Does a chapter 11 plan govern the post-petition interest rate on a priority tax claim, or is the government entitled to the higher rate specified in the Tax Code, 26 U.S.C. § 6621?
Bankruptcy Judge Kevin Gross of Delaware decided that the plan governs.
The dispute with the Internal Revenue Service arose under the chapter 11 plan of W.R. Grace & Co., confirmed in 2011. On the filing date, the IRS had a tax deficiency claim of almost $6 million for 1998.
It was agreed that the Tax Code’s interest rate applied up to the filing date in 2001. The government wanted the same rate to apply from filing until 2009, when the claim was paid. The debtor argued for the lower rate of 4.19% provided in the plan for allowed claims.
In his opinion on Oct. 23, Judge Gross said that the difference in the two rates amounted to about $1.6 million.
The dispute ultimately involved a refund, not an allowed priority tax claim, because the debtor had a net operating loss carryback erasing the 1998 tax deficiency. Consequently, the controversy involved a refund owing to the debtor. If the interest rate were lower on the 1998 deficiency, the refund would be higher.
In an argument Judge Gross called “strained and a bit confusing,” the IRS contended that it had a right of recoupment, not a claim. The plan rate did not apply, according to the government, because it was asserting a right of recoupment rather than a claim.
Judge Gross sided with the debtor “because, in reality and effect, the Plan is the basis for the payment of post-petition interest on Allowed Tax Claims.” As of the filing date, the IRS had an allowed priority claim equal to the deficiency plus statutory interest that was paid during the course of the chapter 11 proceedings.
Ruling for the debtor, Judge Gross said, “The Plan takes priority and it would be inappropriate for the court to apply equitable recoupment under the circumstances.”