OPINION AND ORDER RE PETITION OF TRUSTEES TO DEFER PAYMENT OF TAXES
FULLAM, District Judge.
The Trustees of the Penn Central Transportation Company, in reorganization under section 77 of the Bankruptcy Act, have petitioned the Court for an order directing them to continue to defer payment of certain taxes.
When the debtor's petition for reorganization was approved for filing on June 21, 1970, the debtor was authorized, but not required, to pay taxes. The present petition seeks a directive that no taxes be paid until further order of court, with the limitation that the Trustees be authorized "to pay such taxes as they determine, in exercise of their business discretion, they should pay in the interests of ultimate reorganization." By virtue of this reservation, the Trustees propose to continue paying payroll and withholding taxes, and various other incidental or indirect taxes, the isolation of which for non-payment would be unreasonably inconvenient or costly.
The total liability of the debtor for the year 1970 for taxes of the kind covered by this petition was approximately $86,566,200, of which approximately $45,689,500 remain unpaid. These taxes are payable to some 2,600 collecting agencies, acting on behalf of many thousands of taxing entities.
Included in the above figures are the taxes on certain properties in the area of Grand Central Station in the city of New York, which are the subject of separate petitions filed in connection with these proceedings, documents Nos. 212, 274, 275, 277, 292, 310, 311, 312, and 389. These properties present special problems, including such matters as possible apportionment of the assessments between the underlying fee owned by the debtor, and the valuable improvements owned by leasehold interests; the extent to which the debtor acts merely as a conduit for the payment of taxes; and the consequences which would flow from non-payment. These matters are the subject of ongoing discussions between counsel for the interested parties. The taxes in this category, aggregating approximately $22,000,000 for the year, of which approximately $11,000,000 remain unpaid, will be dealt with in separate orders to be entered later.
Thus, the balance of unpaid taxes to be dealt with in this opinion amount to approximately $34,689,500 for the year 1970, and approximately $64,000,000 for each year thereafter.
The Trustees' petition is opposed by a substantial number of the taxing agencies involved. Some of the opponents contend that the Court cannot lawfully grant the relief prayed for, and all contend that the Court should not grant such relief.
A brief review of the legal principles governing the treatment of tax claims in bankruptcies and reorganizations will be helpful to an understanding of the problems involved in this case.
First, there are the distinctions between pre-bankruptcy tax claims and claims accruing during the reorganization. In ordinary bankruptcies and in Chapter X reorganizations, pre-petition taxes are priority claims in the fourth category under section 64(a), but may be entitled to treatment as secured claims, depending upon the existence of a perfected or perfectible lien under the applicable local statute. While not entirely clear, it is probable that the same is true in railroad reorganizations under section 77. This question was left unanswered in Arkansas Corporation Commission v. Thompson, 313 U.S. 132, 61 S. Ct. 888, 85 L. Ed. 1244 (1941), but lower courts have held that the provisions of section 64 relating to tax claims should be applied in railroad reorganizations. In the Matter of N.Y., Ontario & Western Ry. Co., 25 F. Supp. 709 (S.D.N.Y. 1937), and the same view has been expressed in 5 Collier on Bankruptcy (14th Ed.) 77.21.
Taxes accruing during the reorganization proceeding are part of the cost of doing business, and, generally speaking, are entitled to the same priority as administrative expenses. Southern Railway Co. v. United States, 306 F.2d 119 (5th Cir. 1962); Lyford v. State of New York, 140 F.2d 840 (2d Cir. 1944); Northumberland County v. Reading Coal & Iron Co., 131 F.2d 562 (3rd Cir. 1942); In re Pressed Steel Car Co. of New Jersey, 100 F.2d 147 (3rd Cir. 1938); see 5 Collier on Bankruptcy, (14th Ed.) 77.07; 3A Collier, 62.14. But such taxes do not take precedence over other administrative expenses. Southern Railway Co. v. United States, supra. Indeed, it is frequently held that there can be no priority among debts in the same class. In the Matter of Columbia Ribbon Co., 117 F.2d 999 (3rd Cir. 1941). See 3A Collier on Bankruptcy, (14th Ed.) 64.02.
According to some authorities, trustees are under a duty to seek out and pay taxes accruing during the reorganization proceeding, as distinguished from pre-petition taxes. Ingels v. Boteler, 100 F.2d 915 (9th Cir. 1938), aff'd on other grounds 308 U.S. 57, 60 S. Ct. 29, 84 L. Ed. 78 (1939); In the Matter of Preble Corp., 15 F. Supp. 775 (D. Me. 1936).
Depending upon the vagaries of local taxing statutes, the trustees may or may not be legally liable for post-petition taxes. Much of the confusion and conflict on this subject has been removed by statute. 28 U.S.C. § 960 provides:
"Any officers and agents conducting any business under authority of a United States court shall be subject to all Federal, State and local taxes applicable to such business to the same extent as if it were conducted by an individual or corporation."
Thus, such questions as whether a franchise tax is imposed on the right to exist, or the right to conduct a business, see Michigan v. Michigan Trust Co., 286 U.S. 334, 52 S. Ct. 512, 76 L. Ed. 1136 (1932); or whether trustees conduct business as officers of the court, or as surrogates for the corporation's officers, see United States v. Whitridge, 231 U.S. 144, 34 S. Ct. 24, 58 L. Ed. 159 (1913), are no longer significant. Nevertheless, since Congress has no power to enact a state taxing measure, this statute does not eliminate the necessity of referring to the precise terms of the various taxing enactments to determine the applicability of the tax to trustees in bankruptcy. In view of the Congressional policy evidenced by 28 U.S.C. § 960, doubts are presumably to be resolved in favor of tax liability. See 3A Collier on Bankruptcy (14th Ed.) 62.14 . Cf., Zimmer v. New York State Tax Commission, 126 F.2d 604 (2d Cir. 1942).
Additional distinctions between preand post-petition taxes arise in connection with the running of interest, and perhaps liability for penalties, for nonpayment, or for failure to file returns. See generally Boteler v. Ingels, 308 U.S. 57, 60 S. Ct. 29, 84 L. Ed. 78 (1939); Nicholas v. United States, 384 U.S. 678, 86 S. Ct. 1674, 16 L. Ed. 2d 853 (1966); In re Samuel Chapman, Inc., 394 F.2d 340 (2d Cir. 1968). It should be noted, however, that the Supreme Court in Gardner v. New Jersey, 329 U.S. 565, 580-581, 67 S. Ct. 467, 91 L. Ed. 504 (1947) left open many questions about the applicability to railroad reorganizations of ordinary bankruptcy rules regarding penalties and interest on tax claims.
The 1966 amendments to the Bankruptcy Act have now made clear that there is considerable scope for reexamination of the amount and validity of tax claims, whether arising before or after the filing of the petition. 11 U.S.C. § 11(2A) confers upon the reorganization court jurisdiction to
"(2A) Hear and determine, or cause to be heard and determined, any question arising as to the amount or legality of any unpaid tax, whether or not previously assessed, which has not prior to bankruptcy been contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction * * *."