(292 F.)

C. P. Goree, Asst. U. S. Atty., Roy L. Mitchell, and Underwood, Pomeroy & Haas, all of Atlanta, Ga., for State of Georgia.

SIBLEY, District Judge. The Wyley Company was adjudicated a bankrupt in August, 1922, and the estate reduced to cash and partially disbursed. In December, 1922, the United States claimed $3,975.51 as additional income taxes just assessed for the years 1918 and 1919, About $2,200 of this is admitted to be correctly assessed; the remainder is contested. State taxes amounting to $400 are likewise due. The estate in hand is only about $2,300, with most of the fees and expenses of administration unpaid. Direction is sought by the trustee touching the situation. The questions to be decided are: (1) The correct amount due the United States; (2) the priority of this amount over the state taxes; (3) its priority over expenses of administration.

[1] 1. The court has power to inquire into and fix the amount due as income taxes to the United States. Bankruptcy Act 64a (Comp. St. § 9648). The difference in dispute arises by reason of the company's tax returns having shown as salaries to its officers amounts largely greater than those shown by the individual returns of the officers to have been received by them. These officers were introduced as witnesses by the United States, and testified that the amounts really paid and received by them were the amounts they individually returned; whereas, the amounts deducted in the company's returns are those credited to them on the company's books as salaries accrued. The testimony is that the salaries were fixed by the directors at the amounts credited on the company's books. One witness says the salaries were based on a supposed profit, which, as it later developed, had not really been earned, and the salaries were not drawn because of this development. Another witness says the salaries were fixed absolutely, but not paid for want of ready cash. If the first witness is to be believed, the tax returns should be corrected to eliminate the supposed profit, which did not exist. If the other witness is correct, the returns being evidently made on the basis of accruals, rather than actual receipts and disbursements, the deduction of the amounts absolutely due these officers was correct, though they were never paid, and, of course, now never can be. In either event, the additional taxes assessed on account of these items is held to be erroneous and the true amount due the United States is to be fixed accordingly.

[2, 3] 2. Taxes due the United States and bankruptcies are alike wholly subject to the power of Congress. Congress may make such provisions for the payment of the one through the other as it sees fit. A tax has such lien and priority, and only such, as is given it by statute. 37 Cyc. 1138, 1143. The common-law preference of the sovereign is said not to exist in favor of the United States, save as continued by statutes. United States v. Bank of North Carolina, 6 Pet. 29, 8 L. Ed. 308. A lien is provided for federal taxes by R. S. § 3186 (Comp. St. § 5908), but no special priority is stated. Debts due the United States are given a first priority, apparently extending to cases of bankruptcy, by R. S. § 3466 (Comp. St. § 6372); but taxes are hardly to be considered debts (New Jersey v. Anderson, 203 U. S. 483,

492, 27 Sup. Ct. 137, 51 L. Ed. 284). Bankruptcy Act, § 64a, deals specifically with the payment of taxes from bankrupt estates, providing:

"The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality in advance of the payment of dividends to creditors."

This lays the duty on the court to pay, perhaps without formal proof, all such known taxes, to the extent at least that funds are available, to the end that no arm of the government may be delayed or embarrassed in its revenue. The placing of this provision first in the section suggests that the payment is to be made before any of the payments afterwards provided for in section 64b, but the limiting words, "before payment of dividends to creditors," suggests a postponement only of such persons as are "creditors" and who are to have "dividends.' The Supreme Court, in Richmond v. Bird, 249 U. S. 174, 39 Sup. Ct. 186, 63 L. Ed. 543, has held that a municipal tax having no lien under the state law is not to be paid before a valid lien protected by section 67d of the Bankruptcy Act (Comp. St. § 9651). This decision, however, is not helpful here, because under Georgia law all taxes have a lien and are to be "paid before any other debt, lien, or claim whatever." Code Ga., § 1140. There is no competition here between any but tax liens. Considering the dual nature of our government, and that neither the Union nor the states may destroy or hinder the other in their several functions, and all having equal need of their revenues, it is concluded that the intent of Congress was that there should be a pro rata payment upon all the taxes named in section 64a, when the available fund is not sufficient to pay in full, the taxes due the United States having no priority over the others.

