In re Tele-Tone Radio Corp., Etc., 47-52.

CourtUnited States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
Citation133 F. Supp. 739
Docket NumberNo. 47-52.,47-52.
PartiesIn the Matter of TELE-TONE RADIO CORP., Debtor, Tele-Tone New York Corp., Subsidiary Debtor, Tele-Tone National Corp., Subsidiary Debtor.
Decision Date12 July 1955


Raymond Del Tufo, Jr., U. S. Atty., Newark, N. J., by Jerome D. Schwitzer, Asst. U. S. Atty., Newark, N. J., William Hagen, Philadelphia, Pa., of counsel, for the United States.

Seligson, Morris & Neuburger, by Charles Seligson, New York City, for Walter E. Heller & Co.

Robert Carey, Jr., Newark, N. J., for Paul H. Hudson, reorganization trustee.

Bergman & Rothbard, Newark, N. J., by Sidney M. Bergman, Newark, N. J., for Merritt Lane, Jr., bankruptcy trustee.

Abraham H. Sles, Jersey City, N. J., trustee in bankruptcy for Eureka Television & Tube Corp.

HARTSHORNE, District Judge.

Tele-Tone Radio Corporation was originally before the United States District Court for the Southern District of New York, as the object of proceedings under Chapter XI of the Bankruptcy Act.1 The debtor was left in possession and the business operated for some months. Thereafter, an involuntary petition against Tele-Tone, ultimately including its above subsidiaries, was filed in this Court under Chapter X of the Bankruptcy Act,2 the above petition in New York being dismissed. In the Chapter X proceedings Paul H. Hudson was appointed Trustee. After some months, it was found impossible to effectuate a reorganization. The Chapter X proceeding was accordingly terminated, save for the accounting of its Trustee, and Tele-Tone was ordered to be liquidated in bankruptcy,3 Merritt Lane, Jr., being made Bankruptcy Trustee.

Certain similar, if not identic, questions were raised, both in this Court, as bearing upon the accounting of the Chapter X Trustee, and in the Bankruptcy Court, as bearing upon the proper liquidation of the assets of the bankrupt there. This was the case, for instance, with regard to the question of whether the United States Government had a tax trust amounting to $85,409.16, which should accordingly be paid over directly to the United States, rather than turned over by the Chapter X Trustee to the Bankruptcy Trustee, for administration in the Bankruptcy Court. Consequently, this Court referred that question, previously raised before the Referee in Bankruptcy, to the Referee, as Special Master, to report thereon to this Court. The Referee and Special Master reported thereon in his report, now on exceptions before this Court.

The second question, so reported on, was as to whether the Chapter X Trustee, still in possession of much of the debtor's assets, should pay Walter E. Heller & Company, Inc., $104,329.77 as secured by its liens on inventory and accounts receivable. The third question reported on, was as to whether Eureka Tube & Television Company was entitled to a turn-over order in the amount of $5750.00, the value of goods which Eureka claimed were fraudulently retained by the debtor, or whether Eureka was a general creditor in that amount.

Findings of Fact

On all these issues this Court adopts the findings of fact of the Master in the above report. Fed.Rules Civ.Proc. rule 52(a), 28 U.S.C.A.

The Claim of the United States to a Tax Trust

Preliminary to a discussion of the merits concerning this issue, is the question whether the claim of the United States against the New York Trust Company would lie in this Court, in the light of the lack of jurisdiction of this Court over the latter corporation, existing solely in New York. That corporation had previously paid over to the Chapter X Trustee the entire moneys alleged by the United States to be the subject of such trust. In view of this Court's lack of jurisdiction, and the fact that the United States has a remedy by plenary suit against the New York Trust Company in New York, or in the Southern District of New York, this Court affirms the finding of the Referee that the claim of the United States against the New York Trust Company, as distinguished from its claim against the Chapter X Trustee, should be dismissed.

As to this alleged tax trust, the claim of the United States is based upon (a) the statute, (b) the order of the Referee in the Chapter XI proceeding in New York, (c) alleged general equitable principles.

(a) By the Internal Revenue Code, Title 26 U.S.C.A. § 3661, it is provided that "Whenever any person is required to collect or withhold any internal-revenue tax from any other person and to pay such tax over to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States * * *."

