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.
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.
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
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
$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
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 $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
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 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;
see n 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
Page 436 U. S. 275
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.
III
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
Page 436 U. S. 276
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
Page 436 U. S. 277
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.
Page 436 U. S. 278
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
Page 436 U. S. 279
concern about ensuring post-bankruptcy liability for these
taxes.
IV
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
Page 436 U. S. 280
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,
Page 436 U. S. 281
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]
Page 436 U. S. 282
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.
[
Footnote 1]
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."
[
Footnote 2]
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).
[
Footnote 3]
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,
see
n 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."
76-1 USTC � 9435, p. 84, 156 (SD m.1976). The bankruptcy court
upheld this Illinois rule against respondents' constitutional
attack.
Id. at 84, 157-84, 158.
[
Footnote 4]
Respondents' theory apparently was that the § 6672 penalty is
compensatory in nature. The Government does not here dispute that a
compensatory penalty is generally dischargeable.
See Brief
for United States 26-27, and � 16.
See generally
Bankruptcy Act § 57j, 11 U.S.C. § 93(j); 8 H. Remington, A Treatise
on the Bankruptcy Law of the United States § 3304 (6th ed. J.
Henderson 1955).
[
Footnote 5]
Respondents raised their homestead exemption argument,
see n 3,
supra, in the Court of Appeals, but that court believed
that it did not have to reach the issue in view of its holding that
the entire § 6672 liability was dischargeable, 551 F.2d at 1093 n.
3. The Government contends here that the issue should have been
reached regardless of the dischargeability holding, because
Bankruptcy Act § 17a(1) makes a discharge irrelevant to the
Government's right to proceed "against the exemption of the
bankrupt allowed by law and duly set apart to him," 11 U.S.C. §
35(a)(1) (1976 ed.). Brief for United States 33-34, n. 23. In view
of our holding that the § 6672 liability is not dischargeable, we
need not address this contention. On remand, of course, the Court
of Appeals may consider respondents' argument that some or all of
the homestead exemption belongs to Naomi Sotelo.
[
Footnote 6]
In addition to several District Court cases, the Court of
Appeals cited the conflicting holding of the Fifth Circuit in
Murphy v. U.S. Internal Revenue Service, 533 F.2d 941
(1976). The
Murphy decision was followed by the Fourth
Circuit in
Lackey v. United States, 538 F.2d 592
(1976).
[
Footnote 7]
The Government contends, and respondent does not disagree, that
the three-year limitation in Bankruptcy Act § 17a(1) would not bar
any part of the Government's claim in this case. Brief for United
States 226, n. 15.
[
Footnote 8]
The specific language of Bankruptcy Act § 17a(1)(e) is contained
within a proviso that modifies the more general approach of §
17a(1). Both the general language and the proviso are aimed at
making "taxes" nondischargeable, and there is no reason to believe
that any "taxes" made nondischargeable by the specific terms of §
17a(1)(e) would not also be "taxes" as that word is used more
generally in § 17a(1).
[
Footnote 9]
As in the Court of Appeals,
see supra at
436 U. S. 272,
respondent does not here question his liability under Internal
Revenue Code § 6672. Brief for Respondents 4.
[
Footnote 10]
See also Marsh, Triumph or Tragedy? The Bankruptcy Act
Amendments of 1966, 42 Wash.L.Rev. 681, 694 (1967):
"It is a common phenomenon of business failure that even an
'honest' businessman, in attempting to salvage a business which
appears headed for insolvency, will frequently 'borrow' money of
other people without their consent if he can get his hands on it.
The one fund which he is almost always able to lay his hands on is
the taxes he has withheld and is currently withholding from his
employees for the Government."
A recent statement to the same effect can be found in an opinion
of the Comptroller General of the United States:
"IRS considers delinquencies in the payment of these employment
taxes a serious problem. In 1976, [congressional] testimony . . .
IRS officials expressed concern that employers use withheld taxes
as low interest loans from the Federal Government."
