employer and may be assessed against him in the same manner as other taxes.
It was apparently the opinion of Judge Morrill, and it is here argued on behalf of the Trustee, that the United States was entitled to an equitable lien on the bank accounts of the Debtor because of the provisions of Section 7501 of the Internal Revenue Code, supra, 26 U.S.C.A. § 7501, which read as follows:
'Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax 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. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.'
We cannot agree with either the opinion of Judge Morrill or the argument advanced on behalf of the Trustee.
The provisions of Section 7501, supra, the counterpart of which first appeared in the Internal Revenue Act of 1934, are applicable to an employer obligated by Sections 3102(a) and 3402, supra. The taxes deducted and withheld from the wages of the employees pursuant to the said sections are 'held to be a special fund in trust for the United States.' Section 7501, supra. The intent of the statute was to afford the United States a maximum of assistance in the collection of withholding taxes. The provision did not specifically require the segregation of the sums withheld from the wages of employees but clearly contemplated such segregation in accord with sound accounting practice.
The provision, properly construed, established the status of the United States as the beneficary of a trust fund and accorded it a right to assess and collect the fund 'in the same manner and subject to the same provisions and limitations * * * as are applicable with respect to the taxes from which such fund arose.' Section 7501, supra. Where the monies deducted from the wages of employees are segregated and a trust fund thus created, the legal remedy of the United States is clear: a right to demand and collect the identifiable fund in the manner provided.
It was found by the Referee in Bankruptcy, after the initial hearing, that the Debtor 'paid net wages' and 'did not set aside withholding and social security taxes in a special trust fund.' (Certificate of Review, December 1, 1958). He concluded that the Debtor 'neither collected nor withheld the taxes' for the period in question. It seems reasonably clear that under these circumstances there was no trust fund to which the legal right of the United States could attach. The absence of such a trust fund could not possibly support the right of the United States to an equitable lien on the bank account of the Debtor or any other asset. There is, however, an available legal remedy against those officers of the corporation responsible for the dereliction.
Where there has been a willful failure to comply with the provisions of Sections 3102(a) and 3402, supra, a derivative liability is imposed on the responsible persons under Section 6672 thereof, 26 U.S.C.A. § 6672, which reads as follows:
'Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. * * *.' (Emphasis by this Court).
The penalty is payable upon notice and demand, and may be 'assessed and collected in the same manner as taxes.' Section 6671 of the Code, 26 U.S.C.A. § 6671.
The argument advanced on behalf of the United States appears to assume that the withholding taxes were deducted from the wages of the employees and were commingled with the general funds of the Debtor. This assumption is not consistent with the facts as found by the Referee in Bankruptcy. Since the matter must be remanded to the Referee for further proceedings, we consider the question thus raised.
Where withholding taxes deducted from the wages of employees are commingled with personal monies of the employer, the United States, as beneficiary of the trust fund under Section 7501, supra, has a right to trace and reclaim the withholding taxes. The cited section, however, 'did not dispense with (the) tests for the recovery of diverted trust funds.' Hercules Service Parts Corp. v. United States, 6 Cir., 202 F.2d 938, 940.
Where there has been a commingling of funds prior to bankruptcy such as is here alleged, 'a trust cannot be impressed for the benefit of the cestui que trust unless the trust property is identified or the corpus of the trust is traced into some specific fund or thing into which the original trust property has passed in some form.' Hercules Service Parts Corp. v. United States, supra. A beneficiary who is unable to either identify or trace the funds is not entitled to an equitable lien 'spread over the entire estate of the faithless trustee.' In re Frank, D.C., 25 F.Supp. 1005, 1006. The rule is otherwise only where the trust relationship arises subsequent to bankruptcy and there is a diversion or commingling of trust funds during the period of administration. Hercules Service Corp. v. United States, supra; City of New York v. Rassner, 2 Cir., 127 F.2d 703. The distinction is discussed in the latter cases.
It is argued by the State of New Jersey that the allocation of $ 36,357.10 to the payment of the 'equitable lien' has deprived it of a right 'as a priority tax claimant.' Whether or not it is a tax claimant and entitled to priority under Section 64 of the Bankruptcy Act, 11 U.S.C.A. § 104, we do not decide. The relative priorities of the claimants was not determined by the Referee, but may be determined upon remand of the matter.
The order of the Referee in Bankruptcy is vacated and set aside and the matter is remanded for further proceedings consistent with this opinion.
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