In re Major Dynamics, Inc.

Summary

**Key Legal Topics:** Bankruptcy – Withholding taxes – Trust fund under 26 U.S.C. § 7501 – Administrative expenses – Priority under 11 U.S.C. § 507(a)(1) – Responsible person liability under 26 U.S.C. § 6672 – Trustee’s duty – Post-petition tax obligations. **Holding:** The Ninth Circuit held that post-petition payroll taxes withheld by a debtor-in-possession are not held in a statutory trust for the IRS under 26 U.S.C. § 7501 unless the funds are segregated or traceable. Instead, such taxes are treated as administrative expenses incurred by the estate under 11 U.S.C. § 503(b)(1)(B)(i) and receive first priority under § 507(a)(1), subject to the bankruptcy estate’s distribution scheme. The court affirmed summary judgment against the former president’s claim for declaratory relief, rejecting the argument that the trustee breached a fiduciary duty by failing to remit the withheld taxes.

Holdings

1. Post-petition withholding taxes are not held in trust under 26 U.S.C. § 7501; rather, they are administrative expenses under 11 U.S.C. § 503(b)(1)(B)(i) and subject to the priority system of the Bankruptcy Code.
2. A § 7501 trust cannot arise unless the withholding funds are either segregated or traceable. Since the debtor in possession did not segregate the funds and they are not traceable, no trust arises.

Questions Presented

1. Whether post-petition withholding taxes are subject to a trust under 26 U.S.C. § 7501 in favor of the IRS, or are merely subject to the Bankruptcy Code's priority system as administrative expenses.

Disposition

affirmed