Sales
taxes or transaction privilege taxes:
4-08:ADOR
vs Action Marine, Az Ct Apps 1 CA-TX 06-0006 - in a
recent Arizona Supreme Court decision that holds that the
"responsible persons" for a business entity may be
PERSONALLY liable for the transaction privilege taxes (you
probably call these sales taxes) collected by an entity if
the entity doesn't pay them over to the ADOR, even if the
entity files for bankruptcy relief. Historically, most
people would have thought that the "responsible person" for
the taxes was just the entity itself and not the individuals
involved in the entity and that the individuals could not be
held liable. Indeed, that was the very holding in
bankruptcy decision called "Inselman" that is cited by the
Arizona Supreme Court.
WARNING: THE FOLLOWING IS OLD LAW AND MAY OR MAY NOT
APPLY TO ANY CASES FILED AFTER OCTOBER 17, 2005.
Taxes and BK -
nonfiling pre-BK and no assessment by IRS, more than 3 years
old + non priority. Neilsen has decided that such taxes are
priority (State agrees) but IRS still does not believe that
these are priority. (11/97)
As of 1997 the information below
was the law
on how to discharge taxes after a bankruptcy has been filed.
It may have dramatically changed since this writing. This should be included in every client letter of a person who
owes back taxes to the Federal Government. (This info was
obtained at
http://www.mckenzielaw.com/BANKRUPT.html )
As a result of Bankruptcy Code
Sections 523 and 507 the following taxes are dischargeable:
1. Tax penalties for
non-filing, late payment, late deposit, fraud penalties and
late estimated payments if the taxes to which they relate are
dischargeable.
2. Income taxes which are:
a. Over three years old;
b. Have been filed at
least two years prior to the petition; and/or
c. Have been assessed as
an audit deficiency for at least 240 days.
3. Estate and gift taxes which
are over three years old.
** A taxpayer must not have filed
a fraudulent return or otherwise tried to willfully evade
payment of the tax.
Once a discharge has been entered
by the Bankruptcy Court, submit a written request to Special
Procedures Branch that the IRS abate the tax. The Service will
abate the liability by preparing a Form 3870. The author has
found that the IRS is very inefficient in preparing
post-bankruptcy abatements. Many clients have had levies made
on their wages or bank accounts after a bankruptcy. You must
aggressively pursue abatement. If all else fails, the client
may request that the Bankruptcy Court hold the IRS in contempt
of court. Until the IRS begins protecting the rights of
bankrupts, the IRS may take illegal levy action
notwithstanding the bankruptcy. If you have taken reasonable
steps to notify the IRS of the bankruptcy and discharge, you
will have a potential cause of action for reckless violation
of the Code [IRC § 7433].
However, the Bankruptcy Court has
the authority upon review of a debtor's Chapter 7 bankruptcy
to deny discharge and dismiss the matter if it believes the
debtor can partially or fully repay some debts. In other
words, the Court might try to force a conversion to a Chapter
13 bankruptcy upon a person who originally petitioned for a
Chapter 7 bankruptcy. Such a decision is based upon an income
and expense statement which all debtors have been required to
file since the 1984 amendments to the Bankruptcy Code.
IN RE BUNYAN (01/20/04 - No.
02-56786) (U.S. 9th Circuit Court of Appeals) Pursuant to 11
U.S.C. section 505(a)(2)(A), the bankruptcy court lacked
jurisdiction to consider the validity of income tax
assessments filed by the IRS in Chapter 13 proceedings. A 1993
circuit court order granting the Commissioner's motion to
dismiss necessarily adjudicated the issue of when the tax
court decisions became final.
DUNMORE
v. U.S., (9th Cir. 2004) ONLY BK ESTATE HAD STANDING TO
PURSUE TAX REFUND THAT DEBTOR FAILED TO SCHEDULE
Dunmore, as a debtor seeking bankruptcy relief, had a duty to
carefully schedule his assets, including his refund claims, on
his bankruptcy petition. Cusano v. Klein, 264 F.3d 936, 945-46
(9th Cir. 2001). Dunmore, however, breached this duty when he
chose not to schedule his claims against the IRS on his
Chapter 7 petition. By operation of statute, assets that
Dunmore failed to schedule remained the bankruptcy estate's
property, even after the court discharged his debt. 11 U.S.C.
§ 554(c), (d). Thus, the unscheduled tax refund claims
remained the estate's property post-bankruptcy. Accordingly,
we conclude that the bankruptcy estate was the real party
plaintiff in interest at the time Dunmore filed his action.
IN RE OLSHAN (01/28/04 - No. 02-56792) (U.S.
9th Circuit Court of Appeals) Bankruptcy court erred in
rejecting the IRS' claims for unreported nonbusiness income
and overstated business deductions after finding that the IRS'
method of computing debtor's unreported business income was
flawed. Undisputed evidence in the record will enable the
bankruptcy court to determine debtor's liability for taxes,
penalties, and interest.
DUNMORE v. US (01/29/04 - No.
02-15789) (U.S. 9th Circuit Court of Appeals) Plaintiff's tax
refund claims are "non-core" proceedings under the Bankruptcy
Code, despite the offset claim asserted by the IRS; the
bankruptcy court therefore could not enter a final judgment
without plaintiff's consent. District court abused its
discretion when it affirmed the bankruptcy court's final order
dismissing the claims.
US INTERNAL REVENUE SERV. v.
