though he might have chosen another were the rules on priority and dischargeability other than as provided by these bills. This, plus the further incentives given to creditors, whose claims will achieve priority over or parity with the tax claims only in bankruptcy, will inevitably increase substantially the bankruptcy filings. The resultant tax loss will be borne by the general public. In our view this is neither fair nor wise.

Thank you for permitting me to appear here and to present these views; my staff and I are available and pleased to work with the staff of your subcommittee if our assistance is desired.

Mr. EDWARDS. Thank you very much, Mr. Crampton, Your views coincide with the Commissioner's views.

Mr. CRAMPTON. That's right.

Mr. EDWARDS. I yield to Mr. Butler.

Mr. BUTLER. Well, Mr. Crampton, is that all coincidence?

Mr. CRAMPTON. I believe not. I think we look at it from a little different perspective than perhaps the Commissioner does. One of our attorneys was telling us today when we are in litigation in an effort to collect taxes, an offer will be made and the debtor will be saying to us, "Either you take this offer, or I'll go into bankruptcy." This will not appear as a matter of statistics, but it is a factor that you do crank into your ordinary courtroom approach to a piece of litigation. I think we are getting it from that point of view perhaps a little differently.

Mr. BUTLER. It is strengthening the bargaining position of the debtor who is endeavoring to survive in a difficult situation; is that the effect of this legislation, as you view it from the point of view of the collection agency?

Mr. CRAMPTON. No. I feel it would strengthen the position of the unsecured creditor because he would then be more inclined to endeavor to force the debtor into bankruptcy if, by doing so, under the proposed legislation he would minimize the tax claim, and perhaps elevate his position.

Mr. BUTLER. It is the promotion of the interest of the unsecured creditor by the bankrupt, as against the tax claim, that concerns you? Mr. CRAMPTON. Well, I think that's only part of our concern. I think that's the way it might very well operate.

Mr. BUTLER. I suppose my real question is this, to come back to the situation that you mentioned about the debtor who would in effect blackmail you into accepting a view which you would not think was in the tax collection system's interest

Mr. CRAMPTON. I didn't mean to say "blackmail."

Mr. BUTLER. I will accept that characterization of it; I will be responsible for that. But you mean, basically, that position would strengthen the bargaining position in that situation.

What happens in the present situation when the debtor is trying to compromise, when he goes into bankruptcy and undertakes to compromise a claim; is that a responsibility, a decision made by the Justice Department?

Mr. CRAMPTON. Probably jointly by us. We worked out one yesterday, where both the Internal Revenue Service and the Department of Justice agreed to keep the taxpayer in business and to keep it a producing organization. We are agreeing to subordinate some of our

position, some of our priority, in order to get some new money into the business.

Mr. BUTLER. And how does the system work, how did this particular transaction work; explain to me, procedurally, how you ultimately arrived at this position, how long did it take?

Mr. CRAMPTON. This came about after 2 or 3 years because of a very complex situation involving large amounts of money, and we had to ascertain the facts that we could. But, we negotiated with the attorneys for the debtor

Mr. BUTLER. The negotiations ultimately were made in Washington? Mr. CRAMPTON. Yes.

Mr. BUTLER. The reason I mention this is that I think that is the problem, as I tried to suggest to the Commissioner a little while ago, if this kind of decision-I know you are talking about a big situationtakes several years, and ultimately has to be decided way up the line and by two departments, then we are delaying what ought to be prompt.

That was my complaint which I suggested to the Commissioner. Since I remember you were present, I would like to ask you if you think that is a complaint that is unique with me, or have you heard it from time to time?

Mr. CRAMPTON. Oh, I think the complaint is apparent on its face, that is the situation. I believe I would endorse the suggestion that the Commissioner made, that you adopt in your legislation a provision that has worked rather well in the estate tax area. There you in effect put the burden on the taxpayer, or his representatives, by requesting a prompt assessment, to invite the Internal Revenue Service to focus on the problem and say, "Let's get going," and then, if you don't get going and time passes, the IRS loses its right. It seems to me that is a fairly good way of meeting the problem.

Mr. BUTLER. I appreciate your suggestion, I will have to look at that harder. Thank you very much.

Mr. EDWARDS. Mr. Parker?

Mr. PARKER. Thank you, Mr. Chairman.

Mr. Crampton, generally, in trying to balance the interest between the private creditor and government creditor, Congress has given the broadest powers of lien, levy, execution, and attachment to the Government; the private creditor has to go through some kind of laborious process and legal proceedings while the Government is actually picking up most of the assets that exist.

