1. Under §§ 801 and 802 of Title VIII of the Social Security
Act, an employer is required to collect the tax laid on the wage
incomes of his employees, but is liable for its payment whether or
not he collects it. P.
315 U. S.
515.
2. This liability of the employer is a tax, and a claim thereon
is entitled to priority as for a tax under § 64(a)(4) of the
Bankruptcy Act. P.
315 U. S.
515.
3. A tax, for the purposes of § 64(a)(4) of the Bankruptcy Act,
includes any pecuniary burden upon individuals or property for the
purpose of supporting the Government. P.
315 U. S.
515.
Page 315 U. S. 511
4. The provision of 902 of Title IX of the Social Security Act
allowing the employer to credit against his tax, under § 901, the
amount of his contributions to state unemployment funds up to 90%
of the tax, does not make the tax to that extent a penalty, within
the meaning of § 57(j) of the Bankruptcy Act, as applied to an
employer who has failed to make such contributions. P.
315 U. S.
516.
5. In determining the amounts distributable to the United States
on its tax claim and to the State for its unemployment fund, under
§§ 901 and 902 of Title IX of the Social Security Act, from a
bankrupt estate whose assets were insufficient to satisfy these and
other claims of priority,
held that the allowance to be
made for the state fund should be credited against the total tax
claim of the United States under § 901, rather than against the
amount actually available for such claim. P.
315 U. S.
520.
118 F.2d 537 reversed.
Certiorari, 314 U.S. 592, on cross-petitions, to review a
judgment reversing part of an order of the District Court, 38 F.
Supp. 976, for the distribution of assets of a bankrupt estate.
MR. JUSTICE BYRNES delivered the opinion of the Court.
The United States and the State of New York seek review of a
judgment of the Circuit Court of Appeals for the Second Circuit
reversing in part a District Court order for the distribution of
the assets of a bankrupt estate. The Independent Automobile
Forwarding Corporation was adjudicated a bankrupt on April 26,
1938. A total of $3,053.20 eventually became available for
distribution.
Page 315 U. S. 512
This amount was insufficient even to meet those claims of the
federal and state governments which were assertedly entitled to
priority as taxes under § 64(a)(4) of the Bankruptcy Act. [
Footnote 1] The federal claims of this
character were for amounts due under §§ 801 and 802 of Title VIII
and under § 901 of Title IX of the Social Security Act, [
Footnote 2] and for certain taxes as to
which no question is raised in this case. The state claims were for
payments due its unemployment insurance fund, and for taxes not in
issue here.
The state's appeal from the District Court's first order of
distribution was discontinued by agreement of the
Page 315 U. S. 513
parties because the Social Security Act had been extensively
amended while the appeal was pending. [
Footnote 3] A second order was thereupon entered by the
District Court. The state again appealed to the Circuit Court of
Appeals. It contended that the share of the assets granted to the
federal government was excessive for three reasons: (1) the claim
based on § 801 of Title VIII of the Social Security Act was a claim
for a debt, rather than for taxes, and thus was not entitled to
priority under § 64(a)(4) of the Bankruptcy Act; (2) no more than
10% of the claim based on § 901 of Title IX of the Social Security
Act was entitled to allowance because the balance constituted a
claim for a penalty, rather than a tax, and thus fell within the
prohibition of § 57(j) of the Bankruptcy Act; [
Footnote 4] and (3) the credit against the Title
IX claim provided for in § 902, was incorrectly calculated. The
Circuit Court of Appeals sustained the state's contention with
respect to the Title VIII claim and reversed to that extent the
order of the District Court, but rejected the state's arguments
with respect to the claim under Title IX.
First. The claim based on Title VIII. Section 801 bears
the heading "Income tax on employees," and provides for a tax "upon
the income of every individual" equal to 1 percentum of the wages
received by him with respect to employment during 1937. [
Footnote 5] Section 802(a) provides
that this tax "shall be collected by the employer of the taxpayer
by deducting the amount of the tax from the wages as and when
paid." The employer is made
Page 315 U. S. 514
liable for the payment of the tax. By regulation, pursuant to
Title VIII, [
Footnote 6] the
Treasury Department has explicitly ruled that the tax may be
assessed against the employer regardless of whether he has in fact
deducted it from the employee's wages. The Circuit Court of Appeals
held that the employer was liable "only as an agent bound to pay
whether its duty to collect was performed or not," and that his
liability was for a debt, rather than for taxes.
As authority for this view, it relied upon its decision of the
same date in
City of New York v. Feiring, 118 F.2d 329.
