1.  INTRODUCTION - Ryan Air Service, Inc. seeks to recover money it claims to have overpaid the Alaska Department of Labor Employment Security Division (ESD) after the confirmation of its chapter 11 plan. After confirmation, the ESD charged Ryan a penalty rate for its employer's share of employment security taxes because Ryan Air had not yet completely paid certain pre-petition contributions. These pre-petition contributions were to be paid over time under the terms of Ryan Air's confirmed plan. I conclude that Ryan Air is entitled to a refund.

     2.  FACTUAL AND PROCEDURAL BACKGROUND - Ryan Air Service, Inc. filed a chapter 11 bankruptcy on February 1, 1988. A plan of reorganization was confirmed on July 9, 1990.

In the plan of reorganization, Ryan provided for a payment of delinquent taxes due to the ESD, with interest. ESD did not object to       3 ABR 376  this treatment.

Nonetheless, ESD assigned a penalty contribution rate to Ryan for its employer's share of post-confirmation taxes because of the delinquent pre-petition ESD taxes. The statutory authority cited by ESD is AS 23.20.280(c):

(c) An employer who, because of failure to pay contributions or file reports timely, does not qualify for a rate determination under AS 23.20.280 -- 23.20.310 shall pay contributions at the highest rate provided in AS 23.20.280 -- 23.20.310.

AS 28.20.305 provides:

(a) The department shall promptly notify each employer of the rate of contributions for the employer as determined for a calendar year under AS 23.20.280 -- 23.20.310. The determination becomes conclusive upon the employer unless within 15 days after the notice is mailed to the employer's last address of record or delivered to the employer, the employer files an application for review and redetermination, setting out the reasons for the application.

ESD gave notice of the "C" rate it proposed to assign to Ryan Air yearly for the years 1990, 1991, and 1992. For each of these years ESD informed Ryan Air that it had 15 days to appeal pursuant to AS 23.20.305, but Ryan Air did not appeal the assignment of a "C" rate of a delinquent employer taxpayer within the 15 days allowed.

In 1993, however, Ryan did notice that ESD was proposing to assign it with a "C" rate for 1993, and filed a timely appeal requesting not only a reduction in the rate for 1993, but the years 1990 through 1992, which were not timely appealed pursuant to the state statute.

ESD agreed to reduce the rate for 1993, but not for 1990 through 1992. Approximately $80,000.00 is at issue.

An administrative hearing was held by the Commissioner of the Department of Labor. In an order dated March 31, 1993, the Commissioner indicated the Department had no authority to waive the 15 day limitation on appeals from rate designations. The Commissioner said the ESD did not have the bankruptcy expertise to determine if the imposition of the penalty rate was improper. Although the March 31, 1993 order gives 30 days to appeal, both ESD and Ryan Air represented to this court that they had agreed, with the Department of Labor's acquiescence, that the matter would be referred to the bankruptcy court for a decision as to whether       3 ABR 377  imposition of a "C" rate for the years 1990 through 1992 was an improper impingement on bankruptcy policy.

     3.  LEGAL ANALYSIS -

     3.1.  Does the Court Have Jurisdiction to Make a Determination Under § 505 of the Bankruptcy Code? - The parties do not discuss 11 USC § 505, but § 505 seems to be applicable to the controversy and relevant to ESD's argument regarding untimeliness. § 505 provides in part:

Section 505. Determination of tax liability

(a)(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

(2) The court may not so determine--

(A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title; or

(B) any right of the estate to a tax refund, before the earlier of--

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request.

No adjudication of the amount or legality of the ESD tax or penalty has been made by any tribunal either "before the commencement of the case under this title [title 11 of the United States Code]" or after the bankruptcy petition was filed for that matter. Both parties have agreed that the issue of whether the ESD is entitled to charge the "C" or penalty rate be referred to this court.

Some bankruptcy courts have been reluctant to address such matters after confirmation of a chapter 11 plan. In re Marcellus Wood & Trucking, Inc., 158 BR 650, 654 (Bankr WD Mich 1993) noted that relief under § 505 is discretionary. Because the debtor in Marcellus Wood & Trucking had a confirmed chapter 11 plan, the court (as an alternative holding) declined to hear a tax matter because it would only have       3 ABR 378  benefitted the debtor and not the estate since a plan had been confirmed and there was no estate. The court felt that § 505(a)(1) existed to benefit the estate and not a post-confirmation debtor. See, also, In re Maley, 152 BR 788 (Bankr WDNY 1992) (court should generally not use its equitable discretion to determine debtor's post-confirmation tax liabilities).

