The opinion of the court was delivered by: FRANKEL
This is a rare case, presenting, as Referee Herzog said, a "pure" question of law. The question, for which the particular facts are unimportant, is this:
Is an estate in liquidating bankruptcy under Chapter X of the Bankruptcy Act liable for federal tax penalties incurred by the debtor-in-possession during a superseded Chapter XI proceeding?
Affirming the referee's decision, the court concludes that the estate is not liable for such penalties.
The perimeters of the problem and main guides to decision, none of which yields a definitive answer, may be outlined as follows:
Section 57(j) of the Bankruptcy Act, 11 U.S.C. § 93(j), governing the proof and allowance of claims, provides:
"Debts owing to the United States or to any State or any subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued on the amount of such loss according to law."
It is common ground that the effect of the section is to erase only pre-bankruptcy penalties, Boteler v. Ingels, 308 U.S. 57, 84 L. Ed. 78, 60 S. Ct. 29 (1939), and it would appear to have this effect following commencement of a Chapter XI as well as a Chapter X proceeding. It is likewise undisputed - though the scope of this proposition may be uncertain since Nicholas v. United States, 384 U.S. 678, 694-695, 16 L. Ed. 2d 853, 86 S. Ct. 1674 (1966) - that an estate in liquidating bankruptcy is liable under Boteler for penalties incurred by the trustee during the period of his functioning.
Relying upon the concept, as expressed in Nicholas, that there is a "continuity of interest between the debtor in possession and the trustee as officers of the bankruptcy court" (384 U.S. at 693 n. 27), the Government argues that Boteler should be deemed controlling here. But the Supreme Court has refrained from joining in that view,
and this court - focusing upon the rationale of Boteler, the teachings of Nicholas, and the pertinent policy of Section 57(j) - arrives at a contrary answer to this undoubtedly close question.
The Court in Nicholas, while it spoke of a "continuum," made clear that the flow of responsibilities and liabilities is not an uninterrupted one. In an analysis germane here, it divided the pertinent history "into three periods - the pre-arrangement period, the arrangement period, and the liquidating bankruptcy period." 384 U.S. at 686. The Court held that interest on taxes incurred during either of the first two periods accrues until the end of that period, but not beyond it. And it followed Boteler in exacting penalties from the estate for delinquencies of the trustee during the third period. In some persuasive measure, the rationale of Nicholas, including the reaffirmation of a central ground for decision in Boteler, points toward a result favoring the trustee in this case.
Explaining its conclusion that a trustee should not be immune from penalties for his tax defaults, the Court in Boteler pointed out that a contrary holding would strip from taxing authorities "the traditional and almost universal method of enforcing prompt payment." 308 U.S. at 61. In Nicholas, that point was stated as a central ground for reaffirming the Boteler rule. Quoting the foregoing language from Boteler (384 U.S. at 692), the Court stressed again that for the trustee's violation the Government was "entitled to exact the penalties * * * as a legitimate means to enforce the prompt filing of the tax returns." Id. at 694. It described the result in Boteler as one where "the trustee was penalized for his failure" (ibid., emphasis added) to perform his duty under the tax laws. And it concluded that a similar result should follow from "the trustee's failure to file timely returns" in the case before it. Id. at 695.
Three thoughts affecting the present problem emerge from reflection upon that analysis:
(1) Penalties serve as deterrents or as "encouragements" to compliance. To exact them from the person or entity responsible during any of the three periods supports "the ...