United States v. Sotelo

436 U.S. 268, 98 S. Ct. 1795, 56 L. Ed. 2d 275, 1978 U.S. LEXIS 9, 16 Collier Bankr. Cas. 2d 456, 42 A.F.T.R.2d (RIA) 5001, 4 Bankr. Ct. Dec. (CRR) 271

• Court: Supreme Court of the United States
• Decided: February 22, 1978
• Docket: 76-1800
• Status: Published

Opinions

Me. Justice Marshall

delivered the opinion of the Court.

This case involves the interaction of sections of the Internal Revenue Code of 1954 and the Bankruptcy Act. Respondent Onofre J. Sotelo was found personally liable to the Government for his failure to- pay over taxes withheld from employees of the corporation in which he was the principal officer. The question presented is whether this liability is dischargeable in bankruptcy.

I

In mid-1973, respondents Onofre J. and Naomi Sotelo were adjudicated bankrupts, as was their corporation, O. J. Sotelo & Sons Masonry, Inc. The individual bankruptcy proceedings of the two Sotelos were consolidated. In November 1973, the Internal Revenue Service filed against respondents’ estate a claim in the amount of $40,751.16 “for internal revenue taxes” that had been collected from the corporation’s employees but not paid over to the Government. Respondents were alleged to be personally liable for these taxes under Internal Revenue Code § 6672, 26 U. S. C. § 6672, as corporate officers who had a duty “to collect, truthfully account for, and pay over” the taxes and who had “willfully fail[ed]” to make the requisite payments.¹ Respondents objected to the Government’s claim, arguing that they should not be held personally liable for “taxes of the corporation.” Memorandum Opinion of Bankruptcy Court (Nov. 29, 1974).

In upholding the Government’s claim to the extent of $32,840.71, the bankruptcy court found that Onofre Sotelo had. formerly operated the masonry business as a sole proprietorship and that, since the formation of the corporation, he had been its president, director, majority stockholder, and chief executive officer. Naomi Sotelo-, on the other hand, though named the corporation’s secretary, “did not take an active part in the business.” Id., at 1. The court concluded that Onofre Sotelo was personally liable to the Government under Internal Revenue Code § 6672, since he “was charged with the duty and responsibility to see that the [withheld] taxes were paid.” Memorandum Opinion, supra, at 3.² The record does not reflect any appeal of this ruling.

In October 1975 the Government, seeking to collect part of the money owed by Onofre Sotelo under § 6672, served a notice of levy on respondents’ trustee with regard to- $10,000 that belonged to respondents and was not available for general distribution to creditors in bankruptcy.³ Respondents objected to the levy, in part on the ground that the liability is described in § 6672 itself as a “penalty” and as such had been discharged in bankruptcy.⁴ The Government argued that, to the contrary, the liability was for “taxes,” which § 17a (1) of the Bankruptcy Act, 30 Stat. 550, as amended, 11 U. S. C. § 35 (a)(1) (1976 ed.), makes nondischargeable. The bankruptcy judge agreed with the Government, reasoning that, “[t]hough denominated a 'penalty,’ [the § 6672 liability] is in substance a tax.” 76-1 USTC ¶ 9435, p. 84,157 (SD Ill. 1976). The judge also noted, ibid., that subdivision (e) of Bankruptcy Act § 17a (1) makes specifically nondischargeable “taxes . . . which the bankrupt has collected or withheld from others . . . but has not paid over.” 11 U. S. C. § 35 (a)(1)(e) (1976 ed.). Respondents appealed to the United States District Court for the Southern District of Illinois, which affirmed on the opinion of the bankruptcy court.

The United States Court of Appeals for the Seventh Circuit reversed. In re Sotelo, 551 F. 2d 1090 (1977). It first noted that “Sotelo does not challenge his liability under 26 U. S. C. § 6672 . . . [but] only argues that the liability should have been discharged by his personal bankruptcy petition.” Id., at 1091. The court then held that the liability had been discharged, finding persuasive the fact that § 6672 terms the liability a “penalty” and rejecting the Government’s argument with respect to the specific language referring to withholding taxes in Bankruptcy Act § 17a (1)(e). 551 F. 2d, at 1092.⁵ The court recognized that its ruling was in conflict with “an uncontroverted line of cases.” Id., at 1091.⁶

We granted certiorari, 434 U. S. 816 (1977), and we now reverse.

