In re Wyley Co.

• Decision Date: 18 October 1923
• Docket Number: 8238.
• Parties: In re WYLEY CO.
• Court: U.S. District Court — Northern District of Georgia

292 F. 900

In re WYLEY CO.

No. 8238.

United States District Court, N.D. Georgia.

October 18, 1923

Walter S. Dillon, C. H. Calhoun, and Hamilton Douglas, Jr., all of Atlanta, Ga., for trustee.

C. P Goree, Asst. U.S. Atty., Roy L. Mitchell, and Underwood Pomeroy & Haas, all of Atlanta, Ga., for State of Georgia.

SIBLEY District Judge.

The Wyley Company was adjudicated a bankrupt in August, 1922, and the estate reduced to cash and partially disbursed. In December, 1922, the United States claimed $3,975.51 as additional income taxes just assessed for the years 1918 and 1919, About $2,200 of this is admitted to be correctly assessed; the remainder is contested. State taxes amounting to $400 are likewise due. The estate in hand is only about $2,300, with most of the fees and expenses of administration unpaid. Direction is sought by the trustee touching the situation. The questions to be decided are: (1) The correct amount due the United States; (2) the priority of this amount over the state taxes; (3) its priority over expenses of administration.

1. The court has power to inquire into and fix the amount due as income taxes to the United States. Bankruptcy Act 64a (Comp St. Sec. 9648). The difference in dispute arises by reason of the company's tax returns having shown as salaries to its officers amounts largely greater than those shown by the individual returns of the officers to have been received by them. These officers were introduced as witnesses by the United States, and testified that the amounts really paid and received by them were the amounts they individually returned; whereas, the amounts deducted in the company's returns are those credited to them on the company's books as salaries accrued. The testimony is that the salaries were fixed by the directors at the amounts credited on the company's books. One witness says the salaries were based on a supposed profit, which, as it later developed, had not really been earned, and the salaries were not drawn because of this development. Another witness says the salaries were fixed absolutely, but not paid for want of ready cash. If the first witness is to be believed, the tax returns should be corrected to eliminate the supposed profit, which did not exist. If the other witness is correct, the returns being evidently made on the basis of accruals, rather than actual receipts and disbursements, the deduction of the amounts absolutely due these officers was correct, though they were never paid, and, of course, now never can be. In either event, the additional taxes assessed on account of these items is held to be erroneous and the true amount due the United States is to be fixed accordingly.

2. Taxes due the United States and bankruptcies are alike wholly subject to the power of Congress. Congress may make such provisions for the payment of the one through the other as it sees fit. A tax has such lien and priority, and only such, as is given it by statute. 37 Cyc. 1138, 1143. The common-law preference of the sovereign is said not to exist in favor of the United States, save as continued by statutes. United States v. Bank of North Carolina, 6 Pet. 29, 8 L.Ed. 308. A lien is provided for federal taxes by R.S. Sec. 3186 (Comp. St. Sec. 5908), but no special priority is stated. Debts due the United States are given a first priority, apparently extending to cases of bankruptcy, by R.S. Sec. 3466 (Comp. St. Sec. 6372); but taxes are hardly to be considered debts (New Jersey v. Anderson, 203 U.S. 483, 492, 27 Sup.Ct. 137, 51 L.Ed. 284). Bankruptcy Act, Sec. 64a, deals specifically with the payment of taxes from bankrupt estates, providing:

'The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality in advance of the payment of dividends to creditors.'

This lays the duty on the court to pay, perhaps without formal proof, all such known taxes, to the extent at least that funds are available, to the end that no arm of the government may be delayed or embarrassed in its revenue. The placing of this provision first in the section suggests that the payment is to be made before any of the payments afterwards provided for in section 64b, but the limiting words, 'before payment of dividends to creditors,' suggests a postponement only of such persons as are 'creditors' and who are to have 'dividends.' The Supreme Court in Richmond v. Bird, 249 U.S. 174, 39 Sup.Ct. 186, 63 L.Ed. 543, has held that a municipal tax having no lien under the state law is not to be paid before a valid lien protected by section 67d of the Bankruptcy Act (Comp. St. Sec. 9651). This decision, however, is not helpful here, because under Georgia law all taxes have a lien and are to be 'paid before any other debt, lien, or claim whatever. ' Code Ga., Sec. 1140. There is no competition here between any but tax liens. Considering the dual nature of...