The opinion of the court was delivered by: HARTSHORNE
Tele-Tone Radio Corporation was originally before the United States District Court for the Southern District of New York, as the object of proceedings under Chapter XI of the Bankruptcy Act.
The debtor was left in possession and the business operated for some months. Thereafter, an involuntary petition against Tele-Tone, ultimately including its above subsidiaries, was filed in this Court under Chapter X of the Bankruptcy Act,
the above petition in New York being dismissed. In the Chapter X proceedings Paul H. Hudson was appointed Trustee. After some months, it was found impossible to effectuate a reorganization. The Chapter X proceeding was accordingly terminated, save for the accounting of its Trustee, and Tele-Tone was ordered to be liquidated in bankruptcy,
Merritt Lane, Jr., being made Bankruptcy Trustee.
Certain similar, if not identic, questions were raised, both in this Court, as bearings upon the accounting of the Chapter X Trustee, and in the Bankruptcy Court, as bearing upon the proper liquidation of the assets of the bankrupt there. This was the case, for instance, with regard to the question of whether the United States Government had a tax trust amounting to $ 85,409.16, which should accordingly be paid over directly to the United States, rather than turned over by the Chapter X Trustee to the Bankruptcy Trustee, for administration in the Bankruptcy Court. Consequently, this Court referred that question, previously raised before the Referee in Bankruptcy, to the Referee, as Special Master, to report thereon to this Court. The Referee and Special Master reported thereon in his report, now on exceptions before this Court.
The second question, so reported on, was as to whether the Chapter X Trustee, still in possession of much of the debtor's assets, should pay Walter E. Heller & Company, Inc., $ 104,329.77 as secured by its liens on inventory and accounts receivable. The third question reported on, was as to whether Eureka Tube & Television Company was entitled to a turn-over order in the amount of $ 5750.00, the value of goods which Eureka claimed were fraudulently retained by the debtor, or whether Eureka was a general creditor in that amount.
On all these issues this Court adopts the findings of fact of the Master in the above report. Fed.Rules Civ.Proc. rule 52(a), 28 U.S.C.A.
The Claim of the United States to a Tax Trust
Preliminary to a discussion of the merits concerning this issue, is the question whether the claim of the United States against the New York Trust Company would lie in this Court, in the light of the lack of jurisdiction of this Court over the latter corporation, existing solely in New York. That corporation had previously paid over to the Chapter X Trustee the entire moneys alleged by the United States to be the subject of such trust. In view of this Court's lack of jurisdiction, and the fact that the United States has a remedy by plenary suit against the New York Trust Company in New York, or in the Southern District of New York, this Court affirms the finding of the Referee that the claim of the United States against the New York Trust Company, as distinguished from its claim against the Chapter X Trustee, should be dismissed.
As to this alleged tax trust, the claim of the United States is based upon (a) the statute, (b) the order of the Referee in the Chapter XI proceeding in New York, (c) alleged general equitable principles.
(a) By the Internal Revenue Code, Title 26 U.S.C.A. § 3661, it is provided that 'Whenever any person is required to collect or withhold any internal-revenue tax from any other person and to pay such tax over to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States * * *.'
(b) In the Chapter XI proceeding in New York, the Referee entered an order 'That the debtor in possession * * * is hereby directed and required to segregate and hold separate and apart from all other funds all moneys withheld from employees or collected from others for taxes under any law of the United States or of any state * * *.' The Referee's order thus constituted practically a paraphrase of the terms of the above statute. Thus the statutory and court order bases of the alleged trust res are identic, with a slight exception hereafter noted. Both created a trust out of tax moneys which Tele-Tone was required to 'collect or withhold' from others for payment to the United States. The requirement to withhold taxes from others clearly referred to withholding Social Security contributions from employees, and the like. This was clearly recognized by the Chapter X Trustee himself, and he admits he holds $ 8,396.83 as such taxes withheld from employees' wages accordingly. However, he denies that either Tele-Tone or he were 'required to collect * * * any Internal Revenue tax from any other person', i.e., he claims that the balance of the moneys he holds as such Trustee was none of it subject to either such statute or such order. The claim of the United States to the contrary is, that the balance of the approximately $ 85,000 received by him from the New York Trust Company, as from the Tele-Tone tax account, over and above the approximately $ 8,000 so 'withheld', consists of the Federal manufacturers excise tax.
