United States v. Technical Knockout Graphics, Inc. (In re Technical Knockout Graphics, Inc.)

The United States appeals from an order of the bankruptcy appellate panel, upholding a bankruptcy court decision that permitted the debtor to designate how any payments it made after filing a petition for reorganization under Chapter 11 of the Bankruptcy Code would be used to pay off various federal taxes it owed, 68 B.R. 463 .

The question presented on appeal is whether a corporate debtor under a Chapter 11 reorganization can designate that tax payments made prior to confirmation of its reorganization plan shall be applied first to satisfy the corporation’s trust fund liabilities, thereby protecting the corporation’s principals from potential personal liability. Because we conclude that the debt- or cannot designate allocation of such payments, we reverse the decision of the bankruptcy appellate panel.

*799 I. Facts and Proceedings Below

Technical Knockout Graphics, Inc. (TKO) defaulted on the payment of corporate income, Social Security, unemployment, and income withholding taxes during 1982 and 1983. On May 3, 1984, it filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. The government filed a proof of claim in that proceeding for $491,-634 in…