II

Section 17a of the Bankruptcy Act, as amended, 80 Stat. 270, provides in pertinent part:

“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 or to any State . . . within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes . . . (e) which the bankrupt has collected or withheld from others as required by the laws of the United States or any State . . . but has not paid over . . . .” 11 U. S. C. § 35 (a) (1976 ed.).

Relying on this statutory language, the Government presents what it views as two independent grounds for holding the § 6672 liability of Onofre Sotelo (hereinafter respondent) to be nondischargeable. The Government’s primary argument is based on the specific language relating to withholding in § 17a (1)(e); alternatively, it argues that respondent’s liability, although called a “penalty,” IRC § 6672, is in fact a “tax” as that term is used in § 17a (1).⁷

Regardless of whether these two grounds are in fact independent,⁸ § 17a (1) (e) leaves no doubt as to the nondischarge-ability of “taxes . . . which the bankrupt has collected or withheld from others as required by the laws of the United States or any State . . . but has not paid over.” The Court of Appeals viewed this provision as inapplicable here for two reasons: first, because “it was not Sotelo himself, but his employer-corporation, that was obligated by law to collect and withhold the taxes”; and second, because in any event the money involved constituted a “penalty,” whereas § 17a (1)(e) “renders only 'taxes’ nondischargeable.” 551 F. 2d, at 1092. We believe that the first reason is inconsistent with the Court of Appeals’ recognition of respondent’s undisputed liability under Internal Revenue Code § 6672, and that the second is inconsistent with the language of § 17a (1) (e).

The fact that respondent was found liable under § 6672 necessarily means that he was “required to collect, truthfully account for, and pay over” the withholding taxes, and that he willfully failed to meet one or more of these obligations. IRC §6672; see n. 1, supra,9 Since the §6672 “require[ment]” of collection presumably derives from federal or state law, both of which are referred to in Bankruptcy Act § 17a (1) (e), it is difficult to understand how the court below could have recognized respondent’s § 6672 liability, see supra, at 272, and nonetheless have concluded that he was not “obligated by law to collect . . . the taxes,” 551 F. 2d, at 1092. It is undisputed here, moreover, that the taxes in question were “collected or withheld” from the corporation’s employees and that the taxes, though collected, have not been “paid over” to the Government. It is therefore clear that the § 6672 liability was not imposed for a failure on the part of respondent to collect taxes, but was rather imposed for his failure to pay over taxes that he was required both to collect and to pay over. Under these circumstances, the most natural reading of the statutory language leads to the conclusion that respondent “collected or withheld” the taxes within the meaning of Bankruptcy Act § 17a (1) (e).

We also cannot agree with the Court of Appeals that the “penalty” language of Internal Revenue Code § 6672 is dis-positive of the status of respondent’s debt under Bankruptcy Act § 17a (1) (e). The funds here involved were unquestionably “taxes” at the time they were “collected or withheld from others.” § 17a (1) (e); see IRC §§ 3102 (a), 3402 (a). It is this time period that § 17a (1)(e), with its modification of “taxes” by the phrase “collected or withheld,” treats as the relevant one. That the funds due are referred to as a “penalty” when the Government later seeks to recover them does not alter their essential character as taxes for purposes of the Bankruptcy Act, at least in a case in which, as here, the § 6672 liability is predicated on a failure to pay over, rather than a failure initially to collect, the taxes.

