United States v. Sotelo, 436 U.S. 268 (1978)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Section 6672 of the Internal Revenue Code of 1954 provides that "[a]ny person required to collect, truthfully account for, and pay over" federal taxes who "willfully fails" to do so, shall be liable to a "penalty" equal to the amount of the taxes in question. Section 17a(1)(e) of the Bankruptcy Act makes nondischargeable in bankruptcy "taxes . . . which the bankrupt has collected or withheld from others . . . but has not paid over." Respondents, husband and wife, were adjudicated bankrupt, as was a corporation in which he was the principal officer and majority stockholder. The bankruptcy court found respondent husband (hereafter respondent) personally liable to the Government under § 6672 for his failure to pay over taxes withheld from employees of the corporation. Subsequently, in proceedings by the Government to collect from respondent on his § 6672 liability, the bankruptcy judge, rejecting respondent’s contention that such liability was a "penalty," and, as such, had been discharged, reasoned that, although § 6672 liability was denominated a "penalty," it was, in substance, a tax, and thus was nondischargeable under § 17a(1), and more particularly § 17a(1)(e). The District Court affirmed. The Court of Appeals reversed. Though recognizing respondent’s § 6672 liability, the court held that § 17a(1)(e) was inapplicable because it was not respondent himself, but his corporation, that was obligated to collect and withhold the taxes, and because, in any event, the money involved constituted a "penalty," whereas § 17a(1)(e) renders only "taxes" nondischargeable.

Held: Respondent’s liability under § 6672 is nondischargeable in bankruptcy under § 17a(1)(e). Pp. 273-282.

(a) 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. P. 274.

(b) Since the taxes in question were "collected or withheld" from the corporation’s employees and have not been "paid over" to the Government, respondent’s § 6672 liability was imposed not for his failure to collect taxes, but for his failure to pay over taxes that he was required both to collect and to pay over, and therefore he "collected or withheld" the taxes within the meaning of § 17a(1)(e). P. 275.

(c) The "penalty" language of § 6672 is not dispositive of the status of respondent’s debt under § 17a(1)(e), since the funds involved were unquestionably "taxes" at the time they were "collected or withheld from others," and 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 "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 where, as here, the § 6672 liability is predicated on a failure to pay over, rather than a failure initially to collect, the taxes. P. 275.

(d) The legislative history of § 17a(1)(e) indicates not only that Congress intended to make nondischargeable the withholding tax obligations of persons in respondent’s situation, but also that it meant to ensure post-bankruptcy liability for such taxes in corporate bankruptcy situations (where a corporation’s tax liabilities are rendered uncollectible because of it dissolution). Pp. 275-279.

(e) The overall policy of the Bankruptcy Act of giving a bankrupt a "fresh start" cannot override Congress’ specific intent in § 17a(1)(e) to make a liability like respondent’s nondischargeable, especially since the contrary result would create an inequity between corporate officers and individual entrepreneurs. Pp. 279-281.

551 F.2d 109, reversed and remanded.

MARSHALL, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, BLACKMUN, and POWELL, JJ., joined. REHNQUIST, J., filed a dissenting opinion, in which BRENNAN, STEWART, and STEVENS, JJ., joined, post, p. 282.