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TITLE 11–BANKRUPTCY

CHAPTER 5–CREDITORS, THE DEBTOR, AND THE ESTATE

Sub Chapter – Creditors and Claims

Sec. 507. Priorities

    (a) The following expenses and claims have priority in the following 
order:
        (1) First, administrative expenses allowed under section 503(b) 
    of this title, and any fees and charges assessed against the estate 
    under chapter 123 of title 28.
        (2) Second, unsecured claims allowed under section 502(f) of 
    this title.
        (3) Third, allowed unsecured claims, but only to the extent of 
    $4,000 for each individual or corporation, as the case may be, 
    earned within 90 days before the date of the filing of the petition 
    or the date of the cessation of the debtor's business, whichever 
    occurs first, for--
            (A) wages, salaries, or commissions, including vacation, 
        severance, and sick leave pay earned by an individual; or
            (B) sales commissions earned by an individual or by a 
        corporation with only 1 employee, acting as an independent 
        contractor in the sale of goods or services for the debtor in 
        the ordinary course of the debtor's business if, and only if, 
        during the 12 months preceding that date, at least 75 percent of 
        the amount that the individual or corporation earned by acting 
        as an independent contractor in the sale of goods or services 
        was earned from the debtor; \1\
---------------------------------------------------------------------------
    \1\ So in original. The semicolon probably should be a period.

        (4) Fourth, allowed unsecured claims for contributions to an 
    employee benefit plan--
            (A) arising from services rendered within 180 days before 
        the date of the filing of the petition or the date of the 
        cessation of the debtor's business, whichever occurs first; but 
        only
            (B) for each such plan, to the extent of--
                (i) the number of employees covered by each such plan 
            multiplied by $4,000; less
                (ii) the aggregate amount paid to such employees under 
            paragraph (3) of this subsection, plus the aggregate amount 
            paid by the estate on behalf of such employees to any other 
            employee benefit plan.

        (5) Fifth, allowed unsecured claims of persons--
            (A) engaged in the production or raising of grain, as 
        defined in section 557(b) of this title, against a debtor who 
        owns or operates a grain storage facility, as defined in section 
        557(b) of this title, for grain or the proceeds of grain, or
            (B) engaged as a United States fisherman against a debtor 
        who has acquired fish or fish produce from a fisherman through a 
        sale or conversion, and who is engaged in operating a fish 
        produce storage or processing facility--

    but only to the extent of $4,000 for each such individual.
        (6) Sixth, allowed unsecured claims of individuals, to the 
    extent of $1,800 for each such individual, arising from the deposit, 
    before the commencement of the case, of money in connection with the 
    purchase, lease, or rental of property, or the purchase of services, 
    for the personal, family, or household use of such individuals, that 
    were not delivered or provided.
        (7) Seventh, allowed claims for debts to a spouse, former 
    spouse, or child of the debtor, for alimony to, maintenance for, or 
    support of such spouse or child, in connection with a separation 
    agreement, divorce decree or other order of a court of record, 
    determination made in accordance with State or territorial law by a 
    governmental unit, or property settlement agreement, but not to the 
    extent that such debt--
            (A) is assigned to another entity, voluntarily, by operation 
        of law, or otherwise; or
            (B) includes a liability designated as alimony, maintenance, 
        or support, unless such liability is actually in the nature of 
        alimony, maintenance or support.

        (8) Eighth, allowed unsecured claims of governmental units, only 
    to the extent that such claims are for--
            (A) a tax on or measured by income or gross receipts--
                (i) for a taxable year ending on or before the date of 
            the filing of the petition for which a return, if required, 
            is last due, including extensions, after three years before 
            the date of the filing of the petition;
                (ii) assessed within 240 days, plus any time plus 30 
            days during which an offer in compromise with respect to 
            such tax that was made within 240 days after such assessment 
            was pending, before the date of the filing of the petition; 
            or
                (iii) other than a tax of a kind specified in section 
            523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed 
            before, but assessable, under applicable law or by 
            agreement, after, the commencement of the case;

            (B) a property tax assessed before the commencement of the 
        case and last payable without penalty after one year before the 
        date of the filing of the petition;
            (C) a tax required to be collected or withheld and for which 
        the debtor is liable in whatever capacity;
            (D) an employment tax on a wage, salary, or commission of a 
        kind specified in paragraph (3) of this subsection earned from 
        the debtor before the date of the filing of the petition, 
        whether or not actually paid before such date, for which a 
        return is last due, under applicable law or under any extension, 
        after three years before the date of the filing of the petition;
            (E) an excise tax on--
                (i) a transaction occurring before the date of the 
            filing of the petition for which a return, if required, is 
            last due, under applicable law or under any extension, after 
            three years before the date of the filing of the petition; 
            or
                (ii) if a return is not required, a transaction 
            occurring during the three years immediately preceding the 
            date of the filing of the petition;

            (F) a customs duty arising out of the importation of 
        merchandise--
                (i) entered for consumption within one year before the 
            date of the filing of the petition;
                (ii) covered by an entry liquidated or reliquidated 
            within one year before the date of the filing of the 
            petition; or
                (iii) entered for consumption within four years before 
            the date of the filing of the petition but unliquidated on 
            such date, if the Secretary of the Treasury certifies that 
            failure to liquidate such entry was due to an investigation 
            pending on such date into assessment of antidumping or 
            countervailing duties or fraud, or if information needed for 
            the proper appraisement or classification of such 
            merchandise was not available to the appropriate customs 
            officer before such date; or

            (G) a penalty related to a claim of a kind specified in this 
        paragraph and in compensation for actual pecuniary loss.

