Lumbard, Chief Judge, Waterman, Circuit Judge, and Jameson, District Judge.*fn* Waterman, Circuit Judge, concurring in the result.
Appellants (hereinafter sometimes referred to as "Interstate") are debtors in possession, under a plan entered in 1966 on the completion of proceedings on their Chapter XI petitions pursuant to section 332 of the Bankruptcy Act. They seek $19,534.85 from Columbia Broadcasting System ("CBS"), one of their principal creditors in the bankruptcy proceedings. Interstate were and are dealers, jobbers, and distributors of phonograph records; CBS manufactured and sold such records to Interstate. Until July 22, 1965, CBS and other manufacturers were subject to an excise tax measured by the sales price of the records, 26 U.S.C. § 4141 (1964). Under the statutory scheme, the manufacturers exacted the tax from their wholesalers, who in turn passed it along to the retailers and, ultimately, to the consuming public.
The excise tax was repealed effective July 22, 1965, P.L. No. 89-44. The repealer provided for refunds of taxes paid upon records remaining in the hands of distributors and retailers. The refunds were to be claimed by the manufacturers based upon the requests of their purchaser-dealers. Upon Interstate's request, CBS filed and received a refund of $19,534.85, the amount here in dispute. Between Interstate's request and CBS' filing, Interstate filed their Chapter XI petitions. In due time CBS received the refund and issued credit memos against Interstate's accounts with it.
By motion to the referee Interstate sought an order requiring CBS to pay the sum over to it as debtor in possession. Opposing the motion, CBS which had filed unsecured claims in the Chapter XI proceeding totalling over $80,000 claimed that the tax refund should be retained by it as a set-off under section 68(a) of the Bankruptcy Act, 11 U.S.C. § 108(a) (1964). With the situation unresolved, a plan paying creditors 12 1/2% of their unsecured claims was confirmed by the referee.
Sometime later, the referee decided the motion in favor of Interstate and ordered CBS to turn over the sum. The district court reversed, holding that "the heavy weight of precedent and the business sense of the matter support the contention of CBS that it is entitled to set off the tax refund against its much larger claim upon the debtor." 307 F. Supp. at 1144. This appeal followed.
Appellants raise a host of arguments, all of which were considered and rejected by the district court. We are in substantial agreement with the position taken by the court below, and affirm on the basis of Judge Frankel's opinion, 307 F. Supp. 1142 (S.D.N.Y. 1970).
WATERMAN, Circuit Judge, concurring in the result:
I concur with my brothers that the tax regulation establishing the refund in question anticipated that the manufacturer should have the right to set off, i.e., credit, the amount refunded against any amounts owed to the manufacturer by the retailer and that, in the light of the regulation, the agreement of the parties did not preclude such a crediting. The tax regulation, 26 C.F.R. § 145.2-1(c) states in relevant part:
Payment shall be made, at the manufacturer's option, in cash, by check, or by credit to the dealer's account as maintained by the claimant. The amount of the payment which may be made by crediting such account may not exceed the undisputed debit balance due at the time the credit is made. * * *
Interstate Record argues that Columbia Broadcasting System waived its right under the regulation to set off the payment received against amounts owed to CBS by Interstate, in that it obtained Interstate's agreement to have CBS collect the refund its due "with the understanding that such tax refunded by the Federal Government shall be refunded to the undersigned [Interstate]." Whatever connotation the broad word "refund" may legitimately have in the context of ordinary business transactions, it is my view that here the word must be interpreted in light of the regulation. The regulation was issued in furtherance of the Excise Tax Refund Act of 1965 and specifically permitted a payment so refunded to be credited by the receiver of the payment to his dealer's account.
The phrase "refunded to the undersigned" in the agreement the parties entered into must be viewed in the context of the refunding machinery the Treasury regulations prescribed was to be used and the word "refunded" itself is not so specific a word as to preclude CBS from crediting any amount received ...