Etheridge v. State of Ill.
| Decision Date | 12 July 1989 |
| Docket Number | No. 89-1043.,89-1043. |
| Citation | 127 BR 421 |
| Court | U.S. District Court — Central District of Illinois |
| Parties | Michael ETHERIDGE and Lorine Etheridge, Plaintiffs, v. STATE OF ILLINOIS, Defendant. |
Gregory McHugh, Aledo, Ill., for plaintiffs.
Dan Slack, Rock Island, Ill., for defendant.
Michael and Lorine Etheridge (herein "Debtors") are appealing the bankruptcy court's decision in favor of the State for $14,658 of Retailers Occupation Taxes, owed to the Illinois Department of Revenue by the Etheridges' retail building supply business. The issue on appeal is whether a late filed tax return, filed more than two but less than three years before the bankruptcy petition, is excepted from discharge under Bankruptcy Code § 523(a)(1). 11 U.S.C. § 523(a)(1).
For the reasons stated below, the Court affirms the bankruptcy court's order.
The Bankruptcy Code attempts to balance the debtor's interest in a fresh start with creditors' interest in maximizing both the pool of assets and their individual recoveries. The Code sections at issue in this case reflect this tension.
The primary mechanism for an individual debtor's fresh start is a discharge in bankruptcy, 11 U.S.C. § 524, which operates to enjoin any attempt to enforce a discharged claim. Other policies, which support the interests of certain creditors over those of the debtor, are reflected in the priorities for distribution of payments from the bankruptcy estate, 11 U.S.C. § 507, and in the exceptions from discharge of certain claims, 11 U.S.C. § 523. This case involves the state government's interest in collecting taxes due, which are generally afforded seventh priority, 11 U.S.C. § 507(a)(7); and the non-dischargeability of certain tax claims under § 523(a)(1). 11 U.S.C. § 523(a)(1).
The parties here disagree about the interplay between these two sections of the Bankruptcy Code, as applied to certain retailer taxes payable by the Etheridges' business between two and three years prior to their bankruptcy filing. The Code's provisions and a recent Seventh Circuit decision appear to dispose of both the older and the more recent tax liabilities. (Older taxes are "stale," whereas newer ones are non-dischargeable as a matter of public policy).
Retailers Occupation tax returns are due on the last day of the month for the preceding month. Ill.Rev.Stat. ch. 120, ¶¶ 440, 444. On October 9, 1985, the Etheridges filed a consolidated late tax return covering February through September 1984, plus November 1984 through July 1985, admitting total tax liability of $30,542. The Department of Revenue issued a notice of delinquency on April 28, 1987, by which time $38,577 was due including interest and penalties. The Etheridges made two payments totaling approximately $1,300. They filed a voluntary Chapter 7 bankruptcy petition on October 21, 1987.
Pursuant to the Seventh Circuit's decision in In re Groetken, 843 F.2d 1007 (7th Cir.1988), the bankruptcy court issued a pretrial order discharging Etheridges' liability for the portion of taxes for which a return was last due more than three years before filing for bankruptcy. (Adv. No. 87-8266, June 2, 1988). After trial, Judge Altenberger ruled in favor of the State of Illinois on the remaining tax obligation of $14,658 in late-filed taxes, due more than two but less than three years before the Etheridges' bankruptcy filing. In re Etheridge, 91 B.R. 842 (Bkrtcy.C.D.Ill.1989).