What I fail to understand is, given the case other than where a corporation does not survive bankruptcy, where the tax claims are nondischargeable, why the Government needs to have a priority for the taxes as well.

Mr. CRAMPTON. Well, perhaps I can answer this by assuming a factual situation. Supposing you have a bankruptcy where there are assets of $10,000, and the Government has a tax claim of $10,000, and there is a junior mortgage of $10,000. If it is not dischargeable, and if this legislation were enacted, it wouldn't help the Government very much to let the money go to the junior mortgagee, and then have a nondischargeable $10,000 claim against the debtor, if the debtor is not likely to be an income-producing taxpayer later on. He may have an interest in a corporation that is making horse whips, or something that is running out of business.

It seems to me in this situation, that it is a matter of judgment whether the taxpayer should pay the Federal Government, or should pay the subsequent mortgagee, the person who loaned him the money who has a junior security.

Mr. PARKER. I'm not talking about those sections of the bill which affect liens. I'm talking about those sections which in the present law make a debt nondischargeable and give you a priority as well.

Mr. CRAMPTON. Oh, I think in my example the Government should be entitled to priority, particularly, as the Commissioner pointed out, where these are trust-fund taxes, which is frequently the case. They have taken the money out of the employees' wages; they haven't paid it over to the Federal Government; and we are trying to collect what I consider to be fiduciary funds.

Mr. PARKER. Thank you very much.

Mr. EDWARDS. Mr. Klee?

Mr. KLEE. Thank you, Mr. Chairman.

Mr. Crampton, I would like to pursue the topic of fairness to creditors, both secured and unsecured creditors. The point has been made this morning that the Government is a nonconsensual creditor, and the only way it can get a security interest is by imposing a tax lien. But often private creditors who have tried to assess the liabilities of a business before deciding to extend credit have a very large unknown quantity with which they have no means of dealing, and that quantity is, what is the debtor's tax liability; will the Government come in and slap on a lien 3 months prior to bankruptcy.

Do you see any way to give the private creditor a means to discover the potential tax liability of a business? Should the Government have some burden to give notice, other than the 45-day period in I.R.C. 6323 (d)?

Mr. CRAMPTON. If you are talking about the larger corporations, I would think their public statements would give some indication as to what their tax problems are, and the SEC is requiring more and more information on that. But, if you are talking about the individual taxpayer, I would think not; even there you have disclosure problems and perhaps privacy problems.

Mr. KLEE. Let us focus on the corporation. When a corporation files a tax return, the IRS stated it takes 27 months to even determine whether the return is adequate. In the interim, though, suppose a creditor has extended credit; suppose further that as the business moves toward bankruptcy you slap on a tax lien; all of a sudden everything that the unsecured creditor may have relied on is changed. Is that not unfair to the unsecured creditor?

Mr. CRAMPTON. I'm not so sure that the situation is quite as simple as you present it. I would say that the average person who is going to loan an organization money, or extend credit, has asked for a financial statement; they may have asked for an audited financial statement. Assuming the job is done properly, they would have some idea, I think, about whether there were extensive tax claims lurking in the background; they would certainly know whether the trust fund taxes were paid.

I think if they are caught in that position, to a certain extent it may be the fault that they have been a little careless in their examination of the financial statement of the debtor.

Mr. KLEE. I have one final question. Normally, when security is taken within 4 months prior to the filing of a petition in bankruptcy, for or on account of an antecedent debt, it is vulnerable to being set aside as a preference.

Assuming Congress accepts the position that the Government is entitled to the status of a secured creditor, should the Government be given preferential treatment over all other secured creditors by not being subjected to the normal preference section, and if so, why?

Mr. CRAMPTON. I'm not quite sure I follow the last part of this, the 4-month problem.

Mr. KLEE. The specific question is this, if the Government levies a tax lien within 4 months prior to bankruptcy, presently that tax lien is exempt from being attacked as a preference by section 60b of the Bankruptcy Act. Why should that lien be treated differently than the lien of any other secured creditor who acquires a lien or takes a security interest within 4 months of bankruptcy, for or on account of an antecedent debt? The security interest or lien of the secured creditor can be set aside; does not equity between creditors require the same result for the Government?

Do you think the Government should not only be given the status of a secured creditor, but preferred treatment that other secured creditors do not have?

