United States v. Kaufman
298 F. 11
2d Cir.
1924
Check Treatment
MAYER, Circuit Judge

(after stating the facts as above). The fundamental fallacy of the contention on behalf of the government is that it confuses priority with the existence of a fund out of which taxes are payable or collectable. The authority to tax must be found somewhere. The Revenue Act of 1918, in section 1400 thereof (Comp. St. Ann. Supp. 1919, § 637l%a), specifically repealed, inter alia, title 1, including section 8 (e) of the Revenue Act of 1916 (Comp. St. '§ 6336h), and title 2, including section 201 of the Revenue Act of 1917.

The provisions of the tax statute here concerned are thus section 218 (a) and section 224 of title 2 of the Revenue Act of 1918. As pointed out in the opinion of the referee, supra, there is not the slightest warrant for concluding that the tax was against partnerships, and not solely against the “individuals carrying on business in partnerships.” The language of section 218 (a) is too plain for extended discussion, and its meaning could be fortified, if necessary, by,the contrast between the Revenue Act of 1917 and the Revenue Act of 1918 in this regard.

As, therefore, there was no income tax against the partnership in either of the cases at bar, we must look to the bankruptcy statute to *16ascertain whether it affirmatively provided that the tax assessed against the individuals could be proved against the partnership estate. We need not pause to consider what distinction, if any, there is between “debts” and “taxes” in various parts of the Bankruptcy Act. We may also assume for the purpose of the argument that, if the Revenue Act of 1918 authorized assessment of the tax against the partnership instead of against the individuals, it might not have been necessary to name the United States in any provision as to marshaling.

The point, however, is that, as there is no tax against the partnership, the only remaining theory upon which the tax against the individuals can be proved against and recovered out of the partnership estate is that the Bankruptcy Act of 1898 so provided. Section 5, subd. “f,” of that act, did not so provide. This provision reads:

“Tlie net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership.”

There can be no longer any doubt that the distinction between individual and firm debts is a matter of substance, which cannot be disregarded. In re Wilcox (D. C.) 94 Fed. 84; In re Janes, 133 Fed. 912, 67 C. C. A. 216; In re Schall v. Camors, 251 U. S. 239, 40 Sup. Ct. 135, 64 L. Ed. 247; In re Jarmulowski (C. C. A.) 287 Fed. 703.

There is, of course, no doubt that the right of priority of the United States in the collection of taxes is an attribute of sovereignty. Marshall v. New York, 254 U. S. 380, 41 Sup. Ct. 143, 65 L. Ed. 315. Under section 64a of the Bankruptcy Act of 1898 (Comp. St. § 9648), it is the duty of the court to order the trustee to pay all taxes, legally due and owing by the bankrupt to the United States, in advance of the payment of dividends to creditors; but, of course, the tax must be “legally due and owing by the bankrupt to the United States.”

R. S. U. S- §§■ 3186, 3466, and 3467, deal with tax priority, but there is nothing in the provisions of these sections which changes the tax against an individual into a tax against the partnership. Numerous instances will be found in the case of In re Wilson (D. C.) 252 Fed. 631, which illustrate the difference between the identity of the fund or person against whom a claim can be made and respective priorities once the fund or person is found or determined. If, therefore, the Congress had intended that the tax against the individuals should be paid out of the partnership estate prior to the payment of the partnership debts it would have so declared by some affirmative language to that effect, either in section 5 (f) of the statute or in some other provision.

It must be remembered that the Bankruptcy Act of 1898 has now been in operation for a little over a quarter of a century, and that business has been done on the faith and basis of the statute. It can readily be seen that a partnership might not be able to obtain the same amount of credit from banks and other lending sources if, in marshaling the *17assets of a partnership, such assets become a fund out of which the debts or taxes due and owing from the individual members are payable prior to or pari passu with the partnership debts.

