In re Samoset Associates

• Decision Date: 29 September 1981
• Docket Number: Bankruptcy No. BK75-1404K.
• Parties: In re SAMOSET ASSOCIATES, Debtor.
• Court: U.S. Bankruptcy Court — District of Maine

14 B.R. 408 (1981)

In re SAMOSET ASSOCIATES, Debtor.

Bankruptcy No. BK75-1404K.

United States Bankruptcy Court, D. Maine.

September 29, 1981.

COPYRIGHT MATERIAL OMITTED

Andrew A. Cadot, Perkins, Thompson, Hinckley & Keddy, Portland, Me., trustee.

Robert M. Kane, Jr., Tax Division, Washington, D.C., William H. Browder, Jr., Asst. U.S. Atty., Bangor, Me., for IRS.

MEMORANDUM DECISION

CONRAD K. CYR, Bankruptcy Judge.

The court is confronted in these proceedings with close questions concerning the interplay among the Internal Revenue Code, the Uniform Partnership Act, and an obscure provision of the Judicial Code.

Samoset Associates, the partnership-owner of a Maine coast resort hotel, was adjudicated bankrupt on March 28, 1978 following an abortive Chapter XII arrangement proceeding. A short time after adjudication, the trustee in bankruptcy deposited $200,000 received in settlement of certain post-petition litigation. By January 16, 1981, the accrued interest totaled $49,253, leaving $249,253 available for distribution among holders of claims totaling almost $500,000.

The questions posed in connection with the interest monies are (1) whether the trustee must file federal income tax returns; (2) whether Samoset Associates, the bankrupt partnership, is liable for federal income tax; and (3) whether the trustee is liable for federal income tax.

DUTY TO FILE INCOME TAX RETURNS

Internal Revenue Code § 6012 specifically imposes responsibility for the filing of federal income tax returns upon individuals I.R.C. § 6012(a), fiduciaries and receivers I.R.C. § 6012(b), and corporations I.R.C. § 6012(a).¹ There is no specific requirement for the filing of federal income tax returns by the trustee in bankruptcy of a partnership in ordinary bankruptcy proceedings. The court has discovered no authority for the proposition put forth by the Government that IRC § 6012 imposes a duty on the trustee in bankruptcy of a bankrupt partnership to file income tax returns.² The court concludes that no such duty is imposed by I.R.C. § 6012.

BANKRUPT PARTNERSHIP AS § 641 "ESTATE"

Internal Revenue Code § 641 imposes a tax, payable by the fiduciary,³ on "taxable income of estates. . . ."⁴ Nowhere is the term "estate" defined under the Internal Revenue Code. The Internal Revenue Service has attempted for years to clarify⁵ these bankruptcy tax issues; by regulation, see, e.g., Treas.Reg. § 1.641(b)-2(b); by Treasury decision, see, e.g., T.D. 6580, 26 F.R. 11486 (Dec. 5, 1961); and by revenue rulings, see, e.g., Rev.Rul. 68-48, 68-1 C.B. 301. Each section of the Internal Revenue Code is to be read in pari materia with related sections, Southern National Gas Co. v. United States, 412 F.2d 1222, 1266 (Ct.Cl.1969), with a view to achieving a consistent and harmonious construction, CIR v. Stickney, 399 F.2d 828, 834 (6th Cir. 1968); J.O. Johnson, Inc. v. United States, 476 F.2d 1337, 1340 (Ct.Cl.), cert. denied, 414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973). Augmented by the maxim that tax legislation is not to be extended by implication beyond the plain purport of the statutory language, Greyhound Corp. v. United States, 495 F.2d 863, 869 (9th Cir. 1974), in pari materia construction compels the conclusion that whatever doubt and ambiguity remain as to the taxability of these interest monies must be resolved in favor of the taxpayer, id.; Frankel v. United States, 192 F.Supp. 776, 777 (D.Minn.1961), aff'd 8th Cir., 302 F.2d 666, cert. denied, 371 U.S. 903, 83 S.Ct. 208, 9 L.Ed.2d 165 (1962).

Subchapter J of the Internal Revenue Code, of which section 641 is part, deals with the taxation of the income of estates and trusts and their beneficiaries, and of income in respect of decedents. In most significant respects, except section 641, Subchapter J has been interpreted by the courts as excluding bankruptcy estates from its application. For instance, the deductions prescribed by sections 642 et seq. are not available to bankruptcy estates, Richardson v. United States, 386 F.Supp. 424, 428 (C.D.Cal.1974), aff'd. 552 F.2d 291 (9th Cir. 1977); bankruptcy estates are excluded for purposes of computing distributable net income under section 643(a), and creditors, the beneficiaries of bankruptcy estates, are not considered "beneficiaries" for "estate" purposes under subsection 643(a),⁶id. Contra, In re O'Neill, 79-2 U.S.T.C. 88,238, 88,241 (W.D.Va.1979). These incompatible interpretations of various Internal Revenue Code provisions pertaining to bankruptcy estates do not conform with the in pari materia interpretive treatment mandated by the courts. See, e.g., J.O. Johnson, Inc. v. United States, supra; CIR v. Stickney, supra. The court has not been cited to any authority, nor does any sound reason occur for taxing bankruptcy estates along with decedents' estates under I.R.C. § 641, while denying bankruptcy estates alone the deductions and credits authorized by I.R.C. §§ 642 & 643. The interpretation urged by the Government contravenes the clear congressional policy of Subchapter J, which is to treat estates as conduits of funds, taxable only to the extent that the income realized is not distributed to beneficiaries. See Mott v. United States, 462 F.2d 512, 514 (Ct.Cl.1972).

