UNITED STATES V. SOTELO

Decision Date22 May 1978
Citation436 U. S. 268
CourtU.S. Supreme Court

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Section 6672 of the Internal Revenue Code of 1954 provides that "[a]ny person required to collect, truthfully account for, and pay over" federal taxes who "willfully fails" to do so, shall be liable to a "penalty" equal to the amount of the taxes in question. Section 17a(1)(e) of the Bankruptcy Act makes nondischargeable in bankruptcy "taxes . . . which the bankrupt has collected or withheld from others . . . but has not paid over." Respondents, husband and wife, were adjudicated bankrupt, as was a corporation in which he was the principal officer and majority stockholder. The bankruptcy court found respondent husband (hereafter respondent) personally liable to the Government under § 6672 for his failure to pay over taxes withheld from employees of the corporation. Subsequently, in proceedings by the Government to collect from respondent on his § 6672 liability, the bankruptcy judge, rejecting respondent's contention that such liability was a "penalty," and, as such, had been discharged, reasoned that, although § 6672 liability was denominated a "penalty," it was, in substance, a tax, and thus was nondischargeable under § 17a(1), and more particularly § 17a(1)(e). The District Court affirmed. The Court of Appeals reversed. Though recognizing respondent's § 6672 liability, the court held that § 17a(1)(e) was inapplicable because it was not respondent himself, but his corporation, that was obligated to collect and withhold the taxes, and because, in any event, the money involved constituted a "penalty," whereas § 17a(1)(e) renders only "taxes" nondischargeable.

Held: Respondent's liability under § 6672 is nondischargeable in bankruptcy under § 17a(1)(e). P P. 273-282.

(a) That respondent was found liable under § 6672 necessarily means that he was "required to collect, truthfully account for, and pay over" the withholding taxes, and that he willfully failed to meet one or more of these obligations. P. 274.

(b) Since the taxes in question were "collected or withheld" from the corporation's employees and have not been "paid over" to the Government, respondent's § 6672 liability was imposed not for his failure to collect taxes, but for his failure to pay over taxes that he was required both to collect and to pay over, and therefore he "collected or withheld" the taxes within the meaning of § 17a(1)(e). P. 275.

Page 436 U. S. 269

(c) The "penalty" language of § 6672 is not dispositive of the status of respondent's debt under § 17a(1)(e), since the funds involved were unquestionably "taxes" at the time they were "collected or withheld from others," and it is this time period that § 17a(1)(e), with its modification of "taxes" by the phrase "collected or withheld," treats as the relevant one. That the funds due are referred to as "penalty" when the Government later seeks to recover them does not alter their essential character as taxes for purposes of the Bankruptcy Act, at least where, as here, the § 6672 liability is predicated on a failure to pay over, rather than a failure initially to collect, the taxes. P. 275.

(d) The legislative history of § 17a(1)(e) indicates not only that Congress intended to make nondischargeable the withholding tax obligations of persons in respondent's situation, but also that it meant to ensure post-bankruptcy liability for such taxes in corporate bankruptcy situations (where a corporation's tax liabilities are rendered uncollectible because of it dissolution). P P. 275-279.

(e) The overall policy of the Bankruptcy Act of giving a bankrupt a "fresh start" cannot override Congress' specific intent in § 17a(1)(e) to make a liability like respondent's nondischargeable, especially since the contrary result would create an inequity between corporate officers and individual entrepreneurs. P P. 279-281.

551 F.2d 109, reversed and remanded.

MARSHALL, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, BLACKMUN, and POWELL, JJ., joined. REHNQUIST, J., filed a dissenting opinion, in which BRENNAN, STEWART, and STEVENS, JJ., joined, post, P. 282.

MR. JUSTICE MARSHALL delivered the opinion of the Court.

This case involves the interaction of sections of the Internal Revenue Code of 1954 and the Bankruptcy Act. Respondent Onofre J. Sotelo was found personally liable to the Government

Page 436 U. S. 270

for his failure to pay over taxes withheld from employees of the corporation in which he was the principal officer. The question presented is whether this liability is dischargeable in bankruptcy.

I

In mid-1973, respondents Onofre J. and Naomi Sotelo were adjudicated bankrupts, as was their corporation, O. J. Sotelo & Sons Masonry, Inc. The individual bankruptcy proceedings of the two Sotelos were consolidated. In November, 1973, the Internal Revenue Service filed against respondents' estate a claim in the amount of ,751.16 "for internal revenue taxes" that had been collected from the corporation's employees but not paid over to the Government. Respondents were alleged to be personally liable for these taxes under Internal Revenue Code § 6672, 26 U.S.C. § 6672, as corporate officers who had a duty "to collect, truthfully account for, and pay over," the taxes, and who had "willfully fail[ed]" to make the requisite payments. [Footnote 1] Respondents objected to the Government's claim, arguing that they should not be held personally liable for "taxes of the corporation." Memorandum Opinion of Bankruptcy Court (Nov. 29, 1974).

In upholding the Government's claim to the extent of ,840.71, the bankruptcy court found that Onofre Sotelo

Page 436 U. S. 271

had formerly operated the masonry business as a sole proprietorship and that, since the formation of the corporation, he had been its president, director, majority stockholder, and chief executive officer. Naomi Sotelo, on the other hand, though named the corporation's secretary, "did not take an active part in the business." Id. at 1. The court concluded that Onofre Sotelo was personally liable to the Government under Internal Revenue Code § 6672, since he "was charged with the duty and responsibility to see that the [withheld] taxes were paid." Memorandum Opinion, supra at 3. [Footnote 2] The record does not reflect any appeal of this ruling.

In October, 1975, the Government, seeking to collect part of the money owed by Onofre Sotelo under § 6672, served a notice of levy on respondents' trustee with regard to ,000 that belonged to respondents and was not available for general distribution to creditors in bankruptcy. [Footnote 3] Respondents objected to the levy, in part on the ground that the liability is described in § 6672 itself as a "penalty," and, as such, had been discharged in bankruptcy. [Footnote 4] The Government argued that, to

Page 436 U. S. 272

the contrary, the liability was for "taxes," which § 17a(1) of the Bankruptcy Act, 30 Stat. 550, as amended, 11 U.S.C. § 35(a)(1) (1976 ed.), makes nondischargeable. The bankruptcy judge agreed with the Government, reasoning that, "[t]hough denominated a penalty,' [the § 6672 liability] is, in substance, a tax." 76-1 USTC 9435, p. 84, 157 (SD Ill.1976). The judge also noted, ibid., that subdivision (e) of Bankruptcy Act § 17a(1) makes specifically nondischargeable "taxes . . . which the bankrupt has collected or withheld from others . . . but has not paid over." 11 U.S.C. § 35(a)(1)(e) (1976 ed.). Respondents appealed to the United States District Court for the Southern District of Illinois, which affirmed on the opinion of the bankruptcy court.

The United States Court of Appeals for the Seventh Circuit reversed. In re Sotelo, 551 F.2d 1090 (1977). It first noted that

"Sotelo does not challenge his liability under 26 U.S.C. § 6672 . . . , [but] only argues that the liability should have been discharged by his personal bankruptcy petition."

Id. at 1091. The court then held that the liability had been discharged, finding persuasive the fact that § 6672 terms the liability a "penalty" and rejecting the Government's argument with respect to the specific language referring to withholding taxes in Bankruptcy Act § 17a(1)(e). 551 F.2d at 1092. [Footnote 5]

Page 436 U. S. 273

The court recognized that its ruling was in conflict with "an uncontroverted line of cases." Id. at 1091. [Footnote 6]

We granted certiorari, 434 U.S. 816 (177), and we now reverse.

II

Section 17a of the Bankruptcy Act, as amended, 80 Stat. 270, provides in pertinent part:

"A discharge in bankruptcy shall release a bankrupt from all of his provable debts, . . . except such as"

"(1) are taxes which became legally due and owing by the bankrupt to the United States or to any State . . . within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes . . . (e) which the bankrupt has collected or withheld from others as required by the laws of the United States or any State . . . but has not paid over. . . ."

11 U.S.C. § 35(a) (1976 ed.). Relying on this statutory language, the Government presents what it views as two independent grounds for holding the § 6672 liability of Onofre Sotelo (hereinafter respondent) to be nondischargeable. The Government's primary argument is based on the specific language relating to withholding in § 17a(1)(e); alternatively, it argues that respondent's liability, although called a "penalty," IRC § 6672, is in fact a "tax" as that term is used in § 17a(1). [Footnote 7]

Page 436 U. S. 274

Regardless of whether these two grounds are in fact independent, [Footnote 8] § 17a(1)(e) leaves no doubt as to the nondischargeability of

"taxes . . . which the bankrupt has collected or withheld from others as required by the laws of the United States or any State . . . but has not paid over."

The Court of Appeals viewed this provision as inapplicable here for...

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    ...9348). (24) Frederic M. Muntwyler, 703 F2d 1030 (7th Cir. 1983)(51 AFTR2d 83-997, 83-1 USTC [Paragraph] 9275). (25) Onofre J. Sotelo, 436 US 268 (1978)(42 AFTR2d 78-5001, 78-1 USTC [Paragraph] 9446). (26) Rev. Proc. 84-78, 1984-2 CB Darshan L. Wadhwa, Ph.D., CPA Associate Professor Universi......

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