In re: Daniel Bruce Carpenter and Mary Esther Carpenter
Appearances:
Before: KLEIN,1 PAPPAS, and JURY, Bankruptcy Judges.
O P I N I O N
KLEIN, Bankruptcy Judge:
This appeal involves the interplay between priority tax status under
The joint debtors owned and managed a corporation that did not pay its state unemployment taxes within three years before they filed their personal chapter 11 case. The bankruptcy court held that Montana‘s tax claim for unpaid corporate taxes is a
The court rejected the debtors’ argument that, by negative inference from language in
The debtors’ negative-implication argument, while plausible, runs counter to too much precedent. We AFFIRM.
FACTS
The debtors Daniel and Mary Carpenter were officers and owners of Big Sky Fire Protection, Inc., which sold and serviced fire protection equipment. They were officers responsible for filing Big Sky tax returns and paying its taxes. Unemployment tax contributions owed by Big Sky pursuant to
The Montana Department of Labor and Industry, Unemployment Insurance Contributions Bureau, filed a proof of claim asserting
The debtors objected to the claim, asserting that Big Sky‘s tax debt was not a priority claim as to them despite Montana‘s responsible persons statute, which makes officers personally liable for unpaid corporate taxes.
The debtors conceded that unemployment taxes are an “excise tax” on employers
The debtors relied on our 2012 Hansen decision, holding that unemployment insurance contributions were not taxes “to be collected,” i.e. trust fund taxes, hence not entitled to
The state clarified that its basis for claiming priority tax status was a
Following an evidentiary hearing to establish the facts, the bankruptcy court overruled the objection and allowed the Montana claim as a priority claim to the extent of $78,632.29 and as a general unsecured claim to the extent of the $125.00 penalty. In re Carpenter, 519 B.R. 811, 818 (Bankr. D. Mont. 2014).
The debtors timely appealed.
JURISDICTION
Federal subject matter jurisdiction is founded on
ISSUE ON APPEAL
Whether the claim for a corporation‘s unpaid Montana unemployment insurance taxes is an
STANDARD OF REVIEW
As no findings of fact are questioned, the issues are questions of law reviewed de novo. Litton Loan Serv‘g, LP v. Garvida (In re Garvida), 347 B.R. 697, 703 (9th Cir. BAP 2006).
DISCUSSION
The battle over
I
The debtors argue from a negative inference based on comparison of the language of various
A
The foundation for the debtors’ argument lies in the structure of
Subsections (A) through (F) identify six tax categories that qualify as priority debts:
- taxes measured by income or gross receipts,
11 U.S.C. § 507(a)(8)(A) ; - property taxes,
11 U.S.C. § 507(a)(8)(B) ; - trust fund taxes (i.e., taxes “required to be collected or withheld“),
11 U.S.C. § 507(a)(8)(C) ; -
employment taxes on § 507(a)(4) priority wage claims, 11 U.S.C. § 507(a)(8)(D) ; - excise taxes,
11 U.S.C. § 507(a)(8)(E) ; and - customs duties,
11 U.S.C. § 507(a)(8)(F) .
Each of these
The
In other words, there really are only five categories of impositions that can be described as taxes or customs duties, all of which are entitled to priority status and potential exception from discharge only if not stale. The sixth, the trust fund tax, category does not constitute a separate type of tax, but rather prescribes circumstances of collection for which priority status and accompanying nondischargeable status is perpetual.
B
The debtors seize on the phrase “for which the debtor is liable in whatever capacity” in
The argument is that Congress knows how to provide that persons other than the primary tax debtor are exposed to priority tax status, which it has done in the “trust-fund” portion of
The debtors, relying on the canon of statutory construction that effect must be given to each word, argue that it follows, by negative implication, that the absence of “liable-in-whatever-capacity” language in the other subsections means that persons who are not the primary taxpayers are not required to bear the burden of priority claim status. Since the “liable-in-whatever-capacity” provision is not part of the
Extra traction for the debtors’ argument comes from the proposition that priorities are narrowly construed because they derogate from the principle of equality of distribution among unsecured creditors. Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667 (2006); Lorber, 564 F.3d at 1100.
