In Re Statmaster Corporation
| Decision Date | 27 May 1971 |
| Docket Number | No. 67-219-Bk-CA.,67-219-Bk-CA. |
| Citation | 332 F. Supp. 1248 |
| Parties | In the Matter of STATMASTER CORPORATION, Bankrupt. |
| Court | U.S. District Court — Southern District of Florida |
Robert Paul, Miami, Fla., for trustee.
Robert W. Rust, U. S. Atty., Vincent K. Antle, Asst. U. S. Atty., Miami, Fla., for petitioner.
This matter comes before the Court on a petition for a review of the Referee's lengthy and detailed order determining that the bankruptcy court had jurisdiction over a petition filed by the trustee requiring the United States of America to appear and show cause and deciding on the merits that the trustee was not subject to corporate income taxes on interest income.
The facts are not in dispute. On May 12, 1967 a voluntary bankruptcy petition was filed by Statmaster Corporation, and it was duly adjudicated bankrupt. Subsequently, a trustee was appointed for the bankrupt corporation. The trustee was not authorized to operate the business of the bankrupt and did not do so, but proceeded to liquidate its assets. In the course of the administration of the estate, the trustee petitioned for leave to deposit funds at interest in a time deposit bank account. This action was authorized in an order entered by the Referee. As a result of the placing of funds of the estate in a time deposit bank account, interest in the amount of $5,500.57 was earned by the trustee.
On November 5, 1970 the trustee filed a petition for an order to show cause. Attached to the petition was an Internal Revenue Service form 1120, corporation income tax return for Statmaster Corporation signed by Larry Gilbert, trustee in bankruptcy. This document purported to be a return for the period from January 1, 1968 to October 23, 1970. The purported corporation income tax return showed income from interest of $5,500.57, deductions in excess of that amount and no tax due.
In the petition filed by the trustee, it was prayed that an order be entered directing the United States to show cause why, upon the filing of the corporation income tax return attached to the petition, the trustee should not be relieved and discharged of any and all liability for internal revenue taxes in connection with his administration of the estate. An order to show cause directed to the United States was entered on November 9, 1970, and the matter was set down for a hearing.
The trustee has not filed corporation income tax returns for Statmaster Corporation with the Internal Revenue Service and there has been no opportunity for an audit. However, no claim has been asserted in this proceeding by or on behalf of the United States for corporation income taxes and no claim for taxes has been made or even threatened against the trustee.
The United States opposed the trustee's petition on jurisdictional grounds. However, the Referee decided that he had jurisdiction to grant the relief prayed for in the petition. On the merits of the petition, the Referee determined that since the trustee did not operate the property or business of the bankrupt, the interest income received by him in his fiduciary capacity was not subject to federal income tax and further that the law did not require the trustee to file corporation income tax returns for the bankrupt corporation.
In support of its petition for review, the United States contends that the bankruptcy court lacks jurisdiction to grant the relief prayed for in the petition. The Government also asserts that the law requires a liquidating as well as an operating trustee to file corporation income tax returns for the bankrupt and to pay any tax that is due.
The first contention of the United States is that the trustee seeks a declaratory judgment as to federal taxes, prohibited by Title 28 U.S.C. § 2201. It urges that In re Wingreen Co., 412 F.2d 1048 (5 Cir. 1969) is controlling.
It is uncontroverted that the bankruptcy court has the power to adjudicate tax controversies that come before it. Title 26 U.S.C., Section 6871 (b). Furthermore, the trustee points out that this power extends to the validity and amount of taxes accruing during a bankruptcy proceeding, citing 9 Mertens, Law of Federal Income Taxation, Sec. 54.03, footnote 10. The difficulty with the trustee's position is that in the instant case there is merely a prospective or potential tax controversy. As of this time, no tax deficiency has been asserted by the Commissioner. The trustee, by his petition, seeks protection against the possibility that at some future date an income tax deficiency may be asserted against him, at which time he may have disbursed all of the funds to creditors of the estate.
The trustee seeks to distinguish In Wingreen Co., supra, on its facts, pointing out that the trustee in that proceeding under Chapter X sought to require the District Director of Internal Revenue to make an audit to establish a loss carry forward claim, thereby increasing the value of the business. Although it is conceded no such affirmative action is required of the Internal Revenue Service in the instant case, the Court is of the view that this is a distinction without a difference. In the instant case, as in Wingreen, there is a "largely hypothetical and premature" tax question.
Inasmuch as the Court finds that Wingreen is controlling and the bankruptcy court lacks jurisdiction over the subject matter of the trustee's petition by reason of Title 28 U.S.C., Section 2201, prohibiting a declaratory judgment as to federal taxes, it is not necessary to consider either the question of sovereign immunity or the duty of the trustee in bankruptcy to file income tax returns for the corporation. The Court does, however, take note of the troublesome problems in the administration of bankruptcy which are raised and discussed in the Referee's thoughtful opinion. While the temptation to do otherwise is surely great, the resolution of these problems must be left to Congress.
The petition for review is granted, the Referee's decision is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.
This case is before the Court upon a question as to whether a trustee in bankruptcy must report and pay federal income tax on interest earned upon his deposits of estate funds pending the final liquidation and distribution of the estate.
The question as presented is deceptively simple inasmuch as it covers a number of subsidiary procedural questions which are of equal importance to effective bankruptcy administration under the National Bankruptcy Act, as balanced with the importance of the substantive tax question to the interpretation of that Act and the Internal Revenue Code. To some extent it may fairly be stated that this case involves a possible conflict between the provisions and policies underlying these co-equal statutes enacted by Congress. As such, it deserves a more detailed examination and discussion than would otherwise be justified. The objective must be to resolve any apparent conflict in a fashion which will preserve to the fullest extent possible the intended purposes of the provisions of both statutes.
It is for the foregoing reasons, and also because the issue involved will necessarily delay the closing of every bankruptcy estate until it is resolved, that the Court feels constrained not only to go into the question in depth but also to decide the matter in a way that will result in a prompt, complete determination notwithstanding the somewhat narrower framing of the issues by the parties in the pleadings in this case.
This case was brought before the Court by a Petition for Order to Show Cause filed by the trustee in bankruptcy reciting that he had completed the liquidation of the estate; that during the course of his administration he had deposited estate funds at interest and those deposits had earned a total of $5,500.57 of such interest; and that final distribution to creditors could not be made until the question of the trustee's obligation, if any, for federal income taxes on this interest was finally adjudicated.
Accordingly, the trustee attached to his Petition a Form 1120 "United States Corporation Income Tax Return" which he proposed to file with the Internal Revenue Service reflecting no income tax to be due on such interest "income" because of certain administrative expenses and other distributions which he apparently feels would wipe out any tax liability.
An Order to Show Cause was entered, pursuant to the trustee's Petition, directing the United States of America to show cause why the trustee should not be authorized to file the tax return attached to his Petition, and why upon filing the same an order should not be entered by this Court "relieving and discharging said trustee from any and all liability for internal revenue service taxes arising from the receipt of interest from interest bearing accounts".
The United States responded with an Opposition to Order to Show Cause, which opposes the relief requested upon the following grounds:
Hearing was had on the Order to Show Cause, and the Opposition thereto, and counsel have subsequently filed their respective memoranda of law.
After full consideration and extensive research, the Court is of the opinion that while the United States may have substantial grounds for objecting to the relief in the precise form in which it was demanded, the pleadings do raise an actual controversy which this Court has jurisdiction to resolve directly without resort to any indirect methods which create complicated and unnecessary issues of declaratory relief, subject matter...
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