The opinion of the court was delivered by: BARTELS
This is a petition for review of Referee Rudin's decision upon the meaning of the phrase "legally due and owing" in the 1966 amendment to Section 17(a)(1) of the Bankruptcy Act (11 U.S.C.A. § 35(a)(1)), the pertinent portion of which reads:
" Debts Not Affected by a Discharge. (a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are taxes which became legally due and owing by the bankrupt to the United States or to any State or any subdivision thereof within three years preceding bankruptcy * * *."
The issue involves a claim for Federal personal income taxes of a bankrupt which was filed as a provable priority claim under Section 64(a)(4) of the Bankruptcy Act, as amended (11 U.S.C.A. § 104(a)(4)) and held dischargable under Section 17(a)(1), as amended, upon the predicate that the taxes became "legally due and owing" within three years preceding bankruptcy.
On April 1, 1965, Joseph A. Kopf filed a petition for an arrangement pursuant to Chapter XI of the Bankruptcy Act and was adjudicated a bankrupt on May 6, 1966. The District Director of Internal Revenue filed a claim, as amended, for certain payroll and income tax liabilities plus interest for the taxable years 1960-1964, in the sum of $38,888.20. The Referee allowed the Director's claim as a priority claim for the years 1962, 1963, and 1964 but disallowed the priority personal income tax claims for the years 1960 and 1961 upon the ground that these taxes had been discharged in bankruptcy.
The only tax in dispute is the 1961 Federal personal income tax, which the Referee held became "legally due and owing" on December 31, 1961, although not payable until April 15, 1962, and accordingly did not fall within the three-year period exception specified in Section 17(a)(1), as amended. The Government contests this conclusion upon the ground that the 1961 taxes did not become "legally due and owing" until April 15, 1962, when the taxpayer was required to file the return. Unfortunately, there is no definition of the phrase in the Code and the concept of "legally due and owing" has different meanings depending upon the various taxes imposed under Federal or State law.
The problem here is twofold: (1) What is the nature of, and under what law are the taxes imposed; and (2) for what purpose is the claim classified under the Bankruptcy Act. In the first case it is well settled that the construction of a State statute imposing State taxes, will be followed by the Federal Courts, People of State of New York v. Jersawit, 263 U.S. 493, 68 L. Ed. 405, 44 S. Ct. 167 (1924), and it is equally well settled that Federal courts will rely upon their own construction of Federal tax statutes. We are not concerned here with a State taxing statute, nor are we considering the provability of claims under the Bankruptcy Act. It must be recognized, however, that in the context of State statutes imposing franchise or other local taxes and of Federal statutes imposing withholding taxes, the courts have held that such taxes become "legally due and owing" as provable claims in bankruptcy at the time the obligations accrued or became absolute, although they had not ripened into an obligation to pay and were not payable until a date subsequent to bankruptcy. In re Connecticut Motor Lines, Inc. (provability of Government's claim for income withholding and social security taxes arising from wages accruing prior to bankruptcy, but paid during bankruptcy, for which the Government filed no proof of claim), 336 F.2d 96 (3d Cir. 1964); State of New Jersey v. Anderson (provability of a preference claim for corporate franchise taxes upon the basis of a tax upon capital stock outstanding on January 1st, prior to bankruptcy, although the tax return and assessment were made after bankruptcy), 203 U.S. 483, 51 L. Ed. 284, 27 S. Ct. 137 (1906); In re International Match Corp. (provability of Delaware corporate franchise tax claim assessed before but payable after bankruptcy), 79 F.2d 203 (2d Cir. 1935), cert. denied, Delaware v. Irving Trust Co., 296 U.S. 652, 56 S. Ct. 368, 80 L. Ed. 464 (1935); In re Sherwoods (provability of a New York State Real Estate Tax assessed against a lessee prior to bankruptcy, but payable after filing of the petition), 210 Fed. 754 (2d Cir. 1913). In In re Connecticut Motor Lines, Inc., supra, at p. 104, the Court of Appeals for the Third Circuit, in determining the availability to the Government of filing a priority proof of claim for Federal income withholding and social security taxes, said:
"It is well settled that the term 'legally due and owing' does not mean 'payable.' And '[it] does not follow that taxes are not due and owing from the citizen * * * because the state has prescribed some method exclusive in its character for their collection.'"
Thus, Collier on Bankruptcy, Vol. 3A, Ch. VII, [*] 64.405, p. 2179 (14th ed.), in referring to the filing under Section 64(a)(4), as amended, of provable fourth priority tax claims, whether State or Federal, makes the following observation:
"A distinction must be made in all cases between the accrual of a liability before the petition is filed, though that liability has not yet ripened into an obligation to pay, and the situation where there is no liability whatever until all determinative facts are in existence. The time of the accrual of the obligation to pay rather than the time when the obligation is to be discharged by payment, is the controlling factor".
As hereafter disclosed, Collier was not in this discussion referring to the dischargeability under Section 17(a)(1) of those provable tax claims entitled to a priority under Section 64(a)(4).
Two reasons appear why this Court need not follow the esoteric meaning of "legally due and owing" employed by the above authorities. In the first place, we are not dealing with provability but with dischargeability of a tax claim. In the second place, we are dealing with the interpretation of the term "legally due and owing" as applied to the imposition of the tax under the Federal income tax statute. If in that statute the term obviously means the date of payment rather than the date the liability accrued, then this Court must ...