[4] 3. The question remains: What fund is available? Is it all the money in the trustee's hands, or all that has ever been there, or only the net sum after paying the expenses of raising and preserving it? Varying answers have been given by the courts. Section 64a gives the payment of taxes express priority only over "dividends to creditors." The fees and expenses of officers of the court are hardly to be so described. On the other hand, there is no express priority over taxes given these in section 64b, as there was in the Bankruptcy Act of 1867 (14 Stat. 517). The fair conclusion is that Congress has not expressly and definitely dealt with the matter, but that it is to be controlled by general principles. On such principles the fund must pay its own expenses, when they cannot otherwise be met, no matter what the dignity of the lien upon it. This was ruled in the Fifth Circuit as to a fund exhausted by a lien in Gugel v. New Orleans Bank, 239 Fed. 676, 152 C. C. A. 510; the expenses to be paid, however, not being necessarily the whole expenses of bankruptcy, but only such as were reasonable and necessary to raise or preserve the fund. See In re Hansen & Birch, 292 Fed. 898, this day decided.

The same principle manifestly should be applied to a fund exhausted by tax priorities. In the case of state taxes varying costs are fixed by law for the collecting officers. Code Ga. §§ 1161, 1162. Sales are made through sheriffs and constables, whose fees and expenses are

(292 F.)

fixed by general statutes. When these costs and expenses cannot be made out of the delinquent taxpayer, it has always been the practice to deduct them from the fund raised by a sale, and credit only the net balance on the execution, although no statutory authority for doing so exists, and although Code, § 1140, requires that taxes "be paid before any other debt, lien, or claim whatsoever." In the case of federal taxes, R. S. § 3191 (Comp. St. § 5913), expressly permits the collector who sells property to first pay the expenses of the sale. R. S. § 3207 (Comp. St. § 5929), provides for equitable proceedings to subject real estate to taxes. It is unthinkable that the costs of so doing are not to be paid from the fund, if no other source of payment exists.

Under R. S. § 3466, giving priority to debts due the United States, so far as I am informed, costs of administration have been always first paid. See U. S. v. Eggleston, 25 Fed. Cas. 979, No. 15,027. The expenses of collection of taxes, had no bankruptcy court intervened, may properly be considered in fixing fees and commissions, though that is of less weight in cases where the tax claims have not been presented or known until the costs and expenses have been incurred. In all cases due care will be observed to conserve the public revenues, but the reasonable and necessary expenses of raising, preserving, and disbursing the fund ought to be paid from it, the remainder only being available for distribution. See State v. Lovell, 179 Fed. 321, 102 C. C. A. 505, 31 L. R. A. (N. S.) 988, certiorari refused 219 U. S. 587, 31 Sup. Ct. 471, 55 L. Ed. 347, and cited with approval in Richmond v. Bird, 249 U. S. 174, 39 Sup. Ct. 186, 63 L. Ed. 543.

4. What remedy, if any, the tax officers have respecting sums paid out by the trustee before knowing of the tax claims will not now be considered, as no evidence touching such payments has been presented. and the reference to them in the pleadings is merely general, and no relief is sought by the tax officers at this time.

The referee will fix the exact amount due the United States, and the expenses proper to be charged according to the rulings of this opinion, and prorate the remainder among the several tax claims according to their amounts.

GREAT NORTHERN RY. CO. v. LYNCH.

(District Court, D. Minnesota, Third Division. January 10, 1921.)

No. 797.

1. Internal revenue 11-Special excise tax could not be imposed on proportion of excess of price received over original cost, where price was equal to market value on last day of 1908.

Where a corporation purchased real estate, prior to 1909, and sold it at a profit during the years 1910 and 1911, for a price equal to the market value of the real estate as of the last day of 1908, a special excise tax could not be imposed under Act Cong. Aug. 5, 1909 (Comp. St. Ann. Supp. 1919, §§ 6300-6309), on the pro rata proportion of the excess of selling price over original cost for the period since the act became effective.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

2. Internal revenue 38-Corporation entitled to judgment for amount of illegal special excise tax paid under duress and protest, but not to execution against collector.

Where a corporation paid an illégal internal revenue special excise tax under protest and duress, and its claim for refund filed with the Commissioner of Internal Revenue was denied prior to the institution of its suit against the Collector of Internal Revenue, it was entitled to a judgment for the amount paid, with interest and costs, to be paid out of the proper appropriation from the treasury, but was not entitled to execution against the collector, who had paid the amount received by him into the treasury.

3. Internal revenue

-Amount of obligations written off books when outlawed

held subject to special excise tax.

Where unpaid obligations of a corporation, which accrued prior to 1909, were carried on the corporation's books as liabilities until they became outlawed a special excise tax was properly imposed on the amount there of under Act Cong. Aug. 5, 1909 (Comp. St. Ann. Supp. 1919, §§ 6300-6309). 4. Internal revenue 38-Special excise tax paid on excess of price received over price paid not recoverable, in absence of proof of market value on last day of 1908.

