Opinion ID: 109113
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Heading Rank: 2

Heading: Withholding, Reports, and Returns

Text: Every Court of Appeals which has faced the issue, including the Second Circuit in the present case, has held, contrary to the ruling of the referee, that the withholding provisions of the Internal Revenue Code, and of state or municipal tax statutes, require that a trustee in bankruptcy withhold income and social security taxes from payments of wage claims, and that he prepare and submit to the wage claimants and to the taxing authorities the reports and returns statutorily required of employers. United States v. Fogarty, 164 F. 2d 26, 30-33 (CA8 1947); United States v. Curtis, 178 F. 2d 268, 269 (CA6 1949), cert. denied, 339 U. S. 965 (1950); Lines v. California Dept. of Employment, 242 F. 2d 201, 202, reh. den., 246 F. 2d 70 (CA9), cert. denied, 355 U. S. 857 (1957); In re Connecticut Motor Lines, Inc., 336 F. 2d 96 (CA3 1964). To the same effect is In re Daigle, 111 F. Supp. 109, 111 (Me. 1953). A. The requirement of withholding. Section 3402 (a) of the Internal Revenue Code, 26 U. S. C. § 3402 (a), requires [e]very employer making payment of wages to deduct and withhold upon such wages . . . a tax determined. . . . Section 3401 (a) defines wages for withholding purposes to mean, with certain exceptions, all remuneration . . . for services performed by an employee for his employer, and § 3401 (d) defines employer as the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person. The latter section makes an exception where the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services; in that case, employer means the person having control of the payment of such wages. Sections T46-51.0 (a) and U46-8.0 of the New York City Administrative Code are generally to the same effect. [4] The trustee contends that the payment of wage claims under the Bankruptcy Act, although for wages within the meaning of that Act, is not the payment of wages under § 3402 (a), and that, in any event, the trustee is not the wage claimant's employer to whom § 3402 (a) relates. The payments to the wage claimants who filed in this case are payments for services performed by them for their former employer, Freedomland, before the commencement of the proceeding under the Act. There is, and can be, no dispute as to this. The fact that the services were performed for the bankrupt, rather than for the trustee, and the fact that payment is made after the employment relationship terminated, do not convert the remuneration into something other than wages, as defined by § 3401 (a) of the Internal Revenue Code. That statute, as has been noted, broadly defines wages to include, with stated exceptions not material here, all remuneration. And § 3401 (d), in defining employer, twice refers to services that the employee performs or performed. It thus speaks in the past tense as well as the present and thereby plainly reveals that a continuing employment relationship is not a prerequisite for a payment's qualification as wages. The income tax withholding regulations since 1943 have so provided in specific terms. 26 CFR § 31.3401 (a)-1 (a) (5); Treas. Reg. 120 § 406.205 (b) (1954); Treas. Reg. 116 § 405.105 (1944 and 1951 eds.); Treas. Reg. 115 § 404.101 (a) (1943). The regulations are not in conflict with the statute; they further the statutory purpose and are reasonable; and they are a valid exercise of the rulemaking power. Cammarano v. United States, 358 U. S. 498, 507-512 (1959). [5] The payment of the wage claims is thus payment of wages under § 3402 (a) of the Internal Revenue Code. The fact that in bankruptcy payment of wage claims is effected by one other than the bankrupt former employer does not defeat any withholding requirement. Although § 3402 (a) refers to the employer making payment of wages, § 3401 (d) (1), as also has been noted, provides that if the person for whom the services were performed does not have control of the payment of the wages for such services, the term employer then means the person having control of the payment of such wages. This obviously was intended to place responsibility for withholding at the point of control. The petitioner trustee suggests that control rests in the referee rather than in the trustee, because of the former's duty, under § 39a (5) of the Act, 11 U. S. C. § 67 (a) (5), to declare dividends. We need not determine whether it is the trustee, with his responsibility, under §§ 47a (8) and (11) of the Act, 11 U. S. C. §§ 75 (a) (8) and (11), for making recommendations and actual payments, or the referee, with his supervision over the general administration of the bankrupt estate, or the estate itself, that has control of the payment of such wages, within the meaning of § 3401 (d) (1) of the Internal Revenue Code. One of them is the employer and, as such, has the duty to withhold or to order the withholding, as the case may be. [6] An employer, under § 3402 (a), is thus present. The situation is the same with respect to FICA withholding. Section 3102 (a) of the Internal Revenue Code, 26 U. S. C. § 3102 (a), provides that the tax is to be collected by the employer by deducting from the wages as and when paid. Here, too, the payments clearly are wages under that statute, even though again, at the time of payment, the employment relationship between the bankrupt and the claimant no longer exists. And here, also, the regulations long and consistently have been to this effect. 