Facts of the Case

The IRS filed claims in Bankruptcy Court for taxes, interest, and penalties that accrued when Thomas R. Noland, the trustee of the in-debt First Truck Lines, Inc., sought relief under federal Bankruptcy Code. The Bankruptcy Court held that the claims for taxes and interest were the first priority in the case. Consequently, the court subordinated the penalties, to be adjudicated following the taxes and interest, because the penalties were not financial losses for the IRS. The Court of Appeals affirmed the decision.

Question

May a bankruptcy court subordinate government attempts to collect tax penalties?

Conclusion

No. In a unanimous decision, announced by Justice David H. Souter, the Court ruled that giving tax-penalty claims a lower priority than other claims contradicts Congress_ scheme of priorities regarding federal bankruptcy law.