419 U.S. 43 (1974), 73-375, Otte v. United States

Docket Nº:No. 73-375
Citation:419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212
Party Name:Otte v. United States
Case Date:November 19, 1974
Court:United States Supreme Court

Page 43

419 U.S. 43 (1974)

95 S.Ct. 247, 42 L.Ed.2d 212

Otte

v.

United States

No. 73-375

United States Supreme Court

Nov. 19, 1974

Argued October 15, 1974

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

1. A trustee in bankruptcy for an employer is required by the withholding provisions of the Internal Revenue Code of 1954 (IRC) and similar provisions of the New York City Administrative Code to withhold taxes from the payment of priority claims for wages earned by employees prior to the employer's bankruptcy, but unpaid at the inception of the bankruptcy proceeding. The payment of the wage claims is "payment of wages" under IRC § 3402(a) requiring withholding of income taxes, and is wages under IRC § 3102(a) requiring withholding of social security taxes, and an "employer," defined by IRC § 3401(d)(1) to include "the person having control of the payment" of wages, is present under § 3402(a). The same rationale applies to the withholding of city income taxes under the similar City Code provisions. Pp. 48-52.

2. From the obligation to withhold it follows that the trustee is also required to prepare and submit to the wage claimants and to the taxing authorities the reports and returns required of employers under IRC §§ 6051(a), 6001, and 6011 and similar provisions of the City Code. P. 52.

3. Requiring the trustee to withhold, report, and file returns does not unduly burden the administration of bankrupt estates so as to contravene the spirit of the Bankruptcy Act, for the burden is the same as any employer, or receiver, arrangement debtor, or other fiduciary, with a like number of employees must bear; moreover, both the IRC and the City Code allow the trustee to withhold taxes at a flat rate, thus facilitating the tax computation. Pp. 52-54.

4. Proofs of claim by the United States and New York City with respect to the withholding taxes on the priority wage claims are not required. Since tax liability accrues only when the wage is paid, and since the wages subject to the wage claims here, although earned before bankruptcy, were not paid prior thereto, so that the

Page 44

bankrupt employer's tax liability came into being only during bankruptcy, the taxes are not like debts of the bankrupt for which proofs of claim must be filed. Pp. 54-55.

5. The federal and city withholding taxes are entitled, as are the priority wage claims from which they emerge, to second priority of payment under § [95 S.Ct. 250] 64a(2) of the Bankruptcy Act. Such taxes are not within the fourth priority under § 64a(4), since they did not become due and owing by the bankrupt until after the wage claims were paid following bankruptcy. Nor are such taxes entitled to first priority under § 64a(1), since they are not costs or expenses of administration of the bankrupt estate, but are part of the wage clams themselves, and are carved out of the payment of those claims. Pp. 55-58.

480 F.2d 184, affirmed.

BLACKMUN, J., delivered the opinion for a unanimous Court.

BLACKMUN, J., lead opinion

MR. JUSTICE BLACKMUN delivered the opinion of the Court.

This bankruptcy case raises issues (a) as to whether priority claims for wages earned by employees prior to an employer's bankruptcy, but unpaid at the inception of the bankruptcy proceeding, are subject to withholding taxes, and, if so, (b) as to whether the taxing entities must file proofs of claim, and (c) as to which priority of payment, if any, the withholding taxes enjoy under

Page 45

§ 64a of the Bankruptcy Act (the Act), 11 U.S.C. § 104(a).1

I

On September 15, 1964, Freedomland, Inc., a New York corporation, filed a petition with the United States District Court for the Southern District of New York for an arrangement under Chapter XI of the Act, 11 U.S.C. §§ 701-799. The arrangement failed, and on August 30, 1965, Freedomland was adjudicated a bankrupt. Petitioner, William Otte, was appointed and qualified as the trustee.

During the statutorily prescribed six-month period for the filing of proofs of claim against the estate, see §§ 57 and 63 of the Act, 11 U.S.C. §§ 93 and 103, 413 former employees of Freedomland filed proofs for unpaid wages (each claim in the amount of $600 or less and all the claims aggregating approximately $80,000) that had been earned within three months preceding the filing of the Chapter XI petition. These wage claims concededly were entitled to a second priority of payment under § 64a(2). No proofs for any federal income or Federal Insurance Contributions Act taxes on these wage claims, withholdable under Chapters 24 and 21, respectively, of the Internal Revenue Code of 1954, 26 U.S.C. §§ 3401-3404

Page 46

and 3101-3126, were filed by the United States, and no proofs for any New York City personal income tax, withholdable under Chapter 46, Titles T and U, of the New York City Administrative Code, were filed by the city.