(b) In the Chapter XI proceeding in New York, the Referee entered an order "That the debtor in possession * * * is hereby directed and required to segregate and hold separate and apart from all other funds all moneys withheld from employees or collected from others for taxes under any law of the United States or of any state * * *." The Referee's order thus constituted practically a paraphrase of the terms of the above statute. Thus the statutory and court order bases of the alleged trust res are identic, with a slight exception hereafter noted. Both created a trust out of tax moneys which Tele-Tone was required to "collect or withhold" from others for payment to the United States. The requirement to withhold taxes from others clearly referred to withholding Social Security contributions from employees, and the like. This was clearly recognized by the Chapter X Trustee himself, and he admits he holds $8,396.83 as such taxes withheld from employees' wages accordingly. However, he denies that either Tele-Tone or he were "required to collect * * * any Internal Revenue tax from any other person", i. e., he claims that the balance of the moneys he holds as such Trustee was none of it subject to either such statute or such order. The claim of the United States to the contrary is, that the balance of the approximately $85,000 received by him from the New York Trust Company, as from the Tele-Tone tax account, over and above the approximately $8,000 so "withheld", consists of the Federal manufacturers excise tax.4 But a series of cases have settled the principle that this tax is laid upon the manufacturer alone. Lash's Products Co. v. U. S., 1928, 278 U.S. 175, 49 S.Ct. 100, 73 L.Ed. 251; Biddle v. Commissioner, 1937, 302 U.S. 573, 581, 58 S.Ct. 379, 82 L.Ed. 431; Shearer v. C. I. R., 2 Cir., 1931, 48 F.2d 552; 123 East Fifty-Fourth Street, Inc. v. United States, 2 Cir., 1946, 157 F.2d 68. Nor can there be any claim that the manufacturer is "required" by the statute to collect this tax from his vendees, or any one else. Thus the tax trust finds no basis in the statute, so far as any sums extra the withholding tax are concerned.

The only difference between the order of the New York Referee in the Chapter XI proceeding and the statute is that, while, by the order, the debtor in possession is required to "hold separate" the taxes it has "collected from others", the order does not specifically say, as the statute does, that it is "required" to collect the taxes from others. But assuming, for the sake of argument, that the order was not intended to be a mere paraphrase of the statute, but to cover taxes collected from others, even though Tele-Tone was not required so to collect them, the facts show that Tele-Tone did not collect the manufacturers excise tax, as such, from its vendees. Here it might be noted that the order, as distinguished from the statute, covered taxes so collected when imposed either by the United States or a state or its subdivision. In other words, if, as is the case generally, not only in New Jersey, but throughout the United States, a retail gasoline station carries on its signs as the price of its gasoline, not only the total price, but the amount of the tax to be paid by the purchaser, then perchance such dealer would collect such tax from others. But the facts show that Tele-Tone did no such thing. It never showed, on the bills presented to its customers, any reference whatever to the manufacturers excise tax. True, in making up, for itself, the total price of its goods to customers, it may have included among the items constituting such total sales price, an item covering the excise tax it would ultimately have to pay, just as it included an item for rent of the premises it occupied, of the cost of the materials from which it manufactured its goods, the cost of the labor to perform such manufacture, and so on. But clearly, it has not collected from the purchasers of its goods, its rent, as rent, its labor costs, as labor costs, its material costs, as material costs. Its manufacturers excise tax was therefore not "collected from others" as a tax. Of course, the ultimate consumer ordinarily bears indirectly part or all of the economic incidence of every tax. But this is a far different thing from collecting the amount of such tax from the consumer as a tax. It it were not, then for that very reason substantially every tax imposed would be "collected from others", and such words would have no reasonable meaning whatever. Thus the claim of a tax trust as to the funds in question can not be based upon either the statute or the court order.

(c) The further claim is that the action of Tele-Tone itself, in placing these moneys in its so-called "tax account" in the New York Trust Company, of itself created a trust on general equitable principles. However, to constitute a fixed trust for the benefit of a third party, the act of the trustor must be irrevocable, with no dominion over the res left in the trustor. Ehag Eisenbahnwerte Holding Aktiengesellschaft v. Banca Nationala A Romaniei, 1954, 306 N.Y. 242, 117 N.E.2d 346; Nicklas v. Parker, Chancery 1905, 69 N.J.Eq. 743, 61 A. 267, affirmed, E. & A.1906, 71 N.J. Eq. 777, 61 A. 267, 71 A. 1135. Here the facts show that Tele-Tone had the right generally to withdraw moneys from this tax account....

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