Before MCLAUGHLIN, KALODNER and STALEY, Circuit Judges.
The United States and another*fn1 seek to enforce a lien for taxes against Kensington Shipyard and Drydock Corporation ("Kensington") and Aerodynamic Research Corporation ("Aerodynamic").
In 1945, Aerodynamic, a District of Columbia corporation, had acquired stock control of three manufacturing concerns.*fn2 In acquiring those businesses, Aerodynamic had assumed and agreed to pay the liabilities of the dissolved corporations, including taxes due the United States. Pursuant to Section 311 of the Internal Revenue Code, 26 U.S.C.A. § 311, the Commissioner of Internal Revenue made a transferee assessment of $2,113,111.29 against Aerodynamic on March 31, 1947, and notices of lien were filed in the District of Columbia and Baltimore.
At approximately the same time that Aerodynamic acquired the three manufacturing concerns, it purchased from the Franklin Machine & Foundry Company the assets of a Philadelphia shipyard and ship repair business. Aerodynamic operated the Philadelphia shipyard as one of its divisions from January 26, 1945, until November 30, 1946, at which time the assets of that business were transferred to Kensington, a Pennsylvania corporation, and a wholly owned subsidiary of Aerodynamic. Both Aerodynamic and Kensington admit that this transfer constituted a fraud upon creditors of Aerodynamic. On April 2, 1947, upon learning of the fraudulent transfer, the Commissioner of Internal Revenue, by jeopardy assessment,*fn3 assessed against Kensington as transferee of Aerodynamic the same amount of unpaid taxes which had been assessed against Aerodynamic plus additional interest to date.*fn4 Notice of lien was filed the following day in Philadelphia.
On May 20, 1947, the United States began an action in the United States District Court for the District of Columbia against Aerodynamic under Section 3678 of the Internal Revenue Code, 26 U.S.C.A. § 3678, in which suit the government demanded, inter alia, the enforcement of its lien for taxes assessed against Aerodynamic, and the appointment of a receiver. The court appointed one John Lewis Smith receiver of all the property of Aerodynamic, including all the outstanding shares of Kensington. Pursuant to a supplementary order of that court, issued upon consent of the government, Smith took possession and control of Kensington and proceeded to operate it as a going concern.
The instant proceeding, entitled "Complaint for Enforcement of Lien and Appointment of an Ancillary Receiver," was initiated in the United States District Court for the Eastern District of Pennsylvania on November 26, 1947, by the United States and Smith jointly against Kensington, Aerodynamic and others*fn5 under Section 3678 of the Internal Revenue Code, 26 U.S.C.A. § 3678.*fn6 The district court in this proceeding appointed one Harold Heerman and one Joseph J. Williams permanent receivers of Kensington and ancillary receivers of Aerodynamic in Pennsylvania. The assets of Kensington subsequently were sold on order of the court below, and the lien was transferred to the resulting fund. When the receivers filed their account, the court referred the matter to a special master to audit the account and to make recommendations as to the distribution of the fund.
The two appeals now before this court are: (a) The special master, on advice of the Attorney General of the United States, recommended that the balance for distribution after payment of costs, fees, and the claims therein allowed be awarded to Smith, as receiver of Aerodynamic. The government later revoked its recommendation and filed a motion in the nature of exceptions to the master's report, in which motion it requested the court to distribute the balance to the government by payment to its Collector of Internal Revenue at Philadelphia.The government has appealed from the order of the district court denying the aforesaid motion or exceptions. (b) The special master held that the vacation pay claims of a group of employees were not entitled to priority as administrative expenses. The Industrial Union of Marine and Shipbuilding Workers of America ("Union"), on behalf of these vacation pay claimants and in its own right, has appealed from the order of the district court dismissing exceptions to the master's report.
I. Distribution of the balance.
The question in this appeal resolves itself into two basic issues: First, did the District Court for the Eastern District of Pennsylvania have discretion with respect to the disposition of the fund realized from the sale of the assets of Kensington; and, second, if the answer to that question be in the affirmative, did that court abuse its discretion?
The United States, in effect, contends that the district court had no discretion to remit the fund to Smith. Its argument is that the instant proceeding is completely independent of, and not ancillary to, the action in the District of Columbia. The reason advanced is that the United States, by making an assessment against Kensington under Section 311*fn7 of the Internal Revenue Code, 26 U.S.C.A. § 311, and obtaining an immediate lien, has treated Kensington as if it were the taxpayer primarily liable; and hence, under Section 3678, 26 U.S.C.A. § 3678, the district court is obliged to order payment directly to the United States, as the holder of the outstanding lien.This, it is argued, is a logical result of the government election to proceed under Section 311 of the Internal Revenue Code, rather than to bring an equitable action to set aside the fraudulent transfer.
Section 3678(c) of the Internal Revenue Code, 26 U.S.C.A. § 3678(c), declares that the proceeds of a sale shall be distributed "according to the findings of the court in respect to the interests of the parties and of the United States." The scope, if any, of the district court's discretion is not made crystal clear by this passage; but, if it is read in the light of Section 3678(b), the meaning is more readily perceived. Section 3678(b) provides that the court shall make parties to the proceedings all persons claiming any interest in the property. Since both Smith and the government, inter alia, are necessary, or at least, proper parties, the court below must use its discretion in ascertaining what are the respective interests of Smith and the government. Certainly, Congress could easily have specified that the amount due the United States on its tax claim should be paid to the Collector of Internal Revenue in the district where the assets were sold; that it did not do so seems to us highly significant.
Since the transferee assessment against Kensington was made on the basis of Section 311*fn8 of the Internal Revenue Code, 26 U.S.C.A. § 311, it is necessary to examine this section, which provides that the liability of a transferee of property of a taxpayer shall be assessed, collected, and paid in the same manner as the liability of the taxpayer. This section was first incorporated into the Internal Revenue Code by the Act of February 26, 1926, c. 27, § 280, 44 Stat. 61. Prior to that enactment, the only remedies of the government were to proceed in equity to set aside the fraudulent transfer or, if the debts of the transferor had been assumed, to bring an action at law. Phillips v. Commissioner of Internal Revenue, 1931, 283 U.S. 589, 51 S. Ct. 608, 75 L. Ed. 1289; Continental Oil Co. v. Helvering, 1938, 69 App. D.C. 236, 100 F.2d 101, 109.
No new obligation was imposed upon the transferee by the statute; it merely created a new remedy in the form of a summary and expeditious method of proceeding by assessment directly against the transferee. Although, under some circumstances, for some procedural purposes, the transferee is treated as a taxpayer, the liability of the transferee is clearly secondary, not primary. Phillips-Jones Corp. v. Parmley, 1937, 302 U.S. 233, 235, 58 S. Ct. 197, 82 L. Ed. 221; ...