                        T.C. Memo. 2010-194



                      UNITED STATES TAX COURT



                 JOHN L. LEATHLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 31113-09L.              Filed September 7, 2010.



     Daniel J. Arno, for petitioner.

     John M. Janusz, for respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   The petition in this case was filed in

response to a Notice of Determination Concerning Collection
                                - 2 -

Action(s) Under Section 6320 and/or 6330 (notice of

determination) for petitioner’s taxable years 2000, 2001 and

2002.1   This case is before the Court on respondent’s motion for

summary judgment filed pursuant to Rule 121.    With regard to tax

year 2001, that liability has a zero balance, making that year

moot.    Furthermore, petitioner concedes that tax year 2002 is not

at issue.    Therefore, the only substantive issue to decide is

whether the determination made by respondent’s settlement officer

to sustain the filing of the notice of Federal tax lien with

respect to the accrued interest on petitioner’s paid 2000 income

tax liability was correct.    Petitioner contends that the interest

on the tax liability for 2000 was discharged in petitioner’s

bankruptcy proceeding.

                             Background

     At the time the petition was filed, petitioner resided in

New York.

     Petitioner’s 2000 Federal income tax return was due on April

15, 2001.    The Internal Revenue Service received the return on

December 4, 2003, without full payment.    Petitioner filed a

petition in bankruptcy on October 14, 2005.    On or about March 3,

2009, respondent sent to petitioner a Notice of Federal Tax Lien

Filing and Your Right to a Hearing Under IRC 6320, which advised


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 3 -

petitioner that a notice of Federal tax lien (NFTL) had been

filed with respect to his 2000, 2001, and 2002 unpaid tax

liabilities and that petitioner could request a hearing with

respondent’s Office of Appeals.   Petitioner filed with respondent

a Form 12153, Request for a Collection Due Process or Equivalent

Hearing, for the covered years.   Attached to the Form 12153 was a

letter from petitioner’s representative stating, among other

things, that the tax principal for the liabilities at issue had

been paid and that the penalties and interest thereon were

discharged by petitioner’s bankruptcy filing.   By letter dated

October 15, 2009, sent to respondent’s settlement officer,

petitioner’s representative reiterated that the tax principal had

been paid and that the interest and penalties had been discharged

“because the incidences that gave rise to these taxes were more

than three years old.”   Respondent’s settlement officer sent a

response letter dated November 24, 2009, to petitioner’s

representative advising petitioner that it was respondent’s

position that the penalties were discharged2 in the bankruptcy

but the interest on the principal was not discharged.

     Respondent’s Appeals Office issued to petitioner a notice of

determination dated December 4, 2009, for taxable years 2000 (the

year at issue), 2001, and 2002.   The notice of determination


     2
      The Form 4340, Certificate of Assessments, Payments, and
Other Specified Matters, attached to respondent’s motion shows
the abatement of the penalties.
                                 - 4 -

indicated that respondent’s Appeals Office determined that the

NFTL would not be released and that the interest at issue was not

discharged in petitioner’s bankruptcy.

     Petitioner filed with the Court a petition for lien or levy

action under section 6320(c) or 6330(d).

                              Discussion

     This case is before the Court on respondent’s motion for

summary judgment, to which petitioner objects.    Summary judgment

is intended to expedite litigation and avoid unnecessary and

expensive trials.    See FPL Group, Inc. & Subs. v. Commissioner,

116 T.C. 73, 74 (2001).    Rule 121(a) provides that either party

may move for summary judgment upon all or any part of the legal

issues in controversy.    Full or partial summary judgment is

appropriate where there is no genuine issue as to any material

fact and a decision may be rendered as a matter of law.    See Rule

121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).    The parties agree

that there are no genuine issues in dispute regarding any

material facts.     The only issue we must decide is whether the

accrual of interest on petitioner’s income tax liability for 2000

has been discharged in petitioner’s bankruptcy.    It is undisputed

that petitioner was not discharged from his liability for the

principal amount of income tax due for 2000.
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       A debtor remains personally liable after his discharge for

the principal amount of a nondischargeable tax debt and any

prepetition interest on that tax debt that was not satisfied out

of the bankruptcy estate.    Bruning v. United States, 376 U.S.

358, 360 (1964); In re Larson, 862 F.2d 112, 119 (7th Cir. 1988).

A debtor also remains personally liable for postpetition interest

where the underlying tax debt is not discharged.    Bruning v.

United States, supra at 360; Hanna v. United States, 872 F.2d

829, 831 (8th Cir. 1989); Burns v. United States, 887 F.2d 1541,

1543 (11th Cir. 1989).    Interest is treated as an integral part

of the tax debt upon which it accrues.    Bruning v. United States,

supra.    Interest has therefore been treated as part of the

“claim”, is accorded the same priority status as the underlying

liability, and has been found to be nondischargeable where the

underlying liability is nondischargeable.    In re Larson, supra at

119.

       In the case before us, it is uncontested that the principal

amount of tax was not discharged in petitioner’s bankruptcy

proceeding.    Because the Federal income tax was not discharged in

the bankruptcy proceeding, any interest with respect to the

nondischargeable tax is also not discharged.    On the basis of the

aforementioned caselaw and precedent, we hold that the accrued

interest with respect to petitioner’s underlying tax liability
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for 2000 was not discharged in petitioner’s bankruptcy because

the underlying tax was itself not dischargeable.