        (9) Ninth, allowed unsecured claims based upon any commitment by 
    the debtor to a Federal depository institutions regulatory agency 
    (or predecessor to such agency) to maintain the capital of an 
    insured depository institution.

    (b) If the trustee, under section 362, 363, or 364 of this title, 
provides adequate protection of the interest of a holder of a claim 
secured by a lien on property of the debtor and if, notwithstanding such 
protection, such creditor has a claim allowable under subsection (a)(1) 
of this section arising from the stay of action against such property 
under section 362 of this title, from the use, sale, or lease of such 
property under section 363 of this title, or from the granting of a lien 
under section 364(d) of this title, then such creditor's claim under 
such subsection shall have priority over every other claim allowable 
under such subsection.
    (c) For the purpose of subsection (a) of this section, a claim of a 
governmental unit arising from an erroneous refund or credit of a tax 
has the same priority as a claim for the tax to which such refund or 
credit relates.
    (d) An entity that is subrogated to the rights of a holder of a 
claim of a kind specified in subsection (a)(3), (a)(4), (a)(5), (a)(6), 
(a)(7), (a)(8), or (a)(9) of this section is not subrogated to the right 
of the holder of such claim to priority under such subsection.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2583; Pub. L. 98-353, title III, 
Secs. 350, 449, July 10, 1984, 98 Stat. 358, 374; Pub. L. 101-647, title 
XXV, Sec. 2522(d), Nov. 29, 1990, 104 Stat. 4867; Pub. L. 103-394, title 
I, Sec. 108(c), title II, Sec. 207, title III, Sec. 304(c), title V, 
Sec. 501(b)(3), (d)(11), Oct. 22, 1994, 108 Stat. 4112, 4123, 4132, 
4142, 4145.)


