federal tax claims totalling $281,517. The trustee designated "that this payment be applied to the trust fund portion of the taxes, first for the period ended June 30, 1982 with the excess, if any, applied to the trust fund portion of the taxes for the period ended September 30, 1982." App., infra, 33a. The Internal Revenue Service (IRS) refused to accept the trustee's designation, maintaining that it had the right to apply the payment to the corporate debtor's outstanding tax liability as it chose. The IRS informed the trustee by letter that, "(u)nless such direction of payment is given in a court order, the United States reserves the right to apply such payment(,) which is a distribution of a bankruptcy proceeding(,) to its maximum benefit." Ibid. The trustee thereupon moved the bankruptcy court for an order directing the IRS to apply payments under the plan according to the trustee's designation. In his motion, the trustee argued that he was entitled to designate tax payments under the plan because the payments were "voluntary." He also contended that the designation of payments was necessary for the benefit of the bankruptcy estate. He stated that the designation enabled him to implement a settlement agreement entered into with Richard Rosen, a former officer of the debtor, in which Rosen immediately released $14,000 to the trust, assertedly in exchange for the trustee's agreement "to cooperate in designating tax payments which would forestall personal liability assessed by the IRS against the former officers from affecting them." The trustee also asserted that the designation would not harm the IRS because the plan provided, ultimately, for payment of the tax claims in full. The IRS opposed the trustee's motion on the ground that the payment of priority taxes under a Chapter 11 plan is involuntary and therefore the IRS is permitted to apply the payment as it chooses. App., infra, 33a-34a. b. The bankruptcy court granted the motion and ordered the IRS to follow the trustee's designation (App., infra, 31a-41a). The court stated the general rule that a taxpayer who makes a "voluntary" tax payment is entitled to designate the manner in which it is to be applied, whereas that authority rests with the IRS if the payment is "involuntary" (id. at 34a). Relying on several other bankruptcy court decisions, the court held that "the mere filing of a claim in a Chapter 11 proceeding and the confirmation of a plan of reorganization do not constitute sufficient judicial action to render payment made pursuant to a Chapter 11 plan involuntary" (App., infra, 36a), and therefore the trustee was entitled to designate how the tax payment should be applied (id. at 36a-40a). The court also stated that its conclusion was buttressed by the government's failure to object to confirmation of the plan, even though the plan was silent on the question of designation or the manner in which the tax payments should be applied, because it was "foreseeable" that the trustee would seek such a designation (id. at 40a-41a). c. On appeal, the district court affirmed (App., infra, 24a-26a). The court stated that the bankruptcy court's role in confirming a plan under Chapter 11 does not make a tax payment thereunder involuntary because the Bankruptcy Code affords debtors considerable flexibility in Chapter 11. Thus, in the district court's view, the bankruptcy "court here didn't compel the action; rather, it approved a payment which a debtor wished to make" (App., infra, 26a). 2. a. In the Newport Offshore case, respondent Newport Offshore filed a petition for reorganization under Chapter 11 on November 13, 1985, and continued operating as a debtor-in-possession. The trustee proposed a plan of reorganization under which a third party, Allied Marine Associates, agreed to pay all of respondent's prepetition tax liability and various other debts, and to invest additional money in the corporation; in return, it would receive 85% of the shares of the new, reorganized Newport Offshore. The proposed plan provided for full payment of pre-petition priority tax claims over a period of about six years. It further provided that these payments would be applied to extinguish all "trust fund" tax debts "prior to the commencement of payment of the non-trust fund portion" of the taxes (App., infra, 5a). The government objected to the designation provision on the same grounds that it raised in Energy Resources. b. The bankruptcy court overruled the government's objection (App., infra, 42a-50a). The court declined to adopt respondent's contention that tax payments under a Chapter 11 plan always may be designated by the debtor because there is no "enforced collection measure" that makes them involuntary (see id. at 45a-46a). Instead, the court concluded that whether a Chapter 11 debtor may designate