United States v. SoteloAnnotate this Case
436 U.S. 268 (1978)
U.S. Supreme Court
United States v. Sotelo, 436 U.S. 268 (1978)
United States v. Sotelo
Argued February 22, 1978
Decided May 22, 1978
436 U.S. 268
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
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). Pp. 436 U. S. 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. 436 U. S. 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. 436 U. S. 275.
(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. 436 U. S. 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). Pp. 436 U. S. 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. Pp. 436 U. S. 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. 436 U. S. 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
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.
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 $40,751.16 "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 $32,840.71, the bankruptcy court found that Onofre Sotelo
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 $10,000 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
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]
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.
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]
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 two reasons: first, because "it was not Sotelo himself, but his employer-corporation, that was obligated by law to collect and withhold the taxes"; and second, because, in any event, the money involved constituted a "penalty," whereas § 17a(1)(e) "renders only taxes' nondischargeable." 551 F.2d at 1092. We believe that the first reason is inconsistent with the Court of Appeals' recognition of respondent's undisputed liability under Internal Revenue Code § 6672, and that the second is inconsistent with the language of § 17a(1)(e).
The fact 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. IRC § 6672; seen 1, supra. [Footnote 9] Since the § 6672 "require[ment]" of collection presumably derives from federal or state law, both of which are referred to in Bankruptcy Act § 17a(1)(e), it is difficult to understand how the court below could have recognized respondent's § 6672 liability, see supra at 436 U. S. 272, and nonetheless have concluded that he was not "obligated by law
to collect . . . the taxes," 551 F.2d at 10.92. It is undisputed here, moreover, that the taxes in question were "collected or withheld" from the corporation's employees, and that the taxes, though collected, have not been "paid over" to the Government. It is therefore clear that the § 6672 liability was not imposed for a failure on the part of respondent to collect taxes, but was rather imposed for his failure to pay over taxes that he was required both to collect and to pay over. Under these circumstances, the most natural reading of the statutory language leads to the conclusion that respondent "collected or withheld" the taxes within the meaning of Bankruptcy Act § 17a(1)(e).
We also cannot agree with the Court of Appeals that the "penalty" language of Internal Revenue Code § 6672 is dispositive of the status of respondent's debt under Bankruptcy Act § 17a(1)(e). The funds here involved were unquestionably "taxes" at the time they were "collected or withheld from others." § 17a(1)(e); see IRC §§ 3102(a), 3402(a). 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 a "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 in a case in which, as here, the § 6672 liability is predicated on a failure to pay over, rather than a failure initially to collect, the taxes.
The legislative history of Bankruptcy Act § 17a(1) provides additional support for the view that respondent's liability should be held nondischargeable. A principal purpose of the legislation, enacted in 1966 after several years of congressional consideration, was to establish a three-year limitation on the taxes that would be nondischargeable in bankruptcy; under former law, there was no such temporal limitation. See H.R.Rep. No. 372, 88th Cong., 1st Sess., 1-3 (1963) (hereafter
H.R.Rep. No 372); S.Rep. No. 114, 89th Cong., 1st Sess., 2-3 (1965) (hereafter S.Rep. No. 114). The new section ensured the discharge of most taxes "which became legally due and owing" more than three years preceding bankruptcy. With regard to unpaid withholding taxes, however, the three-year limitation was made inapplicable by the addition of the provision that is today § 17a(1)(e).
This provision was added to the bill to respond to the Treasury Department's position that any discharge of liability for collected withholding taxes was undesirable. The Department's views were expressed in a letter to the Chairman of the House Judiciary Committee from Assistant Secretary of the Treasury Stanley S. Surrey, who indicated that persons other than employer-bankrupts were included within the scope of the Department's
"concer[n] with the inequity of granting a taxpayer a discharge of his liability for payment of trust fund taxes which he has collected from his employees and the public in general. . . . The Department does not believe that it is equitable or administratively desirable to permit employers and other persons who have collected money from third parties to be relieved of their obligation to account for an[d] pay over such money to the Government. . . ."
