Petition — United States v. Sotelo

No. ) JUN L? x

Ju the Supreme Court of the United States

4 OcTORER TERM) 1976

: 76-1800

UNITED STATES OF AMERICA, PETITIONER

| Onorre J. Sor ELO and Naomi SOHO

if

N PETITION FOR A WRIT OF CERTIORARI TO. THE

1 - MNITED STATES COURT OF APPEALS Fon

THE SEVENTH CIRCUIT...

* * ae,

N

ie e ame i ails |

,

reer

e

err

Statement ret

Reasons for granting the writktkk

Derr

CITATIONS

Cases:

Adams v. United States, 504 F.2d 738

Bloom v. United States, 272 F.2d 215,

Bruning v. United States, 376 U.S. 358.

Burack v. United States, 461 F.2d 1281.

Cross v. United States, 311 F.2d 90

Gefen v. United States, 400 F.2d 476,

certiorari denied, 393 U.S. 1119

Genins v. United States, 489 F.2d 95

Harrington v. United States, 504 F.2d

Hewitt v. United States, 877 F.2d 921

“3c o- 2 oo

it

Cases—Continued Page

Kelly v. Lethert, 362 F.2d 629 8

Lackey v. United States, 538 F.2d 592 6

Lynn v. Scanlon, 234 F. Supp. 140 12

Monday v. United States, 421 F.2d 1210,

certiorari denied, 400 U.S. 8221111 7,8

Mueller v. Nixon, 470 F.2d 1348, certio-

rari denied, 412 U.S. 949 8

Murphy v. Internal Revenue Service, 533

F.2d 941, affirming 381 F. Supp. 813__. 6-7, 12

Newsome v. United States, 431 F.2d 742.. 8

Pacific National Ins. Co. v. United States,

422 F.2d 26, certiorari denied, 398 U.S.

ene 8

Sherwood v. United States, 228 F. Supp.

PERRIS EN cee STS SE OE ea 12

Simonson v. Granquist, 369 ? @ Sana 12

Spivak v. United States, 370 F.2d 612,

certiorari denied, 387 U.S. 908 8

Werner v. United States, 512 F.2d 1381 8

Westenberg v. United States, 285 F.

r 12

Statutes:

Bankruptcy Act, e. 541, 30 Stat. 544, as

amended (11 U.S.C. 1 et seg.) :

Section 17, 11 U.S.C. 35 2, 9, 13, 25a

Section 17a, 11 U.S.C. 35 (ay 4

Section 17a (1), 11 U.S.C. 35 (a) (1). 5, 6,

11, 12

Section 17a (1) (e), 11 U.S.C. 35 (a)

rr 5, 9, 10

Section 573, 11 U.S.C. 93 () 12

Statutes—Continued Page

Internal Revenue Code of 1954, as amend-

ed (26 U.S.C.):

ATES

r

e

8

—

>

re

|

|

&

© 00 G0 OO

Section 4061 et e .

Dr

r ES

Miscellaneous:

1A Collier on Abe! u. ed.):

117.05 ; 6 12

mm

H.R. Rep. No. 372, 88th Cong., Ist Sess.

. 10

H.R. Rep. No. 735, 86th Cong., Ist Sess.

(1959) — 10, 11

H.R. Rep. No. 2535, 85th Cong. 2d Sess.

NRE ARC als AR te bo IT Ye 9, 10

8A Mertens, Law of Federal Income Tax-

ation, § 47A.25a (Rev. 1971) 0... 7-8

8 Remington on Bankruptcy, § 3304 (6th

ed.) 12

S. Rep. No. 114, 89th Cong., Ist Sess.

n ; 10, 11

S. Rep. No. 1134, 88th Cong., 2d Sess.

2 rene 10

8. Rep. No. 1182, 85th Cong., 2d Sess.

(1958) densa eae, 10

In the Supreme Court of the United States

OCTOBER TERM, 1976

No.

UNITED STATES OF AMERICA; PETITIONER

U.

ONOFRE J. SOTELO and NAOMI SOTELO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

The Solicitor General, on behalf of the United

States, petitions for a writ of certiorari to review the

judgment of the United States Court of Appeals for

the Seventh Circuit in this case.

OPINIONS BELOW

The opinion. of the bankruptcy court (App. A,

infra, pp. la-14u) and of the district court (App. B,

infra, pp. 15a-16a) are not officially reported. The

opinion of the court of appeals (App. C, infra, pp.

17a-22a) is reported at 551 F.2d 1090.

(1)

2

JURISDICTION

The judgment of the court of appeals was entered

on March 24, 1977 (App. D, infra, pp. 23a-24a). The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

QUESTION PRESENTED

Whether the liability equal to unpaid taxes with-

held from employees’ wages that is imposed by Section

6672 of the Internal Revenue Code of 1954 upon per-

sons who are required to collect and pay over such

taxes but who willfully fail to do so is dischargeable

under Section 17 of the Bankruptcy Act.

STATUTES INVOLVED

Section 6672 of the Internal Revenue Code of 1954

(26 U.S.C.) and Section 17 of the Bankruptcy Act

(11 U.S.C. 35) are set forth in Appendix E, infra,

pp. 25a-26a.

STATEMENT

On June 26, 1973, O. J. Sotelo and Son Masonry

Inc., a corporation, was adjudicated a bankrupt. Re-

spondents Onofre J. Sotelo and his wife, Naomi So-

telo, served respectively as president (chief executive

officer) and secretary of the corporation (App. A,

infra, p. la). Shortly thereafter, on July 5, 1973,

respondents were adjudicated bankrupts on their vol-

untary petitions and their individual bankruptcy

proceedings were consolidated (App. A, infra, p. Ia).

On November 5, 1973, the government filed a claim

in the consolidated cases for $40,751.16 for unpaid

taxes withheld from the corporation’s employees, pen-

alties, and interest. The government’s tax claim was

based upon Section 6672 of the Internal Revenue Code

of 1954, which imposes personal liability for unpaid

withholding taxes upon persons responsible for col-

lecting and paying over taxes withheld from em-

ployees’ wages, but who wilfully fail to do so (App.

A, infra, pp. la-2a). The Internal Revenue Service

thereafter assessed these liabilities.

The bankrupts objected to the claim on the ground

that neither was an officer of the corporation respon-

sible for collecting and paying the withholding taxes

over to the government (App. A, inf a, p. 2a). The

trustee objected to the government’s claim on the

ground that the withholding tax liability was a corp-

orate obligation that was not personally guaranteed

by the bankrupts (App. A, infra, p. 2a). Following

a trial of these issues, the bankruptcy court found

that respondent Onofre J. Sotelo, in his capacity as

chief executive officer and majority stockholder of

the corporation, had been responsible to collect and

pay over the withholding taxes and was therefore per-

sonally liable for the taxes under Section 6672 of the

Code. However, the bankruptcy court further found

that respondent Naomi Sotelo was not personally

liable for the taxes because she had not been respon-

sible for their collection and payment (App. A, infra,

p. 2a).