As pointed out by Judge Rogers in United States v. Wood, 290 Fed. 109, there is a marked difference between the act of 1898 and previous acts in respect of.the relation of the United States to the'present Bankruptcy Act. In the case just cited, there is a review of many cases illustrative of this proposition. It is hard to believe, in tiew of the definite language of section 5 (f), that the Legislature intended to create a situation where the debts or taxes due from the individuals might either wipe out or share with the debts due from the partnership, for any such provision might well have been most detrimental to business and commerce. Of course, it is always within the power of the Congress to tax the partnership as distinguished from the individuals; but where, as here, no such tax exists, we confess that we are unable to find anywhere in the Bankruptcy Act of 1898 any provision which authorizes the collection of the tax from property whch was never taxed. United States v. Hack, 8 Pet. 271, 8 L. Ed. 941; United States v. Evans, 25 Fed. Cas. 1033, No. 15,062. The cases of Lewis v. United States, 92 U. S. 618, 23 L. Ed. 513, and In re Strassburger, 23 Fed. Cas. 224, have been analyzed in the opinion of the referee, and the Lewis Case has been further commented upon in the Wood Case, supra, at page 111 et seq.

Our attention has been called to a decision of the District Court of New Jersey in the Matter of Brezin & Schaefer, 297 Fed. 300. We are unable to agree with this decision.1 There is nothing in the record of either of the cases at bar upon which an equitable lien against the partnership assets may be asserted in favor of the United States. “Equitable lien” is often used synonymously with “equitable assignment” and “impressing a trust.” An excellent definition is found in Lighthouse v. Third National Bank, 162 N. Y. at page 344, 56 N. E. 741:

“One of the first essentials to the creation of an equitable lien is the specific thing or property to which it is to attach. ‘Though possession is not necessary to the existence of an equitable lien, it is necessary that the property or funds upon which the lien is claimed should be distinctly traced, so that the very thing which is subject to the special charge may be proceeded against in an equitable action and sold under decree to satisfy the charge.’ ”

See, also, 3 Pomeroy on Equity (4th Ed.) § 1233; Bispham on Equity (4th Ed.) § 351; Ketchum v St. Louis, 101 U. S. 306, 25 L. Ed. 999; Walker v. Brown, 165 U. S. 654, 17 Sup. Ct. 453, 41 L. Ed. 865; National City Bank v. Hotchkiss, 231 U. S. 50, 57, 34 Sup. Ct. 20, 58 L. Ed. 115; In re National Cash Register Co., 174 Fed. 579, 98 C. C. A. 425; In re See, 209 Fed. 172, 126 C. C. A. 120.

Every element of an equitable lien is absent in each of the cases here under consideration.

*18Finally, there is no merit in the suggestion that the marshaling provisions are not applicable in the Jones & Baker case, because there the composition in that case was had before adjudication. The composition was only with the partnership creditors, and there was no composition with the creditors of the individual partners. This was warranted by section 12 of the Bankruptcy Act, as amended June 25, 1910 (Comp. St. § 9596). In re Breitbart (D. C) 291 Fed.' 693. '

A composition, whether before or after adjudication, so far as affects the questions here presented, stands in the same position as a liquidation through a trusteeship in bankruptcy. See opinion of Referee Remington, Matter of Simon Fox, 6 Am. Bankr. Rep. 525, 530. It is plain that under the Bankruptcy Act it is intended that its administrative sections shall apply, whichever method of administration may be chosen.

We think it unnecessary to comment in detail upon many cases cited in the briefs. It is sufficient to observe that three cases upon which some emphasis is laid by appellant—i. e., Matter of Menist (C. C. A.) 294 Fed. 532, U. S. v. McHatton et al. (D. C.) 266 Fed. 602, and Titus v. Maxwell (C. C. A.) 281 Fed. 433—either are not relevant to the question here under consideration or contain nothing to disturb the conclusion that the decrees below were correct.

Decrees affirmed.

Notes

See interesting article in Columbia Law Review, April, 1924, entitled “The Priority of the United States in the Payment of Its Claims against a Bankrupt,” by Ralph F. Colin, at pages 360, 371, and 372.