Armadillo Corp., Matter of, s. 76-1514

• Decision Date: 28 September 1977
• Docket Number: 76-1515,Nos. 76-1514,76-1516 and 76-1517,s. 76-1514
• Parties: 77-2 USTC P 9659 In the Matter of ARMADILLO CORPORATION, Bankrupt, and Republic Drug Company, Bankrupt. UNITED STATES of America, Plaintiff-Appellant-Cross-Appellee, v. Charles W. ENNIS, Trustee, and Roger C. Gifford, Trustee, Defendants-Appellees-Cross-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1382

561 F.2d 1382

77-2 USTC P 9659

In the Matter of ARMADILLO CORPORATION, Bankrupt, and

Republic Drug Company, Bankrupt.

UNITED STATES of America, Plaintiff-Appellant-Cross-Appellee, v. Charles W. ENNIS, Trustee, and Roger C. Gifford, Trustee,

Defendants-Appellees-Cross-Appellants.

Nos. 76-1514, 76-1515, 76-1516 and 76-1517.

United States Court of Appeals, Tenth Circuit.

Submitted Aug. 5, 1977.

Decided Sept. 28, 1977.

Karl Schmeidler, Tax Division, U. S. Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Denver, Colo., Gilbert E. Andrews and Crombie J. D. Garrett, Tax Division, U. S. Dept. of Justice, Washington, D. C., on the brief), of counsel; James L. Treece, U. S. Atty., and Carolyn J. McNeill, Asst. U. S. Atty., Denver, Colo., for plaintiff-appellant-cross-appellee United States.

Mackintosh Brown of Fuller & Evans, Denver, Colo., for defendants-appellees-cross-appellants Ennis and Gifford.

Before SETH, HOLLOWAY and BARRETT, Circuit Judges.

BARRETT, Circuit Judge.

Appellant, United States, seeks review of the district court's determination of the liability of trustees in bankruptcy for (a) employees' taxes represented by withheld income tax (26 U.S.C.A. § 3402) and Federal Insurance Contributions Act tax (F.I.C.A.) (26 U.S.C.A. § 3102) in relation to wages earned prior to but paid after the initiation of bankruptcy proceedings and (b) for employers' F.I.C.A. taxes (26 U.S.C.A. § 3111) and Federal Unemployment Tax Act taxes (F.U.T.A.) (26 U.S.C.A. § 3301) in relation to such wages. Appellees, trustees, cross-appeal challenging their liability for payment of the taxes, the priority to be afforded the tax claims, and the necessity of the United States to file a proof of claim for the taxes. A brief recitation of the proceedings had may prove helpful in placing the controversy in focus.

Two unrelated companies fell into bankruptcy in early 1970. In each instance the trustee's final report queried the trustee's liability for the aforementioned taxes. The bankruptcy judge thereafter categorized the wage claims as priority wage claims ¹ under Section 64(a)(2) of the Bankruptcy Act (Act) (11 U.S.C.A. § 104(a)(2) ) or as general unsecured wage claims. After doing so, the bankruptcy judge ruled in each case that the trustees were: not liable for the F.I.C.A. and F.U.T.A. taxes imposed on the employer by §§ 3111 and 3301, respectively, for the priority wage claims; not liable for the same F.I.C.A. and F.U.T.A. taxes imposed on the employer for general unsecured wage claims because the United States had failed to file a proof of claim for such taxes; not liable for withholding the employees portion of the withheld income and F.I.C.A. taxes imposed by §§ 3402 and 3101, respectively, for general unsecured wage claims; but that trustees were liable for withholding the employee's portions of the withheld income and F.I.C.A. taxes for priority wage claims.

On appeal, the district court initially observed that the bankruptcy court had correctly determined that the trustee was liable for the employees' portion of the withheld income and F.I.C.A. taxes for priority wage claims in accordance with the mandate of Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974), and that, accordingly, those taxes were not in issue on appeal. The district court then proceeded to consider each of the four taxes in issue relative to (a) the trustee's liability, (b) the priority to be afforded the claim if liability was present, and (c) whether the United her the United States must file a formal proof of claim.

After considering the four taxes in the above-mentioned manner, the district court held that the trustees were liable for the F.I.C.A. and F.U.T.A. ² taxes imposed on the employer by §§ 3111 and 3101, respectively, for both priority wage claims and general unsecured wage claims, and that the trustees were also liable for the employees' portion of the withheld and F.I.C.A. taxes imposed by §§ 3402 and 3101 for general unsecured claims. In addition to finding the trustees liable for all the taxes in question relative to wages accrued prior to but paid after the commencement of bankruptcy, regardless of their classification as priority or general unsecured wage claims, the district court held that the United States need not file a proof of claim for the taxes. The court further held that the taxes would not be afforded a priority under the Act and should be "accorded the same priority as all other general unsecured claims pursuant to the proviso of § 64(a)(4)" of the Act.