But a series of cases have settled the principle that this tax is laid upon the manufacturer alone. Lash's Products Co. v. U.S., 1928, 278 U.S. 175, 49 S. Ct. 100, 73 L. Ed. 251; Biddle v. Commissioner, 1937, 302 U.S. 573, 581, 58 S. Ct. 379, 82 L. Ed. 431; Shearer v. C.I.R., 2 Cir., 1931, 48 F.2d 552; 123 East Fifty-Fourth Street, Inc. v. United States, 2 Cir., 1946, 157 F.2d 68. Nor can there be any claim that the manufacturer is 'required' by the statute to collect this tax from his vendees, or any one else. Thus the tax trust finds no basis in the statute, so far as any sums extra the withholding tax are concerned.
The only difference between the order of the New York Referee in the Chapter XI proceeding and the statute is that, while, by the order, the debtor in possession is required to 'hold separate' the taxes it has 'collected from others', the order does not specifically say, as the statute does, that it is 'required' to collect the taxes from others. But assuming, for the sake of argument, that the order was not intended to be a mere paraphrase of the statute, but to cover taxes collected from others, even though Tele-Tone was not required so to collect them, the facts show that Tele-Tone did not collect the manufacturers excise tax, as such, from its vendees. Here it might be noted that the order, as distinguished from the statute, covered taxes so collected when imposed either by the United States or a state or its subdivision. In other words, if, as is the case generally, not only in New Jersey, but throughout the United States, a retail gasoline station carries on its signs as the price of its gasoline, not only the total price, but the amount of the tax to be paid by the purchaser, then perchance such dealer would collect such tax from others. But the facts show that Tele-Tone did no such thing. It never showed, on the bills presented to its customers, any reference whatever to the manufacturers excise tax. True, in making up, for itself, the total price of its goods to customers, it may have included among the items constituting such total sales price, an item covering the excise tax it would ultimately have to pay, just as it included an item for rent of the premises it occupied, of the cost of the materials from which it manufactured its goods, the cost of the labor to perform such manufacture, and so on. But clearly, it has not collected from the purchasers of its goods, its rent, as rent, its labor costs, as labor costs, its material costs, as material costs. Its manufacturers excise tax was therefore not 'collected from others' as a tax. Of course, the ultimate consumer ordinarily bears indirectly part or all of the economic incidence of every tax. But this is a far different thing from collecting the amount of such tax from the consumer as a tax. It it were not, then for that very reason substantially every tax imposed would be 'collected from others', and such words would have no reasonable meaning whatever. Thus the claim of a tax trust as to the funds in question can not be based upon either the statute or the court order.
