1. A tax assessed under Revenue Act of 1918 upon the income of a
partner is a tax against the individual and not the
partnership,
Page 267 U. S. 409
whether or not his income was derived from partnership business.
P.
267 U. S.
410.
2. In proceedings in bankruptcy against a partnership the
partnership assets must first be applied to the payment of the
partnership debts, and the United States is not entitled to any
priority of payment out of such assets for a tax due it from an
individual partner, except to the extent of the share of such
partner, if any, in the surplus remaining after the payment of the
partnership debts. Bankruptcy Act, § 5f, 64(a); Rev.Stats. 3466,
3186, as amended, considered. P.
267 U. S.
411.
298 F. 11 affirmed.
Certiorari to judgments of the circuit court of appeals
affirming orders of the district court, in bankruptcy which denied
the right of the United States to have the income taxes of
individual partners paid out of the assets of their bankrupt firms
in preference to the claims of partnership creditors.
MR. JUSTICE SANFORD delivered the opinion of the Court.
These two cases were heard together in the circuit court of
appeals. They involve a single question relating to the extent of
the priority of the United States in the collection of taxes in
bankruptcy proceedings.
In 1921, on an involuntary petition filed in the Southern
District of New York, Finkelstein Brothers, a partnership, and the
individual partners thereof were adjudged bankrupts. In 1923, the
Collector of Internal
Page 267 U. S. 410
Revenue filed proof of claim for an income tax assessed against
Abraham Finkelstein, one of the partners, for the year 1919. It is
stipulated that the income on which this tax was based "was derived
from the business of the co-partnership." No individual assets of
Finkelstein had come into the hands of the trustee, and the
partnership assets were insufficient to yield any surplus after the
payment of the partnership debts. The Collector claimed that the
tax against Finkelstein should be paid out of the partnership
assets prior to the partnership debts. The referee denied this
claim, and ordered that the partnership assets first be applied to
the payment of the partnership debts. This order was affirmed by
the district judge.
In 1923, an involuntary petition in bankruptcy was filed in the
same court against Jones & Baker, a partnership. A receiver was
appointed, who collected and held the partnership assets. Before an
adjudication of bankruptcy the partnership offered a composition to
its creditors at less than the full amount of their claims. This
was confirmed by the district judge. Before the partnership assets
were distributed, the Collector of Internal Revenue filed proofs of
claims against the individual partners for income taxes assessed
against them for the years 1918, 1919 and 1920. It does not appear
that the income on which these taxes were based was derived from
the business of the partnership. The Collector claimed that these
taxes should be paid out of the partnership assets prior to the
payments to the partnership creditors. The district judge denied
this claim of priority.
On appeals to the circuit court of appeals, both orders of the
district court were affirmed. 298 F. 11. Writs of certiorari were
granted by this Court. 266 U.S. 596.
1. These taxes were assessed against the individual partners and
due from them to the United States. They were neither assessed
against, nor due from, the partnerships.
Page 267 U. S. 411
The tax assessed against Finkelstein was nonetheless an
individual tax because the income on which it was based was derived
from partnership business. The Revenue Act of 1918, 40 Stat. 1057,
c. 18, § 218(a), under which it was assessed, specifically provided
that "individuals carrying on business in partnership shall be
liable for income tax only in their individual capacity." The
provision that, in computing the income of each partner, there
should be included his distributive share of the income of the
partnership, whether distributed or not, did not change the nature
of the tax or make it one against the partnership.
2. The Bankruptcy Act gives the United States no priority of
payment out of partnership assets for a tax due from an individual
partner. Section 64(a), which provides that
"the court shall order the trustee to pay all taxes legally due
and owing by the bankrupt to the United States . . . in advance of
the payment of dividends to creditors,"
manifestly relates to the payment of the taxes out of the estate
of the bankrupt from whom they are "due and owing." Where the
bankrupt owing the tax is a member of a partnership, it gives the
United States no priority of payment out of the partnership
estate.
The Bankruptcy Act clearly recognizes the separate entity of the
partnership for the purpose of applying the long established rule
as to the prior claim of partnership debts on partnership assets
and of individual debts on individual assets, and "establishes on a
firm basis the respective equities of the individual and firm
creditors."
Francis v. McNeal, 228 U.
S. 695,
228 U. S. 700;
Schall v. Camors, 251 U. S. 239,
251 U. S. 254.
Section 5f (§ 9589) provides that:
"The net proceeds of the partnership property shall be
appropriated to the payment of the partnership debts, and the net
proceeds of the individual estate of each partner to the payment of
his individual debts. Should any surplus
Page 267 U. S. 412
remain of the property of any partner after paying his
individual debts, such surplus shall be added to the partnership
assets and be applied to the payment of partnership debts. Should
[there be] any surplus of the partnership property remain after
paying the partnership debts, such surplus shall be added to the
assets of the individual partners in the proportion of their
respective interests in the partnership."
The intention of Congress that the partnership assets shall be
first applied to the satisfaction of the partnership debts, and
that only the interests of the partners in the surplus remaining
after the payment of partnership debts shall be applied in
satisfaction of their individual debts, is plain.