26 CFR § 31.3121 (a)-1 (i); Treas. Reg. 128 § 408.226 (a) (1951); Treas. Reg. 106 § 402.-227 (a) (1940). The fact that the FICA withholding provisions of the Code do not define employer is of no significance, for that term is not to be given a narrower construction for FICA withholding than for income tax withholding. Because of the identity of definition already observed, n. 4, supra, the same rationale necessarily applies to the New York City withholding tax. The trustee finally suggests that the placing of a withholding obligation upon the trustee amounts to the imposition of a penalty barred by § 57j of the Act, 11 U. S. C. § 93 (j). This argument, however, rests upon the presence of § 6672 of the Internal Revenue Code, 26 U. S. C. § 6672, and §§ T46-65.0 (g) and U46-35.0 (g) of the New York City Administrative Code, all of which impose a penalty, apart from the tax, on a person who willfully fails to fulfill his obligation to withhold or who willfully attempts to evade or defeat any tax. That, obviously, is not this case. B. The requirement of reports and returns. This routinely follows from the obligation to withhold. Section 6051 (a) of the Internal Revenue Code, 26 U. S. C. § 6051 (a), provides that a person required to withhold must furnish the employee a written statement showing the wages subject to withholding and the amount withheld on account of each tax. A duplicate of that statement is to be available for filing with the Internal Revenue Service. § 6051 (d). Sections 6001 and 6011 require every person responsible for payment or collection of taxes to keep such records and make such returns as the Secretary prescribes. The applicable regulations respond to these statutes. 26 CFR §§ 31.6001-1, 31.6001-2, 31.6001-5, 31.6011 (a)-6 (a) (1), and 31.6051-1; Rev. Proc. 71-18, 1971-1 Cum. Bull. 684. It is undisputed that the petitioner trustee must comply with these provisions if he is subject to the withholding requirements of §§ 3402 and 3102. Nicholas v. United States, 384 U. S. 678, 693 (1966). The New York City Administrative Code provisions are to similar effect, §§ T46-52.0 and T46-54.0, U46-9.0 and U46-11.0, and we reach the same conclusions with respect to reports and returns thereunder. C. Expense and delay. The trustee argues, as the referee held, that the imposition of obligations to withhold, report, and file returns places a burden on the administration of bankrupt estates that is at odds with economic and expeditious administration and with the spirit of the Act. He places some reliance, as did the referee, on the paper by Referee Hiller. The Folly of the Fogarty Case, 32 Ref. J. 54 (1958), where the author states that the application of the Fogarty rule is sheer nonsense and that the case is out of harmony with sound bankruptcy law. Id., at 54, 56. There is, of course, an overriding concern in the Act with keeping fees and administrative expenses at a minimum so as to preserve as much of the estate as possible for the creditors. 3A W. Collier, Bankruptcy ¶¶ 62.05 [1], 62.02 [5] (14th ed. 1972). And it cannot be denied that paperwork takes time and occasions expense. In this particular case, withholding must be computed on the 413 wage claims; returns (Forms W-2, W-3, and 941) must be prepared and furnished the claimant and the Internal Revenue Service; records must be maintained; and the taxes withheld must be remitted to the respective taxing entities. We are not persuaded, however, that this burden would be so undue as to be inconsistent with or violative of the spirit of the Act. It is the same burden, no more and no less, that any employer of the same size must bear, and it is the same burden that is borne by any receiver or arrangement debtor or any other fiduciary with a like number of employees. The burden is not disproportionate. [7] Further, the Internal Revenue Service has endeavored to lighten the load by its alternative 25% combined bankruptcy withholding rate for income and FICA taxes. See n. 2, supra. New York City has done the same with its 1% withholding rate. Neither should the burden make it necessary, as is so often and so easily suggested, to employ an accountant. Computations at the rates of 25% and 1%, respectively, are simple and elementary arithmetic exercises, hardly worthy of an accountant's talent; a high school student is able to make those computations as is any bookkeeper, clerk, or the trustee himself. The added tasks of withholding, reporting, returning, and remitting are contemplated, in our view, by the Act. The interests of the taxing entities, who are creditors, too, and, through them, the interests of the public, outweigh the minuscule added burden for the estate. See Swarts v. Hammer, 194 U. S. 441, 444 (1904). If relief is to be considered for bankrupt estates in this respect, it is a matter for legislative, not judicial, concern. There is nothing in the Act or in the Internal Revenue Code that relieves the trustee of these duties. Cf. §§ 7507, 108 (b), 371, and 372 of the Internal Revenue Code, 26 U. S. C. §§ 7507, 108 (b), 371, and 372.