In November, 1969, the trustee filed a motion for an order directing distribution [95 S.Ct. 251] to the 413 priority wage claimants without deduction for any federal, state, or city withholding taxes. He also asked that the referee declare that the trustee was not required to withhold or pay any such tax or to file any report or return relative thereto with the respective taxing authorities. The State of New York, although served, filed no response to the trustee's motion. The United States and the city did respond. The referee issued an order granting the trustee the relief he requested. App. 48a-50a. In a supporting memorandum decision, the referee stated that the withholding and reporting requirements of the federal and city statutes

would impose a further burden on the administration of these estates which is entirely inconsistent with the objective of efficient expeditious economic administration of bankrupt estates,

and that "compliance with withholding and reporting requirements . . . is utterly inconsistent with the spirit and the letter of the Bankruptcy Act." Id. at 36a, 37a.

The United States and the city filed petitions with the United States District Court to review the referee's order and decision. After a hearing, the District Court reversed the order and decision insofar as they pertained to federal taxes. It directed the withholding of federal taxes on the priority wage claims, and also concluded that the amounts to be withheld were "taxes which became legally due and owing by the bankrupt," within the language of § 64a(4), and, therefore, were to be paid as tax claims of the fourth priority. The court observed that little more than a simple bookkeeping effort would be involved in withholding 25% of the wage distributions.2

Page 47

It held that proofs of claim were not required because the employees' proofs gave notice to the trustee and other creditors of the total amounts distributable on account of the claims. The District Court, however, ruled against the city on the ground that the city's personal income tax did not become effective until 1966, and thus no city tax was due and owing by the bankrupt in 1964 when the Chapter XI petition was filed. In re Freedomland, Inc., 341 F.Supp. 647 (1972).

The trustee, the United States, and the city all appealed. The United States Court of Appeals for the Second Circuit affirmed in part and reversed in part. It held that the trustee was obligated to withhold, to report, and to pay over the withholding taxes on the wage claims, and that the taxing entities were not required to file proofs of claim. It further held, however -- and thus, to this extent, disagreed with the District Court -- that both the United States and the city were entitled to be paid as second priority claimants under § 64a(2). In re Freedomland, Inc., 480 F.2d 184 (1973).

We granted the trustee's petition for certiorari (unopposed by the United States) primarily because the circuits are in disarray as to the priority to be accorded to withholding taxes on pre-bankruptcy wage claims.3 414

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U.S. 1156 (1974). [95 S.Ct. 252] No cross-petition was filed by either the United States or the city of New York.

II

Withholding, Reports, and Returns

Every Court of Appeals which has faced the issue, including the Second Circuit in the present case, has held, contrary to the ruling of the referee, that the withholding provisions of the Internal Revenue Code, and of state or municipal tax statutes, require that a trustee in bankruptcy withhold income and social security taxes from payments of wage claims, and that he prepare and submit to the wage claimants and to the taxing authorities the reports and returns statutorily required of employers. United States v. Fogarty, 164 F.2d 26, 333 (CA8 1947); United States v. Courtu, 178 F.2d 268, 269 (CA6 1949), cert. denied, 339 U.S. 965 (1950); Lines v. California Dept. of Employment, 242 F.2d 201, 202, reh. den., 246 F.2d 70 (CA9), cert. denied, 355 U.S. 857 (1957); In re Connecticut Motor Lines, Inc., 336 F.2d 96 (CA3 1964). To the same effect is In re Dale, 111 F.Supp. 109, 111 (Me.1953).

A. The requirement of withholding. Section 3402(a) of the Internal Revenue Code, 26 U.S.C. § 3402(a), requires "[e]very employer making payment of wages" to "deduct and withhold upon such wages . . . a tax determined. . . ." Section 3401(a) defines "wages" for withholding purposes to mean, with certain exceptions, "all remuneration . . . for services performed by an employee for his employer," and § 3401(d) defines "employer" as

Page 49

"the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person." The latter section makes an exception where "the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services"; in that case, "employer" means "the person having control of the payment of such wages." Sections T46-51.0(a) and U46-8.0 of the New York City...