Opinion B-137762 (May 3, 1977), reprinted in 9 CCH 1977
Stand.Fed.Tax Rep. � 6614, p. 71,438.
[
Footnote 11]
See also e.g., 112 Cong.Rec. 13817 (1966) (remarks of
Sen. Ervin);
id. at 13821 (letter to Senators from Sens.
Ervin and Hruska);
id. at 13822 (remarks of Sen. Hruska);
letter from Under Secretary of Commerce Edward Gudeman, reprinted
in S.Rep. No. 114, p. 12; memorandum from W. Randolph Montgomery,
Chairman of the National Bankruptcy Conference, reprinted
id. at 16; S.Rep. No. 1134, 88th Cong., 2d Sess., 2
(1964); H.R.Rep. No. 735, 86th Cong., 1st Sess., 2 (1959).
[
Footnote 12]
Rather than predicating liability on ability to pay, § 6672 is
based on the premise that liability should follow responsibility.
See n 13,
infra. In a recent survey of IRS practices with regard to
§ 6672, the Comptroller General of the United States wrote:
"IRS uses the 100-percent penalty only when all other means of
securing the delinquent taxes have been exhausted. It is generally
used against responsible officials of corporations that have gone
out of business. . . . [I]t is IRS policy that the amount of the
tax will be collected only once. After the tax liability is
satisfied, no collection action is taken on the remaining
100-percent penalties."
Opinion B-137762,
supra, n 10, at 71,438.
[
Footnote 13]
Our dissenting Brethren appear uncomfortable with this
legislative policy choice, expressing concern about "life-long
liability" being imposed on "a comptroller, accountant, or
bookkeeper who reaped none of the fruits of entrepreneurial
success."
Post at
436 U. S. 290,
436 U. S. 291.
While we should not in any event be led by our sympathy to a result
contrary to that intended by Congress, there is here little reason
for concern. No corporate officer, regardless of title, can be held
liable under Internal Revenue Code § 672 unless his position was
sufficiently important that he was "required to collect, truthfully
account for, and pay over" withholding taxes and unless he
"willfully fail[ed]" to meet one or more of these obligations. In
this case, for example, Onofre Sotelo, the chief executive officer
exercising actual authority over the corporation's day-to-day
affairs, was found liable under the section, while Naomi Sotelo was
not, despite the fact that she held the position of corporate
secretary.
See supra at
436 U. S.
270-271, and n. 2.
The dissenting opinion as much as concedes, moreover, that there
is no responsible corporate officer who can be said to reap
"
none of the fruits of entrepreneurial success," since all
employees are dependent on the corporation for their "continued
employment."
Post at
436 U. S. 291
(emphasis added);
see post at
436 U. S.
291-292, n. 3. The "continued employment" of a corporate
officer is obviously a benefit of considerable significance to that
officer, and is generally dependent upon the success of the
corporate enterprise. Hence, an officer has a stake in "the fruits
of entrepreneurial success," and, like a shareholder, may be
tempted illegally to divert to the corporation those funds withheld
from corporate employees for tax purposes.
[
Footnote 14]
Such individuals would be liable after bankruptcy for "taxes"
which they, as employers, "collected or withheld from others . . .
but [did] not pa[y] over." Bankruptcy Act § 17a(1)(e), 11 U.S.C. §
35(a)(1)(e) (1976 ed.).
[
Footnote 15]
Indeed, respondent's business was operated as a sole
proprietorship prior to September, 1970.
See supra at
436 U. S.
270-271; Memorandum Opinion of Bankruptcy Court,
supra, n 2, at 1.
[
Footnote 16]
The dissenting opinion recognizes,
post at
436 U. S. 285
n. 1, Congress' unquestioned concern about eliminating
corporations' "unfair" advantage over individual entrepreneurs.
H.R.Rep. No. 372, p. 2; S.Rep. No. 114, pp. 2-3. Elsewhere our
Brother REHNQUIST appears to concede that Congress meant "to
ameliorate the lot" of only "some bankrupts" when it passed the
1966 amendment to the Bankruptcy Act.