     Petitioner’s argument that the interest relating to the 2000

tax liability was discharged in petitioner’s bankruptcy

proceeding is predicated on 11 U.S.C. section 523(a)(7)(B)

(2006).   Title 11 U.S.C. section 523(a)(7)(B) provides:

     § 523.    Exceptions to discharge

          (a) A discharge under section 727, 1141, 1228(a),
     1228(b), or 1328(b) of this title does not discharge an
     individual debtor from any debt--

                   *     *   *    *      *   *   *

          (7) to the extent such debt is for a fine,
     penalty, or forfeiture payable to and for the benefit
     of a governmental unit, and is not compensation for
     actual pecuniary loss, other than a tax penalty—-

                   *     *   *    *      *   *   *

          (B) imposed with respect to a transaction or event
     that occurred before three years before the date of the
     filing of the petition;

     [Emphasis added.]

     Petitioner argues that “there should be no distinction

between prepetition interest and pecuniary penalties under the

Bankruptcy Law, § 523(a)(7)(B).    That section discharges all such

penalties which we believe includes prepetition interest for

events that occurred more than 3 years prior to the filing of the

bankruptcy.”    In support, petitioner relies on In re Palmer, 88

Bankr. 101 (N.D. Tex. 1986), and Jones v. United States (In re

Garcia), 955 F.2d 16 (5th Cir. 1992), in which interest was
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characterized as a penalty for priority purposes under 11 U.S.C.

section 507, and upon McKay v. United States, 957 F.2d 689 (9th

Cir. 1992), and Roberts v. United States, 906 F.2d 1440 (10th

Cir. 1990), which recognized that tax penalties can be

dischargeable.    Petitioner argues that interest on a tax

liability is treated as a penalty under 11 U.S.C. section 507(a)

(2006) and thus may be dischargeable as a penalty under 11 U.S.C.

section 523(a)(7)(B).    Petitioner’s position would yield an

outcome that is contrary to the previously mentioned caselaw

involving the dischargeability of interest which has accrued on

income tax liabilities.

     Petitioner cites In re Palmer, supra, and Jones v. United

States (In re Garcia), supra, as the basis for his contention

that there is no distinction between interest on a tax liability

and a tax penalty for purposes of applying 11 U.S.C. section

523(a)(7)(B).    However, these cases do not discuss the

application of 11 U.S.C. section 523.    Instead, they deal with

the application of 11 U.S.C. section 507, which addresses the

priority accorded to various expenses and claims of creditors.

In both of these cases, the courts likened interest on a tax

liability to penalties for priority purposes under 11 U.S.C.

section 507.     However, neither case stands for the proposition

that interest is a penalty that is dischargeable under 11 U.S.C.

section 523(a)(7)(B).     The holdings in these cases were limited
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to deciding the narrow priority issue that was before those

courts, and should not be read more broadly to have decided that

interest is a penalty for all purposes under the Bankruptcy Code.

     Petitioner also cites McKay v. United States, supra, and

Roberts v. United States, supra, for the proposition that “tax

penalties assessed more than 3 years before the bankruptcy are

dischargeable.”   These cases do hold that tax penalties may be

dischargeable under 11 U.S.C. section 523(a)(7)(B).   However,

these cases addressed the dischargeability of civil tax fraud

penalties and failure to file Federal income tax return penalties

and not the dischargeability of interest.   In McKay v. United

States, supra at 693, the Court of Appeals for the Ninth Circuit

determined that civil fraud penalties were discharged under 11

U.S.C. section 523(a)(7)(B) where the tax penalty was imposed

with respect to a transaction that occurred more than 3 years

before the filing of the petition in bankruptcy.   Likewise, the

bankruptcy court in Roberts v. United States, supra at 1445,

determined that penalties for failing to file a Federal income

tax return were dischargeable under 11 U.S.C. section

523(a)(7)(B) where the penalties were imposed with respect to an

event that occurred more than 3 years before the filing of the

bankruptcy petition.   However, neither court considered whether

interest is dischargeable under 11 U.S.C. section 523(a)(7)(B)
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because they dealt only with its application regarding

traditional tax penalties.

     The decision of the court in Burns v. United States, 887

F.2d 1541 (11th Cir. 1989), is useful in illustrating the proper

analysis in the case before us.   In Burns v. United States, supra

at 1543-1544, the court held both that accrued interest on a

nondischargeable tax debt is nondischargeable and that tax fraud

penalties based on a transaction that occurred more than 3 years

before the bankruptcy petition were dischargeable under 11 U.S.C.

section 523(a)(7)(B).   That the court considered the treatment of

interest separately from the consideration of the penalties is an

indication that interest and penalties are not one and the same

under the Bankruptcy Code.   In Burns v. United States, supra at

1552, the court concluded that 11 U.S.C. section 523(a)(7)(B)

extinguished liability only for tax penalties and not for

interest on the underlying tax itself.   This holding illustrates

that interest is distinct from penalties in the analysis under 11

U.S.C. section 523(a)(7)(B).

     Petitioner has cited no caselaw holding that interest on a

tax liability is dischargeable under 11 U.S.C. section

523(a)(7)(B).   The mere fact that courts have discussed interest

being afforded the same treatment as a penalty for priority

purposes under 11 U.S.C. section 507 does not provide a basis for

treating it the same under 11 U.S.C. section 523.   This is
                              - 10 -

especially true where there is ample caselaw in which courts have

held that interest on a nondischargeable tax debt is not

discharged in bankruptcy.

     On the basis of the record before us, we find that

respondent may proceed with the collection action that was the

subject of the notice of the filing of a Federal tax lien for the

tax year 2000.   Accordingly, we will grant respondent’s motion

for summary judgment.

     To reflect the foregoing,


                                         An appropriate order and

                                    decision will be entered.
