Commonwealth of Pennsylvania v. Aylward, 13266.
| Decision Date | 11 April 1946 |
| Docket Number | No. 13266.,13266. |
| Citation | 154 F.2d 714 |
| Parties | COMMONWEALTH OF PENNSYLVANIA v. AYLWARD. |
| Court | U.S. Court of Appeals — Eighth Circuit |
A. J. Granoff, of Kansas City, Mo. (J. M. Meyerhardt, of Kansas City, Mo., on the brief), for appellant.
J. L. Milligan and John C. Grover, both of Kansas City, Mo., for appellee.
Before GARDNER, WOODROUGH, and JOHNSEN, Circuit Judges.
United Funds Management Corporation filed its voluntary petition in bankruptcy on September 30, 1942, and was duly adjudged a bankrupt on October 1, 1942. On December 28, 1942, the Commonwealth of Pennsylvania filed its claim for franchise and corporate income taxes for the years 1939, 1940, 1941 and 1942, claiming priority in payment, and later, on October 20, 1943, it filed an amended and substituted claim in the sum of $1131.51, which is the claim involved on this appeal. On oral objections by the trustee in bankruptcy, the court disallowed the claim. From this judgment of disallowance the Commonwealth prosecutes this appeal.
No question is raised as to the formal sufficiency of the proof of claim as filed. During its operation for the years in controversy the United Funds Management Corporation submitted to the Commonwealth of Pennsylvania annual statements as required by the law of that state, showing income and profits. From these reports and the independent judgment of the taxing authorities of Pennsylvania assessments were made of the amount of taxes due from the Company to the State for the years in controversy. The reports so filed correctly showed taxable income based upon the company's theory of reserves. It was operating a business classified as an investment trust. It sold certificates representing an interest in the trust consisting of a selected group of securities. These certificates were sold on monthly installments extending over a period of years and at the maturity of the certificate the holder was entitled to receive in cash the face amount of the certificate which in fact represented the amount paid plus earnings. The certificates provided for lapse and forfeiture under certain conditions, in which event the payments made became the property of the Company. It operated on the assumption that in the future the same percentage of certificate holders would permit their certificates to lapse as had lapsed in the past experience of the Company, and in calculating the amount of reserve set up for the ultimate payment of its certificates and in determining its annual profits it set up no reserve for the percentage of certificates which the Company assumed would be lapsed. It is argued that this practice was illegal and unsafe and that the Company should have set up a reserve upon the hypothesis that all of the outstanding certificates would be matured and have to be paid. Because of this alleged error the trial court concluded that there was no income properly subject to tax by the Commonwealth of Pennsylvania for the years in question. It is not claimed that the Pennsylvania taxing authorities committed any mathematical error in calculating the amount of taxes due but that the Corporation's returns were incorrect and that there was in fact no income on which to assess any tax whatever.
The assessments were determined by the taxing officials in accordance with the procedure prescribed by the Pennsylvania statutes. 72 P.S. § 3420a et seq. They were made by the Department of Revenue and delivered to the Auditor General where they were audited and approved. The Department of Revenue is a state agency created by statute to assess and collect taxes imposed by law and such assessments are subject to audit and approval by the Auditor General or to correction by the Board of Finance and Revenue. A very complete system of procedure for review and appeal from all tax assessments is provided by statute. Thus, within ninety days after the date of any assessment the taxpayer may file a petition for resettlement. Within thirty days after notice of the action taken on any petition for a resettlement the taxpayer may petition the Board of Finance and Revenue to review such action. Following this procedure any taxpayer may, if dissatisfied, appeal to the Court of Common Pleas of Dauphin County, and may likewise appeal from the judgment of that court to the Supreme Court of Pennsylvania.
On February 9, 1942, the Company filed a petition for resettlement of corporation taxes as to the 1939 franchise and income tax. Its petition was refused both by the Department of Revenue and the Auditor General. No petition for review by the Board of Finance and Revenue was filed at any time. Later, the trustee in bankruptcy filed a petition for review, resettlement, abatement and refund, addressed to the Secretary of Revenue and the Auditor General and the Bureau of Corporation Taxes. With this petition the trustee submitted returns for the calendar year 1942, and prayed for a redetermination of tax liability for the years 1939 to 1941, inclusive, on the new facts submitted and for abatement of all sums found not to be due for taxes and for a refund. The Secretary of Revenue held that the filing of the petitions for resettlement and review was improper and not timely, advising that the only procedure open to the Company at that time was the filing of a compromise of taxes as provided by the Pennsylvania statute. No petition for review was filed nor were any further proceedings had or taken. The trustee on advice of counsel repudiates his action in invoking the jurisdiction of the Pennsylvania taxing authorities on the ground that he was without specific authority so to do.
Whether the Bankruptcy Court had the power to review and redetermine the tax assessments here involved which had been determined by the state taxing authorities in accordance with legislative authority, is the basic issue presented. Section 64, sub. a, of the Bankruptcy Act, 11 U.S.C.A. § 104, sub.a, so far as here material, reads as...
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