ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. D.C. No. B-27540 IN BANKRUPTCY.
Adams, Hunter and Garth, Circuit Judges.
Is a "non-operating" trustee of a bankrupt corporation liable for the payment of federal taxes on income generated during the liquidation and distribution of the bankrupt estate? That is the primary question presented on this appeal.*fn1
The facts of the case are undisputed. I.J. Knight Realty Corporation, the bankrupt, owned as its principal asset a building located in Philadelphia. Its sole business was the leasing of space in the building, and the provision of maintenance services to its tenants.
Knight filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in November of 1962. A receiver was appointed and authorized to continue operation of Knight's business. Shortly thereafter, in January of 1963, Knight's building was destroyed by fire; consequently, no business remained for the receiver to operate.
In May of 1963, Knight was adjudicated a bankrupt, and a trustee was appointed. At that time, the bankrupt's assets consisted of the following: (1) claims against various insurance companies in the amount of $1,440,000; (2) the land on which Knight's building had stood; and (3) cash in the amount of $2,030.11.*fn2 The City of Philadelphia, in September of 1963, instituted condemnation proceedings against the land owned by Knight, and the trustee was subsequently awarded $130,000. plus interest for the land. In November of 1963, the bankruptcy referee approved a settlement in the amount of $800,000. for Knight's claim against one of the insurance companies. In March of 1964, the trustee, pursuant to authorization by the Bankruptcy Court, paid $162,789.45 out of the insurance proceeds to satisfy an outstanding mortgage on Knight's building. Later that same month, the trustee deposited $500,000. of the insurance proceeds in interest-bearing accounts, and in fiscal year 1966 deposited another $65,000.
Counsel for the trustee, in February of 1967, filed with the District Director of Internal Revenue the trustee's federal income tax returns for the fiscal years 1963 through 1966. Each return was filed on a corporate income tax Form 1120, and each set forth various items of income and deductions, including interest earned on bank deposits. Based on the trustee's computations, each return showed no taxable income, and hence no tax due, after giving effect to net operating loss carryovers.*fn3 Returns for the fiscal years 1967 through 1970 were filed in due course, and also showed no taxable income for the years in question.
The Commissioner in 1971 conducted an audit of the trustee's returns for the years 1963 through 1970. Various adjustments in the trustee's computations were made by the Commissioner and resulting deficiencies were determined.
In March of 1973, the Commissioner filed a proof of claim against the trustee in the bankruptcy proceeding, asserting that the trustee was liable for payment of corporate income taxes, personal holding company taxes, and penalties and interest in the total amount of $366,736.05 for various of the years 1963 through 1970. The income in question was claimed to have been derived by the trustee from a capital gain on the condemnation sale of the land, and from interest on the insurance proceeds that had been deposited in interest-bearing accounts.
Upon cross-motions for summary judgment the district court held that a "non-operating" trustee is not liable for payment of federal income taxes, and entered judgment for ...