Ill

The legislative history of Bankruptcy Act § 17a (1) provides additional support for the view that respondent’s liability should be held nondischargeable. A principal purpose of the legislation, enacted in 1966 after several years of congressional consideration, was to establish a three-year limitation on the taxes that would be nondischargeable in bankruptcy; under former law, there was no such temporal limitation. See H. R. Rep. No. 372, 88th Cong., 1st Sess., 1-3 (1963) (hereafter H. R. Rep. No. 372); S. Rep. No. 114, 89th Cong., 1st Sess., 2-3 (1965) (hereafter S. Rep. No. 114). The new section ensured the discharge of most taxes “which became legally due and owing” more than three years preceding bankruptcy. With regard to unpaid withholding taxes, however, the three-year limitation was made inapplicable by the addition of the provision that is today § 17a (1) (e).

This provision was added to the bill to respond to the Treasury Department’s position that any discharge of liability for collected withholding taxes was undesirable. The Department’s views were expressed in a letter to the Chairman of the House Judiciary Committee from Assistant Secretary of the Treasury Stanley S. Surrey, who indicated that persons other than employer-bankrupts were included within the scope of the Department’s

“concer[n] with the inequity of granting a taxpayer a discharge of his liability for payment of trust fund taxes which he has collected from his employees and the public in general. . . . The Department does not believe that it is equitable or administratively desirable to permit employers and other persons who have collected money from third parties to be relieved of their obligation to account for an[d] pay over such money to the Government . . . .” Quoted in H. R. Rep. No. 372, p. 6 (emphasis added).

Treasury’s position was further explained in a letter from the same Department official to the Chairman of the Senate Judiciary Committee; the letter emphasized that it was “most undesirable to permit persons who are charged with the responsibility of paying over to the Federal Government moneys collected from third persons to be relieved of their obligations in bankruptcy when they have converted such moneys for their own use.” Quoted in S. Rep. No. 114, p. 10.

In response to the Treasury Department’s concern, the House Judiciary Committee added an amendment that became § 17a (1)(e). H. R. Rep. No. 372, p. 1. According to the House Report, the amendment was specifically intended to® meet “the objection of Treasury to the discharge of so-called trust fund taxes.” Id., at 5. In agreeing to the House amendment, the Senate Committee noted that Treasury’s “opposition” to the bill, to the extent it was based on the fact that responsible persons would have been “relieved of their obligations” for unpaid withholding taxes, was eliminated by the provision that became §17a(1)(e). S. Rep. No. 114, pp. 6,10.

There is no reason to believe that Congress did not intend to meet Treasury’s concerns in their entirety. While the Department may not have focused on the specific question presented here, it left no doubt as to its objection to the discharge of “persons . . . charged with the responsibility of paying over . . . moneys collected from third persons.” Letter from Assistant Secretary Surrey to Chairman of Senate Judiciary Committee, supra. Respondent without question is such a person, a point essentially conceded here by virtue of the recognition of respondent’s liability under Internal Revenue Code § 6672, see supra, at 274-275, and n. 9. Because Congress specifically contemplated that those with withholding-tax-payment obligations would remain liable after bankruptcy for their “conver[sion]” of the tax funds to private use, S. Rep. No. 114, p. 10,¹⁰ we must conclude that the liability here involved is not dischargeable in bankruptcy.

Even without these indications of an intent to make nondischargeable the withholding tax obligations of persons in respondent’s situation, moreover, Congress’ perception of the consequences of corporate bankruptcy makes it most unlikely that the legislature intended § 17a (1)(e) to apply only to the corporation’s liability for unpaid withholding taxes. Both the Committee reports and the floor debates contain repeated references to the fact that a corporation "normally ceases to exist upon bankruptcy,” H. R. Rep. No. 372, p. 2; see S. Rep. No. 114, p. 2, thereby rendering “uncollectable” the corporation’s tax liabilities, 112 Cong. Rec. 13818 (1966) (statement of Sen. Ervin). As one of the bill’s principal sponsors observed, corporate dissolution has “the practical effect of discharging all debts including taxes,” regardless of statutory declarations of nondischargeability. Id., at 13821 (remarks of Sen. Hruska).¹¹ In view of this congressional assumption, the interpretation of § 17a (1)(e) adopted by the Court of Appeals is untenable, for the combination of corporate dissolution with the personal bankruptcies of those found liable under Internal Revenue Code § 6672 would leave no person within the corporation obligated to the Government for unpaid withholding taxes. Such a result would be directly inconsistent with Congress’ declarations that the amendment which became § 17a(1)(e) met the Treasury Department’s concern about ensuring post-bankruptcy liability for these taxes.

