In re 800Ideas.com, Inc.

MEMORANDUM DECISION ON REMAND OF THE CHAPTER 7 TRUSTEE’S OBJECTION TO PROOF OF CLAIM #6 (INTERNAL REVENUE SERVICE)

This matter comes before the Court on remand from the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) and presents a narrow question: When a chapter 7 1 trustee (the “Trustee”) incurs a statutory penalty for his unreasonable failure to timely file federal tax returns for an S corporation debtor, should the statutory penalty be accorded administrative priority under section 503(b)? The Court determines that the short answer is: Yes. Following are the Court’s longer answer and its thoughts in response to the Trustee’s articulated concerns that such an answer would result in unwarranted negative impact on all chapter 7 trustees.

Procedural and Factual Background

The Debtor, 800Ideas.com, Inc., is a California S corporation required to file annual tax returns reporting its income. See 26 U.S.C. § 6037 (a). Generally, an S corporation does not pay federal income taxes; its shareholders, however, are taxed on their respective shares of the S corporation’s income. See 28 U.S.C. § 1363 (a). The S corporation return, thus, includes a Schedule K-1 pertaining to each…