In re Booth Tow Services, Inc., 85-0947-CV-W-6.
| Decision Date | 21 October 1985 |
| Docket Number | No. 85-0947-CV-W-6.,85-0947-CV-W-6. |
| Citation | 53 BR 1014 |
| Parties | In re BOOTH TOW SERVICES, INC., Debtor. UNITED STATES of America, Appellant, v. Robert SPECTOR, Appellee. |
| Court | U.S. District Court — Western District of Missouri |
Michael Quigley, Trial Atty., U.S. Department of Justice, Washington, D.C., for the United States.
Michael Roser, Berman, DeLeve, Kuchan & Chapman, Kansas City, Mo., for appellee.
The above-captioned bankruptcy appeal presents an often litigated legal issue that has divided those courts that have considered it — whether a bankruptcy court can determine, in the context of a Chapter 11 reorganization proceeding for a corporate debtor, the liability of an individual officer or employee for withholding and FICA taxes under 26 U.S.C. § 6672. The bankruptcy court below, relying on Judge Pelofsky's decision in In Re H & R Ice, Co., Inc., 24 B.R. 28 (Bkrtcy.W.D.Mo.1982), held that it could rule on the validity of the IRS assessment of the § 6672 penalty against appellee Spector and, on the merits, concluded that this assessment was improper because Spector was not "a responsible person" within the meaning of § 6672. The Government's appeal addresses solely the jurisdictional question of whether the Chapter 11 proceeding was the proper forum in which to challenge Spector's personal liability.
Booth Tow Services, Inc.'s Chapter 11 reorganization plan was confirmed by the bankruptcy court on May 13, 1982. As part of that plan, the corporate debtor was ordered to pay to the Government certain employee withholding and FICA taxes owed for the second and third quarters of 1981. Under the tax laws, these taxes are held in "a special fund in trust for the United States." 26 U.S.C. § 7501. Even if the employer fails to turn over the monies to the Government, the United States "must nevertheless extend a credit to the employees as if the funds were properly paid over to the government." United States v. Huckabee Auto Co., 46 B.R. 741, 743 (M.D.Ga.1985). In seeking to recover the income and FICA taxes that an employer has failed to pay over to the Treasury, the Government has several statutory remedies. First of all, it can seek an order against the corporate employer for the amount of those taxes in that corporation's Chapter 11 proceeding. Such relief was obtained in the present case pursuant to 11 U.S.C. § 505(a)(1)1 although Booth Tow Services, Inc. apparently never made the required payments. See September 25, 1984, order of bankruptcy court (Booth Tow Services, Inc. directed to pay within ten days all withholding and FICA taxes for the second and third quarters of 1981, or else show cause in writing why it should not be required to do so.). Judge Stewart's power to order the corporate debtor to pay those taxes in the context of the Chapter 11 proceeding is not challenged.
A second procedure by which the Government can recover withholding and FICA taxes that an employer has failed to turn over is established in 26 U.S.C. § 6672. That statute imposes personal liability for those taxes on certain individuals associated with the corporate employer.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
The § 6672 penalty against the individual officer or owner "is distinct from and in addition to the employer's liability for the tax." Huckabee, 46 B.R. at 743, and cases cited therein.2 In the present case, the I.R.S. assessed or threatened to assess a § 6672 penalty for the full amount of the taxes (that the corporate debtor had failed to turn over to the Government) against Robert Spector, a former employee of Booth Tow Services, Inc., with certain authority over that entity's books and records. On May 11, 1984, Spector initiated the present adversary proceeding in Booth Tow Services' Chapter 11 case. He sought relief from the bankruptcy court in the form of an order directing the corporate debtor to make immediate payment of any withholding or FICA taxes owed and determining that Spector had no liability for these taxes under § 6672, "and is not subject to any penalty therefor."