In re 4100 North High Limited, 3 B.R. 232, 235 (Bkrtcy.S.D. Ohio B.J.1980), holds that I.R.C. § 641 itself imposes no tax, even on an "estate," but interacts with the tax imposition provisions of I.R.C. § 1(e). Bankruptcy Judge Kelleher, in a carefully considered opinion, there decided that I.R.C. § 641 does not apply to the estate of a bankrupt partnership.⁷ Id. at 237. See H.Rep. No. 95-595, 95th Cong., 1st Sess. (1977), at 274, 275, U.S.Code Cong. & Admin.News 1978, 5787. The court is convinced by the careful reasoning in 4100 North, the only reported decision encountered treating the taxability of a bankrupt partnership,⁸ that a bankrupt partnership is not an "estate" within the meaning of I.R.C. § 641(a).

Alternatively, were the bankrupt partnership to be treated as an estate for purposes of I.R.C. § 641(a), it would remain to be decided whether the interest monies realized in these proceedings constitute "taxable income." Although interest income is considered gross income, 26 U.S.C. § 61(a)(4), and hence may constitute taxable income, not all gross income received by the trustee in bankruptcy is taxable. United States v. Sampsell, 224 F.2d 721, 722 (9th Cir. 1955); In re F.P. Newport Corp., Ltd., 144 F.Supp. 507, 508 (S.D.Cal.1956). Interest earned on monies deposited by the trustee in bankruptcy pending distribution to creditors is not taxable income. In re 4100 North High Limited, 3 B.R. 232, 239 (Bkrtcy.S.D. Ohio B.J.1980). Cf. In re F.P. Newport Corp., Ltd., 144 F.Supp. 507, 508 (S.D.Cal.1956) 28 U.S.C. § 960; In re Owl Drug, 21 F.Supp. 907, 912 (D.Nev.1937) 28 U.S.C. § 960. No reported decision has reached the conclusion that the nonoperating trustee of a partnership bankrupt is liable for income tax; whereas the nonoperating trustee of a bankrupt corporation has been held liable. See, e.g., In re I.J. Knight Realty Corp., 501 F.2d 62 (3d Cir. 1974).

The interest income must be within the control of the partnership in order to be taxable to the partnership. See Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 148, 85 L.Ed. 75 (1940); Sammons v. United States, 433 F.2d 728, 732 (5th Cir. 1970), cert. denied, 402 U.S. 945, 91 S.Ct. 1621, 29 L.Ed.2d 113 (1971); Driscoll v. Exxon Corp., 366 F.Supp. 992, 993 (S.D.N.Y.1973). Here the trustee in bankruptcy controls the monies deposited at interest, as well as the interest itself, as a fiduciary. Although the trustee in bankruptcy qualifies as a "fiduciary," within the meaning of 26 U.S.C. § 7701(a)(6),⁹ he is not a fiduciary within the meaning of 26 U.S.C. § 6012(b)(4). Were the trustee in bankruptcy a § 6012(b)(4) fiduciary, the interest income would only be taxable to the trustee if the bankrupt partnership were to qualify as an "estate" for I.R.C. § 641 purposes, which it does not.

TAXABILITY OF INCOME UNDER SECTION 960 OF THE JUDICIAL CODE

A trustee in bankruptcy conducting the business of the bankrupt is subject to all federal, state and local taxes "applicable to such business to the same extent as if it were conducted by an individual or corporation." 28 U.S.C.A. § 960. See Palmer v. Webster & Atlas Nat. Bank of Boston, Trustee, 312 U.S. 156, 162, 163-64, 61 S.Ct. 542, 545, 545-546, 85 L.Ed. 642 (1941); In re F.P. Newport Corp., Ltd., 144 F.Supp. 507, 509 (S.D.Cal.1956). Section 960 and its predecessor, 28 U.S.C. § 124a, manifest a clear and consistent congressional intent to tax trustees in bankruptcy to the same extent as "an individual or corporation," Palmer v. Webster & Atlas Nat. Bank of Boston, Trustee, 312 U.S. 156, 163, 61 S.Ct. 542, 545, 85 L.Ed. 642 (1941), but only where the trustee is engaged in "conducting any business" under court authority. While section 960 makes no mention of a "partnership," it is unnecessary for the court to consider the significance of that omission, since it plainly appears that the interest income at issue here was not generated as a result of the "conduct of any business" by the trustee.

Section 960 has been held applicable to a liquidating, as well as an operating, trustee. In re Mid America Co., 31 F.Supp. 601, 606 (S.D.Ill.1939). The retention of employees of the bankrupt by a liquidating trustee, though operation of the business of the bankrupt was not expressly authorized by the bankruptcy court, may bring the trustee within section 960, particularly if the trustee is engaged in "winding down" the business. Id.

Similarly, In re Loehr¹⁰ required the liquidating trustee of an individual bankrupt to pay federal and state taxes on income from the sale of real estate, where the debtor had been engaged in the real estate business prior to bankruptcy. The trustee continued real estate sales for three years. The court held the liquidating trustee in...