The city sales tax involved in that case was laid upon receipts
from sales of personal property. The vendor was required to collect
the amount of the tax from the vendee separately from the sales
price. He was obliged to report periodically concerning his
receipts from sales, and to turn over to the City Comptroller the
taxes due, whether or not he had actually collected them from the
purchasers. If the vendor failed to collect the tax, the vendee was
required to report the transaction and to pay the tax directly.
Thus, the procedure contemplated was that the purchaser should bear
the burden of the tax, but that the seller should collect and
transmit it to the Comptroller. If the seller did not obtain it
from the purchaser, however, the Comptroller was authorized to
proceed to collect it from either of them. The Circuit Court of
Appeals held that the claim of the City against a bankrupt vendor
for the amount of the sales tax outstanding was a claim for a debt,
and not for taxes, within the meaning of § 64(a)(4). We reversed
this decision and held that the burden imposed upon the seller by
the city taxing act had "all the characteristics of a tax entitled
to priority" under § 64(a)(4).
313 U. S. 313 U.S.
283.
Page 315 U. S. 515
We think that our decision in the
Feiring case is
controlling here. The New York City sales tax involved in that case
and the obligation imposed by §§ 801 and 802 of Title VIII of the
Social Security Act cannot be distinguished in any material
respect. It was observed in the
Feiring case that, while
the sales tax was intended to rest upon the purchaser "in its
normal operation,"
"both the vendor and the vendee are made liable for payment of
the tax
in invitum . . . , and the tax may be summarily
collected by distraint of the property of either the seller or the
buyer."
313 U. S. 313 U.S.
283, at
313 U. S. 287.
The burden of the tax provided for by §§ 801 and 802 likewise will
normally rest upon the employee, but the Commissioner of Internal
Revenue may proceed to collect it from the employer whether or not
he has deducted it from the wages of the employee.
Two distinctions between the cases are urged by the State. One
is that § 802(a) of Title VIII provides that the tax "shall be
collected by the employer of the taxpayer," and thus reveals a
Congressional intent that only a claim against the employee should
be treated as one for a tax. The other asserted distinction is that
Title VIII in its entirety is designed to impose two distinct
taxes; § 801 imposes an "income tax" upon the employee, while § 804
imposes an "excise tax" upon the employer. [
Footnote 7] But a tax for purposes of § 64(a)(4)
includes any "pecuniary burden laid upon individuals or property
for the purpose of supporting the government," by whatever name it
may
Page 315 U. S. 516
be called.
New Jersey v. Anderson, 203 U.
S. 483,
203 U. S. 492.
Although he may not be referred to in §§ 801 and 802 as the
taxpayer, and although he may also be subject to the "excise tax"
prescribed by § 804, the plain fact is that the employer is liable
for the § 801 tax whether or not he has collected it from his
employees. We therefore hold that the Title VIII claim of the
United States against the estate of this bankrupt employer is
entitled to the priority afforded by § 64(a)(4).
Second. The claim under Title IX. Section 901 imposes
upon this employer, in addition to the obligations discussed above,
an "excise tax" equal to 2 percentum of the total wages payable by
him during 1937. Section 902, however, permits him to credit
"against the tax imposed by § 901" the amount of his 1937
contributions to the State unemployment fund, but provides that the
total credit "shall not exceed 90 percentum of the tax against
which it is credited."
(a) The State contends that § 902(a) in effect exacts a penalty,
equal to 90% of the amount of the tax levied by § 901, from an
employer who fails to make the payments to the State unemployment
fund required by state law. Since § 57(j) of the Bankruptcy Act
provides that claims by the United States for penalties are not
allowable, [
Footnote 8] it
argues, only 10% of the tax imposed by § 901 is actually a tax for
purposes of § 64(a)(4) of the Bankruptcy Act. There is no merit to
this contention. While the issue here is cast in somewhat different
terms, it is similar in outline to that raised by the
constitutional objection to the Act which was set to rest in
Steward Machine Co. v. Davis, 301 U.
S. 548. There, it was argued that the 90% credit
provisions amounted to coercion of the States which was repugnant
to the Tenth Amendment and to the federal system. The Court
recognized that the effect of the scheme was to encourage the
States to
Page 315 U. S. 517
establish and maintain unemployment insurance funds, and thus to
cooperate with the federal government in meeting a common problem.
