In re Independent Automobile Forwarding Corp.

• Decision Date: 17 March 1941
• Docket Number: No. 127.,127.
• Citation: 118 F.2d 537
• Parties: In re INDEPENDENT AUTOMOBILE FORWARDING CORPORATION. STATE OF NEW YORK v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

118 F.2d 537 (1941)

In re INDEPENDENT AUTOMOBILE FORWARDING CORPORATION STATE OF NEW YORK v. UNITED STATES.

No. 127.

Circuit Court of Appeals, Second Circuit.

March 17, 1941.

John J. Bennett, Jr., Atty. Gen. (Henry Epstein, Sol. Gen., of Albany, N. Y., and W. Gerard Ryan and Francis R. Curran, Asst. Attys. Gen., of counsel), for appellant.

Samuel O. Clark, Jr., Asst. Atty. Gen., J. Louis Monarch and Thomas G. Carney, Sp. Assts. to the Atty. Gen., and George L. Grobe, U. S. Atty., and Joseph J. Doran, Asst. U. S. Atty., both of Buffalo, N. Y., for appellee.

Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The Independent Automobile Forwarding Corporation, an employer of labor to whom and to whose employees the provisions of the Federal Social Security Act, c. 531, 49 Stat. 639, 42 U.S.C.A. § 1101 et seq., were applicable, was adjudicated a bankrupt in the District Court for the Western District of New York on April 26, 1938. The liquidation of its property in the bankruptcy proceedings brought into the hands of the trustee assets insufficient to pay in full the claims filed and allowed priority under § 64, sub. a (4) of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a (4). The trustee filed his petition for instructions governing the payment of such priority claims and an order thereon was made on June 23, 1939, from which an appeal was taken to this court. Part of the claims involved were for taxes due the State of New York and part were for taxes due the United States, including some social security taxes and the amount of a credit allowable on the latter was changed by an amendment to the statute that became effective August 10, 1939. In accordance with a stipulation of the parties, an order was entered discontinuing that appeal without costs and remanding the case to the District Court for a resettlement of its order which would give effect to the amendment. The order was resettled in a way that granted priority to all the taxes claimed by the federal government and by the state and fixed the percentage payable thereon after allowing a credit on the social security taxes to the extent payments were to be made the State of New York on its claim for taxes which were to be contributions to its unemployment fund. This appeal is from the order so made.

The only claimants who will share in the distribution are the State of New York and the United States whose claims are for taxes for the year 1937, and as their claims, regardless of any issues on this appeal, exceed the amount available for distribution, there must, in any event, be a pro rata distribution. That is not disputed, but what part of the amount due the government for social security taxes should be given priority is in dispute as well as the amount of the allowable credit. There is no controversy as to the amount due the State of New York or that its claim is entitled to priority. Nor is there any dispute but that the part of the government's claim which does not arise under the Social Security Act is also entitled to priority.

Turning now to the points in dispute, the first question is whether all taxes assessed under Title VIII and Title IX of the Social Security Act are to be granted priority under § 64, sub. a (4) of the Act as taxes owed by the bankrupt. Those imposed under Title IX and under § 804 of Title VIII are clearly taxes assessed against the employer and so against the bankrupt. The right to priority for so much as may be the correct amount of such taxes is clear but that amount, being in controversy in respect to the Title IX taxes, will later be considered separately herein. That leaves in the first problem only the nature of the liability of the bankrupt under the Social Security Act for taxes imposed under Title VIII, § 801.

Sec. 801 of Title VIII, effective in 1937, provided in so far as presently material that, "In addition to other taxes, there shall be levied, collected and paid upon the income of every individual a tax equal to the following percentages of the wages (as defined in section 811 1011) received by him after December 31, 1936, with respect to employment (as defined in section 811 1011 of this chapter) after such date * * *". And in § 802 (a) of the same Title it was provided that, "The tax imposed by section 801 1011 of this chapter shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. Every employer required so to deduct the tax is hereby made liable for the payment of such tax, and is hereby indemnified against the claims and demands of any person for the amount of any such payment made by such employer."

This part of the Social Security Act laid a tax upon the employees of this bankrupt measured by a percentage of their wages and not a tax upon the bankrupt. It was taxed to a like extent under § 804 of Title VIII and the two taxes put the burden of social betterment upon both the employer and the employees. As to that part of these taxes which were thus imposed upon the employees the employer was, indeed, made a compulsory tax collector and made liable for the payment of such tax. The employer, however, was liable only as an agent bound to pay whether its duty to collect was performed or not. Such liability for a debt, instead of for taxes due and owing the government, does not form the basis of a claim entitled to priority under Sec. 64, sub. a (4). Gulf Oil Corp. v. Grady, 2 Cir., 110 F.2d 178; The City of New York v. Feiring, Trustee, 2 Cir., 118 F.2d 329, decided March 17, 1941; In re General Merchandise Corporation of America, D.C., 32 F.Supp. 805. Accordingly, the taxes assessed under Sec. 801 of Title VIII of the Social Security Act were erroneously allowed as a prior claim. Sec. 607 of the Revenue Act of 1934, 26 U.S. C.A. Int.Rev.Code, § 3661, providing that whenever any person is required to collect or withhold any tax from another person and pay it over to the United States, the tax so collected or withheld shall be held as a special trust for the United States has no application since there is no proof that any part of the government's claim is for such taxes actually collected or withheld. Even if they had been, only what could be traced could have constituted a trust fund. In re Frank, D.C., 25 F.Supp. 1005.

The remaining question involves the meaning of the credit provisions of § 902 (a) of the Social Security Act as amended Aug. 10, 1939, 42 U.S.C.A. § 1102. Before the amendment it provided that: "The taxpayer may credit against the tax imposed by § 901 section 1011 of this chapter the amount of contributions, with respect to employment during the taxable year, paid by him (before the date of filing his return for the taxable year) into an unemployment fund under a State law. The total credit allowed to a taxpayer under this section for all contributions paid into unemployment funds with respect to employment during such taxable year shall not exceed 90 per centum of the tax against which it is credited, and credit shall be allowed only for contributions made under the laws of States certified for the taxable year as provided in Section 903 1103 of this chapter."

As the bankrupt made no contributions to any such state fund, there would have been no allowable credit but for the amendment of Aug. 10, 1939. That changed the...