On October 2, 1975, the government served a notice

of levy on the trustee with respect to $10,000 that had

4

been set aside as respondeat Onofre J. Sotelo’s

homestead exemption (App. A, infra, p. 4a).

The trustee thereafter sought an order of the bank-

ruptcy court directing that the homestead funds be

paid to the government (App. A, infra, p. 4a). How-

ever, respondents objected to the payment of the

$10,000 to the government on the grounds that the

liability for unpaid withholding taxes under Section

6672 was a dischargeable compensatory penalty rather

than a tax, and that the homestead exemption be-

longed to respondent Naomi Sotelo (App. A, infra, pp.

4a, 10a). The bankruptcy court held that respondent

Onofre J. Sotelo’s Section 6672 liability was a non-

dischargeable tax under Section 17a of the Bank-

ruptey Act, and that the homestead exemption be-

longed solely to him, as the head of the household

(App. A, infra, pp. 6a-9a, 10a-12a). The district

court affirmed on the basis of the opinion of the bank-

ruptcy court (App. B, infra, pp. 15a-16a).

The court of appeals reversed. It held that the

liability imposed by Section 6672 was a debt that was

dischargeable in respondent’s personal bankruptcy and

was not a non-dischargeable tax (App. C, infra, pp.

19a, 22a). In the court of appeals’ view, the use of

the word “penalty” in Section 6672 to describe the

Prior to the date on which the government filed its claim,

the trustee allowed respondent Onofre J. Sotelo a homestead

exemption in certain real estate which respondents held as

joint tenants (App. A, infra, p. 3a). The real estate was sold

subject to certain liens, and the trustee set aside $10,000 as

Onofre J. Sotelo’s homestead exemption (App. A, infra, p. 3a).

liability showed that it was not a tax. In so holding,

the court acknowledged that its decision conflicted

with Murphy v. Internal Revenue Service, 533 F.2d

941 (C. A. 5), affirming 381 F. Supp. 813 (N.D. Ala.),

and those of many lower courts that Section 6672 was

a collection device and the liability it imposed equal

to unpaid withholding taxes was in fact a non-dis-

chargeable “tax” within the meaning of Section 17a

(1) of the Bankruptcy Act (App. C, infra, p. 19a).

The court rejected the government’s further argu-

ment that the liability was non-dischargeable under

Section 17a(1)(e) of the Bankruptey Act, which pro-

vides that taxes “which the bankrupt has collected or

withheld from others as required by the laws of the

United States * * * but has not paid over” shall not be

dischargeable. Despite its literal applicability, the

court concluded that respondent’s Section 6672 liabil-

ity was dischargeable because it was a “penalty” and

not a “tax” and because the corporation and not re-

spondent was required to collect and pay over the

withholding taxes in the first instance (App. C, infra,

pp. 20a-21a). |

REASONS FOR GRANTING THE WRIT

In holding that the liability imposed by Section

6672 of the Internal Revenue Code for unpaid with-

holding taxes is dischargeable in the bankruptcy of

the person who willfully failed to pay over such taxes,

the court of appeals acknowledged that its decision

was in conflict with Murphy v. Internal Revenue Serv-

ice, 583 F.2d 941 (C.A. 5), affirming 381 F. Supp.

813, 816-817 (N.D. Ala.) (App. C, infra, pp. 19a,

22a n. 4). There, the Fifth Circuit held that the

liability imposed by Section 6672 was a non-dis-

chargeable debt for taxes within the meaning of

Section 17a (1) of the Bankruptcy Act (11 U.S.C. 35

(a) ()) (App. E, infra, pp. 25a-26a). The decision

also conflicts with Lackey v. United States, 538 F.2d

592 (C.A. 4), which likewise held that the Section

6672 liability is a non-dischargeable tax obligation.

Thus, the decision below is contrary to those of two

other courts of appeals. Resolution of the conflict by

this Court is essential in order that there be a uniform

national rule with respect to this issue involving

the administration of both the Bankruptcy Act and

the Internal Revenue Code.

Moreever, the question whether the Section 6672

persona! liability for unpaid withholding taxes is

dischargeable in the bankruptcy of the person respon-

sible for the collection and payment of such taxes is of

substantial fiscal importance. We are advised by the

Internal Revenue Service that for the fiscal year

1976, there were $2 billion in withholding tax delin-

quencies which resulted in assessments under Sec-

tion 6672 totalling $61 million. Under the decision

below, the Internal Revenue Service believes that the

collectibility of the major portion of the annual $61

million in withholding tax delinquencies will be jeop-

ardized, since corporate officers will be able to avoid

their Section 6672 obligation for corporate withhold-

ing taxes by instituting personal bankruptcy proceed-

7

ings. Indeed, the availability of personal bankruptcy

as a shield against Section 6672 liability would miti-

gate the consequences of failure to pay over withhold-

ing taxes and serve to lessen the incentive of corpo-

rate officers to collect and pay over such taxes con-

scientiously. The threat to the integrity of the with-

holding system posed by the decision below calls for

review by this Court.

1. Section 6672 of the Internal Revenue Code of

1954, Appendix E, infra, p. 25a, provides that “Any

person required to collect * * * and pay over any

tax * * * who willfully fails to collect such tax, or

truthfully account for and pay over such tax, * * *

shali, in addition to other penalties provided by law,

be liable to a penalty equal to the total amount of the

tax evaded, or not collected, or not accounted for and

paid over.” The thrust of the statute is to impose

personal liability upon those whose control of the

financial affairs of a business entity requires them to

collect and pay over taxes collected from third parties.

In the typical case, as here, the statute is used as

a collection device against corporate officers for the

income taxes withheld from their employees’ wages.

Se ., Monday v. United States, 421 F.2d 1210,

121 5 (€.A. 7), certiorari denied, 400 U.S. 821;

Geje . Uni 1 States, 400 F.2d 476, 482 (C. A. 5),

certiorari denicd, 393 U.S. 1119; Hewitt v. United

States, 377 F.2d 921, 924 (C. A. 5); Burack v. United

States, 461 F.2d 1282, 1285 (Ct. Cl.); 8A Mertens,

Law of Federal Income Taxation, '§ 47A.25a, pp. 207-

8

215 Rev. 1971).* Thus, except for the present deci-

sion, the courts have uniformly recognized that the

liability imposed by Section 6672 is a pecuniary bur-

den to insure the collection of unpaid withholding

taxes and other taxes that the Code required certain

persons to collect from third parties.“ Harrington

v. United States, 504 F.2d 1306, 1311 (C.A. 1);

Spivak v. United States, 370 F.2d 612, 616 (C. A.