It is urged, however, on the authority of
United
States v. Herron, 20 Wall. 251,
87 U. S. 255,
and other cases that, as the United States is not named in this
section of the Bankruptcy Act, it is not bound by the rule for
marshaling assets thereby established. But, however this may be, it
is clear that, independently of the provisions of his section, the
priority of payment of taxes given the United States by § 64(a)
extends only to the bankrupt's share in the surplus of the assets
of a partnership of which he is a member. This follows from the
decision in
United States v.
Hack, 8 Pet. 271,
33 U. S. 275, a
case arising under the Act of March 2, 1799,
* providing that,
if the maker of any bond given to the United States for the payment
of duties became insolvent or committed an act of bankruptcy, the
debt due the United States on such bond should be first satisfied.
The maker of such a bond had become insolvent. He had no individual
property, and the assets of an insolvent partnership of which he
was a member were insufficient to pay the partnership creditors. It
was held, on these facts, that the United States was not entitled
to priority of satisfaction out of the partnership assets, since
the Act merely gave it priority of payment
Page 267 U. S. 413
out of the property of its debtor, and the rule was too well
settled to be questioned that his interest in the partnership
property was his share in the surplus after the partnership debts
were paid, and that such surplus only was liable for his separate
debts. To the same effect is
United States v. Evans,
Crabbe 60, 25 Fed.Cas. 1033, a case arising under the same Act.
These decisions are directly applicable to § 3466 of the Revised
Statutes, on which the United States relies, which incorporated the
provisions of the Act of 1799 and similar Acts of August 4, 1790 (1
Stat. 169) and March 3, 1797 (1 Stat. 512), in the general
provision that, whenever any person indebted to the United States
is insolvent, the debts due to the United States shall be first
satisfied, and that this priority shall extend to cases in which an
act of bankruptcy is committed. And insofar as this section, under
the rule stated in
Guarantee Co. v. Title Guaranty Co.,
224 U. S. 152, may
now be applicable in bankruptcy proceedings, it must be held that
any priority of payment to which the United States is entitled for
a debt due it from an individual partner extends only to his share
in the surplus of the partnership assets.
There is no conflict between the decisions in these cases and in
Lewis v. United States, 92 U. S. 618,
92 U. S. 624,
and
In re Strassburger, 4 Woods 557, 23 Fed.Cas. 224, on
which the United States relies. In the
Lewis case, the
members of the firm of Jay Cooke & Co. had been adjudicated
bankrupts, and a trustee had been appointed who held their
individual assets and those of the firm as well. This firm was not
indebted to the United States, but another firm, of which several
of the bankrupts were members, was so indebted. On these facts, it
was held that the bankrupt members of such other firm, as to its
indebtedness, stood to the United States in the relation of
"individual debtors," and that, under the priority given to debts
due the United States by § 3466 of the Revised
Page 267 U. S. 414
Statutes, recognized and reaffirmed in § 28 of the Bankruptcy
Act of 1867 (14 Stat. 530), it was entitled, as a creditor of these
individual bankrupts, to priority of payment out of their
individual estates. There was, however, no suggestion that the
United States, as a creditor of these individual bankrupts, was
entitled to priority of satisfaction out of the partnership assets
of Jay Cooke & Co. In the
Strassburger case, Mr.
Justice Bradley, sitting at circuit, while explicitly recognizing
the rule that, where one member of a firm is indebted to the United
States, its priority extends only to his interest in the surplus of
the partnership assets, held that, as the United States had a
judgment against both members of the firm, it was entitled to
priority of payment thereof out of their joint property in
preference to their joint creditors. Whether a correct result was
reached we need not inquire. And if to any extent the reasoning in
this case may be in conflict with that in the Hack case, it cannot
be approved.
Nor is the contention of the United States strengthened by the
provision in § 3186 of the Revised Statutes, as amended by the Act
of March 4, 1913, c. 166, 37 Stat. 1016, that the amount due the
United States from any person as a tax shall be a lien on all
property and rights to property belonging to such person. To
whatever extent this statute may be now applicable in a bankruptcy
proceeding, under its very terms, the lien includes only the
property of the person owing the tax, and, in the case of a partner
owing an individual tax, it extends only to his interest in the
surplus of the partnership property.
It results that, in proceedings in bankruptcy against a
partnership, the partnership assets must be first applied to the
payment of the partnership debts, and that the United States is not
entitled to any priority of payment out of such assets for a tax
due it from an individual partner, except to the extent of the
share of such partner, if any, in the surplus remaining after the
payment of the partnership debts.
Page 267 U. S. 415
3. The United States also relies, independently of the foregoing
matters, upon the decision in
Re Brezing, 297 F. 300, 306,
in which it was held that, as the individual partners, instead of
drawing out their distributive shares of the income of the
partnership from year to year, had left a large portion thereof in
the partnership business, the United States had a claim in the
nature of an equitable lien for the collection of their individual
income taxes which it could follow into the partnership property.
Whether or not this case was correctly decided on its peculiar
facts, it has no application to either of the present cases, in
which no such facts appear.
The decree of the circuit court of appeals is
Affirmed.
* 3 Laws, U.S. 136, 197; 1 Stat. 627, 676, c. 22, § 65.