Quoted in H.R.Rep. No. 372, p. 6 (emphasis added). Treasury's position was further explained in a letter from the same Department official to the Chairman of the Senate Judiciary Committee; the letter emphasized that it was
"most undesirable to permit persons who are charged with the responsibility of paying over to the Federal Government moneys collected from third persons to be relieved of their obligations in bankruptcy when they have converted such moneys for their own use."
Quoted in S.Rep. No. 114, p. 10.
In response to the Treasury Department's concern, the House Judiciary Committee added an amendment that
became § 17a(1)(e). H.R.Rep. No. 372, p. 1. According to the House Report, the amendment was specifically intended to meet "the objection of Treasury to the discharge of so-called trust fund taxes." Id. at 5. In agreeing to the House amendment, the Senate Committee noted that Treasury's "opposition" to the bill, to the extent it was based on the fact that responsible persons would have been "relieved of their obligations" for unpaid withholding taxes, was eliminated by the provision that became § 17a(1)(e). S.Rep. No. 114, pp. 6, 10.
There is no reason to believe that Congress did not intend to meet Treasury's concerns in their entirety. While the Department may not have focused on the specific question presented here, it left no doubt as to its objection to the discharge of "persons . . . charged with the responsibility of paying over . . . moneys collected from third persons." Letter from Assistant Secretary Surrey to Chairman of Senate Judiciary Committee, supra. Respondent without question is such a person, a point essentially conceded here by virtue of the recognition of respondent's liability under Internal Revenue Code § 6672, see supra at 436 U. S. 274-275, and n. 9. Because Congress specifically contemplated that those with withholding tax payment obligations would remain liable after bankruptcy for their "conver[sion]" of the tax funds to private use, S.Rep. No. 114, p. 10, [Footnote 10] we must conclude that the liability here involved is not dischargeable in bankruptcy.
Even without these indications of an intent to make nondischargeable the withholding tax obligations of persons in respondent's situation, moreover, Congress' perception of the consequences of corporate bankruptcy makes it most unlikely that the legislature intended § 17a(1)(e) to apply only to the corporation's liability for unpaid withholding taxes. Both the Committee reports and the floor debates contain repeated references to the fact that a corporation "normally ceases to exist upon bankruptcy," H.R.Rep. No. 372, p. 2; see S.Rep. No. 114, p. 2, thereby rendering "uncollectable" the corporation's tax liabilities, 112 Cong.Rec. 13818 (1966) (statement of Sen. Ervin). As one of the bill's principal sponsors observed, corporate dissolution has "the practical effect of discharging all debts including taxes," regardless of statutory declarations of nondischargeability. Id. at 13821 (remarks of Sen. Hruska). [Footnote 11] In view of this congressional assumption, the interpretation of § 17a(1)(e) adopted by the Court of Appeals is untenable, for the combination of corporate dissolution with the personal bankruptcies of those found liable under Internal Revenue Code § 6672 would leave no person within the corporation obligated to the Government for unpaid withholding taxes. Such a result would be directly inconsistent with Congress' declarations that the amendment which became § 17a(1)(e) met the Treasury Department's
concern about ensuring post-bankruptcy liability for these taxes.
In light of this legislative history, little doubt remains as to the nondischargeability of respondent's liability under § 17a(1)(e). The Court of Appeals did not consider this history, but instead relied on more general policy factors. The court observed that an "inequit[y]" could arise from holding an individual "liable for a tax owed by a corporation" in cases where, because "[t]he corporate liability . . . vastly exceed[s] the individual's present or future resources," his "entire future earnings could be confiscated to compensate for the corporate liability." Such a result, in the court's view, "would contravene the Bankruptcy Act's basic policy of settling a bankrupt's past debts and providing a fresh economic start." 551 F.2d at 1092-1093.