2), certiorari denied, 387 U.S. 908; Cross v. United

States, 311 F.2d 90, 94 (C.A. 4); Newsome v.

United States, 431 F.2d 742, 745 (C. A. 5); Mueller

v. Nixon, 470 F.2d 1348, 1350 (C. A. 6); Monday v.

United States, supra, 421 F.2d at 1216; Kelly v.

Lethert, 362 F.2d 629, 633 (C.A. 8); Bloom v. United

States, 272 F.2d 215, 223 (C. A. 9), certiorari denied,

363 U.S. 803.

While Section 6672 is most frequently asserted against

corporate officers, the provision also applies to partners,

lenders, and others. See, e. g., Mueller v. Nixon, 470 F.2d 1348,

1349-1350 (C. A. 6), certiorari denied, 412 U.S. 949 (officer of

a second corporation); Adams v. United States, 504 F.2d

73, 75-76 (C.A. 7) (finance company); Pacific National Ins.

Co. v. United States, 422 F.2d 26, 29-30 (C.A. 9), certiorari

denied, 398 U.S. 987 (surety); Werner v. United States, 512

F.2d 1881, 1882 (C. A. 2) (creditor) ; Genins v. United States,

489 F.2d 95, 96 (C.A. 5) (partner).

* Thus, apart from an employer’s obligation to collect and

pay over income taxes withheld from his employees’ wages

(26 U.S.C. 3402, 3408), he is likewise required to collect and

pay over Federal Insurance Contribution Act (social security)

taxes (26 U.S.C. 3102 (a) and (b)); and Railroad Retirement

Act taxes (26 U.S.C. 3202). Furthemore, the Code requires

sellers and others to collect and pay over certain excise taxes.

See, ¢.g., 26 U.S.C. 4061 et seq.

9

In holding that respondent’s Section 6672 liability

was dischargeable in his personal bankruptcy, the

court of appeals erroneously refused to apply Section

17a(1)(e) of the Bankruptcy Act (App. E, infra,

pp. 25a-26a), which controls this case. That provi-

sion states that “a discharge in bankruptcy shall not

release a bankrupt from any taxes * * * which the

bankrupt has collected or withheld from others as

required by the laws of the United States .“

Since respondent had withheld taxes from the wages

of his corporation’s employees, pursuant to the re-

quirements of 26 U.S.C. 3402, the language of Sec-

tion 17a(1)(e) directs that the liability imposed by

Section 6672 upon an officer of a business entity to

pay such taxes is not dischargeable in bankruptcy.

This reading of the statute is confirmed by the

pertinent legislative history of Section 17a (1) (e).

Prior to the 1966 amendment of Section 17, the Treas-

ury had consistently objected to proposals before

Congress that would have made the Section 6672

liability dischargeable in bankruptcy. As the Treas-

ury pointed out, such proposals would thus discharge

or reduce the priority of liabilities resulting not from

the bankrupt’s failure to pay his own taxes but from

his failure to keep intact money which he had obtained

from others as a trustee for the Government.” H.R.

Rep. No. 2535, 85th Cong., 2d Sess. 6 (1958). Con-

gress initially declined tc adopt the Treasury’s posi-

tion in favor of non-dischargeability on the belief

that the enactment of a criminal penalty (26 U.S.C.

7215) against persons who fail to pay over withhold-

10

ing taxes would supplement the Section 6672 collec-

tion device. See H.R. Rep. No. 2535, supra, at 5; S.

Rep. No. 1182, 85th Cong., 2d Sess. 1, 2 (1958).

Despite the enactment of the criminal statute, the

Treasury continued to press for non-dischargeability

in bankruptcy of the obligation to pay withholding

taxes in order to enhance the collectibility of such

taxes, which “shall be held to be a special fund in

trust for the United States” (26 U.S.C. 7501). See

H.R. Rep. No. 735, 86th Cong., Ist Sess. 5-7 (1959);

H.R. Rep. No. 372, 88th Cong., lst Sess. 6 (1963).

In response, Congress added subsection (e) to Section

17a(1) in 1966. As the House Committee Report

stated, its purpose was “to exempt from the provi-

sions of this bill taxes which the bankrupt has col-

lected or withheld from others under Federal or State

law.” H.R. Rep. No. 372, supra, at 1. In the House

Committee’s view, “* the objection of Treasury

to the discharge of so-called trust fund taxes has been

met by the amendment to this bill.” Jd. at 5. The

Senate Reports likewise confirm that the purpose of

Section 17a(1)(e) was to render trust fund taxes

non-dischargeable in bankruptcy. S. Rep. No. 1134,

88th Cong., 2d Sess. 1, 6 (1964); S. Rep. No. 114,

89th Cong., lst Sess. 6 (1965).

In light of this legislative history, there is no basis

for the court of appeals’ conclusion (App. C, infra,

p. 21a) that Section 17a (1) (e) applies only to the

corporate employer and not to the Section 6672 lia-

bility of the officer responsible for the collection and

payment of withheld taxes. Indeed, there would have

11

been little reason for Congress to render non-dis-

chargeable the corporate employer’s obligation to pay

withholding taxes since it was fully aware that for

all practical purposes a corporation ceases to exist

after a liquidating bankruptcy. See, e.g., H.R. Rep.

No. 735, supra, at 2; S. Rep. No. 114, supra, at 2-3.

Thus, in providing for the non-dischargeability of

“taxes * * * which the bankrupt has collected or

withheld from others,” Congress intended that the

obligation to pay over such taxes that Section 6672

imposes upon a corporate officer such as respondent

survive his personal bankruptcy.

2. The court of appeals also erred in holding that

respondent’s Section 6672 liability was a discharge-

able compensatory “penalty” rather than a non-dis-

chargeable obligation for “taxes * * * legally due and

owing by the bankrupt to the United States

within the meaning of Section 17a(1) of the Bank-

ruptcy Act.‘ In so concluding, the court relied upon the

use of the word “penalty” in Section 6672 to describe

a corporate officer’s personal obligation for unpaid

taxes withheld from the wages of the corporation’s

employees.“ But until the decision below, the courts

*Section 17a(1) provides for the non-dischargeability of

taxes which became due “within three years preceding bank-

ruptey.“ The three-year limitation presents no problem in

this case because the withholding taxes were due to be paid

in 1971 and 1978 and respondent's bankruptcy petition was

filed on July 5, 1973 (App. A, infra, p. la).

