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