Post at
436 U. S. 282;
see post at
436 U. S. 285.
There is every indication that the 1966 amendment was not intended
"to ameliorate the lot" of corporations and their principal
officers, at least with regard to taxes collected from employees.
And the dissenting opinion has not even attempted to explain how a
Congress concerned about "discriminat[ion] against the private
individual or the unincorporated small businessman," H.R.Rep. No.
372, p. 2; 3. Rep. No. 114, pp. 2-3, could have thought it just to
relieve corporate officers of § 6672 liability in bankruptcy, as
the dissent's approach would do, while leaving other owners of
"small family business[es],"
post at
436 U. S. 291
-- those who happen to operate through noncorporate entities
subject to the same kind of liability.
MR. JUSTICE REHNQUIST, with whom MR. JUSTICE BRENNAN, MR.
JUSTICE STEWART, and MR JUSTICE STEVENS join, dissenting.
The Government undoubtedly needs the revenues it receives from
taxes, but great as that need may be, I cannot join the Court's
thrice-twisted analysis of this particular statute to gratify it.
The issue involved is the dischargeability in the corporate
officer's bankruptcy proceedings of taxes which the corporation is
obligated to collect and pay over to the Government. In order to
conclude that the corporate officer remains liable for this
corporate obligation the Court turns to an unlikely source indeed:
a 1966 amendment to the Bankruptcy Act, the only apparent purpose
of which was to ameliorate the lot of at least some bankrupts,
see infra at
436 U. S.
284-285, and n. 1. The Court then proceeds to slog its
way to its illogical conclusion by reading a proviso obviously
intended to limit dischargeability of the debts of a bankrupt so as
to expand that category of debts. It then attempts to bolster this
inexplicable interpretation by construing not the
Page 436 U. S. 283
legislation which Congress enacted, but a letter from the
Assistant Secretary of the Treasury not unnaturally opposing any
expansion of the dischargeability in bankruptcy of tax-related
liabilities. The net result of this perverse approach to an
amendment to the Bankruptcy Act is to make nondischargeable a
liability which might well have been dischargeable before Congress
stepped in to alleviate some of the hardships resulting from the
making of the debts of a bankrupt nondischargeable. In the
background of this remarkable decision is § 6672 of the Internal
Revenue Code, which imposes a "penalty" upon a "person required to
collect, truthfully account for, and pay over any tax imposed by
this title." 26 U.S.C. § 6672. Perhaps recognizing that this
provision not only does not support its conclusion but seriously
undermines it, the Court not surprisingly attempts to keep this
provision in the background, addressing it only obliquely in a
footnote, where it summarily concludes, again in a remarkable
tour de force of linguistics and logic, that a penalty
must mean the same thing as a tax. The underlying debt in this case
is that of a third person to pay the tax liability of another. I
would want far clearer language than can be found in this statute
to reach the conclusion that this liability is not dischargeable in
the bankruptcy proceedings of that third person. I therefore
dissent.
As an initial matter, since § 17a(1)(e) of the Bankruptcy Act is
a proviso to § 17a(1), I would have thought that respondent would
have to fall within the terms of the latter before it is even
appropriate to consider whether he falls within the terms of the
former. That is, § 17a first provides that a "discharge in
bankruptcy shall release a bankrupt from all of his provable debts.
. . . " 11 U.S.C. § 35(a) (1976 ed.). It then excepts in § 17a(1)
through § 17a(8) eight different categories of debts which are
not to be generally discharged, including
"taxes which became legally due and owing by the bankrupt to the
United States or to any State
Page 436 U. S. 284
or any subdivision thereof within three years preceding
bankruptcy."
