SALES TAX DISCHARGE ISSUES IN BANKRUPTCY
the filing of the petition for which a return, if required, is last due … after three years before the date of the filing of the petition; or
§ 507( a)( 8)( E)( ii); if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.
Hence, an excise tax is dischargeable, 1) if a return is required with a due date falling more than three years before the bankruptcy, 9 or 2) if a return is not required, if the sales event triggering the tax is over three years before the bankruptcy. 10
This raises the question, what is a sales or excise tax return? 11
The widely accepted Beard test 12 requires, among other things, that to be a return it must be signed under penalty of perjury. The form for California, for example, and doubtless some other states, is not signed under penalty of perjury, and hence, strictly speaking, is not a“ return.” 13 In other words, arguably a tax reporting document is not a“ return” unless signed under penalty of perjury.
9 In re George, 95 B. R. 718( 9 th Cir. BAP 1989)( not dischargeable because within three years of the bankruptcy).
10 In re Belden Locker Co.( Bankr. N. D. Ohio 2008).
11 Accordingly, we are thrown into the maddening bramble bush of the definition of a return as pertains to discharge of income taxes and the McCoy case. See the author’ s articles addressing this on LateFiledReturn. com.
12 Beard v. Comm’ r 793 F. 2d 139( 6 th Cir. 1986).
13 As of the date of this writing, the California Board of Equalization concurs that the quarterly report is not a“ return” within the meaning of § 507( a)( 8)( E)( i).
Another twist on the subject is the question, upon whom or what, exactly, was the tax assessed, the individual proprietor, or his / her business, and when exactly did that assessment occur?
Look at it this way; in the case where a taxpayer owned a business, when did the events triggering the 3-year periods prescribed by § 507( a)( 8)( E) begin, when three years had passed since the business sales event, or when three years passed after the taxpayer became personally liable?
This raises another issue; does the state have a statute of limitations in which to assess the liability for the taxes? 14 The statute may have expired, but did the statute commence as to the individual when it was assessed against the business, or assessed on him / her individually?
In a nutshell, in cases involving sales or similar taxes, the issues that should be addressed are:
1. Does the state have a sales or use tax applicable to retail sales?
2. Is the tax a sales tax, or an excise tax? i. e., on the retailer( excise tax), or on the customer( sales tax = trust fund).
3. If a sales tax 15, it is a nondischargeble trust-fund tax.
4. Does the state require a“ return” or something that is not a return?
5. If a return is required, did the due date fall more than three years before the bankruptcy? If yes, satisfies 11 U. S. C. §
14 In re Ilko 651 F. 3d 1049( 9 th Cir. 2011).
15 Assessed on the customer and hence is a trust-fund tax.
507( a)( 8)( E)( i). 16
6. If a return is not required, did the sales event happen more than three years before the bankruptcy? If yes, satisfies 11 U. S. C. § 507( a)( 8)( E)( ii).
7. If a return is required, does the tax satisfy the other rules for discharge of income taxes?
8. On whom or what is the tax assessed? Has the tax been assessed against a business, or rather the individual responsible for paying the taxes?
See King’ s Discharging Taxes in Consumer Bankruptcy Cases, ¶ 2.8( g), Excise and Sales Taxes. Also ¶ 3.5, Discharge of Other Kinds of Taxes, and ¶ 2.4( f)( 2), Was It a Return? KingLawPublishing. com or BankruptcyBooks. com.
The author thanks attorneys Reba Wingfield( AR), Larry Heinkel( FLA), Steven Benda( CA), Lavar Taylor( CA), Nicolas Corry( AR), Daniel Press( VA), Mark Sharf( CA), and Mark Segal( NV) for their helpful comments on certain issues in the topic.
16 Blalock v. Miss. Dept. Revenue 537 B. R. 284( Bankr. S. D. Miss. 2015)( tax held nondischargeable because taxpayer did not file a state sales tax“ return”). 17 Assessed on the customer and hence
is a trust-fund tax.
18 Blalock v. Miss. Dept. Revenue 537 B. R. 284( Bankr. S. D. Miss. 2015)( tax held nondischargeable because taxpayer did not file a state sales tax“ return”).
National Association of Consumer Bankruptcy Attorneys Summer 2016 CONSUMER BANKRUPTCY JOURNAL 19