I also have declined to rule on a § 505 motion involving federal income taxes on the grounds that the entire matter arose from post-petition events. In re Callan, 2 ABR 355 (Bankr D Alaska 1992).

The present case, to the contrary, involves matters much more closely related to real bankruptcy issues, such as the effect of discharge under § 1141 and discrimination under § 525 of the Bankruptcy Code. The court in In re Original Wild West Foods, Inc., 45 BR 202 (Bankr WD Tex 1984) held that the bankruptcy court retains jurisdiction to enter a post-confirmation order necessary to support consummation of confirmed plan.

While Ryan has not argued that the "C" penalty rate will thwart consummation of the plan, the issue raised is still a core bankruptcy issue. The "C" rate may not effect the "estate" which terminated when the property revested in Ryan Air on confirmation under § 1141(b) of the Bankruptcy Code, but it does effect an important bankruptcy interest, the extent of Ryan Air's discharge. Thus, it is distinguishable from In re Marcellus Wood & Trucking, Inc.. Also, § 505 does not limit its applicability only to the "estate." The legislative history seems to contemplate a bankruptcy court having jurisdiction in a situation such as the one present. Compare, Quattrone Accountants, Inc. v IRS, 895 F2d 925, 925 (3rd Cir 1990).

Therefore, I believe that this court has jurisdiction to make the determination and this is an appropriate case to exercise it if the request is timely.

     3.2.  Is Ryan's Claim Under § 505 Time Barred? -

AS 23.20.305 provides that the penalty rate becomes conclusive unless an objection is filed within 15 days after notice of the imposition of rate is given. ESD argues that this bars Ryan Air from recovery of the 1990 through 1992 taxes.

Another limitation which might apply is AS 23.20.300 which provides:

Sec. 23.20.300 Corrections and adjustments.

Corrections or modifications of an employer's payroll may be taken into account within two years after the computation date for the purpose of a reduction or increase in the employer's rate. When an adjustment is made in an employer's payroll or in an employer's average quarterly decline quotient after rates have been assigned, the adjustment may not alter the position of another employer on the schedule or the contribution rate of another employer. The employer for whom the adjustment in decline quotients is made shall be placed in the class in which another employer with the nearest similar average quarterly decline quotient is placed.

Another rationale for § 505 is that Congress intended to provide a forum for a speedy resolution of tax issues. In re Grand Chevrolet, Inc., 153 BR 296, 300 (CD Cal 1993) and In re Swan, 152 BR 28, 30 (Bankr WDNY 1992).

These stated policy reasons are less persuasive under the facts of this case, but Ryan Air is correct that the imposition of the penalty rate is in violation of its discharge and discriminatory (see ¶¶ 3.3 and 3.4 on this Memorandum Decision). Thus, I will apply the literal reading of § 505(a) which relieves a trustee, a debtor-in-possession, or a debtor in appropriate circumstances from limitations such as AS 23.20.300 and .305.

     3.3. Should Active Steel Erectors be Followed? - The facts of this case are perhaps not quite as strong as In re Active Steel Erectors, Inc., 53 BR 851 (Bankr D Alaska 1985), but only because Ryan Air was slow on the uptake and only focused on the fact that it was being charged a penalty rate for employment security contributions because of pre-petition taxes which were to be paid under Ryan's confirmed plan. Otherwise, Active Steel Erectors controls. Enforcement of a "C" penalty rate on the basis of delinquent taxes which have been discharged under       3 ABR 380  a chapter 11 plan violates the Supremacy Clause of the United States Constitution. See, Perez v Campbell, 402 US 637, 91 SCt 1704, 1708 (1971).

ESD argues that the pre-confirmation delinquent employment security contributions were not discharged by Ryan Air's confirmation under § 523(a)(1) of the Bankruptcy Code. However, § 523(a) only applies to individuals who receive a chapter 11 discharge. § 1141(d) provides:

(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan-

(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title [11 USC § 506(g), (h), or (i)], whether or not-

(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title [11 USC S 501];

(ii) such claim is allowed under section 502 of this title [11 USC § 502]; or

(iii) the holder of such claim has accepted the plan; and

(B) terminates all rights and interests of equity security holders and general partners provided for by the plan.