its tax payments should be decided on a case-by-case basis according to the "totality of the facts and circumstances" (id. at 47a). /4/ The court expressed the concern that, if payments of priority taxes in Chapter 11 cases were always held to be involuntary, it "would remove the initiative of (the debtor's) former principals to seek outside investors, who voluntarily inject needed cash into the estate, and would, as a consequence, either inhibit or eliminate altogether the likelihood of a viable Chapter 11 plan" (id. at 48a). The court concluded that the existence of third-party financing constituted "special circumstances" that justified including the trustee's requested designation provision in the plan (ibid.). c. Ruling from the bench, the district court reversed and ordered the bankruptcy court to delete the designation provision from the reorganization plan (App., infra, 27a-30a). Relying on the Third Circuit's decision in In re Ribs-R-Us, Inc., 828 F.2d 199 (1987), the court concluded that advancing the policy of reorganization did not require permitting the designation provision at issue, which would undermine the policy of collecting taxes (App., infra, 29a). The court concluded that Congress "did not ever intend that a principal stockholder of a corporation in reorganization would have the ability to negotiate in the Bankruptcy Court an exculpatory provision with respect to the trust fund taxes" (id. at 29a-30a). 3. On consolidated appeals, the court of appeals affirmed in the Energy Resources case and reversed in the Newport Offshore case (App., infra, 1a-23a). The court stated that whether payments made pursuant to a Chapter 11 reorganization plan should be characterized as "voluntary" or "involuntary" depends upon the degree of control the bankruptcy court has over the payments at issue, and it found that a Chapter 11 proceeding exhibits some characteristics that are "voluntary" and others that are "involuntary." Recognizing the deference due the IRS's interpretation on this matter, the court declared that it accepted the view that payments made pursuant to a Chapter 11 plan are "involuntary." Id. at 7a-12a. The court determined, however, that this conclusion was not dispositive because it "only means * * * that the IRS's own rules and regulations do not compel it to accept the taxpayers' determinations as to how it must apply payments here at issue" (id. at 12a). The court then proceeded to hold that the bankruptcy courts were empowered to require the IRS to apply the tax payments first to the trust fund tax liability. The court acknowledged that this holding was inconsistent with the Third Circuit's decision in In re Ribs-R-Us, Inc., supra, which had been followed by two other circuits (App., infra, 4a). The court of appeals viewed the governing question as (App., infra, 12a-13a): "Does a bankruptcy court possess the legal power to order the IRS to apply a payment in a way that runs counter to IRS's own internal policies?" The court listed several factors it considered significant in concluding that bankruptcy courts do have the power to override IRS's traditional authority to apply involuntary tax payments as it chooses. First and foremost, the court stated that "Congress has granted bankruptcy courts broad equitable powers" (App., infra, 13a). In particular, the court pointed to the bankruptcy court's power to "'issue any order, process, or judgment that is necessary or appropriate to carry out the provisions' of the Bankruptcy Code" (ibid., quoting 11 U.S.C. 105 (emphasis by the court)). As an example of when "an order allocating Chapter 11 tax payments to 'trust fund' liabilities first would seem 'appropriate,'" the court posited the situation where the responsible officers offer to help rehabilitate the debtor by advancing funds, but "only if the court would assure them that the reorganized corporation would pay its 'trust fund' tax debts first" (App., infra, 13a-14a). In that situation, the court reasoned, the bankruptcy court could determine that the diminished chances that the government would collect its entire tax debt would be outweighed by the increased chances that the debtor would pay something to its general creditors (id. at 14a). In the court's view, the other factors that it listed buttressed this conclusion regarding the bankruptcy court's power. The court stated that the bankruptcy courts have long had the legal power to tell creditors how to apply payments against the debtor's several debts (App., infra, 14a-15a) and that nothing in the Bankruptcy Code limits the bankruptcy court's designation power when the creditor is the IRS (id. at 15a-16a). The court reasoned that "it makes administrative sense for the bankruptcy court to have the power to determine, in some cases, the debt allocation of Chapter 11 tax