Kelly v. Lethert

Decision Date30 June 1966
Docket NumberNo. 18182.,18182.
Citation362 F.2d 629
PartiesTerrance M. KELLY, Appellant, v. George O. LETHERT, as District Director of Internal Revenue, District of Minnesota, Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Joe A. Walters, of O'Connor, Green, Thomas, Walters & Kelly, Minneapolis, Minn., for appellant; Robert J. Christianson, Jr., and Jean J. Chaput, of O'Connor, Green, Thomas, Walters & Kelly, Minneapolis, Minn., on the brief.

Mark S. Rothman, Atty., Tax Div., Dept. of Justice, Washington, D. C., for appellee; C. Moxley Featherston, Acting Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Attys., Tax Div., Dept. of Justice, Washington, D. C., and Miles W. Lord, U. S. Atty., Minneapolis, Minn., on the brief.

Before MATTHES and GIBSON, Circuit Judges, and HUNTER, District Judge.

GIBSON, Circuit Judge.

This appeal is from an order by the United States District Court for the District of Minnesota, dismissing appellant Terrance M. Kelly's complaint, which sought to enjoin the District Director of Internal Revenue from collecting assessed but unpaid taxes under Section 6672 of the Internal Revenue Code of 1954, arising out of the non-payment of withholding taxes and Federal Insurance Contributions Act taxes for the calendar year 1962, due by J. D. Davis Company, Inc., a bankrupt; and to have declared null and void the assessment of certain liabilities against him.

J. D. Davis Company, Inc., was incorporated under the laws of Minnesota in 1960, and engaged in creating, manufacturing and distributing decorative wall accessories. On May 15, 1962, this corporation filed with the United States District Court, District of Minnesota, a petition for Arrangement under Chapter XI of the Bankruptcy Act. At the time of this filing, there existed accrued but unpaid withholding taxes and Federal Insurance Contributions Act (F.I.C.A.) taxes for the first and second quarters of 1962, in an amount exceeding $19,000.00. On November 1, 1962, J. D. Davis Company was adjudicated a bankrupt, and the Referee in the Chapter XI Arrangement entered an order directing that bankruptcy be proceeded with. On that date, the corporation had accrued but unpaid withholding and F.I.C.A. taxes of $7,385.76 that were attributable to the time between the filing of the Chapter XI petition in May, 1962, and the actual adjudication of bankruptcy in November of that year.

During the entire period in which the above liability was incurred by J. D. Davis Company, i. e., the four quarters of 1962, appellant admits that he was a director, vice-president and treasurer of the corporation, and further, that by virtue of these offices he was one of five officers authorized to sign payroll checks during the first half of 1962, and one of three officers authorized to sign checks on the general account during this same period.

The Government has filed proofs of claim against the bankrupt estate of the corporation for the unpaid withholding and F.I.C.A. taxes which accrued both prior and subsequent to the filing of the Chapter XI petition in May, 1962. The unpaid taxes due from the bankrupt estate were $7,385.76, which accrued between the Chapter XI petition and the final adjudication of bankruptcy, and $19,229.00, which is the amount accrued prior to the Chapter XI petition. Of the $13,701.00 held by the Trustee in Bankruptcy, a tentative allocation made by the Trustee is as follows:

                  "Estimated expenses of administration
                    in the bankruptcy
                    liquidation proceeding ............. $  500.00
                  Expenses of the preceding
                    Chapter XI Arrangement .............  9,000.00
                  Preferred wage claims ................  4,080.00."
                

Included in the $9,000.00 computation are the withholding and F.I.C.A. taxes amounting to over $7,000.00, accrued since the Chapter XI petition. No provision has been made in a tentative allocation of the distribution of the assets of the bankrupt estate on hand for the payment of any of the taxes which were accrued prior to the Chapter XI petition, though the Government believes $1,044.81 will be available for this purpose, which would leave an unpaid trust fund liability of J. D. Davis Company of approximately $19,160.32.