If the court had classified the Section 6672 liability as a

non-compensatory penalty, presumably it would have held that

the liability was non-dischargeable. Because the purpose of

12

had uniformly characterized the Section 6672 obli-

gation as a non-dischargeable tax imposed upon per-

sons who should have paid over taxes collected from

third persons but who willfully failed to do so. Thus,

the liability under Section 6672 “is not a penalty as

that term is generally used, but in reality is a lia-

bility for a tax originally imposed upon the corpora-

tion and shifted to the errporate officer upon his

default. Being a tax due from the bankrupt to the

United States, this penalty was therefore not dis-

chargeable under Section 17 [footnote omitted].”

Sherwood v. United States, 228 F. Supp. 247, 251

(E.D. N.Y.). Accord: Murphy v. Internal Revenue

Service, 533 F.2d 941 (C. A. 5), affirming 381 F.Supp.

813, 816-817 (N.D. Ala.); Lynn v. Scanlon, 234 F.

Supp. 140, 144-145 (E.D. N.Y.); Westenberg v.

United States, 285 F. Supp. 915, 917 (D. Ariz.).

Since Section 6672 is a device to collect what are un-

disputably taxes, the liability it imposes upon per-

sons responsible for their collection and payment is

likewise a non-dischargeable tax“ within the meaning

of Section 17a(1). Respondent’s liability under Sec-

tion 6672 is no less a tax liability because his corpor-

ation was also liable for the taxes.

such a penalty is to punish the bankrupt rather than his credi-

tors, penalties are not allowable out of the assets of the bank-

ruptcy estate and are non-dischargeable. See 1A Collier on

Bankruptcy, V 17.05, 17.18 (14th ed.); Bankruptcy Act, c.

541, Section 57j, 30 Stat. 561, as amended (11 U.S.C. 98(j));

Simonson v. Granquist, 369 U.S. 38. However, compensatory

penalties are allowable under Section 57j of the Bankruptcy

Act and, as such, are presumptively dischargeable. 8 Reming-

ton on Bankruptcy, § 8804 (6th ed.)

13

3. Finally, the court of appeals observed that

„a]s a policy matter, the government’s position that

[respondent] remains personally liable, notwith-

standing bankruptcy, for taxes required to be with-

held by his corporation, can lead to substantial in-

equities” (App. C, infra, p. 21a). In the court’s

view, there is no nexus between the estate of an

individual bankrupt corporate officer and the liability

of his corporation for unpaid withholding taxes.

But Section 6672 creates the nexus the court be-

lieved to be lacking by imposing personal liability

for such taxes upon the officer whose preference of

other creditors over the government benefitted his

corporation in the first instance. Thus, there is no

inequity in providing that the corporate officer whose

actions resulted in the corporation’s withholding tax

delinquency cannot eliminate his liability for those

taxes by means of personal bankruptcy. Nor do the

court of appeals’ generalizations concerning the hu-

manitarian policy of the Bankruptcy Act to provide

a debtor with a fresh start answer the question

whether the liability imposed by Section 6672 is dis-

chargeable under Section 17. As this Court stated in

an analogous context in Bruning v. United States,

876 U.S. 358, 361, “$17 is noc a compassionate sec-

tion for debtors * * * [but] demonstrates congres-

sional judgment that certain problems—e.g., those of

financing government—override the value of giving

the debtor a wholly fresh start [footnote omitted].”

—— . K

14

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be granted,

Respectfully submitted.

Wave H. Men, Jun.,

Solicitor General.

Mod C. BAUM,

Acting Assistant Attorney General.

Stuart A. SMITH,

Assistant to the Solicitor General.

Chou J. D. GARRETT,

WYNETTE J. HEWETT,

Attorneys.

JUNE 1977,

la

APPENDIX A

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

NORTHERN DIVISION

Bankruptcy No. RI BK 73 233 &

Bankruptcy No. RI BK 73 234

MERGED CASES

[Filed Jan. 23, 1976, Max J. Lipkin,

Bankruptcy Judge]

IN THE MATTER OF

ONOFRE J. SOTELO AND NAOMI SOTELO, BANKRUPTS.

OPINION

Introduction

On June 26, 1973 O. J. Sotelo and Son Masonry

Inc., a corporation, was adjudicated a bankrupt.

O. J. Sotelo was President and chief executive officer

and Naomi Sotelo, his wife, was Secretary.

On July 5, 1973 Mr. & Mrs. Sotelo were ad-

judicated bankrupts as a result of individual peti-

tions filed by them. These cases were merged by

Order of Court on October 12, 1973.

On November 5, 1973 the Internal Revenue Service

filed a claim in the amount of $40,751.16 in the

merged bankruptcy cases, based on the provisions of

Section 6672 of the Internal Revenue Code, which pro-

2a

vides in substance that any person required to collect

and pay over any tax imposed by the Internal Reve-

nue Code shall be liable to a penalty equal to the total

amount of the tax not paid over.

On March 7, 1974 the Trustee of their estates filed

an objection to this claim on the ground that the

claim was a claim against the corporation and not

personally guaranteed by the bankrupts. The United

States of America filed a Motion in Opposition to

the Trustee’s Objection and moved the Court to enter

an Order allowing the government’s claim because the

claim was predicated upon the statutory liability of

Onofre J. Sotelo and Naomi Sotelo pursuant to the

provisions of Section 6671 and 6672 of the Internal

Revenue Code of 1954.

At the hearing before Judge Covey the bankrupts

were represented by their own counsel and the issue

raised was that the bankrupts were not responsible

officers of the corporation and therefore were not per-

sonally liable for unpaid social security and withhold-

ing taxes.

On November 29, 1974 Judge Covey allowed the

claim of the Internal Revenue Service in the amount

of $32,840.71. In his Opinion he found that Onofre J.

Sotelo was the chief executive officer, president and

majority stockholder of the corporation and was

charged with the duty and responsibility to see that

the social security and withholding taxes were paid.

He further found that Naomi Sotelo was not person-

ally liable for the taxes “as far as the assets of her

bankruptcy estate is concerned.” The Court continued

3a

and stated “however, this is immaterial because the

estates have been merged.”

On September 14, 1973 the Trustee allowed Onofre

J. Sotelo a $10,000 Homestead in certain real estate

occupied by the Sotelo family the title to which was in

Onofre J. Sotelo and Naomi Sotelo as joint tenants.

The Trustee denied Onofre J. Sotelo’s claim of Home-

stead.

This came about because in the original Schedules

filed by the bankrupts each claimed a $5,000 Home-

stead in the same property.

Since the Sotelo’s had a substantial equity in the

property the property was sold on March 8, 1974 by

the Trustee free and clear of liens. The Order of Sale

provided that the liens were to attach to the pro-

ceeds of the sale.