The United States subsequently moved to dismiss Spector's application for relief for lack of subject matter jurisdiction. The Government argued that the validity of a tax assessment against a non-party to a bankruptcy action could not be determined in that action. Spector opposed the motion to dismiss and also moved for a temporary restraining order against IRS attempts to collect or enforce a tax penalty against him. Judge Stewart's August 23 and August 28, 1984, orders denied the motion to dismiss on the authority of In Re H & R Ice Co., Inc., and granted Spector the temporary restraining order pending final determination on the merits of the adversary proceeding.3 The Government's bid for an interlocutory appeal of the jurisdiction ruling failed when Judge Oliver denied such review in a September 25, 1984, order. That order stated in part that
A hearing on the merits of the adversary proceeding occurred before Judge Stewart on October 29, 1984. In post-trial briefing, the United States renewed its jurisdictional challenge and "supplemented it with recent authority." In the bankruptcy court's June 11, 1985, order granting final judgment on behalf of Spector, the jurisdictional issue was again addressed. Judge Steward concluded that Judge Oliver's opinion on interlocutory appeal established "the law of the case to the effect that this court does in fact have jurisdiction." Slip op. at 2.4 Moreover, the bankruptcy court found additional authority for its power to hear Spector's complaint in Booth Tow Services' bankruptcy proceeding in a recent Western District of Missouri decision, Matter of Tom LeDuc Enterprises, Inc., 47 B.R. 900 (1984).5 On the merits, Judge Stewart held that a § 6672 penalty could not be assessed against Spector for unpaid taxes of the corporate debtor because Spector did not fit within the category of "a responsible person." Specifically, it was determined that Spector's activities on behalf of the company were subject to the direction and control of Joe Booth, the controlling owner and chief executive officer of the debtor corporation.
Judge Pelofsky's decision in In Re H & R Ice Co. contains a two-part discussion of a bankruptcy court's jurisdiction, in a Chapter 11 proceeding involving a corporate debtor, to decide the validity of the assessment of a § 6672 penalty against an individual officer or employee.6 First of all, the court pointed to 11 U.S.C. § 505(a)(1) as the source of its power to determine the individual's liability for the corporate debtor's unpaid taxes. Although the assessment against the individual did not involve the debtor's estate, the liability, if any, arises "from the failure to pay the taxes of the debtor."7 24 B.R. at 30. Moreover, "the jurisdictional grant of that Section is not, by its terms, limited to a determination of tax liability of the debtor." Accord, In Re Major Dynamics, Inc., 14 B.R. 969 971 (Bkrtcy.S.D.Cal.1981).8 The obligations of third parties are, therefore, within the broad scope of a bankruptcy court's § 505(a)(1) authority. Accord In Re Jon Co., Inc., 30 B.R. 831, 833-34 (D.Colo.1983).
Judge Pelofsky's opinion then continues by evaluating the effect of the anti-injunction statute, 26 U.S.C. § 7421, on a bankruptcy court's power to enjoin IRS collection of a § 6672 penalty. The anti-injunction statute provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." Because the primary purpose of this statute ("to protect the government's need to assess and collect taxes as expediently as possible with a minimum of pre-enforcement judicial interference") "collides with the thrust and philosophy of the bankruptcy proceedings," Judge Pelofsky concluded that he had the authority to grant the injunctive relief sought. 24 B.R. at 31-32. Accord In Re Datair Systems Corp., 37 B.R. 690, 695-96 (Bkrtcy.N.D.Ill.1983).
That the anti-injunction statute is not a barrier to the relief sought in the present case is confirmed by the Eighth Circuit opinion in Bostwick v. United States, 521 F.2d 741, 744 (1975) (). In Bostwick, the Eighth Circuit held that a bankruptcy court had the power to determine the dischargeability of a debtor's federal tax debt and the jurisdiction to enjoin the district director from collecting such taxes. While the Bostwick view of the anti-injunction statute in the context of bankruptcy proceedings is not shared by some other courts,9 it has not been reevaluated or rejected in the Eighth Circuit. The Bostwick holding should apply equally to the situation where a bankruptcy court is considering enjoining an assessment of a tax against a non-party to a Chapter 11 proceeding if there is bankruptcy jurisdiction.
The court is more troubled, however, by Judge Pelofsky's conclusion that 11 U.S.C. § 505(a)(1) authorizes bankruptcy court jurisdiction over tax...
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