payments" because it is equipped to consider the effect of that determination on the debtor's prospects for rehabilitation and already has the power to structure the timing of tax payments within the six-year constraint of 11 U.S.C. 1129 (App., infra, 16a). The court further noted that the IRS's policy of allocating payments first to non-trust fund taxes, while clearly calculated to maximize the collection of delinquent taxes, was not embodied in any statute (App., infra, 16a-17a). Finally, the court stated that it could "find no policy embodied in any specific statute, tax or otherwise, that either directly, or by manifesting a congressional intent, circumscribes a bankruptcy court's general powers in the respect at issue here" (id. at 17a). In particular, the court stated that the strong congressional policy of ensuring the collection of trust fund taxes embodied in 26 U. S.C. 6672 would not be undermined by its decision because the designation provided for the collection of trust fund taxes first, albeit at the expense of non-trust fund taxes that would go unpaid if the reorganization failed, while the IRS's allocation postponed the collection of trust fund taxes (App., infra, 17a-20a). Accordingly, the court of appeals concluded that the bankruptcy courts have the legal power to order the allocation of involuntary tax payments in Chapter 11 proceedings. The court held that the allocation question should be determined by the bankruptcy court on a case-by-case basis, subject to review under the clearly erroneous standard. App., infra, 21a. And the court specified the following as the appropriate inquiry (ibid.): "upon consideration of the reorganization plan as a whole, in so far as the particular structure or allocation of payments increases the risk that the IRS may not collect the total tax debt, is that risk nonetheless justified by an offsetting increased likelihood of rehabilitation, i.e., increased likelihood of payment to creditors who might otherwise lose their money?" The court concluded that it was unnecessary to remand the cases, holding that the bankruptcy courts' opinions indicated that they both would have upheld the requested designations under the standard promulgated by the court of appeals (id. at 21a-23a). REASONS FOR GRANTING THE PETITION The court of appeals has erroneously decided an important and frequently recurring question of federal law, in direct conflict with the decisions of other courts of appeals. The court has held that bankruptcy courts have discretion to allow a corporate debtor in Chapter 11 proceedings to designate priority federal tax payments under its reorganization plan for application first to trust fund tax liability. The effect of this decision is to sanction the use of Chapter 11 by officers of the corporate debtor to reduce or eliminate their potential personal liability for delinquent trust fund taxes and thereby undermine the separate source of collection of those taxes and the deterrent to their misuse that has been established by Congress. As a result, tax payments under Chapter 11 plans would, as a practical matter, first redound to the benefit of the corporate officers, not the government. If the plan were not successfully completed, the government would still be left with an uncollectible non-trust fund tax claim, while the corporate officers would have been relieved of their trust fund liability to the extent payments have been made. In light of the frequency with which this issue recurs, it is essential that the conflict in the circuits be resolved and that a uniform rule be established to guide the conduct of Chapter 11 proceedings. 1. The court of appeals acknowledged (App., infra, 4a) that the decision below directly conflicts with the Third Circuit's decision in In re Ribs-R-Us, Inc., 828 F.2d 199 (1987). It similarly conflicts with the Sixth Circuit's decision in DuCharmes & Co. v. Michigan, 852 F.2d 194 (1988). In each of those cases, as here, the government objected to a proposed Chapter 11 plan that provided that payments of priority taxes were to be applied first to the trust fund portion of the outstanding tax liability. Both courts of appeals determined that tax payments made pursuant to a Chapter 11 plan are not voluntary and therefore may be allocated as the IRS determines. In re Ribs-R-Us, Inc., 828 F.2d at 201-203; DuCharmes & Co. v. Michigan, 852 F.2d at 196. Pointing to the debtor's failure to produce evidence "that suggests that Congress intended by the Bankruptcy Code to curtail the IRS's longstanding ability to use 26 U.S.C. Section 6672 to provide a collateral source for collection of trust fund taxes," the Third Circuit held that "no provision of the Bankruptcy Code allows either the debtor or the bankruptcy court to direct application of payments and thereby preclude