LOCATION: Duke Power Company's Dan River Stream Station
DOCKET NO.: 125
DECIDED BY: Burger Court (1970-1971)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 401 US 513 (1971)
ARGUED: Feb 22, 1971
DECIDED: Mar 24, 1971
Facts of the case
Media for United States v. Randall
Audio Transcription for Oral Argument - February 22, 1971 in United States v. Randall
Warren E. Burger:
We'll hear arguments next in United States against Randall, number 125.
Richard B. Stone:
Mr. Chief Justice and may it please the Court.
This case which is here on a writ of certiorari to the United States Court of Appeals for the Seventh Circuit raises a fundamental question as to the legal status of taxes which an employer withholds from the wages of his employees and specifically the case raises the proper treatment of those withheld funds in the event that the employer becomes bankrupt or in is to a Bankruptcy Procedure.
The facts of the case are relatively simple.
Halo Metal Products, Inc. filed a petition for an arrangement under Chapter 11 of the Bankruptcy Act and that is the provision which allows operation of the business to try to stow up the Bankruptcy.
It was allowed by the referee of the Bankruptcy Court to remain in possession of the business and to carry on the business' operation subject to the referee supervision during the Chapter XI arrangement.
As is the custom in such an arrangement, the referee entered in elaborate order requiring the debtor in possession to file periodic reports and to maintain full records of its operations during the arrangement period.
And in addition, the referee ordered the debtor to open up three bank accounts.
First of these accounts was to receive all revenues, received by the business during the operation in the arrangement period.
And the second account was to receive periodically from the funds deposited in the first revenues account the amount necessary to pay all employee wages and disbursements from this payroll account were to be made at proper intervals with the approval of the referee.
The referee ordered that simultaneously with meeting the debtor in possession's payroll obligations that the debtor deposit into a third special account the amount of tax and social security deductions that the debtor was required to withhold from his employee's wages and withdrawals from this third account were to be allowed only for payment of withheld taxes and welfare benefits as those payments became due to United States Government.
The debtor failed almost entirely to comply with the referee's orders with the orders of the Bankruptcy Court with respect to this withheld taxes.
Although the income in social security taxes were withheld from the employee wages, the withheld funds were not placed in the special account nor would they pay over the United States at the proper time as required by the arrangement court.
During the arrangement, the United Stats filed the proof of claim for payment of a thousand and seventy-five dollars that is $1,075 of FICA in income taxes withheld from employees salaries on the ground that this amount was a special trust for the United States benefit under Section 7501 (a) of the Internal Revenue Code of 1954 and about the Section, I shall elaborate shortly.
Subsequently, about three months after the filing of the original arrangement petition, Halo was adjudicated a bankrupt.
In a month later on December 22, 1967, the United States filed the petition in the Bankruptcy Proceeding asking that the withheld taxes at which it claim as the Trust Fund under Section 7501 be paid over to the United States just as any Trust Fund would be paid over prior to payment of the cost and expenses of administration of the Bankruptcy Proceeding and the referee denied the Government's petition, the District Court and the COurt of Appeals upheld the referee's denial of the petition and it is that which we are here on the writ of certiorari to contest now.
Both of these courts held essentially that Halo's obligation to pay over to the Government the taxes withheld from employee wages was merely an administrative expense of the bankrupt estate and was thereby subject to the scale of priorities established by Section 64 of the Bankruptcy Act with which I am sure this Court is quite familiar.
And I think it would be helpful to view the issue presented here which is whether the Government is entitled to recognition of a trust fund for the amount of taxes withheld from the salaries of the bankrupt's employees during the arrangement period.
As breaking down essentially into two parts, two questions.
The first question is and this is as really the question is construed by the Court of Appeals whether the trust fund concept is simply inapplicable altogether as both courts below seemed to have felt in a Bankruptcy Proceeding.
And the second question which neither court reached but which I believe was the focus of the bankruptcy referee's decision is whether assuming that the trust does not disappear merely by virtue of the withholding employer's bankruptcy.
Whether the trust is nonetheless defeated or enjoinment of the trust is defeated by virtue of the Government's inability to trace the race of the trust and I will address myself to both of these questions.
Does the Government in this case really is not a matter of priorities at all?
Richard B. Stone:
That's right Mr. Justice Stewart, it's not.
And by contrast, the way the Court looks at it, that's all it was?
Richard B. Stone:
Richard B. Stone:
That's exactly right and prior to several years ago, I believe in 1965 when the Third Circuit decided the Connecticut Motor Lines case, every court that had looked into this and all the commentators as I shall shortly view the question as not one of priorities but simply the recognition of a trust and not a matter of relative priorities.
I think it's --
I think the question becomes to the trust to be --