                      Historical and Revision Notes

                         legislative statements

    Section 507(a)(3) of the House amendment represents a compromise 
dollar amount and date for the priority between similar provisions 
contained in H.R. 8200 as passed by the House and the Senate amendments. 
A similar compromise is contained in section 507(a)(4).
    Section 507(a)(5) represents a compromise on amount between the 
priority as contained in H.R. 8200 as passed by the House and the Senate 
amendment. The Senate provision for limiting the priority to consumers 
having less than a fixed gross income is deleted.
    Section 507(a)(6) of the House amendment represents a compromise 
between similar provisions contained in H.R. 8200 as passed by the House 
and the Senate amendment.
    Section 507(b) of the House amendment is new and is derived from the 
compromise contained in the House amendment with respect to adequate 
protection under section 361. Subsection (b) provides that to the extent 
adequate protection of the interest of a holder of a claim proves to be 
inadequate, then the creditor's claim is given priority over every other 
allowable claim entitled to distribution under section 507(a). Section 
507(b) of the Senate amendment is deleted.
    Section 507(c) of the House amendment is new. Section 507(d) of the 
House amendment prevents subrogation with respect to priority for 
certain priority claims. Subrogation with respect to priority is 
intended to be permitted for administrative claims and claims arising 
during the gap period.
    Priorities: Under the House amendment, taxes receive priority as 
follows:
    First. Administration expenses: The amendment generally follows the 
Senate amendment in providing expressly that taxes incurred during the 
administration of the estate share the first priority given to 
administrative expenses generally. Among the taxes which receives first 
priority, as defined in section 503, are the employees' and the 
employer's shares of employment taxes on wages earned and paid after the 
petition is filed. Section 503(b)(1) also includes in administration 
expenses a tax liability arising from an excessive allowance by a tax 
authority of a ``quickie refund'' to the estate. (In the case of Federal 
taxes, such refunds are allowed under special rules based on net 
operating loss carrybacks (sec. 6411 of the Internal Revenue Code [title 
26]).
    An exception is made to first priority treatment for taxes incurred 
by the estate with regard to the employer's share of employment taxes on 
wages earned from the debtor before the petition but paid from the 
estate after the petition has been filed. In this situation, the 
employer's tax receives either sixth priority or general claim 
treatment.
    The House amendment also adopts the provisions of the Senate 
amendment which include in the definition of administrative expenses 
under section 503 any fine, penalty (including ``additions to tax'' 
under applicable tax laws) or reduction in credit imposed on the estate.
    Second. ``Involuntary gap'' claims: ``Involuntary gap'' creditors 
are granted second priority by paragraph (2) of section 507(a). This 
priority includes tax claims arising in the ordinary course of the 
debtor's business or financial affairs after he has been placed 
involuntarily in bankruptcy but before a trustee is appointed or before 
the order for relief.
    Third. Certain taxes on prepetition wages: Wage claims entitled to 
third priority are for compensation which does not exceed $2,000 and was 
earned during the 90 days before the filing of the bankruptcy petition 
or the cessation of the debtor's business. Certain employment taxes 
receive third priority in payment from the estate along with the payment 
of wages to which the taxes relate. In the case of wages earned before 
the filing of the petition, but paid by the trustee (rather than by the 
debtor) after the filing of the petition, claims or the employees' share 
of the employment taxes (withheld income taxes and the employees' share 
of the social security or railroad retirement tax) receive third 
priority to the extent the wage claims themselves are entitled to this 
priority.
    In the case of wages earned from and paid by the debtor before the 
filing of the petition, the employer's share of the employment taxes on 
these wages paid by the debtor receives sixth priority or, if not 
entitled to that priority, are treated only as general claims. Under the 
House amendment, the employer's share of employment taxes on wages 
earned by employees of the debtor, but paid by the trustee after the 
filing of the bankruptcy petition, will also receive sixth priority to 
the extent that claims for the wages receive third priority. To the 
extent the claims for wages do not receive third priority, but instead 
are treated only as general claims, claims for the employer's share of 
the employment taxes attributable to those wages will also be treated as 
general claims. In calculating the amounts payable as general wage 
claims, the trustee must pay the employer's share of employment taxes on 
such wages.
    Sixth priority. The House amendment modifies the provisions of both 
the House bill and Senate amendment in the case of sixth priority taxes. 
Under the amendment, the following Federal, State and local taxes are 
included in the sixth priority:
    First. Income and gross receipts taxes incurred before the date of 
the petition for which the last due date of the return, including all 
extensions of time granted to file the return, occurred within 3 years 
before the date on which the petition was filed, or after the petition 
date. Under this rule, the due date of the return, rather than the date 
on which the taxes were assessed, determines the priority.
    Second. Income and gross receipts taxes assessed at any time within 
240 days before the petition date. Under this rule, the date on which 
the governmental unit assesses the tax, rather than the due date of the 