Mr. CRAMPTON. Well, there again, that doesn't bother me because I think the creditor that you are talking about, if he has been alert, he is not going to let it go to the 4-month period; but the Federal Government doesn't have much choice about the taxes. If the fellow, or the corporation has accumulated a lot of trust-fund taxes and has not paid them, the IRS hasn't voluntarily extended him any credit, they let the thing presumably run along, and they are coming in, are trying to do something about it.

Mr. KLEE. Thank you very much, Mr. Chairman.

Mr. EDWARDS. They'll put him in jail if he doesn't pay the trust-fund taxes.

Mr. CSONTOS. That's correct, Mr. Chairman.

Mr. CRAMPTON. It is correct, but I don't think it operates too frequently because usually, when the criminal charge is brought, they are paid. Sometimes they go to jail, but I would say it is relatively infrequent.

Mr. EDWARDS. Well, thank you very much, Mr. Crampton. We do want to keep in touch with your division and the Commissioner in the next few months because we still have differences to be ironed out in this revision of the Bankruptcy Act. We take your concerns very seriously, but other witnesses, expert witnesses, disagree with you rather strongly. That's the way our country is put together, with exchanges. Mr. CRAMPTON. Mr. Csontos has already worked with members of your staff, and he will be available at any time they would like to discuss it with him.

Mr. CSONTOS. If I might make one suggestion. It was noted earlier that taxes are not really the province of this subcommittee, or for that matter the full committee. I would like to make it quite clear that the policy decisions on this are obviously for you all to make; but we would like to give any assistance we can in drafting language that will keep us out of litigation 6 years, 10 years, 15 years from now.

59-591-76-pt. 4- -7

We are presently litigating on a weekly basis the 1966 amendments. There are so many things that, if a word or two had been put in, if someone had sat down and thought it through in terms of what could be done to the language of the act, we would have been out of court. We would have saved a lot of manpower in Justice, in the U.S. Attorney's offices, and a lot of court time.

So, if you all want to make policy decisions that we disagree with, that's your province; but we would like to help you with the language of whatever you decide to do, so that we can keep ourselves out of court down the line.

Mr. EDWARDS. We appreciate that very much.

Mr. BUTLER. You are not recommending we send this thing to the other committee that made all those mistakes in 1966.

[Laughter.]

Mr. EDWARDS. Thank you very much, again.

Our final witness this morning is William Plumb, a partner in the law firm of Hogan and Hartson here in Washington.

During our hearings on the bankruptcy laws, we have been privileged to have many very knowledgeable, expert witnesses. It is against this background that Mr. Plumb's work stands out in particular. Since Mr. Plumb's work as a consultant to the Commission, just 211⁄2 years ago, he has published five articles comprising over 500 pages of well-documented, thoughtful, and thorough comments on the Commission's work. His prepared statement for the subcommittee this morning is perhaps the most comprehensive, insightful and detailed presentation we have seen in such a highly technical area as the tax aspects of bankruptcy. Mr. Plumb, it is indeed a privilege and a pleasure to have you with us toady. You have set the standard for us to follow in our coming work on the revision of the bankruptcy laws. Without objection, your prepared statement will be made a part of the record, and you may proceed.

[The prepared statement of William T. Plumb, Jr., follows:]

STATEMENT OF WILLIAM T. PLUMB, JR., WASHINGTON, D.C.

SUITS BY THE ESTATE AGAINST A STATE

Sections 1-104 and 2-201 (a) (9) of the bills, taken together, have the effect of permitting the bankrupt estate to sue the United States or a State in the Bankruptcy Court to recover overpayments of taxes. Today, it is necessary for the estate to go through the more time-consuming process of suing the United States in the District Court or the Court of Claims, and suing the State in whatever forum it provides for the purpose. Congress long ago submitted the Federal Government's affirmative claims for unpaid taxes to the jurisdiction of the Bankruptcy Court in order to speed the closing of estates, and it should not hesitate to do the same concerning claims for overpayments that the Government happens to have collected before bankruptcy.

But I raise for your consideration the question whether Congress, even if it has the power, should undertake to subject the States to suits for tax refunds (or other claims) in courts not of their own choosing. It is true that Congress has long exercised its bankruptcy power to regulate the manner of determining state claims for unpaid taxes, to fix their liens and priority, to bar those not timely presented, and to discharge their tax debtors. But the State in those situations is the moving party, appearing in the Bankruptcy Court in order to share in a fund of which the federal power has validly taken possession, or pursuing a debtor who has been freed of his debts pursuant to federal constitu