11 U.S.C. § 35(a)(1) (1976 ed.). But this latter exception is
itself, in turn, qualified in § 17a(1)(e):
"
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)(1)(e) (1976 ed.). Thus, the normal reading of
§ 17a(1) should be to limit the nondischargeability of taxes to
only those taxes legally due and owing by the bankrupt
within
the three years preceding bankruptcy, and the subsections of §
17a(1), including § 17a(1)(e), are to be read as an exception to
that limitation. That exception provides that certain of the taxes
described in § 17a(1) will not be discharged even if more than
three years old; they will be nondischargeable without regard to
time. Normal statutory construction would thus suggest that the
first inquiry should be whether the liability in question is a tax
legally due and owing by the bankrupt. Only if it is, would it
become necessary to consider whether it is also a tax collected
from others but not paid over.
That this is the correct reading of the statute is further
buttressed by the legislative history. All the Committees which
reported on the 1966 amendment to § 17a stressed that its central
purpose was to enable at least some bankrupts to more nearly
achieve the fresh start promised by the Bankruptcy Act. The Senate
Committee on Finance, for example, in discussing the purpose of the
proposed amendment, agreed with the Committee on the Judiciary
"that present law, by denying any discharge of taxes, presents a
substantial deterrent to one fundamental policy of the Bankruptcy
Act -- effective rehabilitation of the bankrupt."
S.Rep. No. 999, 89th Cong., 2d Sess., 9 (1966). The Senate
Committee went on to suggest slightly different methods from those
advanced by the Judiciary Committee to achieve this goal, but its
Report, like the
Page 436 U. S. 285
others, leaves no doubt that the central purpose of the
amendment was to make the Act more favorable to at least some
bankrupts by limiting, with only a few specified exceptions, the
nondischargeability of taxes to only those due for the prior three
years.
This avowed legislative purpose only heightens the incongruity
of the Court's interpretation. The statute's major purpose was to
limit the nondischargeability of certain debts. And yet the Court
holds today that the enactment of § 17a(1)(e) of that statute
results in a nondischargeable debt without regard to whether that
debt would have been totally nondischargeable before the passage of
§ 17a(1)(e) -- that is, without the slightest attention to the
question of whether it is a tax legally due and owing by the
bankrupt within the meaning of § 17a(1). Thus, by passing a statute
with a basically beneficent purpose, Congress has, according to the
Court, not only made nondischargeable a liability which could
potentially run into the hundreds of thousands of dollars, but may
have worsened, rather than bettered, the lot of the bankrupt.
[
Footnote 2/1]
Finally, even if the language and the history of this statute
were less clear, I would hesitate to depart from our
longstanding
Page 436 U. S. 286
tradition of reading the Bankruptcy Act with an eye to its
fundamental purpose -- the rehabilitation of bankrupts. This has
always led the Court, at least until today, to construe narrowly
any exceptions to the general discharge provisions.
See, e.g.,
Gleason v. Thaw, 236 U. S. 558,
236 U. S. 562
(1915). Admittedly § 17a is not "a compassionate section for
debtors,"
Bruning v. United States, 376 U.
S. 358,
376 U. S. 361
(1964), but even it must be read consistently with the doctrine of
Gleason, supra. And I simply cannot see anything in this
case which justifies the Court in departing from this tradition by
straining to read into the statute an exception to the
dischargeability provisions that was not clearly there before this
amendment was passed, when the very purpose of the amendment which
the Court is now construing was intended to be benevolent, at least
from the bankrupt's perspective.
Thus, the initial question which should have been addressed by
the Court today is whether the amounts for which respondent is
liable are "taxes legally due and owing by the bankrupt." If they
are not, then the further question of whether they are
nondischargeable in their entirety under § 17a(1)(e) does not even
arise. And I see nothing which persuades me that respondent's
liability is a "tax" legally due and owing by him. Neither the
Government nor the Court points to any section of the Internal
Revenue Code which makes a corporate employee liable for the taxes
which the corporate employer is required to withhold from the
employees' paychecks. Sections 3102, 3402, or 3403 of the Internal
Revenue Code certainly cannot be read to do this, because, by their
unmistakable terms, they impose a duty and liability only upon an
"employer," which a corporate employee, regardless of his rank
within the corporate heirarchy, clearly is not.