return, determines the priority.
    If, following assessment of a tax, the debtor submits an offer in 
compromise to the governmental unit, the House amendment provides that 
the 240-day period is to be suspended for the duration of the offer and 
will resume running after the offer is withdrawn or rejected by the 
governmental unit, but the tax liability will receive priority if the 
title 11 petition is filed during the balance of the 240-day period or 
during a minimum of 30 days after the offer is withdrawn or rejected. 
This rule modifies a provision of the Senate amendment dealing 
specifically with offers in compromise. Under the modified rule, if, 
after the assessment, an offer in compromise is submitted by the debtor 
and is still pending (without having been accepted or rejected) at the 
date on which a title 11 petition is filed, the underlying liability 
will receive sixth priority. However, if an assessment of a tax 
liability is made but the tax is not collected within 240 days, the tax 
will not receive priority under section 507(a)(6)(A)(i) and the debtor 
cannot revive a priority for that tax by submitting an offer in 
compromise.
    Third. Income and gross receipts taxes not assessed before the 
petition date but still permitted, under otherwise applicable tax laws, 
to be assessed. Thus, for example, a prepetition tax liability is to 
receive sixth priority under this rule if, under the applicable statute 
of limitations, the tax liability can still be assessed by the tax 
authority. This rule also covers situations referred to in section 
507(a)(6)(B)(ii) of the Senate amendment where the assessment or 
collection of a tax was prohibited before the petition pending 
exhaustion of judicial or administrative remedies, except that the House 
amendment eliminates the 300-day limitation of the Senate bill. So, for 
example, if before the petition a debtor was engaged in litigation in 
the Tax Court, during which the Internal Revenue Code [title 26] bars 
the Internal Revenue Service from assessing or collecting the tax, and 
if the tax court decision is made in favor of the Service before the 
petition under title 11 is filed, thereby lifting the restrictions on 
assessment and collection, the tax liability will receive sixth priority 
even if the tax authority does not make an assessment within 300 days 
before the petition (provided, of course, that the statute of 
limitations on assessment has not expired by the petition date).
    In light of the above categories of the sixth priority, and tax 
liability of the debtor (under the Internal Revenue Code [title 26] or 
State or local law) as a transferee of property from another person will 
receive sixth priority without the limitations contained in the Senate 
amendment so long as the transferee liability had not been assessed by 
the tax authority by the petition date but could still have been 
assessed by that date under the applicable tax statute of limitations 
or, if the transferee liability had been assessed before the petition, 
the assessment was made no more than 240 days before the petition date.
    Also in light of the above categories, the treatment of prepetition 
tax liabilities arising from an excessive allowance to the debtor of a 
tentative carryback adjustment, such as a ``quickie refund'' under 
section 6411 of the Internal Revenue Code [title 26] is revised as 
follows: If the tax authority has assessed the additional tax before the 
petition, the tax liability will receive priority if the date of 
assessment was within 240 days before the petition date. If the tax 
authority had not assessed the additional tax by the petition, the tax 
liability will still receive priority so long as, on the petition date, 
assessment of the liability is not barred by the statute of limitations.
    Fourth. Any property tax assessed before the commencement of the 
case and last payable without penalty within 1 year before the petition, 
or thereafter.
    Fifth. Taxes which the debtor was required by law to withhold or 
collect from others and for which he is liable in any capacity, 
regardless of the age of the tax claims. This category covers the so-
called ``trust fund'' taxes, that is, income taxes which an employer is 
required to withhold from the pay of his employees, and the employees' 
share of social security taxes.
    In addition, this category includes the liability of a responsible 
officer under the Internal Revenue Code (sec. 6672) [title 26] for 
income taxes or for the employees' share of social security taxes which 
that officer was responsible for withholding from the wages of employees 
and paying to the Treasury, although he was not himself the employer. 
This priority will operate when a person found to be a responsible 
officer has himself filed in title 11, and the priority will cover the 
debtor's responsible officer liability regardless of the age of the tax 
year to which the tax relates. The U.S. Supreme Court has interpreted 
present law to require the same result as will be reached under this 
rule. U.S. v. Sotelo, 436 U.S. 268 (1978) [98 S.Ct. 1795, 56 L.Ed.2d 
275, rehearing denied 98 S.Ct. 3126, 438 U.S. 907, 57 L.Ed.2d 1150].
    This category also includes the liability under section 3505 of the 
Internal Revenue Code [26 U.S.C. 3505] of a taxpayer who loans money for 
the payment of wages or other compensation.
    Sixth. The employer's share of employment taxes on wages paid before 
the petition and on third-priority wages paid postpetition by the 
estate. The priority rules under the House amendment governing 
employment taxes can thus be summarized as follows: Claims for the 
employees' shares of employment taxes attributable to wages both earned 
and paid before the filing of the petition are to receive sixth 
priority. In the case of employee wages earned, but not paid, before the 
filing of the bankruptcy petition, claims for the employees' share of 
employment taxes receive third priority to the extent the wages 