SNYDER, No. 02-15618 (9th Cir. September 15, 2003) An IRS
claim for delinquent taxes secured outside of bankruptcy by a
lien on a debtor's interest in an ERISA-qualified pension plan
is not secured under 11 U.S.C. section 506(a), because a
debtor's interest in an ERISA-qualified plan is excluded from
the bankruptcy estate pursuant to 11 U.S.C. section 541(c)(2).
http://caselaw.lp.findlaw.com/data2/circs/9th/0215618p.pdf
US INTERNAL REVENUE SERV. v.
SNYDER (9th Cir. 09/15/03 - No. 02-15618) An
IRS claim for delinquent taxes secured outside of bankruptcy
by a lien on a debtor's interest in an ERISA-qualified pension
plan is not secured under 11 U.S.C. section 506(a), because a
debtor's interest in an ERISA-qualified plan is excluded from
the bankruptcy estate pursuant to 11 U.S.C. section 541(c)(2).
http://caselaw.lp.findlaw.com/data2/circs/9th/0215618p.pdf
ERRONEOUS TAX REFUND IS DISCHARGEABLE
In re Frontone ___ B.R. ___ (C.D.Ill. 2003)
Held, an overpayment to the taxpayer of a tax refund
is a debt owed to the IRS, but is not treated the same as the
underlying tax, and therefore is dischargeable in Chapter 7.
In May 2001 the IRS sent debtors a notice saying they had
overpaid their tax and refunded them $5,140. Subsequently, the
IRS assessed additional taxes owed, and demanded the refund be
paid back. In September 2002 the debtors filed Chapter 7 and
filed an objection to the IRS claim. The court held that §
507(c) gives an erroneous tax refund the same “priority” as
the underlying tax, but not the same nondischargeable status.
“The legislative intent behind the change made in 1984 to the
language of Section 507(c) is easy to ascertain. Congress
obviously concluded - correctly - that it is inequitable to
treat taxpayers who fail or decline to pay their income taxes
the same as taxpayers who pay their income taxes but who incur
obligations to a governmental unit as a result of that
governmental unit's erroneously refunding taxes paid.”
http://caselaw.lp.findlaw.com/data2/circs/9th/0156992p.pdf
GOLDBERG
v. ELLETT (07/16/01 - No. 00-15128) (9th Cir.
Ct App) Bankruptcy court may enjoin a state tax official
from collecting state taxes purportedly discharged in a
bankruptcy proceeding in which state declined to
participate.
http://caselaw.lp.findlaw.com/data2/circs/9th/0015128p.pdf
DEROCHE v.
ARIZONA INDUS. COMM'N (11/29/01 - No. 99-16058) (9th
Cir. Ct App) In determining whether an employer's failure to
provide worker's compensation is an "excise tax" to the
Arizona Special Fund for worker's compensation and occurred
within three years prior to bankruptcy, the date of the
"transaction" is the date employee was injured.
http://caselaw.lp.findlaw.com/data2/circs/9th/9916058p.pdf
N. SLOPE
BOROUGH v. BARSTOW (10/21/02 - No. 01-35892/35901)(9th
Cir) Under Bankruptcy Code section 724(b), priority unsecured
creditors have a right to obtain only that portion of the
proceeds equaling the amount of the tax liens. Any remaining
proceeds go first to junior lien claimants, then to the
holders of the tax liens insofar as their claims were not
already satisfied and, finally, to the estate.
http://caselaw.lp.findlaw.com/data2/circs/9th/0135892p.pdf
BARSTOW v. US
INTERNAL REVENUE SERV. (10/21/02 - No. 01-35819) (9th
Cir) The term "tax lien" in Bankruptcy Code section 724(b)
means a statutory tax lien, and the term does not embrace a
judicial lien securing an underlying tax obligation.
http://caselaw.lp.findlaw.com/data2/circs/9th/0135819p.pdf
US v.
GALLETTI, No. 01-55953/4 (9th Cir. August 08, 2002) The IRS
cannot collect a partnership's tax deficiency directly from
the partners, without first making individualized assessments
or obtaining judgments against the partners, holding them
liable for the partnership's tax debts; bankruptcy claims were
time-barred.
http://caselaw.lp.findlaw.com/data2/circs/9th/0155953p.pdf
STEIN v. CADLE CO. (05/10/01 -
No. 99-56751) Under the Federal Priority Statute, 31 USC
3713 gives the federal government priority over other
judgment creditors notwithstanding the Federal Tax Lien Act.
http://caselaw.lp.findlaw.com/data2/circs/9th/9956751p.pdf
DEROCHE v. ARIZONA INDUS. COMM'N,
No. 99-16058 (9th Cir. April 05, 2002) When determining the
dischargeability in bankruptcy of an excise tax owed on a
"transaction," in which an employer reimbursed the state's
Special Fund for failure to carry insurance, the date of the
"transaction" is the date on which the worker was injured;
thus, since transaction occurred over three years prior to
filing bankruptcy, the excise tax debt was dischargeable.
MILLER v. US, No. 02-17073 (9th
Cir. April 13, 2004) The interplay of Bankruptcy Code sections
1141(d)(2), 523(a)(1)(A), and 507(a)(8) renders an IRS claim
for unpaid withholding taxes nondischargeable by a confirmed
Chapter 11 bankruptcy plan, whether or not that claim was
secured.
http://caselaw.lp.findlaw.com/data2/circs/9th/0217073p.pdf
BACK TO BANKRUPTCY CASE LAW
Index
OPINION
SUMMARIES ARCHIVE FindLaw archives case law summaries of
opinion issued since September 2000 by the U.S. Supreme Court,
all thirteen Federal Circuit Courts, the California Supreme
Court, the California Appellate Courts, and the New York Court
of Appeals.
http://caselaw.lp.findlaw.com/casesummary/index.html