recourse by the United States against responsible parties" (In re Ribs-R-Us, Inc., 828 F.2d at 203-204 & n.4). The court concluded that permitting the debtor to designate the portion of its tax liability to which payments should be allocated would be "in derogation of Congress' strong policy, reflected in section 6672, to protect the government's tax revenues by insuring an additional source from which trust fund taxes can be collected" (id. at 204). The Third Circuit also criticized the approach of permitting designation on a case-by-case basis, which was approved by the court of appeals below; it explained that "(a) uniform federal rule is preferable so that debtors, creditors, and the Internal Revenue Service will be able to know in advance whether the debtor can make such a designation and guide their decisions accordingly" (id. at 202). The decision below is also inconsistent with the Ninth Circuit's decision in a slightly different context in In re Technical Knockout Graphics, Inc., 833 F.2d 797 (1987). In that case, a debtor filed a petition for relief under Chapter 11 and then, before the confirmation of its reorganization plan, filed a motion asking that it be permitted to make payments to the IRS designated for application to its trust fund tax liability. Rejecting the IRS's objection, the bankruptcy court ordered the IRS to apply any such payments according to the debtor's requested designation. The court of appeals reversed, finding that those payments would be "involuntary" and that the bankruptcy court's equitable powers do not permit it to enforce such a designation. The court explained that, once a debtor invokes the assistance of the bankruptcy court to keep its creditors at bay by filing a Chapter 11 petition, it can no longer claim that its tax payments are voluntary, and it "is not free to abuse this system by designating its payments in a way that benefits only its responsible persons, and possibly harms other creditors, including the IRS, without the scrutiny of the court or other creditors" (833 F.2d at 803). /5/ In addition to these court of appeals decisions, the question presented here has been addressed with varying results by numerous lower courts. /6/ Thus, there exists an acknowledged conflict in the circuits and considerable disarray in the lower courts on an important and frequently recurring issue. It is therefore necessary for this Court to resolve the conflict and provide a uniform rule to guide the lower courts in dealing with attempts by Chapter 11 corporate debtors to protect their officers' personal funds by designating priority tax payments for application first to trust fund tax liability. 2. a. The court of appeals erred in holding that the bankruptcy court has the power to direct the IRS to allocate a corporate debtor's involuntary tax payments first to the debtor's trust fund tax liability, so as to eliminate the corporate officers' personal liability for those taxes. The IRS's longstanding policy has been to permit taxpayers to designate the application of tax payments that are voluntarily made. See Rev. Rul. 79-284, 1979-2 C.B. 83, modifying Rev. Rul. 73-305, 1973-2 C.B. 43, superseding Rev. Rul. 58-239, 1958-1 C.B. 94. The IRS's policy, however, does not permit the taxpayer to designate involuntary payments which traditionally have been viewed as including payments received as a result of a levy or legal proceeding in which the government is seeking to collect its delinquent taxes. See Amos v. Commissioner, 47 T.C. 65, 69 (1966). This policy, which has generally been approved by the courts, encourages taxpayers to make voluntary payments. See, e.g., Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983); O'Dell v. United States, 326 F.2d 451, 456 (10th Cir. 1964); Amos v. Commissioner, 47 T.C. at 69-70. In particular, when a corporation is in financial distress, this policy encourages responsible persons to resist the temptation to borrow money from the government's trust fund, i.e., to pay business expenses with taxes that have been withheld from employees' wages. Instead, the officers are motivated to turn those withheld taxes over to the government in a timely fashion so that they can avoid the prospect of personal liability under 26 U.S.C. 6672. Such voluntary compliance with the trust fund structure avoids the expenditure of government resources on collection by means of administrative levy or judicial proceedings. See, e.g., In re Ribs-R-Us, Inc., 828 F.2d at 201-202; In re Avildsen Tools & Machines, Inc., 794 F.2d 1248, 1251 (7th Cir. 1986). The court of appeals disregarded this established framework by permitting a corporate debtor, with the approval of the bankruptcy court, to designate the application of tax payments that the court acknowledged were involuntary. This decision severely