themselves receive third priority. Claims which relate to wages earned 
before the petition, but not paid before the petition (and which are not 
entitled to the third priority under the rule set out above), will be 
paid as general claims. Since the related wages will receive no 
priority, the related employment taxes would also be paid as nonpriority 
general claims.
    The employer's share of the employment taxes on wages earned and 
paid before the bankruptcy petition will receive sixth priority to the 
extent the return for these taxes was last due (including extensions of 
time) within 3 years before the filing of the petition, or was due after 
the petition was filed. Older tax claims of this nature will be payable 
as general claims. In the case of wages earned by employees before the 
petition, but actually paid by the trustee (as claims against the 
estate) after the title 11 case commenced, the employer's share of the 
employment taxes on third priority wages will be payable as sixth 
priority claims and the employer's taxes on prepetition wages which are 
treated only as general claims will be payable only as general claims. 
In calculating the amounts payable as general wage claims, the trustee 
must pay the employer's share of employment taxes on such wages. The 
House amendment thus deletes the provision of the Senate amendment that 
certain employer taxes receive third priority and are to be paid 
immediately after payment of third priority wages and the employees' 
shares of employment taxes on those wages.
    In the case of employment taxes relating to wages earned and paid 
after the petition, both the employees' shares and the employer's share 
will receive first priority as administration expenses of the estate.
    Seventh. Excise taxes on transactions for which a return, if 
required, is last due, under otherwise applicable law or under any 
extension of time to file the return, within 3 years before the petition 
was filed, or thereafter. If a return is not required with regard to a 
particular excise tax, priority is given if the transaction or event 
itself occurred within 3 years before the date on which the title 11 
petition was filed. All Federal, State or local taxes generally 
considered or expressly treated as excises are covered by this category, 
including sales taxes, estate and gift taxes, gasoline and special fuel 
taxes, and wagering and truck taxes.
    Eighth. Certain unpaid customs duties. The House amendment covers in 
this category duties on imports entered for consumption within 1 year 
before the filing of the petition, but which are still unliquidated on 
the petition date; duties covered by an entry liquidated or reliquidated 
within 1 year before the petition date; and any duty on merchandise 
entered for consumption within 4 years before the petition but not 
liquidated on the petition date, if the Secretary of the Treasury or his 
delegate certifies that duties were not liquidated because of possible 
assessment of antidumping or countervailing duties or fraud penalties.
    For purposes of the above priority rules, the House amendment adopts 
the provision of the Senate bill that any tax liability which, under 
otherwise applicable tax law, is collectible in the form of a 
``penalty,'' is to be treated in the same manner as a tax liability. In 
bankruptcy terminology, such tax liabilities are referred to as 
pecuniary loss penalties. Thus, any tax liability which under the 
Internal Revenue Code [title 26] or State or local tax law is payable as 
a ``penalty,'' in addition to the liability of a responsible person 
under section 6672 of the Internal Revenue Code [26 U.S.C. 6672] will be 
entitled to the priority which the liability would receive if it were 
expressly labeled as a ``tax'' under the applicable tax law. However, a 
tax penalty which is punitive in nature is given subordi- nated 
treatment under section 726(a)(4).
    The House amendment also adopts the provision of the Senate 
amendment that a claim arising from an erroneous refund or credit of 
tax, other than a ``quickie refund,'' is to receive the same priority as 
the tax to which the refund or credit relates.
    The House amendment deletes the express provision of the Senate 
amendment that a tax liability is to receive sixth priority if it 
satisfies any one of the subparagraphs of section 507(a)(6) even if the 
liability fails to satisfy the terms of one or more other subparagraphs. 
No change of substance is intended by the deletion, however, in light of 
section 102(5) of the House amendment, providing a rule of construction 
that the word ``or'' is not intended to be exclusive.
    The House amendment deletes from the express priority categories of 
the Senate amendment the priority for a debtor's liability as a third 
party for failing to surrender property or to pay an obligation in 
response to a levy for taxes of another, and the priority for amounts 
provided for under deferred payment agreements between a debtor and the 
tax authority.
    The House amendment also adopts the substance of the definition in 
section 346(a) the Senate amendment of when taxes are to be considered 
``incurred'' except that the House amendment applies these definitions 
solely for purposes of determining which category of section 507 tests 
the priority of a particular tax liability. Thus, for example, the House 
amendment contains a special rule for the treatment of taxes under the 
45-day exception to the preference rules under section 547 and the 
definitions of when a tax is incurred for priority purposes are not to 
apply to such preference rules. Under the House amendment, for purposes 
of the priority rules, a tax on income for a particular period is to be 
considered ``incurred'' on the last day of the period. A tax on or 
measured by some event, such as the payment of wages or a transfer by 
reason of death or gift, or an excise tax on a sale or other 
transaction, is to be considered ``incurred'' on the date of the 
transaction or event.


