In re Alan Wood Steel Co.

• Decision Date: 15 December 1980
• Docket Number: Bankruptcy No. 77-930EG.
• Citation: 7 BR 697
• Parties: In re ALAN WOOD STEEL COMPANY, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

7 B.R. 697 (1980)

In re ALAN WOOD STEEL COMPANY, Debtor.

Bankruptcy No. 77-930EG.

United States Bankruptcy Court, E.D. Pennsylvania.

December 15, 1980.

Nathan Lavine, Adelman & Lavine, Philadelphia, Pa., for Edward Dwyer, Disbursing Agent.

John S. Estey, Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for debtor, Alan Wood Steel Company.

Fell, Spalding, Goff & Rubin, Philadelphia, Pa., Sklar, Pearl, Lichtenstein & Sklar, Philadelphia, Pa., for Creditors' Committee.

Griffin Bell, Atty. Gen., U.S. Dept. of Justice, Washington, D.C., Harvey Bartle III, Atty. Gen., Harrisburg, Pa., Peter F. Vaira, U.S. Atty., Walter S. Batty, Jr., Asst. U.S. Atty., Philadelphia, Pa., David T. Sykes, Philadelphia, Pa., for Central Penn, trustee.

Alan S. Fellheimer, I. Grant Irey, Jr., Philadelphia, Pa., co-counsel for Provident National Bank.

Stephen M. Heumann, Philadelphia, Pa., Chairman, for unsecured creditors' committee.

OPINION

EMIL F. GOLDHABER, Bankruptcy Judge:

The problem confronting us is whether a disbursing agent appointed by us in a Chapter XI case is required to file a tax return with or pay taxes to the state or federal taxing authorities on interest earned by estate funds kept in interest-bearing accounts during the tenure of that agent. We conclude that a disbursing agent is not required to do so.

The facts of the instant case are as follows:¹ On June 10, 1977, Alan Wood Steel Company ("the debtor") filed a petition for an arrangement under Chapter XI of the Bankruptcy Act ("the Act").² On that same day, Edward J. Dwyer ("Dwyer") was appointed one of the receivers of the debtor's estate and, on June 26, 1979, he was appointed trustee. On August 30, 1979, the debtor's modified plan was confirmed. In our order confirming the plan, we appointed Dwyer as one of the two disbursing agents for monies deposited pursuant to the terms of the plan, and we retained jurisdiction to ensure the performance of that plan. Since August 30, 1979, Dwyer has held all funds received by him as disbursing agent (totalling $10,385,317.00) in interest-bearing accounts and certificates of deposit. Under the terms of the plan, the funds were invested for the benefit of one class of creditors (the amounts of whose claims were in dispute). From August to December, 1979, the interest earned by those funds amounted to approximately $300,000. Dwyer has not filed any tax returns with respect to that interest and, on July 24, 1980, he filed the instant application seeking a determination of his obligation to file tax returns and pay taxes on that interest. On August 28, 1980, a hearing was held on this matter on notice to the appropriate state and federal taxing authorities. At that time Dwyer appeared and submitted a memorandum of law on this issue. No representative of the taxing authorities appeared at that hearing or submitted a brief or other response in opposition to Dwyer's application.

Accordingly, guided only by the memorandum of law submitted by Dwyer and by our own examination of the relevant law, we conclude that Dwyer is not required, as disbursing agent, to file any tax returns or to pay any taxes on the interest which accrued during his tenure as disbursing agent.

A. Jurisdiction to Determine the Tax Obligations of the Disbursing Agent.

Section 2(a)(2A) of the Act provides in pertinent part:

a. The courts of the United States hereinbefore defined as courts of bankruptcy are hereby — invested . . . with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this Act . . . to

(2A) Hear and determine, or cause to be heard and determined, any question arising as to the amount of legality of any unpaid tax, whether or not previously assessed, which has not prior to bankruptcy been contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.³

Since we have original jurisdiction in the continuing arrangement proceedings of the debtor herein and since the questions presented by the instant application have not previously been contested and adjudicated by a judicial or administrative tribunal of competent jurisdiction, we conclude that we have jurisdiction under section 2(a)(2A) to hear and determine the issue before us.

The United States Court of Appeals for the Third Circuit has held that section 2(a)(2A) grants jurisdiction to the bankruptcy court to determine tax questions. In re Century Vault Company, 416 F.2d 1035, 1041 (3d Cir. 1969). See, also, McKenzie v. United States, 536 F.2d 726 (7th Cir. 1976); Bostwick v. United States, 521 F.2d 741 (8th Cir. 1975); Gwilliam v. United States, 519 F.2d 407 (9th Cir. 1975); In re Dolard, 519 F.2d 282 (9th Cir. 1975); In re Epstein, 416 F.Supp. 947 (E.D.N.Y.1976); In re Durensky, 377 F.Supp. 798 (N.D.Tex.1974). See generally, 3A Collier on Bankruptcy ¶ 64,4073 at 2234 (14th ed. 1972).

