United States v. Kaufman Same v. Coxe, s. 515

• Decision Date: 02 March 1925
• Docket Number: Nos. 515,516,s. 515
• Citation: 45 S.Ct. 322,69 L.Ed. 685,267 U.S. 408
• Parties: UNITED STATES et al. v. KAUFMAN et al. SAME v. COXE
• Court: U.S. Supreme Court

267 U.S. 408

45 S.Ct. 322

69 L.Ed. 685

UNITED STATES et al.

v KAUFMAN et al.

SAME

v. COXE.

Nos. 515, 516.

Argued Jan. 13, 1925.

Decided March 2, 1925.

Mr. Merrill E. Otis, of St. Joseph, Mo., and the Attorney General, for petitioners.

Mr. J. M. Hartfield, of New York City, for respondents.

Mr. Justice SANFORD delivered the opinion of the Court.

These two cases were heard together in the Circuit Court of Appeals. They involve a single question relating to the extent of the priority of the United States in the collection of taxes in bankruptcy proceedings.

In 1921, on an involuntary petition filed in the Southern District of New York, Finkelstein Brothers, a partnership, and the individual partners thereof were adjudged bankrupts. In 1923 the Collector of Internal Revenue filed proof of claim for an income tax assessed against Abraham Finkelstein, one of the partners, for the year 1919. It is stipulated that the income on which this tax was based 'was derived from the business of the co-partnership.' No individual assets of Finkelstein had come into the hands of the trustee, and the partnership assets were insufficient to yield any surplus after the payment of the partnership debts. The Collector claimed that the tax against Finkelstein should be paid out of the partnership assets prior to the partnership debts. The referee denied this claim, and ordered that the partnership assets first be applied to the payment of the partnership debts. This order was affirmed by the District Judge.

In 1923 an involuntary petition in bankruptcy was filed in the same court against Jones & Baker, a partnership. A receiver was appointed, who collected and held the partnership assets. Before an adjudication of bankruptcy the partnership offered a composition to its creditors at less than the full amount of their claims. This was confirmed by the District Judge. Before the partnership assets were distributed, the Collector of Internal Revenue filed proofs of claims against the individual partners for income taxes assessed against them for the years 1918, 1919 and 1920. It does not appear that the income on which these taxes were based was derived from the business of the partnership. The Collector claimed that these taxes should be paid out of the partnership assets prior to the payments to the partnership creditors. The District Judge denied this claim of priority.

On appeals to the Circuit Court of Appeals both orders of the District Court were affirmed. 298 F. 11. Writs of certiorari were granted by this court. 266 U. S. 596, 45 S. Ct. 92, 69 L. Ed. ——.

1. These taxes were assessed against the individual partners and due from them to the United States. They were neither assessed against, nor due from, the partnerships. The tax assessed against Finkelstein was none the less an individual tax because the income on which it was based was derived from partnership business. The Revenue Act of 1918, 40 Stat. 1057, c. 18, § 218(a), being Comp. St. Ann. Supp. 1919, § 6336 1/8 i, under which it was assessed, specifically provided that 'individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.' The provision that in computing the income of each partner there should be included his distributive share of the income of the partnership, whether distributed or not, did not change the nature of the tax or make it one against the partnership.

2. The Bankruptcy Act (Comp. St. §§ 9585-9656) gives the United States no priority of payment out of partnership assets for a tax due from an individual partner. Section 64(a) being Comp. St. § 9648, which provides that 'the court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States * * * in advance of the payment of dividends to creditors,' manifestly relates to the payment of the taxes out of the estate of the bankrupt from whom they are 'due and owing.' Where the bankrupt owing the tax is a member of a partnership, it gives the United States no priority of payment out of the partnership estate.

The Bankruptcy Act clearly recognizes the separate entity of the partnership for the purpose of applying the long-established rule as to the prior claim of partnership debts on partnership assets and of individual debts on individual assets, and 'establishes on a firm basis the respective equities of the individual and firm creditors.' Francis v. McNeal, 228 U. S. 695, 700, 33 S. Ct. 701, 57 L. Ed. 1029, L. R. A. 1915E, 706; Schall v. Camors, 251 U. S. 239, 254, 40 S. Ct. 135, 64 L. Ed. 247. Section 5f (section 9589) provides that:

'The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of partnership debts. Should [there be] any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership.'

The intention of Congress that the partnership assets shall be first applied to the satisfaction of the partnership debts, and that only the interests of the partners in the surplus remaining after the payment of partnership debts shall be applied in satisfaction of their individual debts, is plain.

It is urged, however, on the authority of United States v. Herron, 20 Wall. 251, 255, 22 L. Ed. 275, and other cases, that as the United States is not named in this section of the Bankruptcy Act it is not bound by the rule for marshaling assets thereby established. But, however this may be, it is clear that, independently of the provisions of his section, the priority of payment of taxes given the United States by section 64(a) extends only to the bankrupt's share in the surplus of the assets of a partnership of which he is a member. This follows from the decision in United States v. Hack, 8 Pet. 271, 275, 8 L....