NICOLAS V. UNITED STATES, 384 U. S. 678 (1966)

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U.S. Supreme Court

Nicolas v. United States, 384 U.S. 678 (1966)

Nicolas v. United States

No. 650

Argued April 19, 1966

Decided June 13, 1966

384 U.S. 678


A corporation filed a petition for an arrangement with unsecured creditors under Chapter XI of the Bankruptcy Act. While operating its business as a debtor in possession, the corporation withheld federal income and social security taxes, and collected cabaret excise taxes. It then filed a petition in bankruptcy, and was adjudged a bankrupt. Petitioner, who was appointed trustee in bankruptcy, did not pay the taxes when they later became due, nor did he file the required tax return. The Government filed an administrative expense statement in the bankruptcy proceeding claiming the principal of the taxes due plus penalties and interest. The referee allowed the claim for taxes, but denied the claims for penalties and interest, and the District Court affirmed. The Court of Appeals reversed, and allowed the claims for penalties and interest.


1. The United States is not entitled to interest in this case. Pp. 384 U. S. 682-692.

(a) Sexton v. Dreyfus, 219 U. S. 339, and New York v. Saper, 336 U. S. 328, establish that interest is suspended once an enterprise enters a period of bankruptcy administration beyond that in which the underlying interest-bearing obligation was incurred. P. 384 U. S. 685.

(b) Where taxes have been incurred during the Chapter XI proceeding itself, the above principle permits interest to accrue during the arrangement proceeding, but requires that it be suspended once the bankruptcy petition is filed. P. 384 U. S. 686.

2. The United States is entitled to payment of the penalties. Pp. 692- 384 U. S. 696.

(a) The trustee in bankruptcy, as representative of the bankrupt estate and successor in interest to the debtor in possession, was, under 26 U.S.C. § 6011(a), obligated to file returns for the taxes even though incurred by the debtor in possession during the pendency of the arrangement proceeding. Pp. 384 U. S. 692-693.

(b) Under Boteler v. Ingels, 308 U. S. 57, the United States is entitled, in the circumstances of this case, to exact the penalties

Page 384 U. S. 679

as a legitimate means of enforcing the prompt filing of the tax returns. Pp. 384 U. S. 693-695.

346 F.2d 32 affirmed in part, reversed in part, and remanded.

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