Neither can § 6672 of the Internal Revenue Code serve the
purpose. The liability imposed therein is specifically denominated
a "penalty," and, absent any indication to the contrary, Congress
is presumed to know the meaning of the words it uses,
Page 436 U. S. 287
especially in highly complex and intricate statutory schemes.
Indeed, in another letter sent by Assistant Secretary of Treasury
Surrey to the Chairman of the House Committee on the Judiciary when
that Committee was considering what eventually became § 17a(1), the
following was specifically brought to the Committee's
attention:
"It is further believed by the Department that this bill is
intended to discharge not only taxes, but also penalties and
interest. However, the bill makes reference only to taxes. In this
connection, it is pertinent to point out that the U.S. Court of
Appeals for the 10th Circuit, in the case of
United States v.
Mighell (C.A. 10th, 1959) 273 F.2d 682, held that the word
'taxes' in section 17 of the Bankruptcy Act (11 U.S.C. 35) does not
include penalties and, by inference, interest. This apparent
ambiguity could cause future litigation."
H.R.Rep. No. 687, 89th Cong., 1st Sess., 7 (1965). And yet
Congress did not modify § 17a(1) to include penalties. (I normally
would not accord such passing references any weight, but the
contrary practice seems today
de rigueur. Ante at
436 U. S.
276-277.)
The history of § 6672 further bears out the notion that this
always has been considered by Congress to be a "penalty," and not a
"tax." For example, § 1004 of the War Revenue Act of 1917, an early
predecessor of § 6672, provided that anyone who failed to make a
return required by the Act or otherwise evaded any tax imposed by
the Act or failed to collect and pay over any such tax was subject
to "a penalty of double the tax evaded" in addition to other
penalties, such as a $1,000 fine and imprisonment. 40 Stat. 325.
Indeed, even today the subchapter heading under which § 6672 is
found is titled "Assessable Penalties."
Finally, the very existence of § 6672 bears testimony to the
fact that there is no other section of federal law which makes the
employee charged with the duty of collecting withholding
Page 436 U. S. 288
taxes liable for those "taxes." If there were such a section, §
6672 would be unnecessary. But it is the absence of such other
provision which is dispositive of this case, in my opinion.
[
Footnote 2/2] Instead of adopting
the course which seems compelled by the structure and history of §
17a(1), however, the Court has chosen today a very different
course. It does give a passing nod to the question of whether one
might have to satisfy § 17a(1) before reaching § 17a(1)(e), but
then dismisses it in rather desultory fashion in a footnote, noting
only that
"there is no reason to believe that any 'taxes' made
nondischargeable by the specific terms of § 17a(1)(e) would not
also be 'taxes' as that word is used more generally in §
17a(1)."
Ante at
436 U. S. 274
n. 8. The Court then goes on to interpret § 17a(1) in light of its
limiting provision, § 17a(1)(e), instead of the other way around, a
tour de force which compels admiration, if not agreement.
The critical, and indeed only, question for the Court then becomes
whether respondent was "required" to collect and pay over the
taxes. Finding that respondent was so required within the meaning
of § 6672 of
Page 436 U. S. 289
the IRC, the Court concludes he falls within the language of §
17a(1)(e) and that is the end of the matter.
The justifications for engaging in this unorthodox method of
statutory construction are supposedly threefold, but are, in my
opinion, far from satisfactory. First, the Court asserts that
respondent's liability is clearly encompassed within the plain
terms of § 17a(1)(e). But, as indicated above, such liability is
encompassed within the terms of § 17a(1)(e) only if we ignore both
the structure and purpose of the statute and proceed directly to §
17a(1)(e) without considering whether § 17a(1) is first
satisfied.