On May 1, 1974 a hearing was held to determine

the validity, priority and amount of liens against

the proceeds of the sale, and on May 7, 1974 the

Court found that Kewanee Federal Savings & Loan

and Beauty Stain Products had valid liens against the

property. Nothing was said in this Order con-

cerning the lien of the United States of America. The

balance of the proceeds, including the $10,000 rep-

resenting Onofre J. Sotelo’s Homestead, was held by

the Trustee pending the outcome of the litigation con-

cerning the objections to the claim of the Internal

Revenue Service.

No action was taken by the Trustee after Judge

Covey’s Decision on November 29, 1974 to turn the

money over to the Internal Revenue Service and on

4a

October 2, 1975 the Internal Revenue Service filed

and served a Notice of Levy on the Trustee which

stated as follows:

“This levy is intended to attach to the Home-

stead Exemption otherwise payable to Onofre J.

Sotelo.”

On October 24, 1975 the Internal Revenue Service

served its final demand on the Trustee and on October

31, 1975 the Trustee filed an Application for an

Order directing him to pay the $10,000 proceeds of

the Homestead Exemption set off by the Trustee to

Onofre J. Sotelo to the Internal Revenue Service.

The Application was set for hearing on December

12, 1975. At the hearing, new counsel for Mrs.

Sotelo appeared and asked leave to file a Brief with

the Court. Leave was given and the matter was

taken under Advisement.

THE ISSUES

Mrs. Sotelo contends (1) that she is entitled to the

entire $10,000 Homestead because her husband could

not deprive her of her Homestead; (2) since the 1970

Illinois Constitution provides in Article I, Sec. 18,

that “the equal protection of the law shall not be

denied or abridged on account of sex * * *”, that

she is entitled to the Homestead; and (3) that the

claim of the Internal Revenue Service was based

on a tax on the corporation and not on the bankrupt

O. J. Sotelo, and therefore it is discharged in bank-

ruptcy.

5a

STATEMENT OF FACTS

The facts are undisputed.

In the Statement of Affairs signed by O. J. Sotelo

in the corporate bankruptcy he stated that he had

been engaged in business as an individual proprietor

between 1962 and October 28, 1970 when he caused

the business to be incorporated in-the State of Dela-

ware.

In the Statement of Affairs in his individual bank-

ruptcy Mr. Sotelo states that he was a self-employed

masonry contractor and that his business was incor-

porated in 1970. He further stated that his income

for the years 1971 and 1972 amounted to approxi-

mately $15,000 each year.

In the Statement of Affairs in Mrs. Sotelo’s in-

dividual bankruptcy she stated that she was a “house-

wife”, and that her income during the years 1971

and 1972 amounted to approximately $3,370.00 each

year.

In Schedule B-4 of his Bankruptcy Schedules, for

the purpose of claiming $1,000 personal property ex-

emption, Mr. Sotelo stated that he was the head of a

household consisting of himself, his wife, and four

children. In her Schedule B-4 Mrs. Sotelo claimed

$300 personal property exemption.

Chapter 52, Sec. 13 Illinois Revised Statutes pro-

vides for Personal Property Exemptions of $300

worth of property to be selected by the debtor and,

in addition, when the debtor is the head of the fam-

ily and resides with the same he shall be entitled to

an additional $700 worth of property as exempt.

6a

In each of their schedules each claimed a $5,000

Homestead pursuant to Chapter 52, Sec. 1 Illinois

Revised Statutes. This Statute gives a $10,000

Homestead to “every householder having a family.”

On August 13, 1973 Onofre J. Sotelo filed an Ap-

plication to Amend his Schedules in order to claim a

$10,000 Homestead Exemption instead of $5,000 and

on September 12, 1973 he filed an Amendment to his

Schedules claiming a Homestead of $10,000 pursuant

to the provisions of Section 1 of Chapter 52 Illinois

Revised Statutes. Two days later, on September 14,

1973, the Trustees set aside the Homestead to him.

DISCUSSION

Homestead

In her Brief Naomi Sotelo contends that the II-

linois Statute allowing a Homestead Exemption is

more than an exemption but is actually an estate in

land, and that therefore the action of Mr. Sotelo

claiming the entire homestead does not deprive her of

her rights. The cases cited in her Brief are inappo-

site. In this regard the statement is made, without

citation of authority, that because of the tax claim

the entire Homestead Exemption vests in the wife

and should be paid to her instead of his creditors.

This is a spurious argument and is of no merit.

The right of Homestead is ineffective as against

federal tax liens and levies regardless of whether it is

described under state law as an exemption or a prop-

erty interest. In Herndon v. United States, 501 F.2d

7a

1219 (8th Cir. 1974), the Court stated at pages

1222-23:

We think the sounder view in this area of con-

flicting approaches is that state exemption laws

—even if the state, through case interpretation,

statute, or constitutional provisions, character-

izes its homestead exemption statute as creating

a present property interest—do not preclude the

United States from levying upon and selling the

taxpayer’s interest in the property.”

Int. Rev. Code of 1954, Sec. 6334, after listing

property (not including homesteads) exempt from

levy for federal taxes specifically states that not-

withstanding any other law of the United States, no

property or rights to property shall be exempt other

than the property specifically listed in that section.

Mrs. Sotelo has no Homestead in the property under

the law of Illinois and of his [sic] District. The law

in this District is settled by the Opinion of Judge

Robert D. Morgan in the case in In re Hendricks, 300

F. Supp. 774 (1969). In that case Mr. & Mrs. Hend-

rieks were adjudicated bankrupts. On the date of

bankruptcy they owned a residence in Vicwria, IIli-

nois as joint tenants. In their Schedules each claimed

a $5,000 Homestead Exemption in said real estate

pursuant to the provisions of Chapter 52, Sec. 1 II-

linois Revised Statutes. The Trustee filed a peti-

tion, in each case, requesting the Court to determine

the proper allowance and allocation of the Homestead

exemption. The Court held that the law is clearly

established in Illinois that where a husband and wife

own property as joint tenants and reside together on

8a

the premises that the husband is the householder con-

templated by the Statute and he alone is entitled

to the Homestead Exemption.

The Court relied on several cases. One case is

Morris Investment Co. v. Skeldon, 399 III. 506, where

the Supreme Court of Illinois held that the husband’s

interest as householder extends to the entire property,

not just to his undivided interest.

Other cases cited by Judge Morgan are Johnson v.

Muntz, 364 III. 482, (1936) and DeMartini v. De-

Martini, 384 III. 124 (1944).

In order for a wife to be the head of a family or

“householder” for the purposes of Homestead laws,

where there is a husband, she must in fact be the

controlling or supporting force in the family and

there must be dependence upon her by the family.

First National Bank & Trust Co. of Rockford v.

Sandifer, 121 III. App.2d 479 (1970).