Special excise tax imposed, under Act Cong. Aug. 5, 1909 (Comp. St. Ann. Supp. 1919, §§ 6300-6309), on excess of price received for stock purchased prior to 1909 over original cost, on sale thereof subsequent to 1909, could not be recovered back, in absence of proof of market value on last day of 1908.

At Law. Action by the Great Northern Railway Company against E. J. Lynch, Collector of Internal Revenue. Judgment for plaintiff for a portion of the relief demanded.

E. C. Lindley, of St. Paul, Minn., and Sanford H. E. Freund, of New York City, for plaintiff.

Alfred Jaques, U. S. Dist. Atty., of Duluth, Minn., for defendant.

BOOTH, District Judge. The above action came on regularly for trial on the 11th day of March, 1918, each party appearing by its respective counsel. From the admissions and stipulations of the parties then and there made and filed, and from the pleadings of the parties, the court finds as follows:

Findings of Fact.

(1) That plaintiff is a corporation duly formed and existing under the laws of the state of Minnesota, and has a principal office at St. Paul, in Ramsey county, in said state.

(2) That E. J. Lynch is, and was on all of the dates hereinafter mentioned, collector of internal revenue for the district of Minnesota, being duly commissioned as such pursuant to the laws of the United States.

(3) That on or about the 16th day of September, 1913, the United States Commissioner of Internal Revenue, presuming to act by virtue of due legal authority conferred by the statutes of the United States Congress, assessed against the plaintiff, as a corporation having capital stock and alleged to be engaged in business in Minnesota, an additional internal revenue special excise tax of $2,530.93, alleged to be due from said corporation to the United States for the year ended December 31,

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

(292 F.)

1910, and additional internal revenue special excise tax of $4,176.09, alleged to be due from said corporation to the United States for the year ended December 31, 1911, under the Act of Congress of August 5, 1909. (Comp. St. Ann. Supp. 1919, §§ 6300-6309.) That the lists upon which said assessments appeared were thereafter duly transmitted to the defendant, and defendant thereupon made a formal demand for the payment of said tax so assessed.

(4) That under date of September 26, 1913, the plaintiff filed with the defendant and with the United States Commissioner of Internal Revenue a claim for the remission and abatement of said additional internal revenue special excise taxes.

(5) That on or about the 18th day of October, 1913, the plaintiff paid to the defendant the amount of said additional assessment, but at the same time filed with defendant and with the United States Commissioner of Internal Revenue writings stating that each of said payments were made under protest, and with a denial of any legal obligation of liability, and solely for the purpose of avoiding the imposition of a penalty and distraint and sale of property, and reserving to the plaintiff all rights for the recovery of the amounts of each of said payments.

(6) That thereafter and on or about the 18th day of October, 1913, the plaintiff filed with the defendant and with the United States Commissioner of Internal Revenue claims for the refunding of $1,734.73 of the additional tax assessed for the year 1910 as aforesaid, and of $1,361.46 of the additional tax paid for the year 1911 as aforesaid.

(7) That on or about the 11th day of November, 1913, the deputy United States Commissioner of Internal Revenue denied plaintiff's claim for refund of said 1910 taxes, except as to $101.98 thereof, and that on or about the 20th day of November, 1913, the said deputy United States Commissioner denied plaintiff's claim for refund of said 1911 taxes, except as to $57.68 thereof. That plaintiff has still outstanding the balance of said 1910 taxes, amounting to $1,632.75, and the balance of said 1911 taxes, amounting to the sum of $1,303.79, or an aggregate of $2,936.53.

(8) That of said additional tax of $2,936.53, assessed and withheld from plaintiff as aforesaid, the sum of $70.01 consisted of an assessment of 1 per cent. upon the sum of $7,001.32, entered upon the books of the plaintiff as profit during the year 1910, and consisting of unpaid obligations of plaintiff accruing prior to January 1, 1909, and which were carried as liabilities until they became outlawed, and were then written off of plaintiff's books as aforesaid, and the sum of $44.88 consisted of an assessment of 1 per cent. upon the sum of $4,488, entered upon the books of plaintiff as profit during the year 1911, and consisting of unpaid obligations of plaintiff accruing prior to January 1, 1909, and which were carried as liabilities until they became outlawed and were then written off of plaintiff's books in 1911.

(9) That of said additional tax of $2,936.53 assessed and withheld from plaintiff as aforesaid, the sum of $376.61 consisted of an assessment of 1 per cent. upon receipts of $37,660.67, received by plaintiff as proceeds of the sale of 300 shares of stock of the Swan River Logging Company, purchased on September 23, 1899, for $300,000 and