168 F.2d 268 | 2d Cir. | 1948
The first point on this appeal concerns the validity of a claim against an estate in bankruptcy for certain sales and business taxes levied by the City of New York against the bankrupt. The trustee concedes the validity of such taxes as were levied upon the bankrupt’s sales of machinery manufactured by it, but contests the tax levied on its purchases of materials. But, as stated in the opinion below, D.C.S.D.N.Y., 75 F.Supp. 458, this is directly contrary to the law and the rulings under it. It is quite settled that both seller and purchaser may be held liable for the city sales tax, though in fact it is primarily imposed upon the purchaser, who must pay it to the City Treasurer if he has failed to pay it to his vendor. § N41 — 2.0, subds. e, f, of the Administra
The other point, however, the liability of the estate for interest upon these tax claims after bankruptcy and until they are paid, is interesting, important, and difficult. Both the referee and the district court have allowed interest, at the high rate provided by the local code of one per cent per month, so that the accumulating interest is fast approaching the face of the claim.
For reasons both of administrative convenience and of fundamental justice and equity it has been steadily held, following the English practice, that interest does not accrue upon claims during the period of bankruptcy administration. Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 55 L.Ed. 244; Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 163, 165, 67 S.Ct. 237, 91 L.Ed. 162; 3 Collier, loc. cit. supra.
In 1926, however, § 64, sub. a, was amended, by adding the words “in the order of priority as set forth in paragraph (b)”; and of the seven priorities provided in b, taxes came sixth or next to the last.' Even that change might have been considered sufficient to reduce taxes to the status of debts in view of the obvious doubt as to the payment of interest upon a sixth claim in a series where the earlier five admittedly carried none. Moreover, § 64, sub. b, spoke of the debts “to have priority” in advance of the payment of dividends to creditors, “and to be paid in full out of bankrupt estates,” in the order then stated; it was at least odd to think that a wage claim up to $600 was “paid, in full” when paid without interest, whereas a tax claim of later priority was not so paid until interest of 12 per cent or more was included.
At any rate the process of assimilation of tax claims to other debts appears, to us at least, to have been completed by the Chandler amendments of 1938. Indeed we thus described the changes in United States v. Roth, supra, 164 F.2d at pages 577, 578: “By the 1938 amendments, however, taxes were classified as ‘debts’ within section 64, sub. a, 11 U.S.C.A. § 104, sub. a, and section 57, sub. n, 11 U.S.C.A. § 93, sub. n, was broadened to include ‘all claims of the United States’ and require them to ‘be proved and filed in the manner provided in this section.’
We see no reason to suppose that this did not place tax claims in the same situation as other debts with respect to interest also.
This conclusion seems to us fortified by arguments of practicality and convenience —if not of equity, as stressed by Judge Bright — which would naturally appeal to legislators or draftsmen, if a careful exploration of the subject is to be attributed to them. Of course, the allowance of accruing interest to these various state and governmental units “would necessitate constant rescheduling and recomputation of dividends available.” 61 Harv.L.Rev. 354, 355. And the net result will be to promote tax claims beyond what seems the clear intent of the statute.
Two further arguments of claimants must be noted. One is as to § 57, sub. j, an old provision of the law stating that debts owing 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 “and such interest as may have accrued thereon according to law.” Whether this has any meaning beyond the penalty or forfeiture cases we do not need to consider, for it seems clearly to be operable only after the question as to what, if any, interest is legal has been decided.
Accordingly the order on appeal will be affirmed to the extent that it refuses to expunge the tax claims, but will be reversed so far as it allows interest after the filing of the petition on January 5, 1944.
Order affirmed in part and reversed in part
The tax period involved was Nov. 1, 1940, to May 31, 1942; the petition in bankruptcy was filed Jan. 5, 1944, and the City’s claim originally on May 19, 1944; the referee’s order of allowance was made on July 18, 1947. In that order ho allowed a sales tax of $495.61, with interest to date of $341.97, and a business tax of $19.72, with interest of $13.13, and made express provision for additional interest at the rate of 1% per month until payment*.
Carter v. United States et al., 2 Cir., 168 F.2d 274.
If, however, a sufficiency of assets develops, the claims will bear interest; and though the usual rule applies also to secured claims, yet where the security itself yields interest or dividends, those are applicable to interest on the claims. 3 Collier, loc. cit. supra.
For the meaning of “paid in full” as limited to the principal, see Hammer v. Tuffy, supra, 145 F.2d at page 449.
In addition, by these amendments the priority subdivision formerly § 64, sub. b, became § 64, sub. a, and the classes of priorities were changed to five instead of seven, the status of tax claims being still next to the last or (4) instead of (6). This was no advancement in position, since former classes (1), (2), and (3) were combined with (1). In 1946, there was added to (1) “the fees for the referees’ salary fund and for the referees’ expense fund.” [This note is not a part of the quotation.]
By making a tax claim a debt of the bankrupt it is brought within the terms of § 63, sub. a, 11 U.S.C.A. § 103, sub. a, defining provable debts, of which subd. (1) allows interest only up to the filing of the petition, and subd. (5) includes provable debts reduced to judgment after filing, but less costs incurred and interest after the filing. Hence under subd. (5), when a tax claim is reduced to judgment after the filing, interest must be deducted. This points up the anomaly of another rule for tax claims not reduced to judgment.
Assume a bankrupt to owe $1,600 to an employee for wages, §1,000 each to three taxing authorities, and §1,000 for rent given priority under state law. Under § 64, sub. a, which gives priority to the amount of §600 for wages and allows the others in order, these would be all paid in full if the assets were §5,000 and there were no other general claims beyond the §400 balance on the wage claim. But with interest allowed on the tax claims at 12% (or perhaps more) per annum during the bankruptcy, possible payments on the later claims would diminish in size as rapidly as Alice in Wonderland,
In the companion case, the United States devotes much attention to various of the federal revenue laws and congressional debates as to changes in them with respect to interest against estates held by fiduciaries. But these do not offer any clear-cut solutions in themselves and are hardly available to change the stated priorities of a bankruptcy act. Obviously the intent of the latter is to treat federal, state, and municipal tax claims alike; it would be quite improper to accord the former alone some advantage based upon some newly discovered other federal law or regulation.