Underlying premises of the argument are that the subsections of
II
In order to assess the debtors’ argument, a review of the history of the priority tax provisions and of judicial constructions is in order.
The phrase “for which the debtor is liable in whatever capacity” is a legacy of the Supreme Court‘s 1978 interpretation of the 1966 amendments to the former Bankruptcy Act in which Congress permitted, for the first time, discharge of most taxes due and owing more than three years before bankruptcy and prescribed a distribution priority for taxes that were not discharged. Act of July 5, 1966, Pub. L. 89-496, 80 Stat. 270.4
One exception to discharge was for trust fund taxes. Those were defined as taxes “which the bankrupt has collected or withheld from others as required by the laws of the United States or any State or political subdivision thereof, but has not paid over.” Bankruptcy Act of 1898, § 17a(1)(e), codified at
A fourth distribution priority was created for all taxes not released by discharge, with the restrictive proviso that “no priority over general unsecured claims shall pertain to taxes not included in the foregoing priority.” Bankruptcy Act of 1898, § 64a(4), codified at
In 1978, the Supreme Court construed the trust fund provision of the 1966 amendment in the context of federal tax liability of responsible parties for withholding taxes. United States v. Sotelo, 436 U.S. 268 (1978). Under Internal Revenue Code § 6672,
Although the statute made no reference to responsible officers, the Court held that, despite the designation as “penalty,” the essential nature of the debt was a tax for purposes of the Bankruptcy Act, which tax debt is not discharged. Sotelo, 436 U.S. at 274-75 & 280-81.
B
Five months after Sotelo was decided, Congress enacted the Bankruptcy Code of 1978, with the phrase “for which the debtor is liable in any capacity” included in
The legislative history explained that the priority section reached the same result as Sotelo.7
Since the basic reasoning of Sotelo was carried forward into the Bankruptcy Code, that decision retains vitality.
One instructive thing about Sotelo is that the Supreme Court construed responsible officer liability as qualifying for priority status even though Bankruptcy Act § 17a(1)(e) did not mention responsible officers and notwithstanding the statutory proviso that “no priority over general unsecured claims shall pertain to taxes not included in the foregoing priority.”
Since the Sotelos were held liable as responsible officers on a bankruptcy tax priority that did not mention responsible officers, Sotelo appears to stand for the proposition that a tax priority applies against anyone who is liable for any priority tax within the period specified by the particular priority.
There is no indication in the 1978 legislative history that Congress intended to limit the Sotelo responsible-officer analysis to trust fund taxes and no other category of tax when it enacted the Bankruptcy Code.
So viewed, there is nothing inconsistent with Sotelo about applying responsible officer liability under applicable nonbankruptcy law to any category of priority tax. But a responsible officer for a tax in any category that is not a trust fund tax would enjoy the same protection from stale tax
C
The new 1978 Bankruptcy Code remodeled the tax discharge and priority tax provisions but did not make significant changes.
Under the Bankruptcy Act, the exceptions to discharge for “taxes,” without specifying which types of taxes, were in the § 17 discharge exception section, while the priority provisions at § 64a merely afforded priority to any tax debt not discharged. Compare Bankruptcy Act § 17, as amended in 1966, with id. § 64a.
The Bankruptcy Code introduced greater specificity by naming categories of taxes and transferred the tax provisions to the priorities section, § 507(a). Now, the discharge exceptions provide only that any priority tax is not discharged. Compare
The exceptions relating to unfiled, late, and fraudulent returns and willful attempts to evade or defeat taxes remained in the discharge provisions. Compare Bankruptcy Act §§ 17a(1)(a)-(d), as amended in 1966, with
As relevant here, the trust fund tax provision moved from the discharge section to the priority tax section, with the addition of the phrase “for which the debtor is liable in whatever capacity.” Compare Bankruptcy Act § 17a(1)(e), as amended in 1966, with
III
The decisional law interpreting the Bankruptcy Code‘s priority tax provisions has focused on categorization because different categories become stale at different times and whether particular liabilities — especially workers’ compensation obligations — are taxes.