IV

In light of this legislative history, little doubt remains as to the nondischargeability of respondent’s liability under § 17a (l)(e). The Court of Appeals did not consider this history, but instead relied on more general policy factors. The court observed that an “inequit[y]” could arise from holding an individual “liable for a tax owed by a corporation” in cases where, because “[t]he corporate liability . . . vastly exceed [s] the individual’s present or future resources,” his “entire future earnings could be confiscated to compensate for the corporate liability.” Such a result, in the court’s view, “would contravene the Bankruptcy Act’s basic policy of settling a bankrupt’s past debts and providing a fresh economic start.” 551 F. 2d, at 1092-1093.

However persuasive these considerations might be in a legislative forum, we as judges cannot override the specific policy judgments made by Congress in enacting the statutory provisions with which we are here concerned. The decision to hold an individual “liable for a tax owed by a corporation,” even if there is a wide disparity between the corporation’s liability and the individual’s resources, was made when Internal Revenue Code § 6672 was passed, since it is that section which imposes the liability without regard for the individual’s ability to pay.¹² And while it is true that a finding of nondischargeability prevents a bankrupt from getting an entirely “fresh start,” this observation provides little assistance in construing a section expressly designed to make some debts nondischargeable. We are not here concerned with the entire Act’s policy, but rather with what Congress intended in § 17a (1) and its subdivision (e). The statutory language and legislative history discussed in Parts II and III, supra, demonstrate an intention to make a liability like respondent’s nondischargeable.¹³

The Court of Appeals’ approach, moreover, would have the effect of allowing a corporation and its officers to- escape all liability for unpaid withholding taxes, see supra, at 278-279, while leaving liable for such taxes after bankruptcy those individuals who do business in the sole proprietorship or partnership, rather than the corporate, form.¹⁴ In passing § 17a (1), however, Congress was expressly concerned about the fact that the operation of prior law was “unfairly discriminatory against the private individual or the unincorporated small businessman.” H. R. Rep. No. 372, p. 2; see S. Rep. No. 114, pp. 2-3. As discussed above, Congress recognized that a bankrupt corporation “dissolves and goes out of business,” 112 Cong. Rec. 13817 (1966) (remarks of Sen. Ervin), thereby avoiding IRS tax claims; it was thought inequitable that a sole proprietor or other individual would remain liable after bankruptcy for the same type of claims. See generally sources cited at 278, and n. 11, supra. This inequity between a corporate officer and an individual entrepreneur, both of whom have a similar liability to the Government, frequently would turn on nothing more than whether the individual was “sophisticated” enough “to, in effect, incorporate himself.” 112 Cong. Rec. 13817 (1966) (remarks of Sen. Ervin).¹⁵ Were we to adopt the Court of Appeals’ approach, we would be instituting precisely the kind of “arbitrary discrimination” that § 17a (1) was designed to alleviate. 112 Cong. Rec. 13818 (1966) (statement of Sen. Ervin).¹⁶

In terms of statutory language and legislative history, then, the liability of respondent under Internal Revenue Code § 6672 must be held nondischargeable under Bankruptcy Act § 17a (1) (e). The judgment of the Court of Appeals is, accordingly,

Reversed and remanded.

1 Internal Revenue Code § 6672, 26 U. S. C. § 6672, provides:

“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.”

Section 6671 (b) of the Code makes clear that “[t]he term 'person,' as used in [§6672], includes an officer or employee of a corporation . . . who ... is under a duty to perform the act in respect of which the violation occurs.” Section 6671 (a) states that the § 6672 penalty “shall be assessed and collected in the same manner as taxes.”

2 Naomi Sotelo was found not to be liable, but the bankruptcy judge noted that this finding was “immaterial” in view of the merger of the estates. Memorandum Opinion of Bankruptcy Court 3 (Nov. 29, 1974).

