In re Century Silk Mills, Inc.

AUGUSTUS N. HAND, District Judge. This is a petition of the state of New York for a review of the order of Referee Lyttle, granting the trustee’s motion to dismiss and expunge the claim filed on behalf of the state of New York for a franchise tax assessed against the bankrupt corporation under the Tax Law. An involuntary petition was filed on July 29,' 1920, and the adjudication of bankruptcy had on November 4, 1920. A receiver was appointed on the filing of the petition, who was subsequently elected trustee, and both officers conducted the business in liquidating merchandise on hand. Section 209 of the New York Tax Law (Consol. Laws, e. 60) reads as follows: “Bee. 209. Franchise Tax on Corporations Based on Net Income. For the privilege of exercising its franchise in this state in a corporate or organized capacity every domestic corporation * * * shall annually pay in advance for the year beginning November first next succeeding the first day of July in each and every year an annual franchise tax, to be computed by the tax comr mission upon the basis of its entire net income, as defined in subdivision three of section 209 of the Tax Law, for its fiscal or the calendar year next preceding, as hereinafter provided, which entire net income is presumably the same as the entire net income which such corporation is required to report to the United States. * * * ” The tax was to be “computed.” In order that the tax commission could compute the tax, section 211 provided that every corporation taxable under article 9-a “shall annually on or before July first, or within thirty days after the making of its report of entire net income to the United States Treasury Department for any fiscal or calendar year, preceding said first day of July, transmit to the tax commission a report in the form prescribed by the tax commission, specifying,” etc. Section 214 provides elaborately for the method of computing the tax, and section 215 provides that: “The tax imposed by this article shall be at the rate of four and one-half per centum of the entire net income of the corporation, * * " determined as provided by this article.” Section 219-a provided that: “The tax commission shall audit and state the account of each corporation known to be liable to a tax under this article, as herein before provided, and shall compute the tax thereon and proceed to collect the same. * *' *' ” Section 219-b requires that “notice of all tax assessment” shall be sent by mail to the post office .address given in the report. Section 219-c provides when the tax shall be paid. “When Tax Payable. The tax hereby imposed shall be paid to the state tax commission on or before the first day of January of each year, or within thirty days after notice of the tax has been given as provided in section 219-b of this chapter if such notice is given subsequent to the first day of December of the year for which sueh tax is imposed. * * >! The corporation filed its report before July 1, 1920, as required by law, upon which a .tax was thereafter fixed in the sum of $2,-884.82. No question is made as to the correctness of this sum as a tax against the corporation for exercising its franchise, but the referee [296] expunged it as a claim against the estate in bankruptcy upon the ground that the petition in bankruptcy was filed July 29, 1920, and that then the estate “actually or potentially passed into the control of the bankruptcy court,” while the tax assessed was by statute for the year beginning November 1, 1920, and had therefore not become due or payable at the time when the bankruptcy court obtained jurisdiction of the assets. Judge Mack rendered a decision in the ease of In re Warner & Pepper, Inc., Bankrupt, in July, 1925, without, however, filing any opinion, and reached the same result as the referee in the ease at bar. Referee Olney came to a different conclusion in the Case of Chinese Pur Importers, Inc., decided August 3, 1925. He relied upon the decisions of the Supreme Court in New Jersey v. Anderson, 203 U. S. 483, 27 S. Ct. 137, 51 L. Ed. 284, and New York v. Jersawit, 263 U. S. 493, 44 S. Ct. 167, 68 L. Ed. 405. In the former ease, however, the tax in question was for a year which had already commenced at the time the petition in bankruptcy was filed, and in the latter case the petition was filed December 22,1920, and the claim of the state for its franchise tax was for the year commencing November 1, 1920, and ending October .31, 1921. In each ease the situation differed from the present because the period which the tax covered had already commenced to run when the petition was filed. Here it had neither commenced to run, nor is there any evidence that the tax had even been computed by the state authorities at the time of the filing of the petitión. To hold that the tax was “legally due and owing,” so as to become payable under section 64a of the Bankruptcy Act, where the tax had not been assessed, and where the period had not begun to run for which the corporation was taxed for .exercising its franchise, is going beyond the facts of any adjudicated ease, and is not called for by the text of the New York statutes, and is not a reasonable interpretation, in view of the strict construction applicable to tax "acts. It is further contended that the tax ought to be imposed, irrespective of the fact that the petition was filed before the tax is shown either to have been assessed or to have become due and owing, because the trustee conducted the business under orders of this court for a short time subsequent to November 1, 1920, when the period covered by the franchise tax began to run. The tax was not upon the conduct of the business liquidated under the orders of this court, but upon the exercise of its franchise by the corporation. The adjudication against the bankrupt did not terminate its corporate existence, but resulted in the appropriation of a fund by this court at the time when the petition was filed. Theobald-Jansen Electric Co. v. Harry I. Wood Electric Co. (C. C. A.) 285 F. 29; White v. Stump, 266 U. S. 310, 45 S. Ct. 103, 69 L. Ed. 301, 5 Am. Bankr. Rep. (N. S.) 1; Bailey v. Baker Ice Co., 239 U. S. at page 275, 36 S. Ct. 50, 60 L. Ed. 275; Everett v. Judson, 228 U. S. 474, 33 S. Ct. 568, 57 L. Ed. 927, 46 L. R. A. (N. S.) 154; Acme Harvester v. Beekman Lumber Co., 222 U. S. 300, 32 S. Ct. 96, 56 L. Ed. 208. The tax may be due from the corporation, but is not a claim against the assets in the custody of the bankruptcy court, because it has accrued since the petition was filed, and is not an obligation incurred by the receiver or trustee. In the case of In re Continental Candy Co. (D. C.) 291 F. 773, Judge Learned Hand expressed a doubt as to whether a receiver would not be liable for such a tax as the one in question by reason of the fact that his rights were those with whieh the corporation was vested, and must therefore be subject to the same liabilities. The point he decided was that a trustee would not be liable to a franchise tax imposed after he was appointed. I would treat a receiver in bankruptcy, where an adjudication follows, as subject to the same liabilities as a trustee. By the filing of the petition the court becomes possessed of the assets, and the title of the trustee while his possession is deferred related back to the filing of the petition. While the doctrine of relation is a legal fiction, invented to produce certain results, I think it is very real as fixing the title in the trustee. There may be said to have been in contemplation of law a complete ownership of the assets by the trustee from the date of the filing of the petition, with whieh no taxing power of the state over the corporate, franchise could interfere. The recent opinion of Judge Knox in the ease of New York Trust Co. v. Island Oil & Transport Corp. et al. (D. C.) 7 F.(2d) 416, dated August 20, 1925, involved the liability of equity receivers to pay franchise taxes. He differs from the result reached by the majority of the court in Franklin Trust Co. v. State of New Jersey, 181 F. 769,104 C. C. A. 629. The property was not taken permanently from the corporation, as in the case of any adjudication in bankruptcy, but the title remained in it, though in the custody of a receiver. It seems difficult to reach any other conclusion than Judge Knox reached in case of an equity receivership, but the rule he ap [297] plied does not necessarily touch the facts of fu• „„„„ Tins case. For the foregoing reasons, the order of the referee is affirmed.