(c) The further claim is that the action of Tele-Tone itself, in placing these moneys in its so-called 'tax account' in the New York Trust Company, of itself created a trust on general equitable principles. However, to constitute a fixed trust for the benefit of a third party, the act of the trustor must be irrevocable, with no dominion over the res left in the trustor. Ehag Eisenbahnwerte Holding Aktiengesellschaft v. Banca Nationala A Romaniei, 1954, 306 N.Y. 242, 117 N.E.2d 346; Nicklas v. Parker, Chancery 1905, 69 N.J.Eq. 743, 61 A. 267, affirmed, E. & A.1906, 71 N.J.Eq. 777, 61 A. 267, 71 A. 1135. Here the facts show that Tele-Tone had the right generally to withdraw moneys from this tax account. See In re Associated Gas & Electric Co., 2 Cir., 1943, 137 F.2d 607. Further, when Tele-Tone deposited moneys therein, it did not deposit moneys in such account as required by the order 'not later than within the calendar week next after such collecting', but deposited moneys in round figures, not in the amount of the excise taxes it would have to pay on the goods it sold, and as such moneys conveniently came to hand. Furthermore, when these moneys came to hand they were not, in fact, payments made by purchasers for goods bought from Tele-Tone. All these payments went to the Heller Company, under the assignment by Tele-Tone to it of all the Tele-Tone accounts receivable, as security for the many thousands of dollars advanced by Heller to keep Tele-Tone in business. Obviously, these advances from Heller were in no way taxes 'collected from others'. Such were in fact the moneys in the account in question, save those withheld from Tele-Tone's employees. Again, since this was the character of such moneys -- security belonging to Heller -- it would have been unlawful, as a 'preference' of one administrative claimant over another for Tele-Tone to have created a trust in such moneys for a third party, even had it intended to do so.
The Government's argument as to the inability of the manufacturer to obtain a refund from the Government of an excise tax not lawfully due, when he passes on such tax to a vendee, is too far-fetched to carry weight. The principles governing one's right to recover a refund of a tax, which is admittedly not lawfully due, and one's liability to pay the tax in the first place, are so different that it simply confuses to attempt to compare them.
Nor is the claim as a tax trust strengthened by the fact that during the Chapter XI proceedings in New York, Tele-Tone drew a check payable to the Government, in a substantial amount, for excise taxes. This check was not presented for payment by the United States, until after the subsequent bankruptcy and Chapter X reorganization proceedings had taken effect. The Chapter X Trustee took title to these moneys in the bank as of the time of filing the petition. Title 11 U.S.C.A. Bonkruptcy, § 110. Thereafter all property of the bankruptcy is in custodia legis. 'Deposits in a bank to the credit of a bankrupt pass to the trustee as assets of the estate. Thus where through delay a check drawn on such a deposit prior to bankruptcy is presented and paid after bankruptcy, the payee is not entitled to retain the sum received as against the trustee. * * * The delivery of the check did not operate as an assignment or segregation of the funds on deposit, nor impress those funds with any trust in favor of the payee.' 4 Collier, Bankruptcy, page 1183. In re Howe, D.C.Mass.1916, 235 F. 908. 'A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank * * *.' Negotiable Instruments Law, R.S. 7:4-6, N.J.S.A.
Thus the report of the Referee is confirmed, that the United States has a claim of $ 8,396.83, which is a trust fund in the hands of the chapter X Trustee. But the balance of the tax claim of the United States is a priority claim, part an administration expense, part an ordinary tax claim, to be paid in accordance with Section 64 of the Bankruptcy Act.
During the above proceedings before the Referee and Special Master on the United States claim to a tax trust, Walter E. Heller & Co., Inc. -- Heller -- filed an intervening petition contending that this Government tax trust claim was invalid, and that therefore it should not affect Heller's lien previously adjudicated to be a valid one, in the amount of $ 104,329.77. Heller filed this petition because its claim would not be paid in full were the United States held to have a valid tax trust. But if the United States claim was not a trust, but a mere tax, or an administrative claim, then Heller, being a secured creditor, would have prior rights in the fund and be paid in full. However, this petition by the United States to hold it entitled to a tax trust, of course did not authorize the United States to raise the altogether different issue as to the validity of Heller's lien, already adjudicated, and on notice to the United States.
Various objections have been raised by the Government and the Chapter X Trustee to Heller's claim as to its priority, as distinguished from its validity. The Government contends that Heller's lien is a 'statutory lien' within the meaning of 11 U.S.C.A. § 107, sub. b and therefore subordinate to certain classes of priority claims. The Government also contends that Heller consented to the subordination of its lien to the United States claim for taxes. Both the United States and the Chapter X Trustee urge that Heller should bear its proportionate ...