The Court next relies on certain concerns expressed by the
Treasury Department in a letter from the Assistant Secretary to the
Chairman of the House Judiciary Committee. No doubt § 17a(1)(e) was
included partially in response to that letter. But there is
certainly nothing contained in that or any other provision to
indicate that, in adding § 17a(1)(e), Congress also intended to
extend the concept of "taxes" in § 17a(1) to include the 100%
penalty imposed by § 6672 or to encompass a corporate official's
responsibility (presumably under the corporate charter and state
law) to collect and pay over federal withholding taxes. The Court
emphasizes the phrase "and other persons" in the letter, and then
observes that "[t]here is no reason to believe that Congress did
not intend to meet Treasury's concerns in their entirety."
Ante at
436 U. S. 277.
But emphasizing that phrase to the exclusion of the rest of the
letter and the language and structure of the statute places a
weight upon that phrase which it cannot bear. Indeed, one could
reach a much different conclusion by simply emphasizing other parts
of the letter, such as 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. . . ."
(Emphasis supplied.) H.R.Rep. No. 372, 88th Cong., 1st Sess., 6
(1963).
Page 436 U. S. 290
And even the Court recognizes that "the Department may not have
focused on the specific question presented here. . . ."
Ante at
436 U. S. 277.
But, most importantly, when interpreting the Bankruptcy Act in
general, with its fundamental goal of rehabilitating bankrupts, and
when interpreting this provision in particular, with its avowed
purpose of furthering that basic goal of the Act, the Court is not
entitled to make the presumption that it does. Rather, in the
absence of a clear congressional expression to the contrary, there
is every reason to believe that Congress did not intend to make
nondischargeable in the employee's bankruptcy proceedings a tax
which is legally due and owing not by the bankrupt employee, but by
the employer.
Finally, the Court emphasizes the fact that corporations often
dissolve upon bankruptcy, thus making all corporate debts
dischargeable in fact, if not in form.
Ante at
436 U. S. 278.
Thus, reasons the Court, it is "most unlikely that the legislature
intended § 17a(1)(e) to apply only to the corporation's liability
for unpaid withholding taxes."
Ibid. But clearly Congress,
had it really intended to alleviate the problem to which the Court
refers, could and hopefully would have used language more suited to
the purpose. It is also incongruous to impute the intent to
Congress to make this particular liability nondischargeable as to
the employee because the corporation will dissolve upon bankruptcy,
and yet to make no other corporate liability nondischargeable as to
the employee, even though dissolution of the corporation is just as
likely in those cases. Such a statutory scheme not only seems at
odds with the basic notion of what a corporation is all about,
i.e., limited liability, but it also imposes a potentially
crushing liability on corporate officials -- a liability that is
nondischargeable in its entirety, and virtually in perpetuity. I
certainly would not impute such an intent to Congress without a
much clearer statutory directive.
While the lifelong liability which the Court imposes today
Page 436 U. S. 291
falls on the shoulders of one who was the chief executive
officer of a small family business, there is unfortunately nothing
in the Court's reasoning which would prevent the same liability
from surviving bankruptcy in the case of a comptroller, accountant,
or bookkeeper who reaped none of the fruits of entrepreneurial
success other than continued employment in the corporation, and in
some cases possibly not even that,
see n 3,
infra. So long as the Government, in
its zeal for the collection of the revenue, may persuade a
bankruptcy court that a corporate employee comes within the Court's
Delphic construction of 26 U.S.C. § 6672 and 11 U.S.C. §
35(a)(1)(e) (1976 ed.), such a person will be denied the "fresh
start" which Congress clearly intended to enhance by the 1966
amendments to the Bankruptcy Act. [
Footnote 2/3] Before the Government
Page 436 U. S. 292
may randomly sweep such persons into a net whereby they are
denied a discharge not of their own tax liability, but of a penalty
imposed upon them for failure to pay over taxes which had been
withheld by another, I would at least insist on a statute which
seemed to point in that direction, rather than in the opposite
one.
