The debtor corporation, kept in possession of its business by
court order under Chapter XI of the Bankruptcy Act, did not comply
with requirements that it deposit withheld taxes in a special tax
account. It was later adjudicated a bankrupt, and the United States
asked the bankruptcy court to pay the amount of withheld taxes
prior to payment of costs and expenses of the bankruptcy
proceedings, pursuant to 26 U.S.C. § 7501(a), which provides that
the amount of withheld taxes "shall be held to be a special fund in
trust for the United States." The referee denied the request, and
the District Court and the Court of Appeals agreed.
Held: Section 64(a)(1) of the Bankruptcy Act, which is
an overriding statement of federal policy on the question of
priorities, clearly provides that the first priority in payments
from bankrupt estates belongs to the costs and expenses of
administration incurred in the bankruptcy proceedings. Pp.
401 U. S.
515-517.
419 F.2d 1068, affirmed.
DOUGLAS, J., delivered the opinion of the Court, in which
HARLAN, BRENNAN, WHITE, and MARSHALL, JJ., joined. BLACKMUN, J.,
filed a dissenting opinion, in which BURGER, C.J., and BLACK and
STEWART, JJ., joined,
post, p.
401 U. S.
518.
Page 401 U. S. 514
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
Halo Metal Products, Inc. (the debtor) was kept in possession of
its business by court order under Chapter XI of the Bankruptcy Act,
11 U.S.C. § 701
et seq. The order required it to open
three separate bank accounts for its general, payroll, and tax
indebtedness and to make appropriate disbursements from those
accounts. Salaries and wages paid were to be credited against the
payroll account and checks for wages and for withheld income and
social security taxes were to be paid after approval by the
referee. Checks for the withheld taxes were to be paid into the tax
account. Withdrawals from this account were to be allowed only for
payment of withheld taxes and welfare obligations.
The debtor did not comply with those requirements. Although it
withheld income and social security taxes from the wages of its
employees, it did not deposit them in the special tax account and
did not pay them, as required, to the United States.
Later, the debtor was adjudicated a bankrupt. The United States,
which had previously filed a proof of claim in the Chapter XI
proceedings for payment of the taxes, now asked the bankruptcy
court to pay the amount of withheld taxes prior to the payment of
the costs and expenses of administration of the bankruptcy
proceedings. The referee denied the request. The District Court
agreed with the referee. The Court of Appeals affirmed the order
denying payment, 419 F.2d 1068. The case is here on petition for a
writ of certiorari which we granted (400 U.S. 817) because of a
conflict among the circuits,
cf. City of New York v.
Rassner, 127 F.2d 703;
United States v. Sampsell, 193
F.2d 154;
Hercules Service Parts Corp. v. United States,
202 F.2d 938.
Page 401 U. S. 515
The United States relies for its priority on 26 U.S.C. §
7501(a), which provides:
"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."
The argument is that withheld taxes are a trust in favor of the
United States. It is answered that the debtor in possession failed
to segregate the taxes so withheld; hence there was no trust. To
that the United States replies that, since the debtor in possession
was a court-appointed officer, the misconduct of the officer should
not defeat the trust. [
Footnote
1] And, the argument continues, creditors are not unfairly
harmed, since the trust funds were never an asset of the
estate.
We deal, however, with a Bankruptcy Act which we conclude is an
overriding statement of federal policy on this question of
priorities. Section 64(a)(1) of the Act, 11 U.S.C. § 104(a)(1)
(1964 ed., Supp. V), provides:
"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 (1) the costs and
expenses of administration. . . . Where an order is entered in a
proceeding
Page 401 U. S. 516
under any chapter of this title directing that bankruptcy be
proceeded with, the costs and expenses of administration incurred
in the ensuing bankruptcy proceeding . . . shall have priority in
advance of payment of the unpaid costs and expenses of
administration . . . incurred in the superseded proceeding. . .
."
Until 1926, claims for administrative expenses were subordinate
to tax claims. [
Footnote 2] In
that year, they were placed ahead of taxes. [
Footnote 3] The costs and administrative expenses
of a trustee were, however, still subordinate to claims of the
referee or creditors for preserving or recovering assets. [
Footnote 4] In 1952, the Act was
amended to give priority to administrative expenses of an ensuing
bankruptcy proceeding over unpaid administrative expenses of a
superseded proceeding. [
Footnote
5]
We have then a progressive legislative development that (1)
marks a decline in the grant of a tax preference to the United
States and (2) marks an ascending priority for costs and expenses
of administration.
Page 401 U. S. 517
We think the statutory policy of subordinating taxes to costs
and expenses of administration would not be served by creating or
enforcing trusts which eat up an estate, leaving little or nothing
for creditors and court officers whose goods and services created
the assets. In
Nicholas v. United States, 384 U.
S. 678,
384 U. S.
690-692, we rejected the claim of the United States
that, under § 7501(a) of the Internal Revenue Code, it was entitled
to interest accruing after the arrangement under Chapter XI and
during the bankruptcy. We so held because to allow interest would
run counter to the "strong policy of § 64(a) (1) of the Bankruptcy
Act."
Id. at
384 U. S. 691.
To allow the present claimed priority for the principal would, by
the same token, run counter to the grain of the Bankruptcy Act.