                        senate report no. 95-989

    Section 507 specifies the kinds of claims that are entitled to 
priority in distribution, and the order of their priority. Paragraph (1) 
grants first priority to allowed administrative expenses and to fees and 
charges assessed against the estate under chapter 123 [Sec. 1911 et 
seq.] of title 28. Taxes included as administrative expenses under 
section 503(b)(1) of the bill generally receive the first priority, but 
the bill makes certain qualifications: Examples of these specially 
treated claims are the estate's liability for recapture of an investment 
tax credit claimed by the debtor before the title 11 case (this 
liability receives sixth priority) and the estate's employment tax 
liabilities on wages earned before, but paid after, the petition was 
filed (this liability generally receives the same priority as the 
wages).
    ``Involuntary gap'' creditors, granted first priority under current 
law, are granted second priority by paragraph (2). This priority, 
covering claims arising in the ordinary course of the debtor's business 
or financial affairs after a title 11 case has begun but before a 
trustee is appointed or before the order for relief, includes taxes 
incurred during the conduct of such activities.
    Paragraph (3) expands and increases the wage priority found in 
current section 64a(2) [section 104(a)(2) of former title 11]. The 
amount entitled to priority is raised from $600 to $1,800. The former 
figure was last adjusted in 1926. Inflation has made it nearly 
meaningless, and the bill brings it more than up to date. The three 
month limit of current law is retained, but is modified to run from the 
earlier of the date of the filing of the petition or the date of the 
cessation of the debtor's business. The priority is expanded to cover 
vacation, severance, and sick leave pay. The bill adds to the third 
priority so-called ``trust fund'' taxes, that is, withheld income taxes 
and the employees' share of the social security or railroad retirement 
taxes, but only to the extent that the wages on which taxes are imposed 
are themselves entitled to third priority.
    The employer's share, the employment tax and the employer's share of 
the social security or railroad retirement tax on third priority 
compensation, is also included in the third priority category, but only 
if, and to the extent that the wages and related trust fund taxes have 
first been paid in full. Because of the claimants urgent need for their 
wages in the typical cases, the employer's taxes should not be paid 
before the wage claims entitled to priority, as well as the related 
trust fund taxes, are fully paid.
    Paragraph (4) overrules United States v. Embassy Restaurant, 359 
U.S. 29 (1958), which held that fringe benefits were not entitled to 
wage priority status. The bill recognizes the realities of labor 
contract negotiations, where fringe benefits may be substituted for wage 
demands. The priority granted is limited to claims for contributions to 
employee benefit plans such as pension plans, health or life insurance 
plans, and others, arising from services rendered within 120 days before 
the commencement of the case or the date of cessation of the debtor's 
business, whichever occurs first. The dollar limit placed on the total 
of all contributions payable under this paragraph is equal to the 
difference between the maximum allowable priority under paragraph (3), 
$1,800, times the number of employees covered by the plan less the 
actual distributions under paragraph (3) with respect to these 
employees.
    Paragraph (5) is a new priority for consumer creditors--those who 
have deposited money in connection with the purchase, lease, or rental 
of property, or the purchase of services, for their personal, family, or 
household use, that were not delivered or provided. The priority amount 
is not to exceed $600. In order to reach only those persons most 
deserving of this special priority, it is limited to individuals whose 
adjustable gross income from all sources derived does not exceed 
$20,000. See Senate Hearings, testimony of Prof. Vern Countryman, at pp. 
848-849. The income of the husband and wife should be aggregated for the 
purposes of the $20,000 limit if either or both spouses assert such a 
priority claim.
    The sixth priority is for certain taxes. Priority is given to income 
taxes for a taxable year that ended on or before the date of the filing 
of the petition, if the last due date of the return for such year 
occurred not more than 3 years immediately before the date on which the 
petition was filed (Sec. 507(a)(6)(A)(i)). For the purposes of this 
rule, the last due date of the return is the last date under any 
extension of time to file the return which the taxing authority may have 
granted the debtor.
    Employment taxes and transfer taxes (including gift, estate, sales, 
use and other excise taxes) are also given sixth priority if the 
transaction or event which gave rise to the tax occurred before the 
petition date, provided that the required return or report of such tax 
liabilities was last due within 3 years before the petition was filed or 
was last due after the petition date (Sec. 507(a)(6)(A)(ii)). The 
employment taxes covered under this rule are the employer's share of the 
social security and railroad retirement taxes and required employer 
payments toward unemployment insurance.
    Priority is given to income taxes and other taxes of a kind 
described in section 507(a)(6)(A)(i) and (ii) which the Federal, State, 
or local tax authority had assessed within 3 years after the last due 
date of the return, that is, including any extension of time to file the 
return, if the debtor filed in title 11 within 240 days after the 
assessment was made (Sec. 507(a)(6)(B)(i)). This rule may bring into the 
sixth priority the debtor's tax liability for some taxable years which 
would not qualify for priority under the general three-year rule of 
section 507(a)(6)(A).
    The sixth priority category also includes taxes which the tax 
authority was barred by law from assessing or collecting at any time 
during the 300 days before the petition under title 11 was filed 
(Sec. 507(a)(6)(B)(ii)). In the case of certain Federal taxes, this 
preserves a priority for tax liabilities for years more than three years 
before the filing of the petition where the debtor and the Internal 
Revenue Service were negotiating over an audit of the debtor's returns 
or were engaged in litigation in the Tax Court. In such situations, the 
tax law prohibits the service's right to assess a tax deficiency until 
ninety days after the service sends the taxpayer a deficiency letter or, 
if the taxpayer files a petition in the Tax Court during that 90-day 
period, until the outcome of the litigation. A similar priority exists 
in present law, except that the taxing authority is allowed no time to 
assess and collect the taxes after the restrictions on assessment 
(discussed above) are lifted. Some taxpayers have exploited this 
loophole by filing in bankruptcy immediately after the end of the 90-day 
period or immediately after the close of Tax Court proceedings. The bill 
remedies this defect by preserving a priority for taxes the assessment 
of which was barred by law by giving the tax authority 300 days within 
which to make the assessment after the lifting of the bar and then to 
collect or file public notice of its tax lien. Thus, if a taxpayer files 
a title 11 petition at any time during that 300-day period, the tax 
deficiency will be entitled to priority. If the petition is filed more 
than 300 days after the restriction on assessment was lifted, the taxing 
authority will not have priority for the tax deficiency.
    Taxes for which an offer in compromise was withdrawn by the debtor, 
or rejected by a governmental unit, within 240 days before the petition 
date (Sec. 507(a)(6)(B)(iii)) will also receive sixth priority. This 
rule closes a loophole under present law under which, following an 
assessment of tax, some taxpayers have submitted a formal offer in 