[
Footnote 2/1]
The Court may well be correct in its observation that when
Congress enacted these amendments it was
"concerned about 'discriminat[ion] against the private
individual or the unincorporated small businessman,' H.R. Rep No.
372, p. 2; S.Rep. No. 114, pp. 2-3,
ante at
436 U. S.
282 n. 16. And this observation, in turn, may support
the conclusion that Congress, with an eye to reducing this supposed
discrimination, intended to ameliorate the lot of only those
individuals who operate through noncorporate entities. But I find
absolutely nothing in the legislative history to indicate that
Congress also intended to reduce this supposed discrimination
between those who operate through corporations and those who do not
by
affirmatively worsening the lot of the former. Thus, I
still search the Court's opinion in vain for any justification for
reading an amendment which was intended to limit the
dischargeability of the debts of bankrupts, albeit only a limited
class of bankrupts, so as to expand that category of debts with
respect to another class of bankrupts."
[
Footnote 2/2]
There are lower court cases to the contrary.
See cases
cited
ante at
436 U. S. 273
n. 6. This line of authority can be traced to
Botta v.
Scanlon, 314 F.2d 392 (CA2 1963), however, where the plaintiff
sought an injunction against the Internal Revenue Service to
restrain the collection of the penalty imposed under § 6672. The
court denied the injunction on the authority of the Anti-Injunction
Act, which provides in pertinent part: "[N]o suit for the purpose
of retraining the . . . collection of any tax shall be maintained
in any court . . ." 26 U.S.C. § 7421(a). The court held that this
section applied to § 6672 penalties as well as taxes, because §
6671(a) of the Code provides: "[A]ny reference in this title to
tax' imposed by this title shall be deemed also to refer to the
penalties . . . provided by this subchapter." 26 U.S.C. § 6671(a).
But while there is clear statutory authority for treating a § 6672
penalty as a tax for purposes of administering the Internal Revenue
Code, there is no authority for treating such a penalty as a tax
for purposes of the Bankruptcy Act. Indeed, the fact that Congress
clearly recognized the need to specify that a penalty was a tax for
purposes of the Internal Revenue Code strongly suggests that its
failure to so specify with respect to the Bankruptcy Act was not an
inadvertent omission.
[
Footnote 2/3]
The Court's lack of concern for the potentially crushing
liability it imposes on bankrupts is nowhere more evident than at
436 U. S. 280
n. 13,
ante, where the Court notes that
"[n]o corporate officer, regardless of title, can be held liable
under Internal Revenue Code § 6672 unless his position was
sufficiently important that he was 'required to collect, truthfully
account for, and pay over' withholding taxes and unless he
'willfully fail[ed]' to meet one or more of these obligations."
While I certainly do not dispute that observation, it does
absolutely nothing to allay my fear that this liability can be
imposed on a variety of salaried corporate employees who enjoy none
of the fruits of entrepreneurial success other than their continued
employment. The Federal Reporter is replete with cases in which
just such individuals have been held liable under § 6672.
See,
e.g., Adams v. United States, 504 F.2d 73 (CA7 1974) (the
court held that an employee of a lending institution, who had been
placed in charge of a corporation to which the institution had
loaned money, could be liable under § 6672 for failure to pay over
withholding taxes collected from the corporation's employees,
regardless of the fact that he held no stock or other interest in
the corporation);
Mueller v. Nixon, 470 F.2d 1348 (CA6
1972) (same);
Turner v. United States, 423 F.2d 448 (CA9
1970) (employee of a bank, who had been made an officer of a
company as a condition of a loan made to the company, could be
liable under § 6672 for failure to pay over withholding taxes
collected from the company's employees). Indeed, it appears to be
agreed by the Courts of Appeals that a person need not be a
shareholder to be held accountable as a responsible person under §
6672.
See, e.g., Anderson v. United States, 561 F.2d 162,
165 (CA8 1977);
Hartman v. United States, 538 F.2d 1336,
1340 (CA8 1976);
Haffa v. United States, 516 F.2d 931,
935-936 (CA7 1975).