May 23, 2001
Dear Madam:
You have the following question: Can the city compromise and settle penalty and interest
on property taxes (or even the taxes themselves) in a bankruptcy proceedings?
The answer appears to be no.
Tennessee Attorney General’s Opinion 79-297, opines that the state is authorized by
Tennessee Code Annotated, ' 20-1701 [now 20-13-102] to compromise and settle sales and use
tax claims. That statute provides that:
The attorney-general of the state, with the written approval of the
governor and the comptroller, may compromise and settle, in so
far as the state is concerned, any civil litigation to which the state
may be a party, upon such terms as in their opinion may seem to
the best interest of the state; and may enter into such agreements
in connection therewith, as may be necessary to effectuate the
purposes of this section.
There is no similar general statute authorizing municipalities to compromise and settle
municipal taxes, and I can find no comparable provision in the Municipal Charter. The Municipal
Code, ' 2-131 does list among the duties of the city attorney, the duty to:
Adjust, settle, compromise or submit to arbitration any action,
cause of action, accounts, debts, claims, demands, disputes and
matter in favor of or against the city or in which the city is
concerned as debtor or creditor, provided the money to settle
claims generally has been appropriated and is available therefore.
However, that provision does not constitute state authorization to compromise and settle tax
claims.
The heavy weight of authority is that absent state legislation authorizing a municipality to
compromise and settle tax disputes, the municipality has no such power. In fact, I have found
no case to the contrary. [See City of Louisville v. Louisville Ry Co., 68 S.W. 840 (1902) and
Shuck v. City of Lebanon, 68 S.W. 843 (1902) (Kentucky); City of Oldsmar v. Monnier, 56 So.2d
527 (1951) (Florida), “There must be specific authorization by the legislature to support
municipal tax compromise” (At 528); Young v. Johnson, 207 A.2d 392 (1965) (Maine); State v.
Pethel, 106 N.E.2d 626 (1952) (Ohio), “The general rule is that the power to tax does not include
the power to remit or compromise taxes...Where taxes are legally assessed, the taxing authority
is without power to compromise, release or abate them except as specifically authorized by
statute...” (At 28-29); Forbes & Wallace, Inc. v. City of Springfield, 486 N.E.2d 1134 (Mass. App.
May 23, 2001
Page 2
1985); Logan City v. Allen, 44 P.2d 1085 (Utah), “As a general rule the taxing authorities of the
state, county, or a municipal corporation may not compromise or release claims for taxes legally
assessed unless empowered so to do by statute. 61 C.J. 973” (At 1-87); In re Tax Rolls for City
of Yakutat, Alaska, 102 F.Supp. 785 (1952) (U.S. Dist Ct., Alaska, First Div., Juneau), “I
conclude in the absence of a showing of statutory authorization that a municipality has no power
to compromise a valid tax claim” (At 787).
Although I am certainly not a bankruptcy law expert, I find nothing in the Bankruptcy
Code requiring or authorizing municipal authorities to settle and compromise tax claims. I have
been unable to find any cases under the current Bankruptcy Code on the question of how far the
bankruptcy court can go to approve settlements and compromises made by the trustee over the
objections of a government having a tax claim against the bankrupt estate. However, under the
pre-1978 Bankruptcy Code, Section 27, 11 U.S.C.A., ' 50, “the receiver or trustee could, with the
approval of the court, compromise any controversy arising in the administration of the estate
upon such terms as he may deem for the best interest of the estate.” In the case of In re
Truscott Boat & Dock Co., 92 F.Supp. 430 (1950), the U.S. District Court for the Western District
of Michigan overturned the bankruptcy court’s approval of a compromise and settlement made
over the protest of the United States, which claimed employment and withholding taxes, at least
some of which it apparently would have gotten if the bankruptcy court had voided a certain
chattel mortgage. The Court declared that the U.S. Government’s objection to the compromise
“should certainly be given serious consideration.” Under the circumstances of this case, “there
was no logical basis for compromise,” because the evidence showed that “it was clear under the
well-established law the chattel mortgage to General Factors was void as to all creditors of the
bankrupt...” [At 435]
Truscott Boat & Dock distinguished an earlier case, In re Prudence, Inc., 98 F.2d 559
(1938), in which the U.S. Second Circuit had upheld the bankruptcy court’s order directing the
trustee to compromise an income tax claim of the United States over its protest. In the latter
opinion the Court had said that,
The very purpose of a compromise is to avoid the determination of
sharply contested and dubious issues...Hence, to succeed upon
this appeal, the appellant must show, assuming there are no
issues of fact in dispute, that the rules of law for which she is
contending are so clearly correct that it was an abuse of discretion
for the district court to approve the settlement, such approval
presupposes some problem of validity in the government’s tax
claim. [At 435]
In that case, “the controversy which was compromised presented complex and dubious
questions.” [At 435] In re Prudence itself indicates that while some earlier cases supported the
tax claim of the United States, the character of the financial transactions at issue made the
application of those cases uncertain. [At 561]
Presumably, the principles of compromise and settlement contained in those cases have
survived into the life of the current Bankruptcy Code. If that is so, and if the previous Tennessee
May 23, 2001
Page 3
Attorney Generals Opinions on the question of whether penalty and interest are merged into
taxes are correct, the question of whether the city is owned the tax is not complex and dubious,
and is in no need of compromise. Obviously, the trustee may dispute those contentions.
Sincerely,
Sidney D. Hemsley
Senior Law Consultant
SDH/