Ordinarily, the husband, if living, and residing

with his family, is the householder contemplated by

the Homestead Act so as to vest a Homestead Estate

in him, even though the prercises of which they reside

are owned by both husband and wife as joint ten-

ants. 20 I.L.P. Homestead Sec. 25, LaPlaca v. La-

Placa, 5 IIl. 2d 468 (1955), DeMartini v. DeMartini,

supra; Johnson v. Muntz, supra.

Separate homesteads in favor of different persons

cannot exist in the same premises at the same time.

29 I.L.P. Homestead Sec. 6, LaPlaca v. LaPlaca,

supra; Morris Investment Co. v. Skeldon, supra;

Johnson v. Muntz, supra.

Under proper circumstances, a wife, although liv-

ing with her husband, may be the householder in

whom the Homestead Estate is vested. DeMartini v.

DeMartini, 386 Ill. 128 and First National Bank v.

Sandifer, supra.

In this case it is clear that Mr. Sotelo was the

householder, he was the head of the family, he was

supporting the family, they were dependent upon him

for support and they were not dependent on Mrs.

Sotelo for support and she was not the householder

entitled to a Homestead Exemption.

THE FEDERAL LIEN

The Federal Statutes grant a lien in favor of the

United States “upon all property and rights to prop-

erty” belonging to any person for unpaid delinquent

federal taxes. The collector of Internal Revenue, or

his deputy is authorized to enforce the collection of

the delinquent and unpaid taxes by levying upon

“all property and rights to property except those spe-

cifically exempted by Federal Statutes.” Sections 6331

and 6334 of the Internal Revenue Code of 1954

(26 U.S.C. 6326, 6331, 6334). Homesteads are not

specifically exempt by said statutes and therefore

are subject to the lien of the federal tax and the

levy.

Once the state law has been applied to ascertain the

taxpayer’s state-created property interest, to govern

the determination of the taxpayer’s interest in the

property to which the lien attaches, we enter the

province of federal law in subjecting the property in-

10a

volved to the discharge of the tax liability. United

States v. Bess, 357 U.S. 51; Aquillino v. U.S., 363

U.S. 509.

Since Mrs. Sotelo does not have a Homestead in the

property and Mr. Sotelo does have a Homestead in the

property the lien of the Federal Government at-

taches to the $10,000 proceeds in the hands of the

Trustee.

. DISCHARGEABILITY

The contention is made that the tax is not a tax on

Onofre J. Sotelo but it is in the nature of a com-

pensatory penalty, and therefore nondischargeable.

The basis for this argument is not specifically set

forth. The taxpayer admits that in Sherwood v.

United States, 228 F.Supp. 247, and Westenberg v.

United States, 285 F.Supp. 915, the Courts held that

the penalty under Section 6672 of the Internal Reve-

nue Code is not dischargeable in bankruptcy.

Mrs. Sotelo fails to make any reference to the

pertinent statutory provisions. Section 17 of the

Bankruptcy Act (11 U.S.C. Sec. 35) relates to debts

not affected by a discharge. It first provides that

debts not affected by a discharge are taxes which

became legally due and owing by the bankrupt to

the United States within three years preceding the

bankruptcy. It also provides in subparagraph a(1)

(e) that taxes are not dischargeable which the bank-

rupt has collected or withheld from others as re-

quired by the laws of the United States but has not

paid over such taxes. It also provides that a dis-

lla

charge shall not be a bar to any remedies available

under applicable law to the United States against

the exemption of the bankrupt allowed by law and

duly set apart to him under this Act. In addition to

these provisions the Act also states that 4 discharge

in bankruptcy shall not release or affect any tax lien.

Section 57j of the Bankruptcy Act (11 U.S.C. Sec.

93) provides in substance that debts owing the

United States as a penalty or forfeiture shall not be

allowed, except for the amount of the pecuniary loss

sustained by the transaction out of which the penalty

or forfeiture arose.

As stated in 1A Collier on Bankruptcy 14th Edi-

tion, Section 17.13, pages 1609 and 1610, although

the Bankruptcy Act does not make specific provisions

concerning the dischargeability of fines and penal-

ties due to the United States certain principles have

become well settled in this connection. Thus, fines

and penalties are not affected by a discharge.

As stated by the author in 1A Colliers at page 1623

with reference to the survival of tax claims against

exempt property the author cites the case of the

United States v. Bess, 357 U.S. 51, which holds that

generally speaking federal tax claims are not subject

to state exemption laws.

Finally it should be noted that the tax involved is

not a “penalty”. Though denominated a “penalty”

it is in substance a tax. Kelly v. Lethert, 362 F.2d

629, Braden v. United States, 442 F.2d 342, cert.

denied 404 U.S. 912. It has also been described as

imposing a civil liability. United States v. Industrial

12a

Crane and Manufacturing Corp., 492 F.2d 772, Cash

v. Campbell, 346 F.2d 670.

In view of the foregoing authorities there is no

merit in the bankrupt’s contention that the tax has

been discharged.

CONSTITUTIONAL VIOLATION

In connection with the argument that Mrs. Sotelo

does not have any Homestead because her husband

was not dependent upon her for support she now con-

tends that this “male chauvinist” argument has abso-

lutely no validity. The United States Supreme Court

she claims has spoken repeatedly on the issue that

sex is a suspect classification, and must have some

rational basis to be upheld.

As indicated above the Homestead Exemption Law

Act of the State of Illinois does not distinguish rights

based on sex. The difference in who is entitled to a

Homestead depends on who is the person supporting

the family whether it be a male or a female.

Chapter 52 Section 1 Illinois Revised Statutes

creates a Homestead for “every householder having a

family.” It does not state that it is every male house-

holder. Section 2 of this Act provides that the Home-

stead continues after the death of such householder

for the benefit of the “husband or wife surviving.”

Section 4 of the Act provides that a conveyance of a

Homestead must be signed by the householder and

“his or her spouse if he or she have one.”

Section 13 of Chapter 52 relating to Exemptions of

Personal Property provides that the “debtor” may

13a

select $300 worth of property, and in addition, when

the “debtor” is the head of the family and resides

with the same he or she may have an additional $700

exemption.

At common law there was no such thing as a

Homestead Right. Homestead Rights, therefore, exist

only by virtue of constitutional or statutory rights

creating them. 40 C.J.S. Homestead Sec. 2.

The exemption of property of a debtor from lia-

bility for the payment of his debts is purely a statu-

tory right. 19 I. L. P. Exemptions Sec. 2.

“Homestead” is wholly statutory and the elements

may be changed by the Legislature. Petruluonis v.

Dudek, 113 III. App.2d 398, 252 N.E.2d 23, 20 I. L. P.

Homestead Sec. 2.

