IRS ORDERED TO TURN OVER EXCISE TAX REFUND.

1. Prior to the commencement of the Chapter 11 case, the debtor Rocor International, Inc. (the "Debtor") was a corporation engaged in the business of transporting refrigerated freight for customers.

2. On August 5, 2002, the Debtor filed a voluntary petition pursuant to Chapter 11, title 11 of the United States Code, thereby commencing this case.

3. The Heavy Vehicle Highway Use Tax ("HVHUT") is an excise tax imposed by Section 4481 of the Internal Revenue Code, 26 U.S.C. § 4481, on the use of each highway motor vehicle that has a taxable gross weight of at least 55,000 pounds.

4. The Debtor operated highway motor vehicles with taxable gross weights in excess of 55,000 pounds on and after July 1, 2002, and was therefore liable for the HVHUT.

5. For highway motor carriers such as those operated by the Debtor, having a taxable gross weight of more than 75,000 pounds, the HVHUT is $550 per truck for the tax year.

6. On July 1, 2002, the tax year for the HVHUT began and that tax year ended on June 30, 2003.

7. The return for the HVHUT (Form 2290) is due by August 31 of the tax year.

8. If a timely return is filed, prior Section 6156 of the Internal Revenue Code permits the HVHUT to be paid in four equal installments: the first installment is due with the return, the second installment is due at the end of the third month of the tax year, the third installment is due at the end of the sixth month of the tax year, and the fourth installment is due at the end of the ninth month of the tax year.

9. On August 31, 2002, the Debtor filed its HVHUT return (Form 2290), reflecting that it was operating 564 highway motor vehicles with taxable gross weights in excess of 75,000 pounds, and it therefore had a liability of $550 per truck for a total liability of $310,200. The Debtor also paid the first installment of $77,550 with the filing of the return. No other payments of the HVHUT were made for that year.

10. On October 8, 2002, the Bankruptcy Court approved a sale of substantially all of the Debtor's assets (including its trucks) to New Prime, Inc. ("New Prime"). That sale closed on October 17, 2002, and the Debtor ceased doing business on that date.

11. New Prime has not paid any part of the HVHUT on the trucks it acquired from the Debtor for the tax year beginning July 1, 2002, and ending June 30, 2003.

12. The contract between New Prime and the Debtor did not provide that New Prime would pay any portion of the HVHUT.

13. In March, 2005, the Estate filed an amended return for the HVHUT (Form 2290) for the period beginning July 1, 2002, and ending on the date of the sale, October 17, 2002, which determined the prorated amount of unpaid tax to be $25,848.12. IRS rejected this amended return based on its assertion that the HVHUT could not be prorated when trucks are sold for periods prior to October 22, 2004.

14. The Debtor paid the excise taxes on fuel at the time of purchase (26 U.S.C. §§ 4041, 4081). However, because some of the fuel purchased by the Debtor was used for an off-highway business use, principally to power the refrigeration units on trucks, the Debtor was entitled to a credit for the excise taxes paid on the fuel that was put to an off-highway business use (26 U.S.C. §§ 4041(b), 4082(a), 6427(1)).

15. The Debtor did not claim a refund for the excise tax on fuel used for an off-highway business use on its corporate income tax for the 2002 tax year.

16. The IRS determined that the Debtor was entitled to four quarterly credits for 2002 for the excise taxes on fuel used for an off-highway business use. The first two credits, issued on April 15, 2002, and July 1, 2002, were refunded to the Debtor. The last two credits were retained by the IRS due to the bankruptcy filing prior to the dates the credits became available. These last two credits were for the third quarter of 2002 in the amount of $76,758.74, and for the fourth quarter of 2002 in the amount of $88,606.89, for a total of $165,365.64. This $165,365.63 amount is the overpayment at issue here.

17. The Debtor had a short tax year for 2002 which began on July 25, 2002, and ended on December 31, 2002, the closing date of the tax year. The Estate filed the Debtor's corporate income tax return for the short year on April 20, 2004.