It observed that "every rebate from a tax when conditioned upon
conduct is in some measure a temptation," but it concluded that "to
hold that motive or temptation is equivalent to coercion is to
plunge the law in endless difficulties," and to accept "a
philosophical determinism by which choice becomes impossible." 301
U.S. at
301 U. S.
589-590. These considerations are equally pertinent to
the suggestion that the 90% rebate arrangement constitutes the
imposition of a "penalty" within the meaning of § 57(j) upon an
employer who fails or refuses to contribute to a state fund. The
amount of the tax assessable under § 901 is definite and fixed,
once the single variable, the total of the wages paid during the
year, is determined. Although the employer is free to obtain a
credit against it by contributing to his state fund, it cannot be
said that it is any the less a tax because the employer has failed,
either through choice or lack of resources, to make such a
contribution. Either the state or the federal government must
provide the money to meet the requirements of relief to the
unemployed. By his contributions to the state, an employer has
diminished the demand upon the financial resources of the federal
government. But, by his failure to contribute, the employer has
increased this demand and sharpened the necessity for obtaining the
revenues required to satisfy it. The effort by the United States to
obtain the revenue by denying the credit must be regarded as the
levying of a tax, and not as the exaction of a penalty. [
Footnote 9]
Page 315 U. S. 518
(b) Finally, the state contends that the District Court applied
an incorrect formula in determining the amount of the credit
deductible under § 902. Section 902 provides:
"The taxpayer may credit against the tax imposed by § 901 of
this chapter the amount of contributions, with respect to
employment during the taxable year, paid by him (before the date of
filing his return for the taxable year) [
Footnote 10] into an unemployment fund under a State
law. The total credit allowed to a taxpayer under this section for
all contributions paid into unemployment funds with respect to
employment during such taxable year shall not exceed 90 percentum
of the tax against which it is credited. . . ."
In the case of a bankrupt who has not made any contribution to
the state unemployment fund at the time of adjudication and whose
assets are insufficient to meet the total of the claims of equal
priority, the calculation of the credit is beset with some
difficulty. The amount available for the state's claim for its
unemployment insurance fund is contingent upon the sums allowed on
the other claims, including that of the federal government under §
901. The amount to be allowed on the claim of the United States is,
in turn, dependent upon the credit deductible from it under the
terms of § 902. And this credit under § 902 is determined by the
sum granted on the state's unemployment insurance fund claim.
Because of this mutual dependence, the courts below have
accepted and approved an algebraic solution of the
Page 315 U. S. 519
problem. Under this solution, the claim for the tax assessed
under § 901 is diminished by subtracting from it an amount equal to
the sum allowed to the State for its unemployment fund. The formula
by which this is accomplished is reducible to a quadratic equation
capable of solution by the recognized method.
As against this algebraic solution, the State urges an
arithmetical calculation which would afford it a larger share of
the assets. In brief, the State's theory is as follows: the amount
of each of the several claims of the State and of the United States
should be divided by the total of such claims. The percentage of
the assets due on each claim is thus determined. The total of the
assets available is then multiplied, in turn, by these percentages,
and the actual sum to be allowed on each claim is found. However,
the amount allowed on the federal government's claim under § 901 is
then multiplied by 10%. The sum equal to this 10% is thereupon
conclusively granted to the United States. But the remaining
amount, equal to 90%, is returned to the estate as a second fund to
be divided among all the claims in the same manner. The share of
this second fund which by this computation would go to the United
States on its § 901 claim is again multiplied by 10%, with the
balance of 90% returning to form a third fund. The process is
repeated until the still undistributed assets reach a vanishing
point.
It will be observed that, while the one solution is algebraic
and the other arithmetic, there is little to choose between them in
terms of complexity. The obvious fact is that neither the
Bankruptcy Act nor the Social Security Act afford the courts any
meaningful assistance in solving the problem raised by this case.
And their legislative history is equally barren.
The State objects to the formula applied below because its
effect is to accord the United States a larger sum in dollars and
cents on its § 901 claim than it would
Page 315 U. S. 520
receive if the available assets were sufficient to discharge in
full all of the priority claims. This is true because, under § 902,
the United States would be entitled to no more than 10% of its §
901 claim if the unemployment fund claim of the State was paid in
full. We agree that this result is somewhat incongruous. However,
the method of computation urged by the State embodies so basic an
error that we cannot accept it. Section 902 permits the credit
"against the tax imposed by § 901." Under the State's formula, the
credit is reckoned in terms of a sum determined by that formula to
be actually available to the United States on its § 901 claim,
rather than in terms of the whole amount actually due under that
section. We think that the words "the tax imposed" must mean "the
tax demanded" or "assessed" or "due." It can hardly be thought to
mean "the tax paid" or "the amount available for payment of the
tax." The formula adopted by the District Court avoids this error
by crediting the undetermined sum available to the state
unemployment fund against the total tax assessed or claimed under §
901. We therefor hold that the District Court and the Circuit Court
of Appeals did not err in adopting and using that formula.
