In re Sapphire SS

• Decision Date: 09 March 1984
• Docket Number: Reorganization No. 67 B 252.
• Citation: 38 BR 155
• Parties: In re SAPPHIRE STEAMSHIP, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

38 B.R. 155 (1984)

In re SAPPHIRE STEAMSHIP, Debtor.

Reorganization No. 67 B 252.

United States Bankruptcy Court, S.D. New York.

March 9, 1984.

Winthrop, Stimson, Putman & Roberts, New York City, for trustee; Robert Anthoine and Rebecca S. Rudnick, New York City, of counsel.

Rudolph Giuliani, U.S. Atty., New York City by Alan Nisselson, Asst. U.S. Atty., for debtor.

BURTON R. LIFLAND, Bankruptcy Judge.

In this multiyear, dormant, bankruptcy liquidation case where assets have swollen due to accumulating interest punctuated only by a partial dividend distribution, the tax gatherer seeks the imposition of penalties for nonpayment of estimated taxes by an otherwise dutiful taxpayer-trustee. The tax gatherer seeks total enjoyment from the trustee's economic discomfiture: a) as a receiver of a 100% recovery for prepetition obligations of the bankrupt; and b) as a current collecting participant in the ongoing accumulation of interest income of the estate on a quarterly basis. The trustee, seeking the highest rate of return, believes he need only settle accounts with the Internal Revenue Service ("IRS") annually. The IRS believes that it is entitled to a quarterly reckoning and has emphasized its position by attempting to assess penalties considered most foul by the trustee. In resolving whether payments must be made annually or quarterly, questions of statutory construction of the Internal Revenue Code and its interrelationship with the policies contained within the bankruptcy laws are presented.

Sapphire Steamship Lines, Inc. filed a voluntary petition in bankruptcy in 1967. The trustee of this estate, one J. Read Smith ("the trustee"), is a "nonoperating" trustee of the bankrupt corporation. From on or before 1970, the sole functions of the trustee have been to administer the estate's liquid assets pending the resolution of certain claims for ultimate distribution to creditors and to discharge his duties under the Bankruptcy Act. From 1974 to the present, the sole source of income to the estate has been passive income that has accrued from interest on the property and proceeds from the settlement of antitrust suits.

The trustee has timely filed and paid annual federal income taxes on behalf of the estate pursuant to Section 6012(b)(3)¹ of the Internal Revenue Code of 1954 ("the Code"). The trustee, however, has not made quarterly estimated tax payments as required by "corporations" pursuant to Section 6154 of the Code. The IRS has assessed the estate for penalties or interest in the amount of $67,735.93 for failure to pay these quarterly estimated taxes. After issuing notices to the trustee requesting penalties for failure to make estimated tax payments in January 1979 and in June 1982, the IRS filed with the Court a Request for Payment of Internal Revenue Taxes for accrued penalties and interest with respect to corporate income taxes for the taxable years ending in 1975, 1976, 1978, 1979, 1981, and 1982. The trustee thereupon on September 16, 1983 submitted the instant application for an order fixing and determining the amount of tax, if any, interest or penalties owed by the trustee and the estate as a result of the trustee's failure to pay estimated tax and for an order barring the IRS from further assessing any penalties or interest.

The narrow issue before the Court is whether the trustee of this corporation which has been adjudicated a bankrupt under the Bankruptcy Act of 1898 should properly be subjected to the collection mechanism of installment tax payments which are applied to "corporations" by Code Section 6154.²

The trustee has conceded and fulfilled its obligation to pay federal income taxes as provided by Section 6012 of the Code. Section 6012(b)(3) of the Code specifically provides that a trustee has a duty to pay taxes on behalf of an estate based on the annual return of income. The statute prescribes in pertinent part that the trustee who

has possession of or holds the title to all or substantially all of the property or business of a corporation, whether or not such property or business is being operated, . . . make the return of income for such corporation in the same manner and form as corporations are required to make such returns.

Internal Revenue Code Section 6012(b)(3) (West Supp.) (1982).

In addition, case law clearly establishes that a nonoperating trustee is liable for the payment of federal income tax. See In re I.J. Knight Realty Corp., 501 F.2d 62, 66 (3d Cir.1974); In re Nab Food Services, Inc., 25 B.R. 221, 223 (Bkrtcy.S.D.Ohio 1982); In re Knight's Mill, Inc., 24 B.R. 143, 146, 7 C.B.C.2d 655, 658 (Bkrtcy.E.D. Mich.1982).