undermines the salutary policy goals that are advanced by the established differential treatment of voluntary and involuntary payments. The incentive for the debtor to make its tax payments voluntarily prior to bankruptcy is removed; despite its decision to default on its taxes and instead to pay them only as required by statute as a condition of confirmation of its reorganization plan, the debtor retains the power to designate its payments as if it had paid the taxes voluntarily. Specifically, the ability later to make the particular designation approved here significantly reduces the likelihood that a failing corporation will pay over to the government the taxes that it has withheld from its employees. Knowing that there will be the opportunity in Chapter 11 proceedings to designate payments first for trust fund taxes substantially weakens the disincentive for corporate officers to use the trust fund in a last-ditch effort to alleviate a corporation's pre-bankruptcy financial difficulties. The specter of Section 6672 liability would be removed as a deterrent to the conversion of trust funds if the responsible persons believe that they can ultimately escape liability under cover of Chapter 11 if the corporation's financial difficulties prove insurmountable. The decision below also undermines the congressional policies favoring collection of trust fund taxes and of federal tax liabilities in general in bankruptcy proceedings. Congress viewed the conversion by employers of monies held in the trust fund as a particularly severe type of tax delinquency. Taxes that are withheld by an employer from its employee's wages are credited by the government to that employee's account as paid, whether or not the withheld funds are actually paid over to the government by the employer. Accordingly, the loss from the employer's failure to turn over those trust fund taxes is suffered directly by the Treasury. See 26 U.S.C. 31(a); Slodov v. United States, 436 U.S. 238, 243 (1978). To prevent such losses, Congress enacted Section 6672 to impose personal liability in the amount of delinquent withholding taxes directly upon the persons responsible for not turning them over to the government. This provision establishes not only an alternative means of collection but also a strong disincentive to corporate officers to draw upon withheld taxes to alleviate a corporation's financial difficulties. See Slodov v. United States, 436 U.S. at 243; United States v. Sotelo, 436 U.S. 268, 277 n. 10 (1978). The decision below, however, allows responsible persons to use the corporate Chapter 11 proceedings as a shield to protect themselves from Section 6672. The designation sought here benefits the responsible persons of the corporation (by reducing their Section 6672 liability) while providing, at most, only a speculative benefit to the corporation. At the same time, it compromises the protection afforded the public fisc by Section 6672. Corporate tax payments that would otherwise be applied to reduce the corporation's other tax liabilities for which there is no alternative means of collection will instead be applied first to reduce the potential exposure of the corporate officers for the delinquent trust fund liabilities. Thus, in the event the delinquent taxes are only partially paid under the reorganization plan, the Treasury will suffer a loss. b. The bankruptcy court lacks authority to direct the IRS to allocate payments first to the outstanding trust fund liability. Clearly, there is no provision expressly conferring this authority, and the court of appeals erred in reading such authority into 11 U.S.C. 105, which empowers bankruptcy courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." That general provision speaks to the procedural powers of the court; the legislative history explains that it is designed to extend the power of the All Writs Act (28 U.S.C. 1651) to bankruptcy courts, as well as to cover any other powers traditionally exercised by bankruptcy courts under the old Bankruptcy Act. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 316-317 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 29 (1978). Thus, the courts have recognized that the purpose of Section 105 is to allow the bankruptcy court to issue equitable orders such as injunctions and stays and to punish contempt in cases where such orders are consistent with the Bankruptcy Code; its purpose is not to give the bankruptcy court leeway to create new substantive rights for debtors. See, e.g., Bird v. Carl's Grocery Co. (In re NWFX, Inc.), 864 F.2d 593, 595 (8th Cir. 1989); Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299, 302 (4th Cir. 1987); United States v. Sutton, 786 F.2d 1305, 1307-1308 (5th Cir. 1986). The designation orders approved by the court of appeals here plainly fall outside