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MATTER ABNER MICHAUD AND ALYCE E. MICHAUD (04/10/72)

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


decided: April 10, 1972.

IN THE MATTER OF ABNER MICHAUD AND ALYCE E. MICHAUD, BANKRUPTS

Biggs and Van Dusen, Circuit Judges, and Green, District Judge.

Author: Van Dusen

Opinion OF THE COURT

VAN DUSEN, Circuit Judge.

The United States has appealed from a district court order*fn1 which affirmed the order of a referee in bankruptcy denying priority status to the income tax claims of the United States. The primary issue to be resolved on this appeal is whether the district court was correct in concluding that Section 17a(1) (c) of the Bankruptcy Act, 11 U.S.C. § 35(a) (1) (c), operates to release Abner Michaud and Alyce E. Michaud from their federal income tax deficiencies for the years 1955, 1956, 1957, 1958 and 1960, with the result that under the terms of Section 64a(4) of the Bankruptcy Act, 11 U.S.C. § 104(a) (4),*fn2 the United States is not entitled to a priority over general unsecured creditors with respect to these tax deficiencies. We have concluded that the district court was incorrect in its interpretation of Section 17a(1) (c) and reverse the district court order.

Section 17a(1) of the Bankruptcy Act, 11 U.S.C. § 35(a) (1), as amended in 1966, provides, in relevant part, as follows:

"(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts . . . except such as (1) are taxes which became legally due and owing by the bankrupt to the United States . . . within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes . . . (c) which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt . . . ."

The United States concedes that the taxes at issue (i.e., income taxes of the bankrupts for the years 1955-1958 and 1960) became legally due and owing more than three years preceding bankruptcy*fn3 (appellant's brief at 10, n. 11); thus, the Government's income tax claims for these years would be released by the Michaud's discharges in bankruptcy*fn4 under the terms of Section 17a(1), unless the above-quoted subsection (c) preserves them.*fn5 Further, the trustee (the appellee in this action) concedes that the second condition listed in Section 17a(1) (c) has been satisfied, that is that the taxes at issue were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of the bankrupts' administrative and judicial remedies.*fn6 (appellee's brief at 8). Thus the decision on this appeal turns on whether the first condition listed in subsection (c) has been satisfied, that is, whether the taxes at issue are "taxes . . . which were not reported on a return made by the bankrupt . . . ." within the meaning of Section 17a(1) (c) of the Bankruptcy Act.

During the period 1955-1960, Abner Michaud held a 95% interest in a partnership which conducted a meat processing and distributing business. In his tax returns for this period,*fn7 Michaud claimed as business deductions 3% of the partnership's gross sales, representing payments to the managers, chefs, purchasing agents and other customer representatives with whom the partnership dealt, which payments were characterized as "sales promotion expenses" by the bankrupts and as "kickbacks" by the United States. The United States has conceded that Michaud fully stated his income during this period, that the Internal Revenue Service was aware of the fact that kickbacks were paid to purchasers in the meat processing and distributing industry, and that the amount and character of these "sales promotion expenses" deductions taken by the Michauds were apparent from their returns (see the Referee's opinion at 3-4). On the other hand, the Referee and the district court have determined that these deductions were properly disallowed by the Government,*fn8 so that the income tax liability for which the United States claims priority was not stated in the returns filed by the Michauds.*fn9

The Referee and the district court held that in these circumstances the taxes at issue were not "taxes . . . which were not reported on a return made by the bankrupt" within the meaning of Section 17a(1) (c) of the Bankruptcy Act, so that these tax claims of the United States were released by the discharge in bankruptcy and were, therefore, not entitled to priority under the terms of Section 64a(4) of the Act. Noting that a fundamental purpose of the 1966 amendments to the Bankruptcy Act was to provide for the effective rehabilitation of the bankrupt by providing some time limit on the tax claims exempt from release after a discharge in bankruptcy,*fn10 the district court concluded that this purpose would be substantially frustrated if the Government's tax claim were not released in the circumstances of this case.*fn11 The district court further declared that Section 17a(1) (c) of the Bankruptcy Act and the three-year statute of limitations on assessments in Section 6501 of the Internal Revenue Code (26 U.S.C. § 6501) are in pari materia and appeared to reason that because the latter operates normally to preclude the Government from making an assessment more than three years after the return is filed if the taxpayer has included his full gross income on his return,*fn12 the former should be construed similarly so as to discharge a tax claim which arose more than three years before a discharge in bankruptcy, provided that -- as is concededly the case with the Michauds -- the bankrupt has stated his full gross income and indicated the nature of his unwarranted deductions in his return.