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135 practice notes
  • 160 B.R. 882 (Bkrtcy.S.D.N.Y. 1993), 88 B 10377, In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey
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    ...the benefit of all its creditors." In re Drexel Burnham Lambert Group Inc., supra, 134 B.R. at 488 (quoting, Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254, 42 L.Ed.2d 212 A claim is not entitled to priority simply because the right to payment arose after the commencement of......
  • 170 B.R. 69 (Bkrtcy.S.D.N.Y. 1994), 92 B 40477 , In re R.H. Macy & Co., Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Second Circuit
    • July 7, 1994
    ...v. Unishops, Inc. (In re Unishops, Inc.), 553 F.2d 305, 308 (2d Cir.1977); In re Freedomland, Inc., 480 F.2d 184, 189 (2d Cir.1973),aff'd, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974), and has explained that "the purpose of according priority in these cases is fulfillment of the eq......
  • 208 B.R. 1000 (Bkrtcy.S.D.Ga. 1996), 88-20540, Matter of Concrete Products, Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Eleventh Circuit
    • July 2, 1996
    ...narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors"); Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254, 42 L.Ed.2d 212 (1974); Brown v. Gerdes, 321 U.S. 178, 64 S.Ct. 487, 88 L.Ed. 659 (1944); Leiman v. Guttman, 336 U.S. ......
  • 6 B.R. 886 (Bkrtcy.E.D.N.Y. 1980), 77 B 52, Matter of Typhoon Industries, Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Second Circuit
    • November 10, 1980
    ...Hartman v. Lauchli, 238 F.2d 881 (8th Cir.), cert. denied, 353 U.S. 965, 77 S.Ct. 1048, 1 L.Ed.2d 915 (1957). Cf. Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974) (employer FICA and income tax withholding contributions, based upon wages earned prior to bankruptcy but ......
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129 cases
  • 160 B.R. 882 (Bkrtcy.S.D.N.Y. 1993), 88 B 10377, In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey
    • United States
    • Federal Cases United States Bankruptcy Courts Second Circuit
    • October 29, 1993
    ...the benefit of all its creditors." In re Drexel Burnham Lambert Group Inc., supra, 134 B.R. at 488 (quoting, Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254, 42 L.Ed.2d 212 A claim is not entitled to priority simply because the right to payment arose after the commencement of......
  • 170 B.R. 69 (Bkrtcy.S.D.N.Y. 1994), 92 B 40477 , In re R.H. Macy & Co., Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Second Circuit
    • July 7, 1994
    ...v. Unishops, Inc. (In re Unishops, Inc.), 553 F.2d 305, 308 (2d Cir.1977); In re Freedomland, Inc., 480 F.2d 184, 189 (2d Cir.1973),aff'd, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974), and has explained that "the purpose of according priority in these cases is fulfillment of the eq......
  • 208 B.R. 1000 (Bkrtcy.S.D.Ga. 1996), 88-20540, Matter of Concrete Products, Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Eleventh Circuit
    • July 2, 1996
    ...narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors"); Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254, 42 L.Ed.2d 212 (1974); Brown v. Gerdes, 321 U.S. 178, 64 S.Ct. 487, 88 L.Ed. 659 (1944); Leiman v. Guttman, 336 U.S. ......
  • 6 B.R. 886 (Bkrtcy.E.D.N.Y. 1980), 77 B 52, Matter of Typhoon Industries, Inc.
    • United States
    • Federal Cases United States Bankruptcy Courts Second Circuit
    • November 10, 1980
    ...Hartman v. Lauchli, 238 F.2d 881 (8th Cir.), cert. denied, 353 U.S. 965, 77 S.Ct. 1048, 1 L.Ed.2d 915 (1957). Cf. Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974) (employer FICA and income tax withholding contributions, based upon wages earned prior to bankruptcy but ......
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    ...be construed as limited to federal income tax withholding, it has been held to apply also to FICA and FUTA taxes. Otte v. United States, 419 U.S. 43, 74-2 U.S.T.C. [paragraph] 9822 (1974); In re Armadillo Corp., 410 F. Supp. 407, 76-2 U.S.T.C. [paragraph] 9546 (D. Colo. 1976) aff'd, 561 F.2......
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    ...determine liability for the payment of FICA tax under sections 3102 and 3111 and FUTA tax under section 3301. See Otte v. United States, 419 U.S. 43, 95 S. Ct. 247, 42 L. Ed. 2d 212 (1974); In re Armadillo Corp., 410 F. Supp. 407 (D. Colo. 1976), aff'd, 561 F. 2d 1382 (10th Cir. 1977). Due ......