Bankruptcy – Priorities – Priority Status of Tax on Wages Earned But Unpaid at Time of Bankruptcy

The State of California demanded that a trustee in bankruptcy pay the employer’s tax due on wages earned by the employees of the bankrupt. The wages were earned within the three-month period prior to the petition in bankruptcy but had not been paid prior to bankruptcy. The trustee did not continue the operation of the bankrupt’s business. The United States district court reversed the Referee and ordered the trustee to pay the tax claim. The court of appeals affirm. ed. On rehearing, held, affirmed. Since the tax is not due until the wages are actually paid, the tax accrues during the administration of the estate and is consequently an expense of administration entitled to the first priority within section 64 (a) of the Bankruptcy Act. Lines v. State of California Dept. of Employment, (9th Cir. 1957) 246 F. (2d) 70.