In re Finkelstein

• Decision Date: 07 April 1924
• Docket Number: 338.,267
• Citation: 298 F. 11
• Parties: In re FINKELSTEIN et al. UNITED STATES et al. v. KAUFMAN. In re JONES & BAKER.
• Court: U.S. Court of Appeals — Second Circuit

298 F. 11

In re FINKELSTEIN et al. UNITED STATES et al. v. KAUFMAN. In re JONES & BAKER.

Nos. 267, 338.

United States Court of Appeals, Second Circuit.

April 7, 1924

These two appeals were argued at the same time and will be disposed of in one opinion. In the Finkelstein case the District Court for the Southern District of New York affirmed the order of the referee in bankruptcy allowing the claim of Bowers collector, against the individual assets of Finkelstein, but not against the partnership assets. The facts are sufficiently set forth in the opinion of Referee Townsend which, because of its careful review of the question litigated, we quote infra.

In the Jones & Baker case, the District Court for the Southern District of New York reached the same conclusion on a different state of facts, in respect of which, however, there is no difference in principle from what was held in the Finkelstein case. The facts in the Jones & Baker case may be briefly stated.

Jones &amp Baker was a partnership composed of two partners, William R. Jones and Jackson B. Sells, and was engaged in the stock brokerage business. On March 31, 1923, an involuntary bankruptcy proceeding was commenced against the firm in the District Court for the Southern District of New York and a receiver was appointed. An offer of composition in bankruptcy was made by the firm to the partnership customers and creditors, as distinguished from the creditors of the individual partners, which contemplated the valuing of all securities in the margin accounts at their value on May 31, 1923, and the payment to the partnership customers and creditors on the resulting credit balances of at least 90 per cent. in cash and securities as so valued. No offer of composition was made to the creditors of the individual partners. This offer of composition was confirmed by the District Court, and the receiver was directed to carry it into effect. Under the composition the creditors of the firm cannot by any possibility recover the full amount of their claims.

In July, 1923, more than one month after the appointment of the receiver, the government, upon a re-examination of the individual tax returns of the individual partners, for the years 1918, 1919 and 1920, assessed certain additional income taxes against Jones for $632,768.04 and Sells for $62,661.89. Separate claims for these amounts were thereupon filed with the receiver, both dated July 14, 1923, by the collector of internal revenue for the Second collection district of New York. These two claims were entitled in the bankruptcy proceedings and were specifically stated to be against the individuals. Subsequently separate amended claims in identical language were filed with the receiver for slightly reduced amounts.

As the result of negotiations, a formal stipulation was entered into under date of November 26, 1923, between the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, and Jones, by which the amount of his income tax liability for the years 1918, 1919 and 1920 was reduced to $273,739.07. Under the same date a similar stipulation was entered into with Sells, reducing his net additional income tax liability for the same years to $5,518.41. These stipulations were entered into separately with each partner, and each stipulation fully recites the facts relating to the individual assessment concerned.

The government, however, has endeavored in the bankruptcy proceeding to assert these claims as claims against the assets of the firm of Jones & Baker, collected and held by the receiver for the use and benefit of the creditors of the firm, and has endeavored to enforce the two claims as being entitled to payment out of the firm's assets prior to the customers and creditors of the firm. The opinion of the referee in the Finkelstein case follows:

'The collector's claim * * * asserts a claim against Abraham Finkelstein for an unpaid balance of income tax for the year 1919; the balance being stated at $11,523.30. Priority in payment before all claims, together with interest at 1 per cent. per month until paid, beginning January 22, 1922, is also asserted. The question of priority and of rate of interest will be reserved by the referee for the present.

'The entire income tax for the year 1919 asserted against Abraham Finkelstein is $15,364.40, of which he appears to have paid the installment, or onefourth, normally falling due in March, 1920, at $3,841.10. The remaining three installments, or three-fourths, aggregating $11,523.30, form the basis of the present claim. On October 14, 1920, a petition in bankruptcy was filed against the partnership and the partners, upon which petition the three partners individually and as a partnership was adjudicated on April 1, 1921. It does not appear that the collector prior to the filing of the petition in bankruptcy in October, 1920, ever took any steps against Abraham Finkelstein to collect the unpaid installments of June 15, 1920, and September 15, 1920, either against the individual property of Abraham Finkelstein, including his interest in the partnership at that time.

'At the hearing it appeared that all the assets in the hands of the trustee in bankruptcy are partnership assets, and that the trustee has no assets otherwise the property of Abraham Finkelstein. It was conceded Abraham Finkelstein had a substantial interest in any surplus of partnership assets remaining after paying partnership debts. It is, however, conceded that in this there is no surplus. At the hearing the government contended that the collector's claim was payable out of the partnership assets prior to the payment of the general copartnership creditors.

'At the hearing the trustee contended that the government's claim was only payable out of any individual assets (of which in this case there were none) belonging to the individual estate of Abraham Finkelstein within subdivision 'f' of section 5 of the Bankruptcy Act (Comp. St. Sec. 9588). In other words, the government's contention is that the tax assessed against Abraham Finkelstein should be paid out of the partnership assets prior to partnership creditors, the same as if the income tax had been assessed upon the partnership as an entity, as was the case under the Revenue Act of 1917. See title 2, Sec. 201 (Comp. St. 1918, Sec. 6336 3/8b), of that statute, which reads as follows: 'That in addition to the taxes under existing law and under this act there shall be levied, assessed, collected and paid for each taxable year upon the income of every corporation, partnership, or individual, a tax (hereinafter in this title referred to as the tax). equal to the following percentages of the net income. * * * '

'It is to be noted that title 1 of the act of 1917 imposes an income tax upon the income of every individual, and that title 2 of the act imposes a graduated excess profits tax on a partnership as an entity. The Revenue Act of 1918, under which the present tax was imposed upon Abraham Finkelstein, was a departure from the plan of the Revenue Act of 1917 in not imposing a tax upon a partnership as an entity, but declaredly imposed the tax upon the partner in his individual capacity, and in respect to the income, whether distributed or not, which he was entitled to receive from the partnership. The language of the statute is as follows:

''Sec. 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed.' Comp. St. Ann. Supp. 1919, Sec. 6336 1/8i.

''Sec. 224. That every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners.' Comp. St. Ann. Supp. 1919, Sec. 6336 1/8l.

''If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided until paid, with the interest, penalties, and costs that may

accrue in addition thereto upon all property and rights to property belonging to such person. * * * '

''Sec. 3466. Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority hereby established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.

"Sec. 3467. Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he

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