In re:

KELLY C. HEITSTUMAN and MARY C. HEITSTUMAN,

Debtors.

Case No. A01-01223-DMD Chapter 13

The debtor Kelly C. Heitstuman initially operated a business known as Eagle Mountain Excavation as a sole proprietorship. On February 7, 2000, Heitstuman incorporated the business under the name “Eagle Mountain Excavation, Inc.” Heitstuman and his wife jointly filed for chapter 13 relief on November 8, 2001.

The debtors have objected to three Internal Revenue Service (IRS) claims filed in this chapter 13 proceeding. The bar date for submission of government claims was May 7, 2002. The first government claim was filed March 1, 2002 in the amount of $10,470.00. It included a secured claim of $5,134.29 for FICA Form 941 withholding taxes due from the sole proprietorship, Eagle Mountain Excavation. The taxes were due from the tax period ending June 30, 1998 and were assessed on September 28, 1998. The secured claim was based on a tax lien filed in the Anchorage Recording District on October 7, 1999. The tax lien also included debts for other 941 taxes arising in 1998 and 940 taxes arising early in 1999. The claim also includes an unsecured priority claim for income taxes in the sum of $5,035.79.

The debtors filed a late claim for the IRS on June 5th, 2002. This claim listed priority income taxes in the sum of $15,000.00.

On January 29, 2003, the IRS filed another proof of claim. This claim totaled $43,258.37. Its secured claim remained the same, $5,134.29, but its unsecured priority claim increased from $5,035.79 to $37,824.66. The source of the increase was a civil penalty of $32,788.27 arising from the tax period ending June 30, 2001. The debtors contend that the civil penalty asserted in the late claim is unenforceable because it was filed nearly 9 months after the bar date for governmental claims.

A creditor can file a claim after the bar date when the proof of claim is an amendment to a timely filed claim but not a separate and distinct claim. ¹

In Menick v. Hoffman, ²

the Ninth Circuit allowed a proof of claim filed six months after the bar date for income taxes. Its original timely claim had been for withholding taxes and federal insurance act taxes; not income taxes. Bankruptcy courts have been reluctant to extend Menick beyond the particular facts involved. In In re Osborne, ³

a bankruptcy court in the central district of California refused to allow a late-filed claim for payroll taxes when the initial timely claim was only for income taxes. Osborne was upheld on appeal by the Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit itself. ⁴

The bankruptcy court in Osborne followed a two-step analysis in determining whether an amendment to a timely claim was valid. “A court must determine, first, whether the new claim filed after the bar date bears a reasonable relationship to the original filing and, second, whether the balancing of equities supports the allowance of the new claim.” ⁵

The first claim of the IRS included a claim for “WT-FICA” or Social Security FICA ⁶

taxes arising under 26 U.S.C. § 3111(a). Section 3111(a) requires employers to pay a tax equal to 6.2% of post-1990 employee wages. Should an employer fail to remit the tax, it will be liable for a penalty equal to the amount of the tax. ⁷

Here the FICA withholding taxes in the first claim were due June 30, 1998. Claim No. 48, filed by the IRS on January 29, 2003, included a claim for the tax period ending June 30, 2001. It was described as a civil penalty, a potential liability pursuant to § 6672 of the Internal Revenue Code. The amount listed was for $32,788.27.

Does the claim for a civil penalty bear a reasonable relationship to the original claim? Here it is impossible to tell. A civil penalty can be assessed for any tax. ⁸

There is no breakdown of the individual penalty components in the later claim. Is the penalty imposed for income taxes, social security taxes, or federal unemploy-

7 ABR 542 ment insurance taxes? If it is imposed for income taxes or FICA, it would bear a reasonable relationship to the initial timely claim. ⁹

If it was imposed for federal unemployment taxes or FUTA, ¹⁰

it would not bear a reasonable relationship to the original claim because the original claim contained no FUTA liability. No determination of the validity of the civil penalty can be made until the IRS provides a breakdown of the penalty components.

The second issue to be resolved is whether the balancing of the equities supports allowance of the amended claim. Again, it is impossible for the court to apply the equitable considerations of In re Miss Glamour Coat Co., Inc., ¹¹

without knowing the penalty components. A status conference regarding the objections to claims will be promptly scheduled to deal with this issue.

3 In re Osborne, 159 B.R. 570, 574 (Bankr. C.D. Ca. 1993), Aff'd 167 B.R. 698 (9th Cir. BAP 1994); Aff'd 76 F3d 306 (9th Cir. 1996).

9 In my view, the fact that the debtors incorporated their business on Feb.7th, 2000 does not sever the relationship between the claims.