In re 4100 North High Ltd., Bankruptcy No. B2 75-492-B

• Decision Date: 17 March 1980
• Docket Number: B2 75-493-A.,Bankruptcy No. B2 75-492-B
• Citation: 3 BR 232
• Parties: In re 4100 NORTH HIGH LIMITED and Northwest Business and Professional Center, Limited, Bankrupts. Fred G. PRESTON, Trustee in Bankruptcy, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

3 B.R. 232 (1980)

In re 4100 NORTH HIGH LIMITED and Northwest Business and Professional Center, Limited, Bankrupts.

Fred G. PRESTON, Trustee in Bankruptcy, Plaintiff, v. UNITED STATES of America, Defendant.

Bankruptcy Nos. B2 75-492-B, B2 75-493-A.

United States Bankruptcy Court, S.D. Ohio, E.D.

March 17, 1980.

Thomas C. Scott, of Loveland, Callard, Clapham & Scott, Columbus, Ohio, for plaintiff.

Fred G. Preston, Trustee in Bankruptcy, Columbus, Ohio.

James C. Cissell, U.S. Atty., Cincinnati, Ohio, Albert R. Ritcher, Asst. U.S. Atty., Columbus, Ohio, Jason P. Green, Trial Atty., Tax Div. of the Dept. of Justice, Washington, D.C., for defendant, United States of America.

OPINION, DECISION AND ORDER RULING UPON MOTION FOR SUMMARY JUDGMENT

D.J. KELLEHER, Bankruptcy Judge.

These adversary proceedings were commenced by separate complaints filed December 30, 1977 by the plaintiff, Fred G. Preston, in his capacity as trustee in bankruptcy of 4100 North High Limited 4100 N. High and Northwest Business and Professional Center, Ltd. Northwest, respectively. Responsive pleadings were filed on March 15, 1978 by the United States Attorney for this District.

A joint pre-trial conference of both adversary proceedings was held on April 17, 1978 at which counsel for the parties agreed to submit to the Court issues made by the pleadings upon stipulations and briefs. A Stipulation of Facts was filed in each case on May 17, 1978. Each recites that the stipulations were made "for the purpose of submitting this case for trial upon cross-motions for Summary Judgment." Because the similar facts of these adversary proceedings raise identical legal issues they will be joined for decision.

The parties have stipulated to the facts in the statement which follows. Each bankrupt is an Ohio limited real estate partnership whose principal asset was a building. The business of each was the rental of space and collection of rentals from the building. Each was adjudicated a bankrupt on May 2, 1975 and Fred G. Preston thereupon qualified and has since acted as Trustee in Bankruptcy for each. On May 7, 1975 the Court authorized the trustee to conduct the business and manage the property of each. During 1975, until the trustee disposed of the buildings, he did operate the business of each bankrupt and while doing so he collected rents from tenants.

On August 30, 1977 plaintiff filed two U.S. Fiduciary Income Tax Returns for each bankrupt with the District Director of Internal Revenue. The first return for each covered the fiscal period from May 2, 1975 through April 30, 1976; the second return for each covered the fiscal period from May 1, 1976 through April 30, 1977. Rental income was reported in each 1976 return. Income reported in each fiscal 1977 return is the interest earned on cash deposited with a bank. The plaintiff trustee reported no income tax due upon either return for the fiscal period ended April 30, 1976.

On December 12, 1977 the Internal Revenue Service I.R.S. issued notices to the trustee, advising him that pursuant to 26 U.S.C. § 6213(b) he had erred in computing the tax and that a total balance of $714.32 was due for 4100 N. High and $3,086.96 was due for Northwest regarding the returns filed by the trustee for the fiscal period ended April 30, 1976. On February 10, 1978 notices and demands for payment were issued by I.R.S. to the plaintiff in the amount of $727.36 for 4100 N. High and $3,143.33 for Northwest.

The parties have also stipulated that filed, proved and allowed claims total $61,935.59 against the estate of 4100 N. High and $559,885.58 against the estate of Northwest. The final meeting of creditors in each estate has been held and this litigation appears to be the only remaining unresolved matter.

