Rev. Rul. 68-574

The Internal Revenue Service has given further consideration to the positions expressed in Revenue Ruling 62-96, C.B. 1962-1, 308, with respect to the collectibility of post-petition interest and nonpecuniary loss penalties in bankruptcy proceedings, and in general receivership or assignment for the benefit of creditor cases, particularly in regard to the effect which that Revenue Ruling has on G.C.M. 21860, C.B. 1940-1, 181,

G.C.M. 21860 involves the question of the accrual of post-petition interest in a bankruptcy proceeding. The G.C.M. states, in part, that when an adjudication of bankruptcy or appointment of a receiver for a taxpayer occurs before the amount of a deficiency and interest is assessed, interest accrues during the bankruptcy or receivership proceeding only on the principal amount of the tax. The G.C.M. further states that in the case of an adjudication of bankruptcy or appointment of a receiver for a taxpayer after the amount of a deficiency and interest is assessed, interest accrues on the amount of the unpaid assessed tax and interest during the bankruptcy or receivership proceeding.

Since the publication of G.C.M. 21860, the question of the collectibility of post-petition interest in bankruptcy proceedings has been the subject of a series of court decisions. The Supreme Court of the United States in City of New York, et al. v Lewis H. Saper, Trustee, et al. , 336 U.S. 328 (1949), Ct. D. 1715, C.B. 1949-1, 120, decided that tax claims in bankruptcy proceedings bear interest only to the date of bankruptcy, that is, the date on which the petition in bankruptcy is filed. The Saper decision was applied by the Supreme Court in John Nicholas, Trustee v United States , 384 U.S. 678 (1966), Ct. D. 1912, C.B. 1966-2, 511, to interest that accrued after a petition in bankruptcy was filed on taxes incurred during a Chapter XI arrangement proceeding under the Bankruptcy Act.

After Saper was decided, an effort was made by the Service to distinguish post-petition interest on secured tax claims from post-petition interest on unsecured tax claims such as those involved in Saper . However, in United States v J. Allen Harrington, Trustee , 269 F.2d 719 (1959), the United States Court of Appeals for the Fourth Circuit disallowed a claim for post-petition interest even though the Government had filed notice of its tax lien prior to the adjudication of bankruptcy. The court stated that `it is now settled that interest on tax claims, whether liens have been perfected or not, is not collectible beyond the date of the filing of the petition in bankruptcy.' Accord, United States v. Irving I. Bass, Trustee , 271 F.2d 129 (1959); In re Kerber Packing Company , 276 F.2d 245 (1960).

Revenue Ruling 62-96 stated the position that post-petition interest, whether or not secured by a Federal tax lien, will not be claimed against the estate of a bankrupt in proceedings under the Bankruptcy Act, in general receiverships, or in assignment for the benefit of creditor cases.

However, there are a number of exceptions to the restriction against the collection of post-petition interest from the bankrupt's estate. Two of these exceptions were recognized by the court in United States v Harrington , namely, (1) such interest may be collected against the remaining assets in the event the bankrupt ultimately proves to be solvent, and (2) income produced by the property held by the creditor as collateral may be applied against the claim for interest. A third exception was recognized by the Supreme Court in Paul F. Bruning v United States , 376 U.S. 358 (1964), Ct. D. 1888, C.B. 1964-2, 500. The Court held that post-petition interest continues to run on a debt for taxes that is not discharged in the bankruptcy proceeding. Such interest remains a personal liability of the debtor that is collectible out of after-acquired assets. Revenue Ruling 62-96 recognizes a fourth exception: that post-petition interest will be claimed against the bankrupt's estate if such interest arises in connection with the administration of the estate. In those cases in which post-petition interest is collectible from the bankrupt's estate, interest continues to accrue during bankruptcy proceedings under the appropriate provision of the Internal Revenue Codes of 1939 and 1954.

The right to penalties as a claim against the bankrupt's estate was also discussed in Revenue Ruling 62-96. That Revenue Ruling reflected the Supreme Court's decision in Hattiebelle O. Simmonson, Trustee v R. C. Granquist , 369 U.S. 38 (1962), Ct. D. 1867, C.B. 1962-1, 302, which held that the Government was not entitled to receive penalties from the bankrupt's estate even though such penalties were secured by liens arising prior to the filing of the petition in bankruptcy. The Simonson decision was, in effect, codified in Public Law 89-495, C.B. 1966-2, 595, which amended section 67(c) of the Bankruptcy Act, 11 U.S.C. 107(c), to provide that liens securing penalties not allowable under section 57(j) of the Bankruptcy Act, 11 U.S.C. 93(j), will be invalid against the trustee in bankruptcy and will not be eligible for preservation. (Section 57(j) disallows penalties or forfeitures owing to the United States or to any State or any subdivision thereof other than pecuniary loss penalties or forfeitures.)

The limitation on the right to claim non-pecuniary loss penalties against the bankrupt's estate is subject to certain exceptions. The Supreme Court in Nicholas v United States concluded that penalties incurred in connection with the administration of the bankrupt's estate may be claimed against the estate where the collection of the penalty is sought in the same proceeding. In addition, penalties will be claimed in general receivership and assignment for the benefit of creditor cases and when the bankrupt's estate proves to be solvent. The collection of penalties will also be enforced against property, secured by a Federal tax lien, which is not under bankruptcy administration and from after-acquired property if the underlying tax liability is not discharged in bankruptcy.

Accordingly, post-petition interest, whether or not secured by a Federal tax lien, will not be claimed against the estate of a bankrupt in proceedings under the Bankruptcy Act, in general receivership, or in assignment for the benefit of creditor cases. However, such interest will be claimed if the bankrupt ultimately proves to be solvent or if the interest arises in connection with the administration of the estate. The collection of such interest will also be enforced against income produced from property held as collateral and against after-acquired property of the debtor if the underlying tax liability is not discharged in bankruptcy.

Non-pecuniary loss penalties, whether secured or unsecured by a Federal tax lien, will not be claimed against the bankrupt's estate in bankruptcy proceedings but will be claimed in general receivership and in assignment for the benefit of creditor cases. However, such penalties will be claimed if the bankrupt proves to be solvent or if the penalties arise in connection with the administration of the estate, and the collection of the penalty is sought in the same proceeding. Penalties will also be claimed against after-acquired property of the debtor, if the underlying tax liability is not discharged in bankruptcy, and against property secured by a Federal tax lien, which is not under bankruptcy administration.

G.C.M. 21860, and Revenue Ruling 62-96, are hereby superseded.