RESPONDENT: United States
LOCATION: Mena Public High School
DOCKET NO.: 73-375
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Second Circuit
CITATION: 419 US 43 (1974)
ARGUED: Oct 15, 1974
DECIDED: Nov 19, 1974
Howard Karasik - for petitioner
Keith A. Jones - for respondent United States
Samuel J. Warms - for respondent
Facts of the case
Media for Otte v. United StatesAudio Transcription for Oral Argument - October 15, 1974 in Otte v. United States
Audio Transcription for Opinion Announcement - November 19, 1974 in Otte v. United States
Warren E. Burger:
The judgment and opinion of the Court in No. 73-375, Otte against the United States will be announced by Mr. Justice Blackmun.
Harry A. Blackmun:
This case raises issues concerning withholding taxes in the bankruptcy context.
We took certiorari from the Second Circuit because the Federal Courts of Appeals were in disagreement on the primary issue.
That is, what priority if any are withholding taxes entitled to under the scale set forth in Section 64 of the Bankruptcy Act?
Freedomland, Inc., a corporation first sought an arrangement under Chapter XI of the Act and then when this failed it was adjudicated a bankrupt.
413 of its employees filed proofs for unpaid wages earned before the inception of the bankruptcy proceedings.
These wage claims clearly were entitled to a second priority.
The United States however did not file proofs of claim for taxes assertedly withholdable under the federal income tax law and the Federal Insurance Contributions Act.
Neither -- neither did the City of New York filed proofs for what it asserted were city taxes withholdable under its administrative code.
It turned out that the bankrupt estate had sufficient assets to pay off all first priority and second priority claims in full.
In due course then, the trustees sought an order from the referee authorizing the payment of the 413 priority wage claimants but without deduction for withholding taxes.
The motion was granted.
On review, the District Court for the Southern District of New York reversed so far as the referee's order concerning the federal taxes.
The Court directed the withholding and gave the taxes of fourth priority status in as much as it felt they were taxes which became legally due and owing by the bankrupt within the language of the statute.
It rejected the referee's argument that withholding and the book work that would accompany it were inconsistent with the purposes of the Act.
The District Court however ruled against New York City's position on the ground that the wages in question had been earned prior to 1966 when the city income tax went into effect.
On appeal, the Second Circuit affirmed in part and reversed in part.
It held that the trustee was obligated to withhold and report and to remit the taxes but the taxing authorities were not required to file proofs of claim and that both the United States and New York City were entitled to second priority status.
In an opinion filed today we hold that a trustee in bankruptcy with respect to these earned but unpaid pre-bankruptcy wages is obligated to withhold income and Social Security taxes when those wages are paid from the bankrupt estate.
We so hold despite the fact that an employment relationship between the trustee and the wage earner does not exist.
We also hold that payments of these priority wage claims qualifies wages under both the bankruptcy and under the tax statutes.
We too reject the argument that the withholding burden on the trustee, such as it is, is not consistent with the policy of the Bankruptcy Act.
We further hold that proofs of claim need not be filed with respect to these pre-bankruptcy wages.
And finally we hold that these particular withholding taxes are entitled to a second priority. That is the same priority that the wage claims possess.
We so hold because the withholding taxes derive from the wages themselves.
We refuse to place them in the fourth category because they are not taxes that became legally due and owing by the bankrupt.
And we do not place them in the first priority relating to cost and expenses of administration.
The judgment of the Court of Appeals is therefore affirmed.
Warren E. Burger:
Thank you Mr. Justice Blackmun.