On appeal, United States argues that the trustees are liable for the payment of all the taxes in question, that it is not required to file proof of claims with respect to taxes relating to wage claims, that the taxes are entitled to the status of first priority debts under § 64(a) of the Act, and that the district court erred in ruling otherwise. Trustees, in their cross-appeal, contend that the district court erred in finding them liable for the taxes and in finding that the United States was not required to file proofs of claim. We will treat the trustees' claims first.

I.

This appeal involves a case of first impression brought by United States to achieve a degree of certainty relative to the liability of trustees in bankruptcy for wage claim related taxes. The district court was, however, aided by Otte v. United States, supra, in limiting the issues to be determined:

It is important to note first what is not at issue here. The bankruptcy court held that the trustee in each case was liable for the taxes ordinarily withheld by an employer from the employee's wages i. e., the employee's income tax on his wages and his share of FICA. This holding was required by the Supreme Court's recent opinion in Otte v. United States, 419 U.S. 43, (95 S.Ct. 247, 42 L.Ed.2d 212) (1974) and is not challenged here. In Otte the Court held that either the bankruptcy judge or the trustee was an "employer" under §§ 3401 and 3101 of the Internal Revenue Code and was responsible for withholding those taxes on the § 64(a)(2) priority wage claims. Id. at 51, (95 S.Ct. 247). There, as in these two cases, the wages had been earned prior to the filing of the bankruptcy petition but had not been paid prior to that time. The Government did not need, according to Otte, to file a proof of claim for these taxes since "(l)iability came into being only during bankruptcy." Id. at 55 (95 S.Ct. 247).

(R., Vol. II, p. 134.)

Trustees argue collectively that they are not liable for: (1) the employer's portion of F.I.C.A. taxes on priority wage claims because the taxes are excise taxes, added increments, and that no employment relationships were established or maintained between trustees and wage claimants; (2) the payment of F.U.T.A. taxes on priority wage claims because they are excise taxes. Trustees contend that F.U.T.A. taxes are different from the other taxes herein, and should not be considered in pari materia with them because the employees are protected by a bankrupt's unemployment coverage and that if the employees obtain new employment they will be covered by their new employer(s). Trustees argue that the few dollars which might be garnered by holding them liable for F.U.T.A. do not justify the extra time and manpower necessary to calculate credits; (3) the employer's portion of F.I.C.A. taxes or for F.U.T.A. taxes on general unsecured wage claims because the wages to which these claims are traced have lost their identity as wages and are simply part of the general mass of unsecured non-priority claims. Trustees also contend that they are not employers for these kind of added increment taxes; and (4) that trustees are not liable for withholding the employees' portion of withheld income and F.I.C.A. taxes on general unsecured wage claims because there is no reason that these wages should retain their character as wages, but rather, that they should be considered the same as any other trade creditor claim. Trustees argue that these claims should not be withheld since to do so would dilute funds available for general creditors.

It is undisputed that all employers are statutorily required to pay or withhold the taxes at issue herein. ³ Thus, the pivotal question on the issue of liability comes down to the degree to which a trustee is required to function as an employer in paying and withholding wage claim related taxes.

In Otte v. United States, supra, relied upon by the trial court, the Court held that a trustee is obligated to withhold and pay the employee's withheld income tax and the employee's share of F.I.C.A. taxes for priority wage claims. Although not deciding the issues immediately before us, the Court did opine generally relative to a trustee's withholding responsibility:

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, 30-33 (CA8 1947); United States v. Curtis, 178 F.2d 268, 269 (CA6 1949), cert. denied, 339 U.S. 965, 70 S.Ct. 1001, 94 L.Ed. 1374 (1950); Lines v. California Dept. of Employment, (9 Cir.) 242 F.2d 201, 202, reh. den., 246 F.2d 70 (CA9), cert. denied, 355 U.S. 857, 78 S.Ct. 86, 2 L.Ed.2d 64 (1957); In re Connecticut Motor Lines, Inc., 336 F.2d 96 (CA3 1964). To the same effect is In re Daigle, 111 F.Supp. 109, 111 (Me.1953). (Emphasis supplied.) 419 U.S., at p. 48, 95 S.Ct., at p. 252.

The Court also opined relative to a trustee's liability:

The payment of the wage claims is thus "payment of wages" under § 3402(a) of the...