3 This $10,000 was derived from the trustee’s sale of real estate held by respondents as joint tenants, and would have been payable to one or both of respondents had it not been for the Government’s claim. The trustee set aside the $10,000 as a “homestead exemption” for Onofre Sotelo only, apparently pursuant to Illinois law. Respondents argued below that the entire $10,000 belonged to Naomi Sotelo, who did not have any § 6672 liability, see n. 2, supra. In response to this contention, the bankruptcy court stated: “[T]he law is clearly established in Illinois that where a husband and wife own property as joint tenants and reside together on the premises . . . the husband . . . alone is entitled to the Homestead Exemption.” 76-1 USTC ¶ 9435, p. 84,156 (SD Ill. 1976). The bankruptcy court upheld this Illinois rule against respondents’ constitutional attack. Id., at 84,157-84,158.

4 Respondents’ theory apparently was that the § 6672 penalty is compensatory in nature. The Government does not here dispute that a compensatory penalty is generally dischargeable. See Brief for United States 26-27, and n. 16. See generally Bankruptcy Act § 57j, 11 U. S. C. § 93 (j); 8 H. Remington, A Treatise on the Bankruptcy Law of the United States § 3304 (6th ed. J. Henderson 1955).

5 Respondents raised their homestead exemption argument, see n. 3, supra, in the Court of Appeals, but that court believed that it did not have to reach the issue in view of its holding that the entire § 6672 liability was dischargeable, 551 F. 2d, at 1093 n. 3. The Government contends here that the issue should have been reached regardless of the discharge-ability holding, because Bankruptcy Act § 17a (1) makes a discharge irrelevant to the Government's right to proceed “against the exemption of the bankrupt allowed by law and duly set apart to him,” 11 U. S. C. § 35 (a) (1) (1976 ed.). Brief for United States 33-34, n. 23. In view of our holding that the § 6672 liability is not dischargeable, we need not address this contention. On remand, of course, the Court of Appeals may consider respondents’ argument that some or all of the homestead exemption belongs to Naomi Sotelo.

6 In addition to several District Court cases, the Court of Appeals cited the conflicting holding of the Fifth Circuit in Murphy v. U. S. Internal Revenue Service, 533 F. 2d 941 (1976). The Murphy decision was followed by the Fourth Circuit in Lackey v. United States, 538 F. 2d 592 (1976).

7 The Government contends, and respondent does not disagree, that the three-year limitation in Bankruptcy Act § 17a (1) would not bar any part of the Government’s claim in this case. Brief for United States 25-26, n. 15.

8 The specific language of Bankruptcy Act § 17a (1) (e) is contained within a proviso that modifies the more general approach of § 17a (1). Both the general language and the proviso are aimed at making “taxes” nondischargeable, and there is no reason to believe that any “taxes” made nondischargeable by the specific terms of § 17a (1) (e) would not also be “taxes” as that word is used more generally in § 17a (1).

9 As in the Court of Appeals, see supra, at 272, respondent does not here question his liability under Internal Revenue Code § 6672. Brief for Respondents 4.

10 See also Marsh, Triumph or Tragedy? The Bankruptcy Act Amendments of 1966, 42 Wash. L. Rev. 681, 694 11967):

“It is a common phenomenon of business failure that even an ‘honest’ businessman, in attempting to salvage -a .business which appears headed for insolvency, will frequently ‘borrow’ money of other people without their consent if he can get his hands on it. The one fund which he is almost always able to lay his hands on is the taxes he has withheld and is currently withholding from his employees for the Government.”

A recent statement to the same effect can be found in an opinion of the Comptroller General of the United States: “IRS considers delinquencies in the payment of these employment taxes a serious problem. In 1976 [congressional] testimony . . . , IRS officials expressed concern that employers use withheld taxes as low interest loans from the Federal Government.” Opinion B-137762 (May 3, 1977), reprinted in 9 CCH 1977 Stand. Fed. Tax Rep. ¶ 6614, p. 71,438.