One consistent theme in the Ninth Circuit decisions is that the
Another theme is that responsible officer taxes are enforceable for any category of priority tax. Ilko, 651 F.3d at 1057-59 (§ 507(a)(8)(A)(iii)); Shank, 792 F.2d at 832 (§ 507(a)(8)(E)); George v. Cal. Bd. of Equalization (In re George), 95 B.R. 718, 720-21 (9th Cir. BAP 1989), aff‘d mem., 905 F.2d 1540 (9th Cir. 1990) (§ 507(a)(8)(E)); accord, 4 COLLIER ¶ 507.11[4].
Similarly, not every responsible officer liability is a trust fund obligation. Ilko, 651 F.3d at 1056-57; Hansen, 470 B.R. at 542-45.
IV
This brings us back to our decision in Hansen, which the debtors contend is controlling. It is not.
A
Hansen was an unemployment insurance tax case in which a corporation‘s responsible officer under California Unemployment Insurance Code § 1735 was assessed in March 2004 for underpaid unemployment insurance taxes. Administrative litigation was settled in March 2009. The responsible officer defaulted after making six of the eleven contractual installments and filed a chapter 7 bankruptcy case in January 2010 in which the taxing authority filed an adversary proceeding seeking determination that the debt was excepted from discharge under
But, the passage of nearly six years between the date of assessment and the date of the Hansens’ bankruptcy posed a stale tax problem. Unable to persuade the court that the various
The barrier was the “tax required to be collected” element because California unemployment insurance taxes are payable directly by the employer.
Our panel rejected the argument that the phrase “tax required to be collected” in
Concluding that the unemployment insurance taxes were not “required to be collected,” our panel held that the taxing authority had not established the initial essential element for a
There being no other basis for
B
The debtors contend that they are in the “exact situation” as the debtor in Hansen. Not so.
The debtor in Hansen was a responsible officer who was vicariously liable with respect to non-trust fund unemployment insurance taxes that were stale under
The debtors in this appeal are responsible officers who are vicariously liable with respect to non-trust fund unemployment insurance taxes that are not stale under
Since the Hansens’ unemployment tax debt was too stale for the
C
The debtors’ negative inference argument assumes that the various
This brings the analysis back to the Supreme Court‘s Sotelo decision. The salient point is that the Court did not construe the responsible officer “penalty” in the Internal Revenue Code as being outside the priority tax provision. Since there was no mention of responsible officer liability in the Bankruptcy Act, the Court could have applied a narrow construction to deny priority status to responsible officer liability. Instead, preferring substance over form, it concluded that the responsible officer liability that the tax statute termed a “penalty” was for taxes for purposes of bankruptcy law. Sotelo, 436 U.S. at 275.
It follows that the Montana statute imposing responsible officer liability on the debtors is, itself, a tax. Sotelo, 436 U.S. at 275; George, 95 B.R. at 720-21.
The question becomes, what category of tax? The answer is the same category as the underlying corporate tax — a
The rationale, which originates with Sotelo, is twofold. First, it should not matter whether an individual operates as a sole proprietorship or through a corporation. Sotelo, 436 U.S. at 281-82. Second, to hold otherwise would function as an incentive to cause a corporation to default on tax obligations. Sotelo, 436 U.S. at 280-81; Shank, 792 F.2d at 832; George, 95 B.R. at 720-21. We cannot ignore those precedents.
Conclusion
The liability imposed upon corporate responsible officers by
Accordingly, we AFFIRM the order of the bankruptcy court.