Indeed, in the fifth paragraph of each complaint, plaintiff alleged:

"* * * Nothing further remains to be done by plaintiff in the administration of this case. Plaintiff is unable to make final distribution, however, until the liability of your Trustee, if any, for income taxes as an expense of the administration is determined, and until he may be protected against subsequent action by defendant in attempting to asses sic or collect any tax from him which may arise as a direct or indirect result of his activity in bankruptcy in this case."

As is so often the case, the phrasing of the issue clearly delineates the polar positions assumed by the parties. In his brief, plaintiff states:

"The principal issue before the Court is whether or not a trustee of the estate of a bankrupt partnership is required to pay federal income taxes on monies received by him during the course of administration in the nature of rents and interest." Underlining added.

In contrast, defendant states:

"The question before the Court is whether the law specifically exempts the plaintiff, trustee, in this case from the assessed post-petition federal income tax liability." Underlining added.

The use of the word "estate" both in the Bankruptcy Act (now repealed, but still applicable herein) and in the Internal Revenue Code without precise definition in either statutory setting is at the heart of the issues in these cases. As of the date of the filing of a petition initiating a proceeding under the Bankruptcy Act, title to the property of the bankrupt vests by operation of law in the trustee. 11 U.S.C. § 110a. A bankruptcy estate thereupon comes into being, whether the bankrupt is an individual, a corporation, a partnership or a limited partnership. A basic issue presented by these cases is whether such bankruptcy estates are estates separately taxable under the Internal Revenue Code. Therefore, we must examine the statutory provisions and accompanying legislative history of the Internal Revenue Code provisions as worded in 1975 and 1976.

Defendant asserts, and the Court agrees, that the rental income collected by the trustee in 1975 in these cases falls within the Code definition of gross income. 26 U.S.C. § 61. Defendant also asserts that a tax is imposed on the income of each bankruptcy estate by 26 U.S.C. § 641(a) which as worded in 1975 and 1976 stated:

"(a) Application of tax.—The tax imposed by section 1(e) shall apply to the taxable income of estates or of any kind of property held in trust, including—

(1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

(2) income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated."

However, § 641(a) does not itself impose a tax, but only refers to the "* * * tax imposed by section 1(d) * * *." The referenced section as worded in 1975 and 1976 in pertinent part stated:

"There is hereby imposed on the taxable income * * * of every estate and trust taxable under this subsection, a tax determined in accordance with the following table * * *." Underlining added. 26 U.S.C. § 1(d).

The modifying language underlined must have been intended to have some purpose. The apparent purpose is to limit the imposition of the tax so that not every estate and trust is taxable under § 1(d). Unless so read the clause has no meaning at all. Apparently, the language was inserted by the Code amendments of 1969, P.L. 91-172, but legislative history fails to explain what was intended by the limiting clause. The only hint found in the Internal Revenue Code itself of what may have been intended is § 641(a) which counsel for the government contends should be broadly construed to include, although not mentioned therein, bankruptcy estates and, apparently, every estate and trust, citing § 7701(b) of the Code which states:

"The terms `includes\' and `including\' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." Underlining added. 26 U.S.C. § 7701(b).

Counsel for the government makes the statement that "* * * the levying provisions are not in issue here" and contends that the rule of White v. United States, 305 U.S. 281, 59 S.Ct. 179, 83 L.Ed. 172 (1938), should be applied to cast upon plaintiff the burden of showing an unequivocal exemption or exclusion from taxation, rather than the rule of Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L.Ed. 211 (1917) which held that statutes levying taxes will not be extended by judicial implication beyond the clear import of the language used in the statute, and that doubts must be construed against the government.

However, it appears that the undefined meaning of the limiting clause of § 1(d), wholly incorporated into § 641(a), raises precisely the issue which counsel for the government states "* * * is not in issue here." What is meant by "* * * every estate and trust taxable under § 1(d) * * *" is not well-answered by § 7701(b) which tells us that the word "including" used in § 641(a) "* * * shall not be deemed to exclude other things otherwise within the meaning of the term defined." Underlining added. If we accept the contention that § 7701(b) compels the conclusion that a bankruptcy estate and it should follow—every other kind of estate and trust was intended to be covered by § 641(a), and hence § 1(d) which imposed the tax, then the limiting clause of § 1(d) is meaningless. Such acceptance would impute to Congress the intention of enacting a statutory provision having no meaning. This we cannot do. Our function is not to ignore statutory language, but to interpret it consistently with the intent of Congress as we may ascertain it.

We find guidance for such...