We reject this conclusion reached by the district court and conclude that the phrase "taxes . . . which were not reported on a return made by the bankrupt" as used in Section 17a(1) (c) of the Bankruptcy Act includes a tax deficiency ultimately established by the Government even if, as in the case of the Michauds, the taxpayer has fully reported both his gross income and the basis of the deductions which are ultimately disallowed. Although the matter is not free from doubt in view of the scant legislative history,*fn13 we believe that this interpretation of Section 17a(1) (c) is the most reasonable construction of the language used by Congress and that the result which we reach is consistent with the purposes of this 1966 amendment to the Bankruptcy Act. The critical factor is that in Section 17a(1) (c) Congress has excepted from the general rule of Section 17a(1) "taxes . . . which were not reported on a return made by the bankrupt." (Emphasis added.) As the Supreme Court has indicated many times, "normally 'statutory words are presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them.'" Colony, Inc. v. Comm'r, 357 U.S. 28, 32, 78 S. Ct. 1033, 1036, 2 L. Ed. 2d 1119 (1958). See also Banks v. Chicago Grain Trimmers, 390 U.S. 459, 465, 88 S. Ct. 1140, 1144, 20 L. Ed. 2d 30 (1968) ("In the absence of persuasive reasons to the contrary, we attribute to the words of a statute their ordinary meaning."). The verb "report" is defined in Webster's New International Dictionary (3d ed. 1961) as follows: "to give a formal or official account or statement of: state formally." "Report," in other words, connotes the formal representation of a state of facts rather than the informal presentation which would be connoted by the terms "indicate," "include," etc. The fact that Congress employed the term "reported" in Section 17a(1) (c) demonstrates, therefore, that Congress intended to make the critical factor whether the taxes at issue were formally stated in the return.*fn14 Since it is conceded by the trustee that the tax liabilities at issue in this case were not stated on the Michauds' returns, it follows that under the terms of Section 17a(1) (c) these tax claims were not released by the Michauds' discharge in bankruptcy. There is no basis in this language for the distinction suggested by the district court between a tax liability which is not reported on the return because gross income has been understated and a tax liability which is not stated in the return because an unwarranted deduction has been taken. When Congress has intended to make such a distinction it has done so clearly, as in the case of the statute of limitations on the assessment and collection of income tax claims in Section 6501 of the Internal Revenue Code.*fn15 No such distinction has been made in Section 17a(1) of the Bankruptcy Act.*fn16

The construction which we give to Section 17a(1) (c) is not inconsistent with the intent of Congress in drafting the 1966 amendments to the Bankruptcy Act. As the district court noted, Congress clearly intended to stimulate the successful rehabilitation of the bankrupt by means of the release after bankruptcy of older tax liabilities. Although the district court assumed that its construction of Section 17a(1) (c) was most consistent with this purpose, it is not clear that this assumption is correct, at least in the long run.*fn17 Furthermore, as the exceptions to Section 17a(1) themselves indicate, Congress attempted to balance against the bankrupt's interest the interests of the federal, state and local governments in the collection of tax revenues to meet their myriad responsibilities.*fn18 The plain meaning of the language employed by Congress in Section 17a(1) (c) indicates that this latter interest was intended to prevail in the circumstances presented by this appeal. If this exception is thought too broad in light of the remedial purposes of the 1966 amendments to the Bankruptcy Act, it is Congress, not the courts, which must amend the statute.

Finally, we note that the result which we reach is supported by the only other cases construing Section 17a(1) (c) to which we have been referred. See In re Indian Lake Estates, Inc., 428 F.2d 319 (5th Cir. 1970);*fn19 In re Cohen, 6801 U.S. Tax Cas. (CCH) 9250, 21 A.F.T.R.2d 992 (N.D.Ga. Nov. 3, 1967). Our interpretation is also supported by several leading authorites. See 1 Collier, Bankruptcy § 17.14(4), at 1620 (14th ed. 1967); Plumb, "Federal Liens and Priorities -- Agenda for the Next Decade," 77 Yale L.J. 228, 263 (1967); cf. Kennedy, "The Bankruptcy Amendments of 1966," 1 Ga.L.Rev. 149, 177 (1967).*fn20

For the foregoing reasons, the decision of the district court will be reversed and the case remanded for proceedings consistent with this opinion.


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