In re Patin

ALAN JAROSLOVSKY, Bankruptcy Judge.

The Internal Revenue Service has objected to the debtor’s Chapter 13 plan because it proposes to separately classify tax penalties and pay nothing on them, while paying 100% to other unsecured claims. While the issue does not seem to be completely resolvable based on briefs, the court will do as much as it can.

The court first notes that section 1322(a)(2) of the Bankruptcy Code requires that a Chapter 13 plan must provide for all priority claims to be paid in full. Section 507(a)(8)(G) provides that tax penalties are entitled to priority if in compensation for actual pecuniary loss. The court therefore assumes that the penalties at issue here are pure penalties, and in no way required to make the IRS whole.

The issue is simple to state. Given that the debtor can only afford a fixed amount to be paid to creditors, may he elect to pay all creditors in full and nothing on a pure penalty, or must the penalty be paid from the same pot so that all creditors receive less than full payment?

The court disagrees with the IRS that the Chapter 7 provisions of the Code are irrelevant. Section 1325(a)(4) of the Code requires the court to consider each…