It is interesting to note that if Mrs. Sotelo's posi-

tion is correct namely that this law is unconstitu-

tional this would be of no benefit to her because there

would be no homestead laws on the books of the State

of Illinois. The general rule is that a statute declared

unconstitutional is null and void. 16 CJS Constitu-

tional Law Sec. 101.

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

The Statement of Facts contained herein shall con-

stitute Findings of Fact under Rule 752 of the Bank-

ruptey Rules and the discussion of the legal propo-

sitions in the foregoing Discussion shall constitute

l4a

Conclusions of Law under Rule 752 of the Bank-

ruptcy Rules.

DATED at Peoria, Illinois, this 23rd day of January,

1976.

I, Max J. Lipkin

MAX J. LIPKIN

Bankruptcy Judge

15a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

NORTHERN DIVISION

No. RI BK 73 233 & No. Ri BK 73 234

MERGED CASES

[Filed Feb. 23, 1976, William J. Littell, Clerk]

IN RE

ONOFRE J. SOTELO AND NAOMI SOTELO, BANKRUPTS.

DECISION AND ORDER ON APPEAL

This is an appeal from an Order of the Bankruptcy

Judge, directing the trustee of the merged estates

herein to pay to the Internal Revenue Service the

sum of $10,000, representing the proceeds of a home-

stead exemption previously set off by the trustee to

Onofre J. Sotelo. It is contended by the bankrupts

that such exemption, failing in the husband Onofre

against the government claim, is available to the wife,

Naomi.

This court has read and considered the entire rec-

ord on appeal, including all arguments of counsel in

briefs. While the arguments of the bankrupts’ coun-

sel may be considered ingenious and vigorous rep-

resentation of the clients’ financial interests, it be-

comes apparent, upon objective consideration, that

they have all been discussed and decided correctly

16a

under the applicable laws in the Opinion filed herein

by the Bankruptcy Judge on January 23, 1976.

Further hearing thereon or discussion here would

serve no useful purpose.

Accordingly, IT IS ORDERED that the Order of

the Bankruptcy Judge herein filed January 23, 1976,

is AFFIRMED on appeal in this court.

/s/ Robert D. Morgan

ROBERT D. MORGAN

United States District

Judge

Entered: February 23, 1976

17a

APPENDIX C

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 76-1429

IN THE MATTER OF ONOFRE J. SOTELO and

NAOMI SOTELO, Bankrupts.

Appeal in Bankruptcy from the Order of the United

States District Court for the Southern District

of Illinois, Northern Division

Nos. RI-BK-73-233 and RI-BK-73-234

Robert D. Morgan, Judge.

HEARD DECEMBER 3, 1976—DECIDED MARCH 24, 1977

Before BAUER, Woop, Circuit Judges, and GRANT,

Senior District Judge.*

BAUER, Circuit Judge. Appellant Onofre J. Sotelo

contends that the district court erred in not discharg-

ing in bankruptcy a liability imposed upon him un-

der 26 U.S.C. § 6672 for failing to account to the

government for taxes withheld from the wages of the

employees of the corporation of which he was chief

executive officer. The question on review is whether

* The Hon. Robert A. Grant, United States District Court

for the Northern District of Indiana, is sitting by designation.

18a

the liability is a nondischargeable tax or a discharge-

able penalty.

Sotelo does not challenge his liability under 26

U.S.C. § 6672.“ He only argues that the liability

should have been discharged by his personal bank-

ruptcy petition. Sotelo bases has argument on Section

17 of the Bankrupty Act, 11 U.S.C. § 35, which pro-

vides in pertinent part:

“$35. Dischargeability of debts—Debts not

affected by 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: Provided, however,

That a discharge in bankruptcy shall not release

a bankrupt from any taxes. . . (e) which the

bankrupt has collected or withheld from others

as required by the laws of the United States or

any State or political subdivision thereof, but

has not paid over

1 “8 6672. Failure to collect and pay over tax, or attempt

to evade or defeat tax

Any person required to collect, truthfully account for, and

pay over any tax imposed by this title who willfully fails

to collect such tax, or truthfully account for and pay over

such tax, or willfully attempts in any manner to evade or

defeat any such tax or the payment thereof, shall, in

addition to other penalties provided by law, be liable to a

penalty equal to the total amount of the tax evaded, or not

collected, or not accounted for and paid over. No penalty

shall be imposed under section 6653 for any offense to

which this section is applicable.”

19a

The Bankruptcy Judge proved and allowed Sotelo’s

liability. The liability thus is dischargeable under

Section 17 unless it is a “tax. . legally due and ow-

ing by the bankrupt to the United States.” Sotelo

maintains that his liability cannot be a nondischarge-

able “tax” because 26 U.S.C. § 6672 calls it a “pen-

alty.” Under his view, only the employer corporation

obligated to withhold the funds is liable for a “tax.”

26 U.S.C. § 3402.

The government recognizes that Section 6672 ex-

plicitly imposes a “penalty” rather than a “tax”, but

relies on an uncontroverted line of cases that repudi-

ate the statutory language and hold that a Section

6672 liability is a nondischargeable tax for bank-

ruptey purposes. In re Murphy, 533 F.2d 941, 942

(5th Cir. 1976), affg In re Murphy, 381 F.Supp.

813 (N.D. Ala. 1974); Westenberg v. United States,

285 F.Supp. 915 (D. Ariz. 1968); Lynn v. Scanlon,

234 F.Supp. 140 (E.D.N.Y. 1964); Sherwood v.

United States, 228 F.Supp. 247 (E.D.N.Y. 1964).

Notwithstanding this contrary precedent, we re-

verse the district judge and hold the liability to be a

dischargeable debt.

All the cases cited by the government rely on Botta

v. Scanlon, 314 F.2d 392 (2d Cir. 1963), which holds

that the liability imposed under Section 6672 is a

“tax” within the meaning of the Internal Revenue

Code’s Anti-Injunction Statute, applicable to suits

brought to restrain “the assessment or collection of

any tax” (emphasis added). 26 U.S.C. § 7421(a).

26 U.S.C. § 7421 (a) provides in full:

“(a) Tax.—Except as provided in sections 6212(a) and

(e), 6218(a), and 7426(a) and (b) (1), no suit for the

20a

The Botta court based its decision on Section 6671

of the Internal Revenue Code. Section 6671 man-

dates that

“any reference in this title [which includes the

Anti-Injunction Statute] to ‘tax’ imposed by this

title shall be deemed also to refer to the penalties

and liabilities provided by this subchapter [which

includes Section 6672].”

No provision equivalent to Section 6671 applies to

references to “taxes” in the Bankruptcy Act. Botta’s

holding that a Section 6672 “penalty” is a “tax” for

purposes of the Anti-Injunction Statute, premised as

it is on the clear language of Section 6671, cannot be

extended to the bankruptcy context.