This construction conforms with a literal reading of the second
sentence of § 7501(a), which makes the amount of such fund
payable
"in the same manner and subject to the same provisions and
limitations . . . as are applicable with respect to the taxes from
which such fund arose."
In conformity with
Nicholas, we read those words
against the history of the Bankruptcy Act. So read, the fund is as
subordinate as the taxes.
See In re Green, 264 F. Supp.
849, 851.
What we decide today is also in accord with those decisions
which hold that the specific priorities granted by Congress in the
Bankruptcy Act govern generalized statutes giving the United States
priority in a wide range of situations. [
Footnote 6]
Guarantee Co. v. Title Guaranty
Co., 224 U. S. 152;
Davis v. Pringle, 268 U. S. 315.
Affirmed.
Page 401 U. S. 518
[
Footnote 1]
"Where the funds are received by a public officer, such as a
receiver or trustee in bankruptcy, the owner of the funds is
entitled to priority with respect to the funds so received without
further tracing."
5 A. Scott on Trusts § 521, p. 3652 (3d ed.1967).
[
Footnote 2]
3A Collier on Bankruptcy 2046-2048, 2155-2156 (14th
ed.1969).
[
Footnote 3]
44 Stat. 662.
[
Footnote 4]
Collier,
supra, n. 2, at 2049, 2050 n. 15.
[
Footnote 5]
66 Stat. 426.
"Unless provision is made for payment of the costs and expenses
necessary to liquidate, administer and close the estate in the
ensuing bankruptcy proceeding, ahead of all prior incurred and
unpaid administration costs and expenses, there is always danger of
a breakdown of administration. There should be assurance to the
trustee in the ensuing proceeding that the costs and expenses
incurred by him, such as bond and insurance premiums, costs of
conducting a public sale and compensation for his services and for
the services of his attorney, will be paid out of the assets
liquidated and administered by him ahead of the prior unpaid costs
and expenses."
S.Rep. No. 1395, 82d Cong., 2d Sess., 5.
In 1966, Congress amended § 17 of the Act so as to make
dischargeable all taxes due and owing more than three years prior
to bankruptcy except,
inter alia, those withheld or
collected from others but not paid over. Act of July 5, 1966, 80
Stat. 270.
[
Footnote 6]
The competing Act in those cases was Rev.Stat. § 3466, which
read:
"Whenever any person indebted to the United States is insolvent,
or whenever the estate of any deceased debtor, in the hands of the
executors or administrators, is insufficient to pay all the debts
due from the deceased, the debts due to the United States shall be
first satisfied; and the priority hereby established shall extend
as well to cases in which a debtor, not having sufficient property
to pay all his debts, makes a voluntary assignment thereof, or in
which the estate and effects of an absconding, concealed, or absent
debtor are attached by process of law, as to cases in which an act
of bankruptcy is committed."
MR. JUSTICE BLACKMUN, whom THE CHIEF JUSTICE, MR. JUSTICE BLACK,
and MR. JUSTICE STEWART join, dissenting
I cannot escape the conviction that the Court's ruling on this
very narrow issue dishonors property of the United States and
effects a windfall for those who benefit from the ruling.
The amount in issue consists of income and FICA taxes actually
withheld from wages of employees. These are not taxes of the
debtor. Were it not for the withholding scheme, the amounts would
have been paid out to the employees as gross wages, and it would
have been their obligation, as it was prior to the adoption of
withholding, to pay those taxes. Instead, the employer now
withholds, and § 7501(a) of the Internal Revenue Code of 1954, 26
U.S.C. § 7501(a), appropriately impresses a trust upon the amounts
withheld. The Court today defeats the trust only because the
arrangement debtor in possession, a corporation which the Court has
characterized as "an officer of the bankruptcy court,"
Nicholas
v. United States, 384 U. S. 678,
384 U. S. 690
(1966), flagrantly disobeyed the arrangement court's specific order
to pay the withholding amounts into a separate bank account. The
respondent trustee concedes that, if the order had been obeyed, the
trustee would have no case. Tr. of Oral Arg. 34.
The decision in
Nicholas does not demand the result
reached by the Court. That case concerned interest accruing during
bankruptcy, not the tax on which the interest
Page 401 U. S. 519
was asserted. The present decision is a long step down the road
beyond
Nicholas.
Neither am I persuaded by the suggestion made by the trustee,
and seemingly reflected in the Court's opinion, that a contrary
decision would leave little or nothing for administrative costs of
the bankruptcy proceeding, and therefore would deter orderly
administration of bankrupt estates. I suspect that the fact of
bankruptcy administration of a vast number of small- or no-asset
cases is a sufficient refutation of that suggestion.
I find myself in accord with the views expressed by the Second,
Sixth, and Ninth Circuits.
City of New York v. Rassner,
127 F.2d 703 (CA2 1942);
In re Airline-Arista Printing
Corp., 267 F.2d 333 (CA2 1959),
aff'g 156 F.
Supp. 403 (SDNY 1957);
Hercules Service Parts Corp. v.
United States, 202 F.2d 938 (CA6 1953);
United States v.
Sampsell, 193 F.2d 154 (CA9 1951). I would reverse.