18. On September 29, 2002, IRS filed its motion to modify stay to set off tax overpayment motion (the "Stay Motion"). An order granting the Stay Motion was entered on October 22, 2004, which stated in part, "[t]he stay is modified to allow the Internal Revenue Service to set off debtor's 2002 income tax overpayment of $165,365.63 against debtor's excise tax for the period ending June 30, 2003. The parties now agree that this order should be vacated.

19. The Estate filed its motion for turnover on October 26, 2004, which seeks turnover of the $165,365.63 refund (the "Refund") due on the fuel excise tax for the third and fourth quarters of 2002. IRS has opposed that motion and asserts that it should be able to set off the Refund against the Debtor's liability for the HVHUT for the period beginning July 1, 2002 and ending June 30, 2003.

The issue in this case, as framed by the parties' pleadings, is whether the IRS is entitled to set off the amount of the Refund against the Debtor's liability for the HVHUT for the period beginning July 1, 2002 and ending June 30, 2003.

The right of setoff "allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the 'absurdity of making A pay B when B owes A.'" United States v. Myers (In re Myers), 362 F. 3d 667, 672 (10th Cir. 2004)(citing Citizens Bank v. Strumpf, 516 U.S. 16, 18 (1995)). Under § 553(a), a creditor with an independent right of setoff may setoff a debtor's obligations only if the creditor satisfies three elements.

The language of § 553 applies only to the setoff of prepetition debts as against each other. However, relying on language in the Tenth Circuit case of Zions First Nat'l Bank, N.A. v. Christiansen Bros., Inc. (In re Davidson Lumber Sales, Inc.), 66 F.3d 1560, 1569 (10th Cir. 1995), both parties' briefs before the court assume that setoff is also applicable to mutual postpetition obligations. Therefore, for purposes of the instant discussion, the court assumes without deciding that § 553 can apply to permit setoff of postpetition obligations between the debtor and the creditor.

Here, the parties agree that the Refund arose postpetition, in the third and fourth quarters of 2002, and after the August 5, 2002 bankruptcy filing. The parties further agree that the tax year for the Debtor's HVHUT began on July 1, 2002 and ended on June 30, 2003. The parties disagree, however, regarding the when the tax liability accrued for purposes of the § 553 analysis. The IRS argues that the HVHUT accrued at the end of the tax year, which was postpetition, while the Estate argues that it accrued at the beginning of the tax year. Interestingly, both parties cite the same case, Dixon v. Internal Revenue Serv. (In re Dixon), 218 B.R. 150 (B.A.P. 10th Cir. 1998), as support for their respective positions.

In Dixon, the debtors filed a chapter 13 bankruptcy petition on April 9, 1993. Although the record was unclear regarding the timing, the debtors filed their 1992 federal income tax return sometime between January 1, 1993 and the date it was due on April 15, 1993. In their chapter 13 plan, they proposed to pay the IRS the amount listed in their schedules as due as an unsecured priority claim. Neither the IRS nor the debtors filed a proof of claim for the taxes. The debtors' plan was confirmed. They completed the payments due and received their discharge in 1996. After the debtors received their discharge, the IRS commenced post-discharge collection efforts. In response, the debtors filed an adversary proceeding seeking a determination that the 1992 tax liability had been discharged and the return of the money collected after the discharge.

In defense of the debtors' adversary complaint, the IRS argued that its 1992 tax claim was covered by § 1305(a)(1) of the Bankruptcy Code, which is entitled, "Filing and allowance of postpetition claims," and provides in pertinent part:

There, the IRS argued, relying on 26 U.S.C. § 6151(a), that the debtors' taxes had become payable when the relevant tax return was due without regard to extensions of time, i.e. April 15, 1993, which was after the filing of their bankruptcy petition. On the other hand, the debtors argued that their taxes had become payable on the first day following the end of the 1992 tax year, i.e. January 1, 1993, which was prior to their bankruptcy filing. The basis for the debtors' argument was that their 1992 tax liability became "fixed and calculable" at the close of the tax year. "At any time during the tax year, some unforeseen event might have changed their tax liability, reducing it (if, for example, they had suffered a casualty loss) or increasing it (if, for example, they had won the state lottery). But once the tax year ended, their tax liability was largely established, although Congress has authorized a few later events to change that liability." Dixon, 218 B.R. at 152. Relying on the structure and language of the statute, the court agreed with the debtors' argument and held the tax debt had become payable prepetition, and thus § 1305 did not apply. The debt was provided for in the debtors' chapter 13 plan and was discharged. Id. at 154.

In the present case, the parties agree that the HVHUT tax year at issue began on July 1, 2002 and closed on June 30, 2003. Relying on the result in Dixon, the IRS argues that the Debtor's liability for the HVHUT accrued at the close of the tax year, or June 30, 2003, which was postpetition. Consequently, it argues that it may setoff the Refund from the Debtor's outstanding HVHUT liability.

In response, the Estate argues that the holding of the Dixon case applies, and that unlike income taxes that accrue on the first day following the close of the tax year, HVHUT liability accrues on the first day of the tax year, which in this case was July 1, 2002, prior to the Debtor's bankruptcy filing. Thus, the HVHUT liability accrued prepetition and is not subject to setoff against the Refund.

After review of the applicable statutes and regulations, specifically 26 U.S.C. §§ 4481-4483 and 26 C.F.R. §§ 41.01-41.6156-1 (2002), the court is persuaded that a modified version of the Estate's analysis more appropriately recognizes the differences in the income taxes at issue in Dixon and the HVHUT at issue here while, at the same time, giving meaning to the language of Dixon.

The applicable statutes and regulations, as set out above, provide that "[o]wners of certain heavy vehicles are required to pay an annual federal tax on each vehicle. . . . The tax year runs from July 1 to June 30,³ and for vehicles owned and used in July, the tax is due on August 31.⁴" In re American Freight System, Inc., 174 B.R. 610, 613 (Bankr. D. Kan. 1994)(internal citations added). In addition, certain taxpayers are permitted to pay this tax in installments.⁵

Pursuant to the statutory scheme as described and under the rationale of Dixon, the court finds that the HVHUT accrued on August 1, 2002. To calculate the HVHUT, the Debtor was required to multiply the number of heavy vehicles it had owned and used in July, 2002 (564), times the tax per vehicle ($550), for a total tax liability of $310,200. The number of vehicles owned and used by the Debtor during the month of July, 2002, was determinable at the beginning of the month following July, 2002. Thus, the court finds that the Debtor's HVHUT tax liability was "fixed and calculable" on August 1, 2002 under Dixon. The Debtor did not file its bankruptcy petition until August 5, 2002. Therefore, the August 1, 2002 accrual date for the HVHUT preceded the petition date. The court further finds that neither the due date of the HVHUT return (August 31, 2002) nor the Debtors ability to pay in installments are material to the legal issue before the court. Because the HVHUT constitutes an outstanding prepetition tax liability, and the Refund is attributable to excess postpetition taxes paid, setoff is inappropriate in this case. Consequently, the IRS is not entitled to setoff the Debtor's liability for the HVHUT from the Refund.

For these reasons, the court finds that the Estate's motion to vacate and reconsider order modifying stay to set off tax overpayment should be and hereby is GRANTED; the Estate's cross-motion to require Internal Revenue Service to turnover refund should be and hereby is GRANTED; and the IRS's motion for summary judgment should be and hereby is DENIED.

IT IS SO ORDERED this 30th day of September, 2005.

² Unless otherwise specified, all references herein are to Title 11 of the United States Code.

³ 26 U.S.C. § 4482(c)(4).

⁴ 26 C.F.R. § 41.6071(a)-1 and § 41.6151(a)-1 (2002).

⁵ 26 C.F.R. § 41.6156-1 (2002).