compromise, dragged out negotiations with the taxing authority until the 
tax liability would lose priority under the three-year priority period 
of present law, and then filed in bankruptcy before the governmental 
unit could take collection steps.
    Also included are certain taxes for which no return or report is 
required by law (Sec. 507(a)(6)(C)), if the taxable transaction occurred 
within three years before the petition was filed.
    Taxes (not covered by the third priority) which the debtor was 
required by law to withhold or collect from others and for which he is 
liable in any capacity, regardless of the age of the tax claims 
(Sec. 507(a)(6)(D)) are included. This category covers the so-called 
``trust fund'' taxes, that is, income taxes which an employer is 
required to withhold from the pay of his employees, the employees' 
shares of social security and railroad retirement taxes, and also 
Federal unemployment insurance. This category also includes excise taxes 
which a seller of goods or services is required to collect from a buyer 
and pay over to a taxing authority.
    This category also covers the liability of a responsible corporate 
officer under the Internal Revenue Code [title 26] for income taxes or 
for the employees' share of employment taxes which, under the tax law, 
the employer was required to withhold from the wages of employees. This 
priority will operate where a person found to be a responsible officer 
has himself filed a petition under title 11, and the priority covers the 
debtor's liability as an officer under the Internal Revenue Code, 
regardless of the age of the tax year to which the tax relates.
    The priority rules under the bill governing employment taxes can be 
summarized as follows: In the case of wages earned and actually paid 
before the petition under title 11 was filed, the liability for the 
employees' share of the employment taxes, regardless of the prepetition 
year in which the wages were earned and paid. The employer's share of 
the employment taxes on all wages earned and paid before the petition 
receive sixth priority; generally, these taxes will be those for which a 
return was due within three years before the petition. With respect to 
wages earned by employees before the petition but actually paid by the 
trustee after the title 11 case commenced, taxes required to be withheld 
receives the same priority as the wages themselves. Thus, the employees' 
share of taxes on third priority wages also receives third priority. 
Taxes on the balance of such wages receive no priority and are 
collectible only as general claims because the wages themselves are 
payable only as general claims and liability for the taxes arises only 
to the extent the wages are actually paid. The employer's share of 
employment taxes on third priority wages earned before the petition but 
paid after the petition was filed receives third priority, but only if 
the wages in this category have first been paid in full. Assuming there 
are sufficient funds to pay third priority wages and the related 
employer taxes in full, the employer's share of taxes on the balance of 
wage payments becomes a general claim (because the wages themselves are 
payable as general claims). Both the employees' and the employer's share 
of employment taxes on wages earned and paid after the petition was 
filed receive first priority as administrative expenses.
    Also covered by this sixth priority are property taxes required to 
be assessed within 3 years before the filing of the petition 
(Sec. 507(a)(6)(E)).
    Taxes attributable to a tentative carryback adjustment received by 
the debtor before the petition was filed, such as a ``quickie refund'' 
received under section 6411 of the Internal Revenue Code [title 26] 
(Sec. 507(a)(6)(F)) are included. However, the tax claim against the 
debtor will rein a prepetition loss year for which the tax return was 
last due, including extensions, within 3 years before the petition was 
filed.
    Taxes resulting from a recapture, occasioned by a transfer during 
bankruptcy, of a tax credit or deduction taken during an earlier tax 
year (Sec. 507(a)(6)(G)) are included. A typical example occurs when 
there is a sale by the trustee of depreciable property during the case 
and depreciation deductions taken in prepetition years are subject to 
recapture under section 1250 of the Code [title 26].
    Taxes owed by the debtor as a transferee of assets from another 
person who is liable for a tax, if the tax claim against the transferor 
would have received priority in a chapter 11 case commenced by the 
transferor within 1 year before the date of the petition filed by the 
transferee (Sec. 507(a)(6)(H)), are included.
    Also included are certain tax payments required to have been made 
during the 1 year immediately before the petition was filed, where the 
debtor had previously entered into a deferred payment agreement 
(including an offer in compromise) to pay an agreed liability in 
periodic installments but had become delinquent in one or more 
installments before the petition was filed (Sec. 507(a)(6)(I)). This 
priority covers all types of deferred or part payment agreements. The 
priority covers only installments which first became due during the 1 
year before the petition but which remained unpaid at the date of the 
petition. The priority does not come into play, however, if before the 
case began or during the case, the debtor and the taxing authority agree 
to a further extension of time to pay the delinquent amounts.
    Certain tax-related liabilities which are not true taxes or which 
are not collected by regular assessment procedures (Sec. 507(a)(6)(J)) 
are included. One type of liability covered in this category is the 
liability under section 3505 of the Internal Revenue Code [title 26] of 
a lender who pays wages directly to employees of another employer or who 
supplies funds to an employer for the payment of wages. Another is the 
liability under section 6332 of the Internal Revenue Code [title 26], of 
a person who fails to turn over money or property of the taxpayer in 
response to a levy. Since the taxing authority must collect such a 
liability from the third party by suit rather than normal assessment 
procedures, an extra year is added to the normal 3-year priority 
periods. If a suit was commenced by the taxing authority within the 
four-year period and before the petition was filed, the priority is also 
preserved, provided that the suit had not terminated more than 1 year 
before the date of the filing of the petition.
    Also included are certain unpaid customs duties which have not grown 
unreasonably ``stale'' (Sec. 507(a)(6)(K)). These include duties on 
imports entered for consumption with 3 years before the filing of the 
petition if the duties are still unliquidated on the petition date. If 
an import entry has been liquidated (in general, liquidation is in an 
administrative determination of the value and tariff rate of the item) 
or reliquidated, within two years of the filing of the petition the 
customs liability is given priority. If the Secretary of the Treasury 
certifies that customs duties were not liquidated because of an 
investigation into possible assessment of antidumping or countervailing 
duties, or because of fraud penalties, duties not liquidated for this 
reason during the five years before the importer filed under title 11 
also will receive priority.
    Subsection (a) of this section also provides specifically that 
interest on sixth priority tax claims accrued before the filing of the 
petition is also entitled to sixth priority.
    Subsection (b) of this section provides that any fine or penalty 
which represents compensation for actual pecuniary loss of a 
governmental unit, and which involves a tax liability entitled to sixth 
priority, is to receive the same priority.
    Subsection (b) also provides that a claim arising from an erroneous 
refund or credit of tax is to be given the same priority as the tax to 
which the refund or credit relates.


