In re Armadillo Corp., Bankruptcy No. 70-B-549
| Decision Date | 10 March 1976 |
| Docket Number | Bankruptcy No. 70-B-549,70-B-1409. |
| Citation | 410 F. Supp. 407 |
| Parties | In re ARMADILLO CORPORATION, Bankrupt. UNITED STATES of America, Appellant, v. Charles W. ENNIS, Appellee. In re REPUBLIC DRUG COMPANY, Bankrupt. UNITED STATES of America, Appellant, v. Roger C. GIFFORD, Appellee. |
| Court | U.S. District Court — District of Colorado |
Arthur L. Biggins, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for appellant.
Mackintosh Brown, Denver, Colo., for appellees.
This matter is before the court on appeal by the United States from orders entered by the bankruptcy judge in the separate cases. Because the issues presented and the orders appealed from here are identical, these two cases have been consolidated on appeal from the orders denying the relief requested by the United States.
Armadillo Manufacturing Co. filed a voluntary straight bankruptcy petition on February 17, 1970. The required number of creditors filed a petition for an involuntary straight bankruptcy of The Republic Drug Co. on April 29, 1970. The claim of the United States here concerns the disallowance of claims for certain taxes allegedly due on wage claims filed in both cases and recognized by the bankruptcy court either as § 64(a)(2) priority wage claims or as general unsecured wage claims—i. e., wage claims in excess of the $600 limit for each claimant specified in § 64(a)(2). Bankruptcy Act, § 64; 11 U.S.C. § 104 (1970). The United States has filed no formal proofs of claim for these taxes, claiming priority under § 64(a)(1) of the Bankruptcy Act. A review of the taxes involved is necessary to determine the three questions raised as to each tax: liability, priority, and necessity of filing proof of claim.
At issue here are taxes allegedly due under the following sections of the Internal Revenue Code of 1954: first, 26 U.S.C. § 3402—income tax on employee's wages, to be withheld by the employer; second, 26 U.S.C. § 3101—the employee's tax under the Federal Insurance Contributions Act, called the employee's portion of FICA or social security taxes; third, 26 U.S.C. § 3111—the employer's excise tax under the Federal Insurance Contributions Act, called the employer's portion of FICA or social security taxes; and fourth, 26 U.S.C. § 3301—the employer's excise tax under the Federal Unemployment Tax Act, called the employer's FUTA or unemployment tax. Under the Code, the employee's portion of FICA taxes and the income taxes on his wages are to be withheld by his employer and paid over to the Internal Revenue Service directly. The employer likewise pays his own share of the FICA taxes and the FUTA tax directly to the Service.
The bankruptcy court recognized two distinct types of wage claim and allowed the claim of the Government for certain of the stated taxes on the basis of whether they were assessed on the § 64(a)(2) priority wage claims or on the general unsecured wage claims. The Government's claims for the employees' income taxes on wages and the employees' portions of FICA were allowed as assessed on the § 64(a)(2) priority wage claims. All other tax claims were disallowed. It is this disallowance the Government appeals.
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 these taxes on the § 64(a)(2) priority wage claims. Id. at 51, 95 S.Ct. at 253, 42 L.Ed.2d at 221. 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 "liability came into being only during bankruptcy." Id. at 55, 95 S.Ct. at 255, 42 L.Ed.2d at 223.
What remains for determination here involves the tax claims of the Government not allowed by the bankruptcy court. These are: first, the employer's portion of the FICA on the § 64(a)(2) priority wage claims; second, the employer's FUTA tax on the § 64(a)(2) priority wage claims; third, the employee's income tax on wages on the general unsecured wage claims; fourth, the employee's portion of FICA on the general unsecured wage claims; fifth, the employer's portion of FICA on the general unsecured wage claims; and sixth, the employer's FUTA tax on the general unsecured wage claims. For each of these tax claims three issues must be resolved: (a) is the trustee liable; (b) what priority must be accorded the claim if there is liability; (c) must the Government file a formal proof of claim. An understanding of the complex and numerous issues involved may be aided by the following table.
TABLE I
ISSUES
EMPLOYEE'S TAXES | EMPLOYER'S TAXES
|
§ 3402 | § 3101 | § 3111 | § 3301
Withholding Tax | E's Share of | R's Share of | R's FUTA (unemployment)
on Wages (E's | FICA (soc'l | FICA (soc'l | Tax
income tax) | sec.) | sec.) |
---------------------------------------|--------------------------------------------
| | |
| | 1 | 2 |
| | | |
§ 64(a)(2) | These taxes on these claims | (a) liability | (a) liability |
PRIORITY | | | |
WAGE | were allowed by the bankruptcy | (b) priority | (b) priority |
CLAIMS | | | |
| court. | (c) proof of | (c) proof of |
| | claim | claim |
|---------------------------------------|--------------------------------------------|
| | |
| 3 | 4 | 5 | 6 |
GENERAL | | | | |
UNSECURED | (a) liability | (a) liability | (a) liability | (a) liability |
WAGE | | | | |
CLAIMS | (b) priority | (b) priority | (b) priority | (b) priority |
(in excess | | | | |
of $600) | (c) proof of | (c) proof of | (c) proof of | (c) proof of |
| claim | claim | claim | claim |
------------------------------------------------------------------------------------
NOTE: E represents employee
R represents employer
Issue 1(a): Liability of the Trustee for the Employer's Portion of FICA on the § 64(a)(2) Priority Wage Claims. The Government argues that the trustee in each case fits within the statutory definition of an "employer" and thus is liable for the employer's excise tax imposed by § 3111 of the Internal Revenue Code of 1954 Code on the priority wage claims. It argues that the claim is of the first priority under § 64 of the Bankruptcy Act Act and that therefore no proof of claim need be filed. The trustee in each case argues, and the bankruptcy court held, that the trustee is not an employer, since no one has ever performed services for the trustee. They further assert that the claim would not be allowed first priority under the Act if it were recognized, since it would not be a cost or expense of administering the estate, and that a proof of claim would have to be filed within the time limit under the Act in order to be allowed. It is conceded here that no claims were filed and the Government's claims would fail if this court held such a proof of claim were required.
Otte v. United States, supra, did not discuss a trustee's liability for this employment tax, although it did discuss the trustee's liability for the employee's portion of the FICA tax. The bankruptcy court in its orders noted a distinction between the employee's contributions under FICA and the employer's contributions: the former is a tax imposed on the basis of the employee's income and is merely to be withheld by the employer under the "pay as you go" taxing philosophy adopted by Congress after World War II; the latter is an excise tax imposed on the employer by virtue of his having persons in his employ, it is a tax on the "privilege of employment." The trustee in bankruptcy, the bankruptcy judge reasoned, is not a person with workers in his employ and therefore is not an employer for purposes of the § 3111 FICA tax on employers.
The difficulty with this conclusion is established by Otte. There the Court held that the trustee was an "employer" within the definition of chapter 24 of the Code, which deals...
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