In Re Pacific Atlantic Trading Co., Debtor. United States of America, Claimant-Appellant v. Robert F. Towers, Trustee-Appellee

The government appeals from a district court judgment in favor of the bankruptcy trustee and against the Internal Revenue Service (IRS). The government contends that a claim for tax liabilities retains its priority status under 11 U.S.C. § 507 (a)(7) and its position in the order of distribution under section 726(a)(1) regardless of when proof of the claim is filed. The district court had jurisdiction pursuant to 28 U.S.C. § 158 (a). We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 158 (d). We reverse.

I

An involuntary petition under Chapter 7 of the Bankruptcy Code was filed against Pacific-Atlantic Trading Co. (Pacific Atlantic) on September 15, 1988. The IRS received notice of the bar date. IRS records indicated no unpaid tax liabilities of Pacific Atlantic but did show Pacific Atlantic had not filed any tax returns or made any installment payments of estimated taxes for 1985 through 1989.

The IRS opened a file for Pacific Atlantic on August 10, 1989, and correctly noted in the file the August 11, 1989, bar date. The IRS, however, did not examine Pacific Atlantic’s potential tax liabilities until September 1990. On February 8, 1991, the IRS filed a proof…