of the Reading's debt if Reading is unsuccessful in obtaining compensation in excess of that allocated to Reading in the Final System Plan. The same arrangement will be offered to other taxing bodies, and to the extent they accept, tax liens on the retained property of Reading will be discharged. Assets will be freed for use in the reorganization attempt to satisfy other creditors since those taxing authorities accepting the agreement will have to look solely to the additional compensation in the valuation case. Furthermore, the taxing authorities' waiver to vote in a plan of reorganization will simplify its approval.
The bondholders raise the additional criticism that interest on the deferred tax claim is excessive in that eight percent interest compounded annually instead of the legal six percent interest rate will cost the estate thousand of dollars if applied to all agreements with the estate. The realities of today's money market plus the fact that Judge Fullam in the Penn Central case allowed the identical rate of interest on C-1 notes convinces me that an eight percent interest rate compounded annually is fair and equitable as to taxing authorities in this reorganization. In the Matter of Penn Central Transportation Co., 458 F. Supp. at 1279-80 (E.D.Pa. 1978). Furthermore, eight percent compounded annually is the interest rate which Reading will be paid on any additional compensation it receives in the valuation case. Regional Rail Reorganization Act § 306(c)(4)(D), as amended, 45 U.S.C. § 746(c)(4)(D) (1976).
The State of New Jersey is concerned that the settlement agreement might constitute a waiver by any accepting taxing authority of its claims against ConRail for the balance of taxes due in 1976. Under the Final System Plan, Reading's operating assets were conveyed to ConRail as of March 31, 1976. This split the tax year so that Reading owned the property for three months and ConRail owned it for nine. The Special Court in Section 4(a) of its Order of March 2, 1976, (Sp.Ct.Rptr. M-000073-M000076), held that ConRail has the obligation with respect to those nine months. The settlement agreement deals only with claims admittedly due by Reading to Philadelphia. Reading does not admit that it has any obligation to any taxing authority or to ConRail for the nine months in 1976 following April 1, 1976. Thus, the settlement agreement and this court's order have no effect on any taxing authority's right to assert a claim against ConRail or the trustees for any taxes based on the last nine months of 1976. The taxing authorities are free to assert such claims, and the trustees are free to deny any obligation with respect to them.
The State of New Jersey expresses concern that nontax claimants (other than the government's 211(h) claims) may assert priority over the claims of taxing authorities which have compromised their real estate taxes. New Jersey seeks to have this settlement agreement establish a priority structure in favor of taxing authorities accepting the settlement. This cannot be done. The settlement agreement does not attempt to establish priorities among the creditors of the estate. The agreement simply limits Philadelphia's rights with respect to the balance of its claim, plus interest, to the additional compensation defined in the agreement, so that the city will share the additional compensation ratably with other taxing authorities and those of like priorities. It would be inappropriate at this time to give accepting taxing authorities a higher priority; these matters are best left to hearings on the Plan of Reorganization.
In summary, the agreement is intended to deal with real estate tax claims asserted by Philadelphia and admitted to be due by Reading for the years 1971 to 1977. According to the fair and equitable requirement of Section 77(e)(1) of the Bankruptcy Act the same offer must be made to all taxing authorities to which Reading owes real estate taxes. However, the trustees have the right to challenge tax claims other than real estate or claims made against Reading for the period after April 1, 1976, as to properties conveyed to ConRail. The financial impact of this settlement on the bankrupt will depend on the extent to which it obtains additional compensation from the valuation case. However, at this time, the overall effect of the settlement is fair, equitable and in the Reading's best interests. Consequently, I approved the trustees' petition.