However persuasive these considerations might be in a legislative forum, we as judges cannot override the specific policy judgments made by Congress in enacting the statutory provisions with which we are here concerned. The decision to hold an individual "liable for a tax owed by a corporation," even if there is a wide disparity between the corporation's liability and the individual's resources, was made when Internal Revenue Code § 6672 was passed, since it is that section which imposes the liability without regard for the individual's ability to pay. [Footnote 12] And while it is true that a finding of
nondischargeability prevents a bankrupt from getting an entirely "fresh start," this observation provides little assistance in construing a section expressly designed to male some debts nondischargeable. We are not here concerned with the entire Act's policy, but rather with what Congress intended in § 17a(1) and its subdivision (e). The statutory language and legislative history discussed in Parts II and III, supra, demonstrate an intention to make a liability like respondent's nondischargeable. [Footnote 13]
The Court of Appeals' approach, moreover, would have the effect of allowing a corporation and its officers to escape all liability for unpaid withholding taxes, see supra at 436 U. S. 278-279,
while leaving liable for such taxes after bankruptcy those individuals who do business in the sole proprietorship or partnership, rather than the corporate, form. [Footnote 14] In passing § 17a(1), however, Congress was expressly concerned about the fact that the operation of prior law was "unfairly discriminatory against the private individual or the unincorporated small businessman." H.R.Rep. No. 372, p. 2; see S.Rep. No. 114, pp. 2-3. As discused above, Congress recognized that a bankrupt corporation "dissolves and goes out of business," 112 Cong.Rec. 13817 (1966) (remarks of Sen. Ervin), thereby avoiding IRS tax claims; it was thought inequitable that a sole proprietor or other individual would remain liable after bankruptcy for the same type of claims. See generally sources cited at p. 436 U. S. 278, and n 11, supra. This inequity between a corporate officer and an individual entrepreneur, both of whom have a similar liability to the Government, frequently would turn on nothing more than whether the individual was "sophisticated" enough "to, in effect, incorporate himself." 112 Cong.Rec. 13817 (1966) (remarks of Sen. Ervin). [Footnote 15] Were we to adopt the Court of Appeals' approach, we would be instituting precisely the kind of "arbitrary discrimination" that § 17a(1) was designed to alleviate. 112 Cong.Rec. 13818 (1966) (statement of Sen. Ervin). [Footnote 16]
In terms of statutory language and legislative history, then, the liability of respondent under Internal Revenue Code § 6672 must be held nondischargeable under Bankruptcy Act § 17a(1)(e). The judgment of the Court of Appeals is, accordingly,
Reversed and remanded.
Internal Revenue Code § 6672, 26 U.S.C. § 6672, provides:
"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."
Section 6671(b) of the Code makes clear that
"[t]he term 'person,' as used in [§ 6672], includes an officer or employee of a corporation . . . who . . . is under a duty to perform the act in respect of which the violation occurs."
Section 6671(a) states that the § 6672 penalty "shall be assessed and collected in the same manner as taxes."
Naomi Sotelo was found not to be liable, but the bankruptcy judge noted that this finding was "immaterial" in view of the merger of the estates. Memorandum Opinion of Bankruptcy Court 3 (Nov. 29, 1974).
This $10,000 was derived from the trustee's sale of real estate held by respondents as joint tenants, and would have been payable to one or both of respondents had it not been for the Government's claim. The trustee set aside the $10,000 as a "homestead exemption" for Onofre Sotelo only, apparently pursuant to Illinois law. Respondents argued below that the entire $10,000 belonged to Naomi Sotelo, who did not have any § 6672 liability, seen 2, supra. In response to this contention, the bankruptcy court stated:
"[T]he law is clearly established in Illinois that, where a husband and wife own property as joint tenants and reside together on the premises . . . the husband . . . alone is entitled to the Homestead Exemption."