the scope of this authority. The bankruptcy court does not have "a roving commission to do equity" (United States v. Sutton, 786 F.2d at 1308) or to issue any order that conceivably could aid the rehabilitation of the debtor. Rather, it is bound to implement the substantive rules established in the Bankruptcy Code and to observe other requirements of law. The designation order here does not help to "carry out the provisions" of the Bankruptcy Code (11 U.S.C. 105); indeed, it runs counter to the Code provisions that seek to secure the payment of delinquent taxes. The Bankruptcy Code establishes a priority system for the payment of outstanding debts in which the taxes owed by respondents are accorded a high priority (see 11 U.S.C. 507(a) (1982 & Supp. V 1987); thus, it is not appropriate for the bankruptcy court to upset settled rules in order to enhance the prospects of unsecured creditors at the acknowledged expense of the IRS's ability to collect its priority taxes (see App., infra, 21a). In enacting the Bankruptcy Code, Congress weighed the government's right to collect its taxes against the competing interests of the general creditors in collecting their debts and the debtor's desire to obtain a "fresh start." See e.g., S. Rep. No. 989, supra, at 13-14. There is no suggestion, however, that Congress intended to confer upon the bankruptcy court power to designate tax payments, to the detriment of the IRS's ability to collect taxes, in order to entice responsible persons to release claims against the debtor or to cooperate in obtaining financing. It is undoubtedly true that the success of a reorganization may be jeopardized if the debtor's officers are, for whatever reason, unwilling to cooperate fully in the reorganization. But that does not give the bankruptcy court carte blanche to enter orders designed to secure such cooperation by assisting the officers at the expense of another party to the bankruptcy. As the district court stated in Newport Offshore (App., infra, 29a-30a), Congress did not "intend that a principal stockholder of a corporation in reorganization would have the ability to negotiate in Bankruptcy Court an exculpatory provision with respect to the trust fund taxes." /7/ The general principle regarding the allocation of involuntary tax payments should be fully applicable here, and a corporate debtor in Chapter 11 should not be permitted to insist on application of its payments first to trust fund taxes in order to eliminate its officers' Section 6672 liability. 3. Resolution of the question presented here is of great importance to the administration of the tax laws. The issue of the validity of a corporate designation in a Chapter 11 plan is one that frequently recurs because most corporate bankruptcies involve withholding tax liability, and the lower courts are in considerable disarray on the issue. Thus, resolution of the conflict will eliminate disparate results among taxpayers depending upon the jurisdiction in which they file their Chapter 11 petition. Moreover, the issue has significant fiscal impact upon the government. When a Chapter 11 reorganization fails after a few payments are made, as many of them do, /8/ the effect of the designation is to reduce the total amount of the outstanding tax liability that may be collected by the government because of the reduction in the responsible persons' Section 6672 liability. /9/ Allowing such a designation thus shifts the risk of failure of the plan from the responsible officers, whose improper conduct created the delinquency in the first place, to the government. And, as we have explained (pp. 16-17, supra), it would also tend to increase arrearages in trust fund payments by reducing the officers' incentive to make voluntary payments prior to bankruptcy. At all events, resolution by this Court of the conflict in the courts of appeals is required if there is to be even-handed administration of the tax and bankruptcy laws. CONCLUSION The petition for writs of certiorari should be granted. Respectfully submitted. KENNETH W. STARR Solicitor General SHIRLEY D. PETERSON Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General ALAN I. HOROWITZ Assistant to the Solicitor General GARY D. GRAY LINDA E. MOSAKOWSKI Attorneys AUGUST 1989 /1/ The Internal Revenue Service was erroneously named as the governmental party in the Energy Resources litigation. Accordingly, we have substituted the United States as the proper party in the caption of Energy Resources. /2/ Sections 3102 and 3402 of the Internal Revenue Code (26 U.S.C.) require employers to deduct from wages certain amounts for the employees' income taxes and for the employees' portion of social security taxes. These amounts are to be "held * * * in trust" for the United States and later paid over to the government by the employer (26 U.S.C. 7501). Other corporate tax liabilities that are not withheld from employees' wages, such as corporate income tax and the employer's share of social security taxes, are referred to as "non-trust fund" taxes. /3/ Due to a 1984 amendment that added a new category of priority claims, priority federal tax claims are now seventh priority claims. See 11 U.S.C. 507(a)(7) (Supp. IV 1986). /4/ The court listed several factors that it regarded as relevant to this analysis, including: (1) the history of the debtor; (2) whether the IRS had taken any pre-bankruptcy collection measures; (3) the nature of the Chapter 11 plan; (4) the extent of administrative or court action; and (5) the "existence of exceptional or special circumstances warranting (the) allocation provided by the plan." App., infra, 47a n.7. /5/ The result reached by the court below is consistent with that reached by the Eleventh Circuit in United States v. A & B Heating & Air Conditioning, Inc., 823 F.2d 462 (1987), vacated, 108 S. Ct. 1724 (1988), on remand, 861 F.2d 1538 (1988). On the government's petition for a writ of certiorari, that decision, which upheld the bankruptcy court's discretion to order the IRS to comply with the debtor's designation, was vacated by this Court in light of the debtor's declaration that it was no longer interested in enforcement of the designation provision. The reorganization plan ultimately was amended to remove that provision. /6/ The following cases have held payment of priority taxes in bankruptcy to be subject to application as the IRS determines on the ground that the payments are involuntary: In re Frank Meador Buick, Inc., No. 88-349-R (W.D. Va. Mar. 16, 1989), rev'g 85 Bankr. 392 (Bankr. W.D. Va. 1988), appeal pending, No. 89-2954 (4th Cir.); In re Intermarket, Inc., 93 Bankr. 70 (D.Md. 1988); In re Professional Technical Services, Inc., 94 Bankr. 578 (E.D. Mo. 1988); In re Vermont Fiberglass, Inc., 88 Bankr. 41 (D. Vt. 1988); In re McCom Communications, Inc., 76 Bankr. 180 (N.D. Ala. 1987); In re Mister Marvins, Inc., 48 Bankr. 279 (E.D. Mich. 1984); In re Frost, 47 Bankr. 961 (D. Kan. 1985); In re Avildsen Tools & Machines, Inc., 40 Bankr. 253 (N.D. Ill. 1984), aff'd on other grounds, 794 F.2d 1248 (7th Cir. 1986); In re Vincent-McCall Co., 68-2 U.S. Tax Cas. (CCH) Paragraph 9591 (E.D. Wis. 1986); In re Puget Sound Plywood, Inc., 89-1 U.S. Tax Cas. (CCH) Paragraph 9240 (Bankr. W.D. Wash. 1989); In re Shoup's Food Service, Inc., 96 Bankr. 767 (Bankr. W.D. Mich. 1988); In re Jehan-Das, Inc., 91 Bankr. 542 (Bankr. W.D. Mo. 1988), aff'd, No. 89-3030-CV-S-2 (W.D. Mo. May 8, 1989), appeal pending, No. 89-1859 (8th Cir.); In re R.L. Inge Development Corp., 78 Bankr. 793 (Bankr. E.D. Va. 1987); In re Tam Specialty Co., 85-2 U.S. Tax Cas. (CCH) Paragraph 9758 (Bankr, N.D. Cal. 1985); In re Obie Elie Wrecking Co., 35 Bankr. 114 (Bankr. N.D. Ohio 1983); In re Hubler Rentals, 79-2 U.S. Tax Cas. (CCH) Paragraph 9621 (E.D. Pa. 1979). The following decisions have held such payments to be voluntary and thus subject to designation by the debtor or the bankruptcy court: In re Lifescape, Inc., 54 Bankr. 526 (Bankr. D. Colo. 1985); In re Tom LeDuc Enterprises, Inc., 47 Bankr. 900 (W.D. Mo. 1984). The following cases have held, like the court of appeals below, that allocation of payments is within the discretion of the bankruptcy court: Hineline v. Household Fin. Corp., 72 Bankr. 642 (N.D. Ohio 1987); In re B & P Enterprises, Inc., 67 Bankr. 179 (Bankr. W.D. Tenn. 1986). /7/ Indeed, those responsible persons would not be able to obtain that relief in their own personal bankruptcy proceedings. Section 6672 liabilities would be entitled to priority of payment in those proceedings and, to the extent not satisfied therein, they would not be dischargeable, but would remain an enforceable debt after bankruptcy. See 11 U.S.C. 507(a)(7)(C), 523(a)(1) (1982 & Supp. V 1987). It is inappropriate for the bankruptcy court to permit the same officers to use the threat of noncooperation in the corporate debtor's reorganization to achieve personal relief that they could not obtain in their own bankruptcy proceedings. /8/ The Administrative Office of the United States Courts has estimated that 90% of Chapter 11 reorganizations fail. See In re Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363, 382 (5th Cir. 1987) (Jones, J., dissenting), aff'd, 108 S. Ct. 626 (1988). Indeed, if there were not a considerable likelihood that the plan would fail, the designation issue would be of no concern to the responsible officers since the plan must provide for the payment of all trust fund taxes by the corporate debtor within six years. /9/ The Collection Division of the IRS estimates that up to $34 million per year in tax revenue could be lost if designations are permitted routinely.