Towers ex rel. Pacific Atlantic Trading Co. v. United States (In re Pacific-Atlantic Trading Co.)

The United States of America (“Government”) appeals from the district court’s order affirming the judgment of the bankruptcy court. The district court ruled that the Government’s claim for 1988 income taxes, filed as an administrative claim in Pacific Atlantic Trading Company’s (“PATCO”) Chapter 7 bankruptcy, was not an allowable administrative expense because: (1) the taxes were taxes of a kind specified in 11 U.S.C. § 507 (a)(7)(A)(iii) (1988) 1 and thus specifically excepted from allowance as an administrative expense pursuant to 11 U.S.C. § 503 (b)(l)(B)(i); and (2) alternatively, the taxes were not incurred by the estate. The district court also held that the 1988 tax liability should be distributed with late-filed, non-priority claims pursuant to 11 U.S.C. § 726 (a)(3) rather than with priority claims under 11 U.S.C. § 726 (a)(1) because the Government failed to file a timely proof of claim.

The Government contends that its claim for PATCO’s 1988 income taxes is entitled to first priority as an administrative expense rather than seventh priority as an unsecured tax claim because the taxes were incurred by the estate and were not taxes of a kind specified in § 507(a)(7). The…