Opinion
No. 73 B. 468 (RLC)
March 5, 1980
Rosenman, Colin, Freund, Lewis Cohen, New York City, for trustee; Jane S. Solomon, New York City, of counsel.
Robert B. Fiske, Jr., U.S. Atty., S.D.N.Y., New York City, by Eileen Sudler, Asst. U.S. Atty., of counsel.
Opinion
Under the liquidation plan approved and confirmed by the court, creditors' claims against the bankrupt estate were dividend into five classes, A through E, in descending order of priority. Those creditors in Class A and B were employees who had worked for the debtor-in-possession and the trustee during the administration of the estate under Chapters X and XI of the Bankruptcy Act. Their wage claims were paid in full, and income taxes and the employees' portion of social security taxes were withheld and paid to the appropriate taxing authorities. The trustee also paid the employer's unemployment and social security taxes for these wages to the appropriate federal and state taxing authorities. Class C priority wage claims were also paid in full and the employees' taxes arising from these wages were withheld and paid over. At issue in this case is the status of the employer's taxes on Class C claims.
The trustee argued that the employer's taxes arising from payment of the Class C priority wage claims should be classified in Class E. There are not sufficient assets remaining in the estate to pay any Class E claims. The government argued that the employer's taxes arising in connection with the payment of these wages should be accorded either first priority under Section 64a(1) as expenses of administration, or the same priority as the wage claims themselves.
The court first rejected the government's argument for first priority, noting that according a higher priority to the employer's taxes than to the wage claimant's "would result in a similar anomalous depletion of the estate to the disadvantage of the priority wage claimants."
Citing the case of In re Armadillo Corp., CCH Dec. at ¶ 9029.40, the Court further rejected the government's contention that the employer's taxes be given the same priority as the wage claims themselves, because, unlike the employees' taxes, which are given the same priority, they are neither wages nor derived from the wage claims.
Additionally, the court noted that the employer's taxes could not receive a fourth priority under Section 64a(4) — here Class D — as taxes due and owing by the bankrupt. In Otte v. United States, CCH Dec. at ¶ 9032.44, the court determined that the trustee in bankruptcy is the employer within the meaning of Section 3402(a) the Internal Revenue Act. As the employer's taxes in the instant case did not become due until after bankruptcy when the wages were paid, at which time the trustee was deemed to be the employer, these taxes were not "taxes due and owing by the bankrupt" and therefore could not be accorded a fourth priority. Accordingly, the employer's taxes on priority wage claimsearned pre-bankruptcy but paid post-bankruptcy received nonpriority treatment as general unsecured claims, and could be classified in Class E.