(2) The confirmation of a plan does not discharge an individual debtor from any debt excepted from discharge under section 523 of this title [11 USC § 523]. [emphasis added]

Thus, the pre-petition ESD delinquent taxes were provided for in the plan and discharged. The use of these discharged taxes as a basis for charging a "C" rate was improper under Active Steel Erectors.

     3.4. Is § 525(a) of the Bankruptcy Code Applicable? -

ESD's action in charging Ryan Air a "C" penalty rate also violates § 525(a) of the Bankruptcy Code. The judge who decided Active Steel Erectors felt § 525(a) was not applicable. See, id at fn 6. I feel, § 525(a) is applicable and is an additional reason why ESD's charging the "C" rate is objectionable.

      3 ABR 381  11 USC § 525(a) provides:

(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499a-499s), the Packers and Stockyards Act, 1921 (7 U.S.C. 181-229), and section 1 of the Act entitled "An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes," approved July 12, 1943 (57 Stat. 422; 7 U.S.C. 204), a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

In In re Rees, a factually similar case, the court held that, because of the restrictive wording of the § 525(a), it did not apply. The court noted that the statute speaks of licenses, permits, charters, and franchises, but not of "rates." Thus, the court held in Rees that the setting of a higher or penalty "rate" by the government based on non-payment of pre-petition taxes was not prohibited by § 525.

Rees contains an excellent review of the case law and legislative history, but in reaching his conclusion that § 525(a) was not breached by the setting of a higher rate, the judge imposed too narrow a reading on the language and spirit of § 525(a). See, 3 Collier on Bankruptcy ¶ 525.02[5] at 525-12 (15th ed 1993).

ESD cites In re A.C. Williams Company, 51 BR 496 (Bankr ND Ohio 1984) as an example of a case which refused to read § 525(a) expansively. The debtor sought to prevent the Ohio Bureau of Workers' Compensation from rating a debtor with a confirmed chapter 11 plan based upon pre-petition and pre-confirmation experience. Court states at 500: "A review of authorities indicates that section 525 has accordingly been applied to disputes involving licenses, permits, etc., not rate determinations."

But, the rate determination in A.C. Williams was based upon safety experience not non-payment of a discharged pre-petition tax. The same judge in In re Geffken, 43 BR 697 (Bankr ND Ohio 1984) seems to have       3 ABR 372  found a violation under § 525(a) in circumstances similar to the case at bar. Geffken involved chapter 13 debtor's injunction against the Industrial Commission of Ohio's pre-petition suit to close debt for failure to pay premiums under workers' compensation fund. In addition to finding the Commission's action stayed by § 362(a), the court held that it was prohibited by § 525 and Perez v Cambell.

The legislative history for § 525(a) provides that the list of discriminatory activities included (i.e., the denial, revocation, suspension, or failure to renew a license, permit, charter, franchise, or similar grant) was not meant to be exclusive or exhaustive. The legislative history suggests that the courts were to be permitted to develop the case law in this area to determine what kind of discriminatory treatment would be violative of this section. 3 Collier on Bankruptcy, ¶ 525.01 at 525-2 (15th ed 1993). I believe the setting of a penalty rate based upon a discharged debt is little different from denying or conditioning a license based upon such a debt. § 525(a) should apply in the present situation to bar ESD from imposing a penalty rate.

See, generally, Annot. Protection of Debtor from Acts of Discrimination by Governmental Units under the Bankruptcy Code of 1978, 68 ALR Fed 137-56 (1984).

     4.  CONCLUSION - A separate order will issue requiring ESD to refund the difference between the non-penalty rate and the penalty rate. As an interim step, the court will ask the parties, if they can, to agree upon the amount of the judgment and an appropriate interest rate up to the date of the order. Interest from the date of the order shall be at the federal judgment rate under 28 USC § 1961.

Ryan Air should lodge an appropriate order in the form of a judgment. If the parties cannot agree on the figures, each should file a brief setting forth the appropriate calculations, including any authority for the interest rate to be assessed up to the date of the judgment.

DATED: May 9, 1994

HERBERT A. ROSS
U.S. Bankruptcy Judge