                               Amendments

    1994--Subsec. (a)(3). Pub. L. 103-394, Sec. 207, amended par. (3) 
generally. Prior to amendment, par. (3) read as follows: ``Third, 
allowed unsecured claims for wages, salaries, or commissions, including 
vacation, severance, and sick leave pay--
        ``(A) earned by an individual within 90 days before the date of 
    the filing of the petition or the date of the cessation of the 
    debtor's business, whichever occurs first; but only
        ``(B) to the extent of $2,000 for each such individual.''
    Subsec. (a)(4)(B)(i). Pub. L. 103-394, Sec. 108(c)(1), substituted 
``$4,000'' for ``$2,000''.
    Subsec. (a)(5). Pub. L. 103-394, Secs. 108(c)(2), 501(b)(3), 
substituted ``section 557(b)'' for ``section 557(b)(1)'' after ``grain, 
as defined in'' and ``section 557(b)'' for ``section 557(b)(2)'' after 
``facility, as defined in'' in subpar. (A) and ``$4,000'' for ``$2,000'' 
in concluding provisions.
    Subsec. (a)(6). Pub. L. 103-394, Sec. 108(c)(3), substituted 
``$1,800'' for ``$900''.
    Subsec. (a)(7). Pub. L. 103-394, Sec. 304(c)(3), added par. (7). 
Former par. (7) redesignated (8).
    Subsec. (a)(8). Pub. L. 103-394, Sec. 304(c)(2), redesignated par. 
(7) as (8) and substituted ``Eighth'' for ``Seventh''. Former par. (8) 
redesignated (9).
    Subsec. (a)(9). Pub. L. 103-394, Secs. 304(c)(1), 501(d)(11)(A), 
redesignated par. (8) as (9) and substituted ``Ninth'' for ``Eighth'' 
and ``a Federal depository institutions regulatory agency (or 
predecessor to such agency)'' for ``the Federal Deposit Insurance 
Corporation, the Resolution Trust Corporation, the Director of the 
Office of Thrift Supervision, the Comptroller of the Currency, or the 
Board of Governors of the Federal Reserve System, or their predecessors 
or successors,''.
    Subsec. (d). Pub. L. 103-394, Sec. 501(d)(11)(B), substituted 
``(a)(6), (a)(7), (a)(8), or (a)(9)'' for ``or (a)(6)''.
    1990--Subsec. (a)(8). Pub. L. 101-647 added par. (8).
    1984--Subsec. (a)(3). Pub. L. 98-353, Sec. 449(a)(1), inserted a 
comma after ``severance''.
    Subsec. (a)(4). Pub. L. 98-353, Sec. 449(a)(2), substituted ``an 
employee benefit plan'' for ``employee benefit plans'' in provisions 
preceding subpar. (A).
    Subsec. (a)(4)(B)(i). Pub. L. 98-353, Sec. 449(a)(3), inserted 
``each'' after ``covered by''.
    Subsec. (a)(5). Pub. L. 98-353, Sec. 350(3), added par. (5). Former 
par. (5) redesignated (6).
    Subsec. (a)(6). Pub. L. 98-353, Sec. 350(1), redesignated former 
par. (5) as (6) and substituted ``Sixth'' for ``Fifth''. Former par. (6) 
redesignated (7).
    Subsec. (a)(7). Pub. L. 98-353, Secs. 350(2), 449(a)(4), 
redesignated former par. (6) as (7), substituted ``Seventh'' for 
``Sixth'', and inserted ``only'' after ``units,''.
    Subsec. (c). Pub. L. 98-353, Sec. 449(b), substituted ``has the same 
priority'' for ``shall be treated the same''.


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.


                      Adjustment of Dollar Amounts

    For adjustment of dollar amounts specified in subsec. (a)(3), 
(4)(B)(i), (5), (6) of this section by the Judicial Conference of the 
United States, effective Apr. 1, 1998, see note set out under section 
104 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 104, 364, 365, 502, 503, 
523, 724, 726, 752, 766, 901, 943, 1123, 1129, 1222, 1226, 1322, 1326 of 
this title; title 15 section 78fff.



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