In re Murphy

• Decision Date: 23 August 1974
• Docket Number: No. 14357.,14357.
• Citation: 381 F. Supp. 813
• Parties: In the Matter of Jimmy Frank MURPHY, Bankrupt.
• Court: U.S. District Court — Northern District of Alabama

381 F. Supp. 813

In the Matter of Jimmy Frank MURPHY, Bankrupt.

No. 14357.

United States District Court, N. D. Alabama, M. D.

August 23, 1974.

Hobdy G. Rains, Gadsden, Ala., for the bankrupt.

Bill Bradley, R. Kent Henslee, Gadsden, Ala., for the trustee.

Andrew F. Oehmann, Jr., Trial Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., Wayman G. Sherrer, U. S. Atty., N. D. Ala., Birmingham, Ala., for the United States.

ALLGOOD, District Judge.

This case involves interesting and important questions in the fields of taxation and bankruptcy law and is now on its second appearance before this Court.

The matter was submitted on an agreed stipulation of facts, which though scanty, are possibly sufficient to reveal the problems involved.

Chronologically, the events were, as adopted from the stipulation, as follows:

1."The Bankrupt, Jimmy Frank Murphy, as President of Jim Murphy Ford Sales, Inc., signed and filed with the Internal Revenue Service Form 941, Employer's Quarterly Federal Tax Returns for the first quarter of 1970, and for a portion of the second quarter of 1970.Copies of these returns are attached hereto as Exhibits 1 and 2 respectively."

Note: The exhibited copies of the returns filed and signed by "Jimmy F. Murphy, President" were dated April 25, 1970 and May 28, 1970 respectively.

2."On or about May 15, 1970, the Ford Motor Credit Company attached and otherwise seized the assets of Jimmy Murphy Ford Sales, Inc., including the corporation's inventory and bank accounts, and thereafter prohibited the Bankrupt from acting on behalf of the corporation.Although, the United States of America admits this fact, it contends that said fact is immaterial to the determination of the question of dischargeability presently before the Court."

3."On May 14, 1971, a delegate of the Secretary of the Treasury made an assessment against the Bankrupt, Jimmy Frank Murphy, as the responsible officer of Jim Murphy Ford Sales, Inc., for the unpaid Withholding and the employees' share of the FICA taxes due from Jim Murphy Ford Sales, Inc., for the first and second quarters of the calendar year 1970.Said assessment was made in the aggregate amount of $2,809.77."

Note: This assessment against Jimmy Frank Murphy"as a responsible officer" was made on the authority of Section 6672 of the Internal Revenue Code of 1954, which provides that any person who is required to collect or account for or pay over such taxes and wilfully fails to do so shall in addition to other penalties provided by law, "be liable to a penalty equal to the total amount of the tax" not collected, accounted for or paid over.

The stipulation does not reveal that there was any finding that Jimmy Frank Murphywilfully failed to pay the tax, except inferentially in the assessment of 100% of the tax against him for the Internal Revenue.

Nor is there any stipulation that the taxes were not paid by the corporation at the time of filing except as inferred by the assessment.No copy of the assessment or the findings therein is in the record.However, as illustrated further in this opinion, the assessment, long prior to bankruptcy and not reviewed or questioned administratively, was final and had the force of a judgment fixing the liability of the bankrupt prior to bankruptcy which necessarily involved a finding of "wilful failure".

4."On December 13, 1971, Jim Murphy Ford Sales, Inc., a corporation, filed a Petition for Adjudication, and was adjudicated a bankrupt on that date by this Court."

5."On November 8, 1971, Jimmy Frank Murphy filed a petition with the Bankruptcy Court and was adjudicated a bankrupt."

6."On February 16, 1972, this Court entered an Order of Discharge of the Bankrupt, Jimmy Frank Murphy, releasing him from all his dischargeable debts."

7."On March 24, 1972, the Bankrupt filed an application seeking, among other things, a determination of the dischargeability of the assessments made against the Bankrupt as a responsible officer of Jim Murphy Ford Sales, Inc., for the first and second quarters of the calendar year 1970."

There are other facts and matters stipulated which are not deemed essential to the resolution of this appeal.They relate to the collections made by Internal Revenue by offset of refunds due on the 1970 and 1972 1040 Returns and levy on property or after bankruptcy earnings.The stipulation reflects after such credits the balance due Internal Revenue was the sum of $343.83, subject to adjustment for interest.

Although the amount involved in the case from a monetary standpoint is meager, nevertheless the plight of the bankrupt is one that naturally incites sympathy and tends to provoke compassion.The purpose of bankruptcy to give the bankrupt a new start in life and to free him from the burden of his debts is frustrated by a proceeding which does not discharge him from paying taxes created by a corporate enterprise which ended in financial disaster and in his personal financial ruin.

The whole problem of incurring liability as an officer of a corporation for unpaid withholding taxes is one that frequently arises again and again in bankruptcy.Transferee assessments are constantly being made in many cases of bankrupt corporations against officers or other "persons" responsible for the payment of withholding taxes.It is not uncommon for insolvent going concerns to meet the payroll, minus the tax deductions, in order to keep the labor force happy.Usually no provision is made for the payment of the tax which has been by bookkeeping deducted from the employees.This is done because funds are obtained sufficient to meet the net payroll, but not enough to create an actual trust fund for the amount due Internal Revenue.There is in such cases, not an actual diversion, but rather a failure to set aside the tax money.There is a duty on each taxpayer to create and honor the trust fund at the time each payroll is met.Failure to act to this end constitutes a "wilful failure" where several payrolls are made.

No real contention is presented that Jimmy Frank Murphy was not a "person" charged with this duty or that he did not wilfully fail to comply with Section 6671 of the Internal Revenue Code.

No funds or estate were created in either the bankruptcy of the corporation or in his individual case.The assumption would have to be made that he was legally liable for the assessment as a penalty against him, and that it remained unpaid at the time of his discharge in bankruptcy.

After his discharge was granted, but before the case was closed, the bankrupt sought to have the Bankruptcy Court determine that his liability under the assessment was cancelled by the discharge and by petition sought to make Internal Revenue a partydefendant by adversary proceeding.

The Internal Revenue immediately countered with the contention that his petition was a suit against the United States and that it could not be made a party and the Court lacked jurisdiction because it had not previously filed a claim or entered an appearance in the case.It also asserted that the bankrupt's liability was non-dischargeable in bankruptcy.

The contention that the Court lacked jurisdiction to hear and...