United States v. Kaufman

Background

Two bankruptcy cases from New York involved partnerships and claims by the Collector of Internal Revenue. In one, a partner had an income tax assessed for 1919 that was based on partnership business, but there were no individual assets and the partnership assets left no surplus after paying partnership debts. In the other, the Collector filed tax claims against partners for 1918–1920 while partnership assets were held for a composition to creditors. District courts denied the Collector priority from partnership assets, and the Circuit Court of Appeals affirmed those denials.

Reasoning

The Court explained that the income taxes were assessed against the individual partners, not against the partnerships themselves. Under the Bankruptcy Act, the government’s priority to collect taxes applies to the bankrupt person’s estate, meaning only the partner’s interest in any surplus after partnership debts are paid. The Act and earlier cases treat the partnership as a separate entity whose assets must first satisfy partnership debts, and statutory liens or past decisions do not change that result in these facts.

Real world impact

The ruling means the United States cannot force payment of an individual partner’s income tax out of partnership assets ahead of partnership creditors, except to the extent of the partner’s share of surplus left after partnership debts. Partnerships, their creditors, and partners should expect partnership assets to be applied first to partnership debts before individual tax claims are paid.