In re J. Menist & Co., Inc., 244.

• Decision Date: 09 April 1923
• Docket Number: 244.
• Citation: 290 F. 947
• Parties: In re J. MENIST & CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

290 F. 947

In re J. MENIST & CO., Inc.

No. 244.

United States Court of Appeals, Second Circuit.

April 9, 1923

William Hayward, U.S. Atty., of New York City (Victor House, Asst U.S. Atty., of New York City, of counsel), for appellant.

Zalkin & Cohen, of New York City (E. Fichandler, of New York City of counsel), for trustee in bankruptcy.

See also, 289 F. 229.

Appeal from an order in bankruptcy entered in the District Court for the Southern District of New York. The petition in this matter was filed March 20, 1920. On November 28, 1919, the United States had assessed on Menist's income for 1917 an additional tax of $2,421.75, and required the corporation to pay the same on December 11, 1919. No payment was made. On May 5, 1921, the United States filed a claim in this proceeding for the said tax plus 5 per cent. penalty and 1 per cent. interest per month until paid. That the tax was duly levied and is correct in amount are matters not in controversy.

The statutory justification asserted for the demand of interest and penalties is Act Oct. 3, 1917, 40 Stat. 300, Sec. 212 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, Sec. 6336 3/8m) making section 14(a) of the Act of September 8, 1916, 39 Stat. 756 (Comp. St. Sec. 6336n(a)), applicable to taxes under the 1917 act. By these statutes it is provided that '* * * to any sum or sums due and unpaid after the fifteenth day of June of any year, or after one hundred and five days from the date from which the return of income is required to be made by the taxpayer, and after ten days' notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due.'

At the hearing below the United States withdrew its claim for the penalty of five per centum, but insisted upon the demand for one per cent. per month under the guise of lawful interest. The lower court held that so-called interest at the rate of 1 per cent. a month amounted to a penalty, and therefore allowed the tax, with interest at 6 per cent., to be computed to the day of the date of payment by the trustee. There appears to be an error in the transcript as to the time when interest should begin. It has not been insisted upon in argument and may be corrected by agreement. From the order embodying this decision the present appeal was taken.

Before ROGERS, HOUGH, and MAYER, Circuit Judges.

HOUGH Circuit Judge (after stating the facts as above).

The fundamental proposition thought to justify this appeal is that a tax is not a debt. This is usually true; taxes are not treated as debts, because the latter are obligations founded on contract, while taxes are imposts levied by government and operating in invitum. Meriwether v. Garrett, 102 U.S. 472, at pages 513, 514, 26 L.Ed. 197. But we are here concerned only with the bankruptcy statute, and a tax whether due to the nation, to a state, or any other lawful taxing power, is a species of debt under that act. This is because it is called a debt by the statutory caption of section 64, which is the law invoked, and properly invoked, by the government in pursuing its present demand. 30 Stat.p. 563 (Comp. St. Sec. 9648). Further, this court has so decided in Re Sherwoods, 210 F. 754, 758, 127 C.C.A. 304, Ann. Cas. 1916A, 940, and the point is elaborately and well treated in Kaw, etc., v. Schull, 230 F. 587, 144 C.C.A. 641, L.R.A. 1916E, 628.

A tax being then a preferred debt, neither interest nor any other derivative or appended claim can rise higher than the tax debt which gives it birth and being, and it is provided in respect of all debts 'owing to the United States, a state, a county, etc.' as a penalty, shall not be allowed, except for the amount of the pecuniary loss sustained in the proceeding out of which the penalty arose. Section 57j (Comp. St. Sec. 9641(j)). It is a matter almost too plain to require citation that an exaction may be a penalty without being called by that name. Fontenot v. Accardo (C.C.A.) 278 F. 871, at page 874. The...