The only court to hold otherwise is the United States Court of Appeals for the Fifth Circuit in In re Statmaster Corporation, 465 F.2d 978 (5th Cir. 1972), aff'g. 332 F.Supp. 1248 (S.D.Fla.1971). In Statmaster, the Fifth Circuit held that the jurisdictional grant contained in section 2(a)(2A) did not supersede the general prohibition against declaratory judgments on tax matters found in section 2201 of the Declaratory Judgment Act.⁴ That conclusion was considered and rejected, however, by the other circuit courts in the cases cited above. Since we are not bound by the decision of the Fifth Circuit in Statmaster, but are bound by the decision of the Third Circuit in Century Vault, we conclude that we have jurisdiction to decide the instant tax question.

Further, we agree with Dwyer that our refusal to exercise that jurisdiction would result in undue delay and expense in the administration of this case. If we were to decline to decide the instant issue, the disbursing agent would be compelled to present the issue of his obligations under the state and federal tax laws in other forums. In the interim, distribution of funds under the plan would be delayed. Moreover, because of the length of time that is often necessary to distribute funds under a plan, the tax liability of the disbursing agent would continue to accrue, thereby requiring recalculations of the amounts to be distributed to the various creditors. This would be "contradictory to the principal aim of the Bankruptcy Act — the expeditious administration of estates and the prompt payment of dividends to creditors." In re Simplex Sales Company, 336 F.Supp. 672, 674 (S.D.Fla.1972).

B. The Disbursing Agent's Obligation to File Returns for or to Pay Federal Income Taxes for the Debtor Corporation.

There are no provisions of the Act or the Rules of Bankruptcy Procedure which require a disbursing agent to file a federal income tax return or to pay federal income taxes on interest earned by the investment of funds to be distributed under the plan. Furthermore, after checking the relevant sections of the Internal Revenue Code, we conclude that there is nothing contained therein which requires a disbursing agent to file a return or to pay taxes on such interest.

The only section of the Internal Revenue Code that deals with persons required to file tax returns in the bankruptcy context is section 6012(b) which states in pertinent part:

(3) Receivers, trustees and assignees for corporations. — In a case where a receiver, trustee in bankruptcy, or assignee, by order of a court of competent jurisdiction, by operation of law or otherwise, has possession of or holds title to all or substantially all the property or business of a corporation, whether or not such property or business is being operated, such receiver, trustee or assignee shall make the return of income for such corporation in the same manner and form as corporations are required to make such returns.

26 U.S.C. § 6012(b) (emphasis added). Hence, we conclude that that section does not apply to a disbursing agent for several reasons. Firstly, a disbursing agent is not a receiver, trustee or assignee of the debtor corporation. Trustees in bankruptcy are appointed under section 44(a) of the Act and receivers are appointed under section 332, while disbursing agents are appointed under section 337(1) of the Act. 11 U.S.C. §§ 72(a), 732 and 737(1) (1976). What is more, a disbursing agent is not an assignee of the corporation since there is no assignment to him of the property of the debtor corporation. See Black's Law Dictionary 109 (5th ed. 1979).

Secondly, a disbursing agent does not have possession of or hold title to all or substantially all the business or property of the debtor corporation. While a trustee in bankruptcy holds title to the debtor's property under section 70(a) of the Act and a trustee and receiver have the power to operate the debtor's business under section 343, a disbursing agent has only the power "to distribute, subject to the control of the court, the consideration, if any, to be deposited by the debtor." 11 U.S.C. §§ 110, 743 and 737 (1976).

Thirdly, the interest earned by the investment of the funds deposited under the plan is not income of the debtor corporation as described in section 6012(b)(3) of the Internal Revenue Code. The debtor has no claim or interest in the funds deposited under the plan and held by the disbursing agent and, therefore, the debtor has no claim to the interest earned by those funds during the term of the disbursing agent. Section 367 of the Act states that "Upon confirmation of an arrangement — . . . (3) the consideration deposited, if any, shall be distributed and the rights provided by the arrangement shall inure to the creditors affected by the arrangement." 11 U.S.C. § 767 (1976). Since the plan in the case sub judice provided that the funds held by the disbursing agent were to be distributed to certain creditors and, in the interim, to be invested for the benefit of one class of creditors, payment of whose claims was...