The judgment of the Circuit Court of Appeals is reversed with
respect to the claim under Title VIII, but is otherwise affirmed.
The case is remanded to permit the reinstatement of the judgment of
the District Court.
Reversed.
* Together with No. 251,
New York v. United States,
also on writ of certiorari, 314 U.S. 592, to the Circuit Court of
Appeals for the Second Circuit.
[
Footnote 1]
"Section 64. Debts which have priority. -- a. The debts to have
priority, in advance of the payment of dividends to creditors, and
to be paid in full out of bankrupt estates, and the order of
payment, shall be . . . (4) taxes legally due and owing by the
bankrupt to the United States or any State or any subdivision
thereof. . . ."
U.S.C. Title 11, § 104.
[
Footnote 2]
C. 531, 49 Stat. 636-639.
"Section 801. Income tax on employees. In addition to other
taxes, there shall be levied, collected, and paid upon the income
of every individual a tax equal to the following percentages of
wages (as defined in § 811) received by him after December 31,
1936, with respect to unemployment (as defined in § 811) after such
date: (1) With respect to employment during the calendar years
1937, 1938, and 1939, the rate shall be 1 percentum."
U.S.C. Title 42, § 1001.
"Section 802. (a) The tax imposed by § 801 shall be collected by
the employer of the taxpayer, by deducting the amount of the tax
from the wages as and when paid. Every employer required so to
deduct the tax is hereby made liable for the payment of such tax,
and is hereby indemnified against the claims and demands of any
person for the amount of any such payment made by such
employer."
U.S.C. Title 42, § 1002.
"Sec. 901. On and after January 1, 1936, every employer (as
defined in § 907) shall pay for each calendar year an excise tax,
with respect to having individuals in his employ, equal to the
following percentages of the total wages (as defined in § 907)
payable by him (regardless of the time of payment) with respect to
employment (as defined in § 907) during such calendar year: . . .
(2) with respect to employment during the calendar year 1937, the
rate shall be 2 percentum. . . ."
U.S.C. Title 42, § 1101.
[
Footnote 3]
C. 666. 53 Stat. 1360, 1399.
See notes
9 and 10 infra.
[
Footnote 4]
"Section 57(j). Debts owing to the United States or any State or
subdivision thereof as a penalty or forfeiture shall not be allowed
except for the amount of the pecuniary loss sustained by the act,
transaction, or proceeding out of which the penalty or forfeiture
arose, with reasonable and actual costs occasioned thereby and such
interest as may have accrued thereon according to law."
U.S.C. Title 11, § 93(j).
[
Footnote 5]
Both the pertinent state and federal claims are for the year
1937.
[
Footnote 6]
Treasury Regulations 91, Article 505.
[
Footnote 7]
"Section 804. Excise tax on employers. In addition to other
taxes, every employer shall pay an excise tax, with respect to
having individuals in his employ, equal to the following
percentages of the wages (as defined in § 811) paid by him after
December 31, 1936, with respect to employment (as defined in § 811)
after such date: (1) With respect to employment during the calendar
years 1937, 1938, and 1939, the rate shall be 1 percentum."
U.S.C. Title 42, § 1004.
[
Footnote 8]
See note 4
supra.
[
Footnote 9]
In 1939, Congress undertook to put an end to any doubts on this
question by providing in § 902(i) of the amendments to the Social
Security Act that no part of the tax imposed by Title IX should be
deemed a penalty or forfeiture within the meaning of § 57(j) of the
Bankruptcy Act. C. 666, 53 Stat. 1360, 1400.
[
Footnote 10]
This condition had not been complied with in the present case.
However, the 1939 amendments to the Social Security Act, which
resulted in the dismissal of the first appeal by stipulation,
provided that the credit should be allowed on payments to the state
fund
"without regard to the date of payment, if the assets of the
taxpayer are at any time during the fifty-nine-day period following
such date of enactment, in the custody or control of a receiver,
trustee, or other fiduciary appointed by, or under the control of,
a court of competent jurisdiction."
§ 901(a)(3). C. 666, 53 Stat. 1360, 1399. This bankrupt estate
qualified under this provision.