The government’s cases support their result by ex-

plaining that Section 6672

“is not a penalty as that term is generally used,

but in reality is a liability for a tax originally

imposed upon the corporation and shifted to the

corporate officer upon his default.” Sherwood v.

United States, supra at 251.

More a characterization than an analysis, this ra-

tionale is insufficient to override Congress’ own char-

acterization of the liability it created in Section 6672.

The government’s alternative ground, 11 U.S.C.

§ 35(a)(1)(e), suffers from the same disability as

purpose of restraining the assessment or collection of any

tax shall be maintained in any court by any person,

whether or not such person is the person against whom

such tax was assessed.

2la

its primary ground. Section 35(a)(1)(e) provides

that

“a discharge in bankruptcy shall not release a

bankrupt from any taxes. . which the bankrupt

has collected or withheld from others as required

by the laws of the United States .. but has not

paid over.

This proviso was enacted to make . withholding taxes

collected by the bankrupt but not paid over to the

government nondischargeable no matter how long past

due. Without it, Section 35(a)(1) would discharge

all such taxes except those due . . within three

years preceding bankruptcy.” H.R. Rep. No. 687,

89th Cong., Ist Sess. 1, 5-6 (1965). Because the

proviso renders only “taxes” nondischargeable, not a

“penalty” imposed under 26 U.S.C. § 6672, it cannot

be applied to Sotelo’s liability. Moreover, Section 35

(a) (1) (e) applies only to taxes “which the bankrupt

has collected or withheld from others as required by

the laws of the United States”, and it was not Sotelo

himself, but his employer-corporation, that was obli-

gated by law to collect and withhold the taxes gov-

erned by the proviso. 26 U.S.C. § 3402.

As a policy matter, the government’s position that

Sotelo remains personally liable, notwithstanding

bankruptcy, for taxes required to be withheld by his

corporation, can lead to substantial inequities. When

an individual remains personally liable after bank-

ruptcy for his own taxes, there is at least some con-

nection between the amount of the liability and the

sum of his taxable assets. This nexus is absent when

22a

an individual is held liable for a tax owed by a cor-

poration. The corporate liability might vastly exceed

the individual’s present or future resources. Indeed,

the bankrupt’s entire future earnings could be con-

fiscated to compensate for the corporate liability, a

result that would contravene the Bankruptcy Act’s

basic policy of settling a bankrupt’s past debts and

providing a fresh economic start. Declining to bring

about such a possibility, we hold the Section 6672 lia-

bility dischargeable in bankruptcy.’

Any uncertainty created by the conflict between

our holding and established precedent, albeit not bind-

ing precedent, seems a low price to pay for achieving

the basic purpose of the Bankruptcy Act by respecting

the statutory language of the Act and the Internal

Revenue Code.*

REVERSED and REMANDED.

A true Copy:

Teste:

Clerk of the United States

Court of Appeals for

the Seventh Circuit

* By so holding, we need not consider Sotelo’s alternative

argument that Mrs. Sotelo is entitled to a state homestead

exemption free from her husband’s Section 6672 liability.

This opinion has been circulated among all judges of this

court in regular active service. No judge favored a rehearing

in banc on the question of the conflict with the Fifth Circuit’s

holding in In Re Murphy, 533 F.2d 941 (1976).

23a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Chicago, Illinois 60604

March 24, 1977

Before

Hon. William J. Bauer, Circuit Judge

Hon. Harlington Wood, Jr., Circuit Judge

Hon. Robert A. Grant, Senior District Judge*

No. 76-1429

IN THE MATTERS OF:

ONOFRE J. SOTELO and Naomi SoreLo, Bankrupts.

Appeal from the United States District Court

for the Southern District of Illinois,

Northern Division

Nos. RI-BK-73-233 and 234

Robert D. Morgan, Judge

This cause came on to be heard on the transcript

of the record from the United States District Court

for the Southern District of Illinois, Northern Divi-

sion, and was argued by counsel.

* Honorable Robert A. Grant, Senior Judge, United States

District Court for the Northern Distriet of Indiana, sitting

by designation.

24a

On consideration whereof, it is ordered and ad-

judged by this court that the judgment of the said

District Court in this cause appealed from be, and

the same is hereby, REVERSED, with costs, and RE-

MANDED, in accordance with the opinion of this court

filed this date.

25a

APPENDIX E

Internal Revenue Code of 1954 (26 U.S.C.):

SEC. 6672. FAILURE TO COLLECT AND PAY OVER

TAX, OR ATTEMPT TO EVADE OR

DEFEAT TAX.

Any person required to collect, truthfully ac-

count for, and pay over any tax imposed by this

title who willfully fails to collect such tax, or

truthfully account for and pay over such tax, or

willfully attempts in any manner to evade or

defeat any such tax or the payment thereof, shall,

in addition to other penalties provided by law, be

liable to a penalty equal to the total amount of

the tax evaded, or not collected, or not accounted

for and paid over. No penalty shall be imposed

under section 6653 for any offense to which this

section is applicable.

Bankruptcy Act, c. 541, 30 Stat. 544, Sec. 17 [as

amended by Sec. 1, Act of June 22, 1938, e. 575,

52 Stat. 840, 851] (11 U.S.C. 35):

Sec. 17. Debts not affected by a discharge.

a [as amended by Sec. 2, Act of July 5, 1966,

P.L. 89-496, 80 Stat. 270]. A discharge in bank-

ruptcy shall release a bankrupt from all of his

provable debts, whether allowable in full or in

part, except such as (1) are taxes which be-

came legally due and owing by the bankrupt to

the United States or to any State or any sub-

rupt from any taxes (a) which were not as-

r

26a

to make a return required by law, (b) which

were assessed within one year preceding bank-

ruptey in any case in which the bankrupt failed

to make a return required by law, (c) which

were not reported on a return made by the

bankrupt and which were not assessed prior to

bankruptcy by reason of a prohibition on assess-

ment pending the exhaustion of administrative

or judicial remedies available to the bankrupt,

(d) with respect to which the bankrupt made a

false or fraudulent return, or willfully attempted

in any manner to evade or defeat, or (e) which

the bankrupt has collected or withheld from

others as required by the laws of the United

States or any State or political subdivision there-

of, but has not paid over; but a discharge shall

not be a bar to any remedies available under

applicable law to the United States or to any

State or any subdivision thereof, against the ex-

emption of the bankrupt allowed by law and duly

set apart to him under this Act: And provided

further, That a discharge in bankruptcy shall

not release or affect any tax lien;

® ©. &. GOVERNMENT painTiINe orrice; 1977 2se7e1 17