The Supreme Court ruled 5 to 4 yesterday that formal bankruptcy does not relieve a corporate officer of full liability for withholding taxes collected from employes of his bankrupt corporation but "willfully" not paid to the government.
The dissenters accused the majority of taking a "perverse approach" and, with a "remarkable tour de force of linguistics and logic," reaching an "illogical" and "twisted" conclusion.
Onofre Sotelo and his small masonry corporation were judges bankrupt in 1973. The Internal Revenue Service claimed $32,871 that the company had collected in withholding but had not turned over to the IRS.
A bankruptcy court held that Sotelo, having been legally responsible for paying the taxes, was personally liable. The IRS then tried to collect $10,000 that belonged to Sotelo and his wife, the corporation's secretary, and that was not available to creditors.
The Sotelos argued that the liability was itself a "penalty" under the bankruptcy law and, as such, had been discharged by their bankruptcy. The 7th U.S. Circuit Court of Appeals agreed. But the Supreme Court reversed, agreeing with the government that Sotelo's liability was nondischargeable in bankruptcy.
In the opinion for the court, Justice Thurgood Marshall said that the appellate court "did not consider" the intent of Congress as revealed by the legislative history, relying instead "on more general policy factors."
The appeals court noted that an "inequity" could arise from holding an individual "liable for a tax owed by a corporation" in cases where the liability of the corporation vastly exceeds the individual's resources, present or future. Marshall commented:
"However persuasive these considerations might be in a legislative forum, we as judges cannot override the specific policy judgments made by Congress in enacting the statutory provisions with which we are concerned . . .
Chief Justice Warren Burger joined Marshall, as did Justices Byron White, Harry Blackmun and Lewis Powell Jr. Justice William Rehnquist wrote the dissenting opinion, joined by Justices William Brennan Jr., Potter Stewart and John Paul Stevens.
Rehnquist wrote the Contress had "a basically beneficient purpose" - the rehabilitation of bankrupts - in passing the bankruptcy law. Yet, he said, the majority interpreted the intent of Congress not only to make nondischargeable a liability which potentially could run into hundreds of thousands of dollars but may have worsened, rather than bettered, the lot of the bankrupt . . .
He went on to say: "While the life-long liability which the court imposes today falls on the shoulders of one who was the chief executive officer of a small family business, there is unfortunately nothing in the court's reasoning which would prevent the same liability from surviving bankruptcy in the case of a comptroller, accountant or bookkeeper who reaped none of the fruits of entreprenuerial success other than continued employment in the corporation, and in some cases possibly not even that."
In a related case, the court ruled 6 to 3 that a person who acquires a corporation cannot be held liable for withholding taxes that the previous owners collected from employes but had not, contrary to their assurances to the buyer, paid to the government.
The case involved Ike Slodov, an orthodontist who bought three food-vending corporations that collected $250,000 in withholding taxes but, without his knowledge, had dissipated the money. He then acquired revenues sufficient to pay the IRS, but spent it instead for wages, rent, supplies and other normal expenses.