11 See also, e. g., 112 Cong. Rec. 13817 (1966) (remarks of Sen. Ervin) ; id., at 13821 (letter to Senators from Sens. Ervin and Hruska); id., at 13822 (remarks of Sen. Hruska); letter from Under Secretary of Commerce Edward Gudeman, reprinted in S. Rep. No. 114, p. 12; memorandum from W. Randolph Montgomery, Chairman of the National Bankruptcy Conference, reprinted id., at 16; S. Rep. No. 1134, 88th Cong., 2d Sess., 2 (1964); H. R. Rep. No. 735, 86th Cong., 1st Sess., 2 (1959).

12 Rather than predicating liability on ability to pay, § 6672 is based on the premise that liability should follow responsibility. See n. 13, infra. In a recent survey of IRS practices with regard to § 6672, the Comptroller General of the United States wrote:

“IRS uses the 100-percent penalty only when all other means of securing the delinquent taxes have been exhausted. It is generally used against responsible officials of corporations that have gone out of business . . . . [I]t is IRS policy that the amount of the tax will be collected only once. After the tax liability is satisfied, no collection action is taken on the remaining 100-percent penalties.” Opinion B-137762, supra, n. 10, at 71,438.

13 Our dissenting Brethren appear uncomfortable with this legislative policy choice, expressing concern about “lifelong liability” being imposed on “a comptroller, accountant, or bookkeeper who reaped none of the fruits of entrepreneurial success.” Post, at 290, 291. While we should not in any event be led by our sympathy to a result contrary to that intended by Congress, there is here little reason for concern. No corporate officer, regardless of title, can be held liable under Internal Revenue Code § 672 unless his position was sufficiently important that he was “required to collect, truthfully account for, and pay over” withholding taxes and unless he “willfully fail[ed]” to meet one or more of these obligations. In this case, for example, Onofre Sotelo, the chief executive officer exercising actual authority over the corporation’s day-to-day affairs, was found liable under the section, while Naomi Sotelo was not, despite the fact that she held the position of corporate secretary. See supra, at 270-271, and n. 2.

The dissenting opinion as much as concedes, moreover, that there is no responsible corporate officer who can be said to reap “none of the fruits of entrepreneurial success,” since all employees are dependent on the corporation for their “continued employment.” Post, at 291 (emphasis added); see post, at 291-292, n. 3. The “continued employment” of a corporate officer is obviously a benefit of considerable significance to that officer and is generally dependent upon the success of the corporate enterprise. Hence an officer has a stake in “the fruits of entrepreneurial success” and, like a shareholder, may be tempted illegally to divert to the corporation those funds withheld from corporate employees for tax purposes.

14 Such individuals would be liable after bankruptcy for “taxes” which they, as employers, “collected or withheld from others . . . but [did] not pa[y] over.” Bankruptcy Act § 17a (1) (e), 11 U. S. C. § 35 (a) (1) (e) (1976 ed.).

15 Indeed, respondent’s business was operated as a sole proprietorship prior to September 1970. See supra, at 270-271; Memorandum Opinion of Bankruptcy Court, supra, n. 2, at 1.

16 The dissenting opinion recognizes, post, at 285 n. 1, Congress’ unquestioned concern about eliminating corporations’ “unfair” advantage over individual entrepreneurs. H. R. Rep. No. 372, p. 2; S. Rep. No. 114, pp. 2-3, Elsewhere our Brother Rehnquist appears to concede that Congress meant “to ameliorate the lot” of only “some bankrupts” when it passed the 1966 amendment to the Bankruptcy Act. Post, at 282; see post, at 285. There is every indication that the 1966 amendment was not intended “to ameliorate the lot” of corporations and their principal officers, at least with regard to taxes collected from employees. And the dissenting opinion has not even attempted to explain how a Congress concerned about “discriminat[ion] against the private individual or the unincorporated small businessman,” H. R. Rep. No. 372, p. 2; S. Rep. No. 114, pp. 2-3, could have thought it just to relieve corporate officers of § 6672 liability in bankruptcy, as the dissent’s approach would do, while leaving other owners of “small family businesses],” post, at 291 — those who happen to operate through noncorporate entities — subject to the same kind of liability.