The Debtors argue first that the bankruptcy court did not apply the "applicable standard of review" (Brief of Appellant, p. 2) for barring a discharge. Debtors argue that the Bankruptcy Code must be liberally construed in favor of the debtor and any bar to discharge must be strictly construed against the creditor. Debtors further argue that Congress specifically approved discharge of tax debts. In support, Debtors cite United States v. Sanabria, 424 F.2d 1121 (7th Cir.1970), which stands for the proposition that discharge in bankruptcy prevents a lien for taxes due and owing more than three years before the bankruptcy filing, from attaching to after-acquired property. Quoting the Senate Committee Report for the 1966 bankruptcy amendments, the court noted the importance of discharge to allow honest debtors "a fresh start unburdened by what may be an overwhelming liability for accumulated taxes." The Sanabria court found that "the dominant purpose of the change was to relieve a debtor of the burden of these older taxes i.e., those due more than three years before filing after bankruptcy." 424 F.2d 1121, 1122. In the instant case the decision in In re Groetken, 843 F.2d 1007 (7th Cir. 1988) was dispositive on the question of the portion of the taxes due and payable more than three years before the bankruptcy filing; however, the Sanabria case sheds no further light on the issue remaining on appeal, which is the status of taxes due and payable more than two but less than three years before the bankruptcy filing.
In further support of their contention that the courts are to construe any exceptions to discharge in favor of the debtor, Debtors cite In re Tester, 62 B.R. 486, 490 (Bkrtcy.W.D.Va.1986), which in turn refers to the Collier treatise on bankruptcy, stating, "exceptions to discharge are to be strictly construed against the objecting creditor and liberally in favor of the debtor." 3 Collier on Bankruptcy, § 523.05A at 523-15 (1985).
However, another authority has noted the countervailing policy underlying non-dischargeability of tax liens: "in effect the Bankruptcy Code is making a policy decision in favor of the tax collector over the debtor's need for sufficient property to make a fresh start." Ginsberg on Bankruptcy, ¶ 6104, p. 6026 (1988 Supp.). In a subsequent section dealing with tax claims, the Ginsberg treatise states, "federal, state or local tax claims generally will not be discharged in a Chapter 7 case . . . The Bankruptcy Code takes a very narrow view of the dischargeability of tax claims owed to any governmental unit." Id. at ¶ 11,302, p. 11.031. The State also argues on appeal that the Bankruptcy Code's priority treatment of obligations owed to governments implies policy support for non-dischargeability of these taxes. The Court agrees.
Debtors further argue that bankruptcy courts have placed a heavy burden on the state to avoid a tax discharge. In support of this proposition, they cite three cases:
1. In re Cerar, 84 B.R. 524 (C.D.Ill. 1988). This case was recently before this Court. Cerar v. Federal Deposit Insurance Corp., 97 B.R. 447 (C.D.Ill.1989). Cerar interprets § 523(a)(6) (). The subject of the case was an FDIC-insured account, rather than a tax owed to a governmental unit. This Court's ruling in Cerar relied on elements and standards set forth in In re Kimzey, 761 F.2d 421 (7th Cir.1985), which also involved a debtor/bank relationship and the "willful and malicious injury" section, § 523(a)(6), rather than a governmental entity, § 523(a)(1). The standard set forth in Kimzey, clear and convincing evidence, applies to private creditors as well as the government.
2. Matter of Carracino, 53 B.R. 513 (Bkrtcy.D.N.J.1985). In Carracino, the court denied summary judgment to the state for failing to provide sufficient information to determine whether the taxes due were of the kind and for the period specified in § 523(a)(1)(A) ().
3. Matter of Carapella, 84 B.R. 779 (Bkrtcy.M.D.Fla., Tampa Div.1988). Carapella was convicted of mail fraud through eight shell corporations, none of which had filed any income tax returns. The IRS was owed over $1 million, and Carapella had been imprisoned. The IRS agent who identified the shell corporations filed alternate documents (IRS Form 870) for identification purposes, which defendant signed; these functioned as the equivalent of tax returns. Therefore, the court ruled against the state under § 523(a)(1)(B)(i) (). However, the court remanded for fact finding on the dischargeability of the tax liability pursuant to § 523(a)(1)(C), (fraud and misrepresentation with respect to a tax debt).
Neither Carracino nor Carapella appears to contradict the clear and convincing evidence standard of Kimzey, supra. The Debtors have presented no argument sufficient to reverse the bankruptcy court's finding that the State has met its burden.
The Debtors argue that the statutory construction used by the bankruptcy court was in error. The relevant Bankruptcy Code sections provide in pertinent part:
Debtors would have the...
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