On August 21, 1964, a 100% penalty in the amount of $20,346.09 was assessed against the appellant and two other officers of J. D. Davis Company, Inc., under Section 6672 of the Internal Revenue Code of 1954, for the withholding and F.I.C.A. taxes that the corporation had failed to pay for the four quarters of 1962, as noted,1 notwithstanding the fact that the Government had previously filed a proof of claim with the bankrupt estate of the corporation. This assessment was made after rejection of the protests of appellant and the other corporate officers so assessed wherein they contended that they were not the officers of the corporation who were responsible for the failure to pay the accrued but unpaid taxes. The appellant then filed the complaint which is the subject of the instant appeal, alleging that in addition to the bankruptcy assets of the corporation which the Trustee presently has, there also exist certain substantial accounts receivable that the Trustee is in the process of collecting and that in the due course of the administration of the estate of the bankrupt corporation the Government will be paid a substantial portion of the debt due from the corporation. Hence, it is contended, if the appellant is compelled to pay this accrued but unpaid tax due from the corporation, the result will be that he will pay the tax "without any possibility of subrogation or recourse to the priority position of the United States in the bankruptcy proceedings (against the company)." For this reason, the appellant contends that the threatened levy on the assessments against him would compel him to pay taxes due from another without due process of law, and would constitute an unwarranted interference with the bankruptcy proceedings pending in the United States District Court against the corporation. He seeks an injunction, restraining all levies or other collection actions against him on the assessment or any interference with the bankruptcy proceedings. The District Director moved to dismiss the complaint on the ground that the Court lacked jurisdiction over the subject matter. The District Court granted the motion, without opinion.

The sole question now before us is whether the District Court was correct in granting the District Director's motion to dismiss appellant's complaint that sought to enjoin the collection of a tax assessed under Section 6672 of the Internal Revenue Code of 1954 (26 U.S.C. 1958 ed., Sec. 6672), which section reads as follows:

"FAILURE TO COLLECT AND PAY OVER TAX, OR ATTEMPT TO EVADE OR DEFEAT TAX.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable."

(Section 6653 applies to negligence and fraud penalties, which are not in issue in this case.)

Appellant's present basic contention is, in essence, that the denial of his request for an injunction puts appellant in the "unenviable position" of satisfying the obligation of the bankrupt, without the right to seek redress from the bankrupt. This contention mistakes the basic nature of the assessment against him of which he complains; it is not the tax liability of another with which he has been charged, but his own "separate and distinct liability," as defined in Section 6672 of the Internal Revenue Code of 1954. Bloom v. United States, 272 F.2d 215 (9 Cir., 1959), cert. denied 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146. See also United States v. Strebler, 313 F.2d 402 (8 Cir., 1963); Botta v. Scanlon, 314 F.2d 392 (2 Cir., 1963). These decisions make it clear that the withholding tax imposed upon wages by Section 3402 is a collection through the employer at the source of income and F.I.C.A. taxes due from the employee. This tax is deducted from the employee's wages; the employee is credited with the tax withheld and the employer is required to pay these withheld amounts, which constitute trust funds, over to the Government. As trust funds, this money belongs to the Government and is not to be used in corporate operations or to prefer certain creditors of the employer corporation. The Government has to give credit on its records to the employees who have initially paid this tax by a deduction from their wages and salaries. Thus, when the employer fails to remit these trust funds, the Government must, in effect, pay this tax, unless it can be collected from another source. That other source is provided in Sections 7501 and 6672 of the Internal Revenue Code. Section 7501, Internal Revenue Code of 1954 (26 U.S.C. 1958 ed., Sec. 7501), thus states "The liability for taxes withheld or collected." as follows:

"(a) General rule — Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax 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. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.
"(b) Penalties — For penalties applicable to violations of this section, see sections 6672 and 7202."

In the case of a corporation, the withheld trust funds may be lost in the event of liquidation or bankruptcy, as in the present instance....

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