This application, however, addresses the more novel question of whether the trustee has a similar obligation with respect to payment of quarterly estimated taxes governed by Section 6154.³ Given the various rules of statutory construction applied to the taxing statutes, as well as the relevant legislative history, this Court declines to impose the obligation to pay an estimated tax upon the nonoperating trustee of this estate.

I. Rules Governing Construction of Taxing Statutes

Internal Revenue Code Section 6012 specifically imposes a duty to file federal income tax returns upon, inter alia, bankrupt corporations in its subsection (b)(3). In contrast, Section 6154, which deals with estimated tax payments, contains no subsection specifying a trustee's obligation to pay an estimated tax for a bankrupt corporation. Several cases have addressed the problem of interpreting omissions of this kind in tax statutes, and this Court believes that Section 6154 should not be construed to include bankrupt corporations within its purview.

It is "the well known rule of construction that in case of doubt, a taxing statute must be construed most strongly in favor of the taxpayer and against the government." Greyhound Corporation v. United States, 495 F.2d 863, 869 (9th Cir.1974); Frankel v. United States, 192 F.Supp. 776, 777 (D.Minn.1961) aff'd, 302 F.2d 666 (8th Cir. 1962), cert. denied 371 U.S. 903, 83 S.Ct. 208, 9 L.Ed.2d 165 (1962). See also Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 53, 62 L.Ed. 211 (1917). In the instant case, the propriety of inferentially applying Section 6154 is less than clear. Thus, case law counsels a narrow construction. As the court in Greyhound Corporation stated: "Tax statutes are not to be extended by implication beyond the clear import of the language used and, in case of doubt, are construed most strongly against the government." 495 F.2d at 869.

Congress, in addressing the status of a bankrupt corporation with regard to the filing of tax returns in Section 6012(b)(3) specifically carved out a subsection mandating such filing. However, it adopted no such subsection to clarify Section 6154 regarding the bankrupt's duty to pay estimated taxes. As the Court in Frankel, supra, stated: "Congress could very easily have manifested any other intent by a limiting or qualifying provision." Frankel, 192 F.Supp. at 777-78. Accordingly, this Court finds that it cannot include bankrupt corporations within the purview of Section 6154 where Congress has elected not to do so. As one court declared: "Taxes should be imposed by Congress, and not by the courts. If there is serious doubt as to taxability, as in this case, the doubt should be resolved in favor of the taxpayer." Ellis v. United States, 416 F.2d 894, 897 (6th Cir.1969).

The Internal Revenue Code must be read as a comprehensive whole. As one court declared: "All the sections of the Code must be read together to avoid conflict and achieve a harmonious, rational result." Southern National Gas Co. v. United States, 412 F.2d 1222, 1266, 188 Ct.Cl. 302 (1969). And, in reiterating this principle, the court in In re Samoset Associates, 14 B.R. 408, 411 (Bkrtcy.D.Me.1981), in construing Sections 6012 and 641 of the Code, reasoned that the tax liability of a bankrupt corporation can only be determined by reading the applicable section "in pari materia with related sections . . . with a view to achieving a consistent and harmonious construction". Id. (citations omitted). See also Commissioner v. Stickney, 399 F.2d 828, 834 (6th Cir.1968). The court in Samoset then declared that pairing this rule of in pari materia construction with the maxim that "tax legislation is not to be extended by implication beyond the plain purport of the statutory language . . . compels the conclusion that whatever doubt and ambiguity remain . . . must be resolved in favor of the taxpayer." Samoset, 14 B.R. at 411.

Moreover, as the United States Supreme Court has declared: "General language of a statutory provision, although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment." Ginsberg & Sons v. Popkin, 285 U.S. 204, 208, 52 S.Ct. 322, 323, 76 L.Ed. 704 (1932) (citing United States v. Chase, 135 U.S. 255, 260, 10 S.Ct. 756, 757, 34 L.Ed. 117 (1890)). This Court thus may not fairly read the phrase "bankrupt corporation" into the language of Section 6154 where that status has been separately and specifically addressed by Section 6012.

The Board of Tax Appeals implemented these same rules of statutory construction in International-Great Northern Railroad Co. v. Commissioner, 24 B.T.A. 726 (1931). In declaring that the trustee of a bankrupt corporation is not liable for excess profit taxes under the Revenue Act of 1818, the court in Great Northern grappled with the distinction between a corporation and a bankrupt entity. The court, relying upon the United States Supreme Court's decision involving an excess profits tax under the Revenue Act of 1916 in Reinecke v. Gardner, 277 U.S. 239, 48 S.Ct. 472, 72 L.Ed. 866 (1928), found that the income of the trustee of a bankrupt corporation is not that of the underlying corporation. The Court in Great Northern also cited Reinecke's articulation of the proposition that "the extension of a tax by...