In re Razorback Ready-Mix Concrete Co.
| Decision Date | 08 May 1984 |
| Docket Number | Adv. No. 83-336.,Bankruptcy No. LR-82-516 |
| Citation | 45 BR 917 |
| Parties | In re RAZORBACK READY-MIX CONCRETE CO., Debtor. RAZORBACK READY-MIX CONCRETE CO., Plaintiff, v. UNITED STATES of America, and District Director of Internal Revenue, Defendants, Charles D. Ragland, Commissioner of Revenues, Department of Finance and Administration, State of Arkansas, Intervenor. |
| Court | U.S. Bankruptcy Court — Eastern District of Arkansas |
C. Richard Crockett, Little Rock, Ark., for plaintiff.
Ann Fuchs, Dept. of Finance & Administration, Little Rock, Ark., for intervenor.
George W. Proctor, U.S. Atty., Little Rock, Ark., Lawrence P. Sherlock, Dept. of Justice, Tax Division, Washington, D.C., for defendants.
On October 12, 1983, this matter came on to be heard. Plaintiff, Razorback Ready-Mix Concrete Co. appeared by counsel, C. Richard Crockett; Defendants, United States of America and District Director of Internal Revenue appeared by counsel, Lawrence Sherlock; and Intervenor, Charles D. Ragland, Commissioner of Revenues, appeared by attorney Ann Fuchs.1 All parties presented to the Court a Stipulation of Facts, and the matter was submitted to the Court upon the pleadings, such Stipulation, administrative proceedings before the Court, briefs of counsel and oral argument.
The parties, for purposes of this action only, stipulated the following facts and statements:
1. The Plaintiff is the Debtor in a Chapter 11 proceeding which was instituted by the filing of a petition on June 9, 1982.
2. On June 3, 1982, Defendant filed a tax lien for $21,442.68, copy of which is attached hereto, and the amount of the lien was unpaid at the time Plaintiff filed its petition herein.
3. Within a period of 90 days prior to the filing of the petition, the Debtor made payments to the Defendant, United States of America, totalling $71,266.25. The payments were made by check on the following days and in the following amounts:
March 23, 1982 — $15,000.00
April 12, 1982 — $41,266.25
May 18, 1982 — $15,000.00
4. The payments were made because of failure by Plaintiff to pay F.I.D.C. taxes for the four taxable quarters of 1981. The total of $71,266.25 was applied by the Defendant in the following manner: taxes— $51,714.53, interest—$5,747.34, and penalties —$13,804.38.
5. The Debtor was insolvent at the time of the payments.
6. The payments enabled the Defendant to receive more than it would have if this case were a proceeding under Chapter 7, the payments had not been made, and the Defendant had received payment on the tax liabilities under the provisions of the Bankruptcy Code. This is true because in a hypothetical Chapter 7 case the tax claim of the State of Arkansas would have shared equal priority with the unpaid federal tax liabilities, and the State would have received part of the $71,266.25 which was paid to the Defendant.
7. The payments to the Defendant were made from the general checking account of the Debtor. Although the Debtor had a payroll account, only funds which were sufficient to pay the net amount of the paychecks were transferred from the general account to the payroll account. Taxes which were withheld from the wages of the Plaintiff's employees were normally kept in the general account until turned over to the United States. All revenues of Plaintiff were deposited in the general account, and only Plaintiff had the right to disburse funds from such account.
8. Between the time that the taxes in question were withheld from the wages of the Debtor's employees and the time that the payments were made to the Defendant, the general checking account of the Debtor was reduced on occasions to near zero.
9. In order to make the payments to the Defendant, the Debtor borrowed funds in excess of the payments, either by itself or through its president, which funds were deposited into the general checking account and used as operating funds.
10. The United States of America does not claim any interest in this proceeding as a secured creditor, but only as a priority unsecured creditor and as a creditor with administrative claims.
This is an adversary proceeding in which the debtor is seeking to recover as preferences certain monies paid to the United States. The debtor is also objecting to the priority to be granted to certain claims made by United States for interest and penalties on federal taxes.2
The pertinent facts in this proceeding are set forth in the Stipulation of Facts which has been filed by the parties and set out above. The debtor filed its petition under Chapter 11 of the Bankruptcy Code on June 9, 1982. Within the 90 day period preceding the date of filing the debtor made three payments to the United States totalling $71,266.25. The payments were made on account of unpaid withholding-F.I.C.A. taxes withheld from the wages of the debtor's employees during 1981, plus interest and penalties thereon. The total of $71,266.25 was applied in payment of $51,714.53 in tax, $5,757.34 in interest and $13,804.38 in penalties.
The payments were made to the United States out of the debtor's general checking account. This was the account through which the debtor normally paid taxes withheld from wages of its employees. The usual procedure followed by the debtor was that only an amount necessary to pay net wages was transferred from the general account to the payroll account; withheld amounts were not transferred. After the taxes in issue were withheld from the employees' wages the payments to the United States were not timely made but made in March, April, and May of 1982. In order to make these particular payments to the United States the debtor borrowed funds and, in addition to funds on hand, which were deposited in the general account, wrote three checks to the Government for the unpaid taxes, including penalties and interest.
The debtor, in asking this court to consider these three payments preferential transfers, relies on Section 547(b) of the Bankruptcy Code (11 U.S.C.) which provides as follows:
From the Stipulation of Facts it can be seen that several of the requirements for a preference have been met with respect to the payments in question. In fact, with respect to the monies which were used to pay interest ($5,747.34) and penalties ($13,804.38), the Government has conceded that such payments were preferences and can be recovered by the debtor.
The Government contends, however, that the monies which were used to pay the taxes cannot constitute a preference because they were not "property of the debtor" as Section 547(b) requires, citing as support for this position Section 7501(a) of the Internal Revenue Code (26 U.S.C.).3 This section of the Revenue Code provides that the amount of any tax withheld or collected by one person from another person "shall be held to be a special fund in trust for the United States" and was an express congressional recognition of the nature of withheld taxes. Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). Such taxes are ordinarily never considered property of the employer having the duty to withhold. Initially, the tax monies are the property of the employees from whose wages the monies are withheld, and, after the withholding is accomplished, 26 U.S.C. Section 7501(a) provides that the monies belong to the United States and are held in trust by the employer.
The legislative history of Section 547 supports a conclusion that the party having the duty to withhold is merely holding the money in trust until it can be turned over to the United States. The report which accompanied the bill in the House of Representatives contained the following language:
A payment of withholding taxes constitutes a payment of money held in trust under Internal Revenue Code section 7501(a), and thus will not be a preference because the beneficiary of the trust, the taxing authority, is in a separate class with respect to those taxes, if they have been properly held for payment, as they will have been if the debtor is able to make the payments. House Report No. 95-595, 95th Cong., 1st Sess. 372-373 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6328-6329. emphasis added
The debtor contends that since the actual trust fund monies withheld in 1981 had been commingled in the general fund account and spent by the time the payments were made in 1982, the United States' claim is no different from the claims presented by any other creditor. It has been stipulated that taxes withheld by this debtor from employee's wages were normally retained in the general checking account with only monies for net wages transferred to the payroll account and that the balance in the general account was reduced to near zero several times in the interval between the withholding of wages and the payments to the United States. The...
To continue reading
Request your trial