Groetken, In re, 86-3066

• Decision Date: 01 April 1988
• Docket Number: No. 86-3066,86-3066
• Citation: 843 F.2d 1007
• Parties: , Bankr. L. Rep. P 72,248 In re Richard Eugene GROETKEN, Debtor. Richard Eugene GROETKEN, Plaintiff-Appellant, v. STATE OF ILLINOIS, DEPARTMENT OF REVENUE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1007

843 F.2d 1007

17 Bankr.Ct.Dec. 1043, Bankr. L. Rep. P 72,248

In re Richard Eugene GROETKEN, Debtor Richard Eugene GROETKEN, Plaintiff-Appellant, v. STATE OF ILLINOIS, DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 86-3066.

United States Court of Appeals Seventh Circuit.

Argued May 29, 1987.

Decided April 1, 1988.

Paul H. Lauber, Farrell & Long, P.C., Godfrey, Ill., for debtor.

Lynn M. Travis, Asst. Atty. Gen., Springfield, Ill., for defendant-appellee.

Before RIPPLE and MANION, Circuit Judges, and REYNOLDS, Senior District Judge. ^*

MANION, Circuit Judge.

Richard Groetken appeals the district court's decision that a judgment against him under the Illinois Retailer's Occupation Tax Act was not discharged in bankruptcy. We reverse.

I.

The facts in this case are not in dispute. During the years 1979 and 1980, Richard Groetken was an officer of Pizza John's, Inc. Pizza John's operated a restaurant in Alton, Illinois that was subject to the Illinois Retailer's Occupation Tax Act ("Occupation Tax Act"), Ill.Rev.Stat. ch. 120, paragraphs 440-453 (1985). ¹ Pizza John's Occupation Tax obligations to the State were left unpaid during those years. In September, 1981, the State of Illinois, Department of Revenue ("the State") sued Groetken in state court to recover the unpaid Occupation Tax. The suit alleged that Groetken was personally liable for the unpaid taxes under a provision of the Occupation Tax Act that allowed the State to collect a "penalty" equal to the amount of unpaid tax against a responsible corporate officer who willfully failed to pay the corporation's Occupation Tax. See Ill.Rev.Stat. ch. 120, p 452 1/2 (1985).

On January 7, 1982, judgment in the amount of $6,858.19 was entered against Groetken pursuant to a stipulation by the parties. Groetken and the State stipulated that Groetken would be allowed to pay off the judgment in monthly installments.

After making payments on the judgment totaling approximately $1,875.00, Groetken stopped paying the State. The State then initiated proceedings to discover Groetken's assets. This prompted Groetken to file a Chapter 7 bankruptcy petition on May 24, 1984. On September 6, 1984, Groetken received a Chapter 7 discharge. The bankruptcy court's order discharged Groetken of all "debts dischargeable under 11 U.S.C. Sec. 523." Since his discharge, Groetken has made no payments on the State's 1982 judgment against him.

On July 10, 1985, the State initiated further proceedings in state court to collect the 1982 judgment. This prompted Groetken to file a "Complaint by Debtor to Determine Dischargeability of a Debt--Illinois Retailers' Occupation Tax" in the United States Bankruptcy Court for the Southern District of Illinois. Groetken claimed that the bankruptcy court had discharged his obligations under the 1982 judgment. After a brief hearing, the bankruptcy court ruled against Groetken. The bankruptcy court held that the judgment under the Occupation Tax Act was, in substance, a non-dischargeable judgment for taxes Groetken collected under the Illinois Use Tax Act ("Use Tax Act"), Ill.Rev.Stat. ch. 120, paragraphs 439.1-439.22 (1985). See In re Rosenow, 715 F.2d 277, 280-82 (7th Cir.1983) (obligations under the Use Tax Act never dischargeable in bankruptcy). Groetken appealed the bankruptcy court's order to the district court. The district court affirmed.

II.

A discharge under 11 U.S.C. Sec. 727 does not discharge an individual debtor from tax debts "of the kind and for the periods specified in ... [11 U.S.C. Sec. 507(a)(7) ], whether or not a claim for such tax was filed or allowed." ² 11 U.S.C. Sec. 523(a)(1)(A). Among the taxes listed in Sec. 507(a)(7) are taxes "on or measured by ... gross receipts" that became due within three years before the filing of the bankruptcy petition, 11 U.S.C. Sec. 507(a)(7)(A) ("Section A") and excise taxes on a transaction that became due within three years before filing the bankruptcy petition, 11 U.S.C. Sec. 507(a)(7)(E) ("Section E"). Thus, excise taxes and taxes on or measured by gross receipts are dischargeable if they became due more than three years before the filing of the bankruptcy petition. See Rosenow, 715 F.2d at 279.

Some taxes are not dischargeable regardless of when they became due. Taxes that are "required to be collected or withheld and for which the debtor is liable in whatever capacity" are never dischargeable. 11 U.S.C. Sec. 507(a)(7)(C) ("Section C"); see Rosenow, 715 F.2d at 279. Section C covers the "so-called 'trust fund' taxes, that is, income taxes which an employer is required to withhold from the pay of his employees, the employees' share of social security and railroad retirement taxes, and ... Federal unemployment insurance," S.Rep. No. 95-989, 95th Cong.2d Sess. 71 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5857, as well as other taxes that a person is required to collect and hold on behalf of a governmental unit, see Rosenow, 715 F.2d at 279-80. See also In re Shank, 792 F.2d 829 (9th Cir.1986). For ease of reference, we will refer to all taxes falling under Section C as "trust fund" taxes.

Here, the sole issue raised on appeal is how the State's claim under the Occupation Tax Act should be characterized under Sec. 507(a)(7). ³ Groetken and the State agree that Groetken's Occupation Tax obligations became due more than three years before he filed his bankruptcy petition. However, Groetken argues that the Occupation Tax is either a gross receipts tax falling under Section A or an excise tax falling under Section E. Under either Section A or Section E, his Occupation Tax obligations would be discharged because they became due more than three years before he filed his bankruptcy petition. The State argues that its claim under the Occupation Tax Act is in reality a non-dischargeable claim for the money Groetken was required to collect from purchasers under the Use Tax Act.

The Illinois taxation scheme commonly referred to as the Illinois "sales" tax actually consists of two complementary statutes--the Occupation Tax Act and the Use Tax Act. The Occupation Tax Act imposes a "tax ... upon persons engaged in the business of selling tangible personal property at retail at the rate of 5% of the gross receipts from such sales of tangible personal property made in the course of such business...." Ill.Rev.Stat. ch. 120 p 441 (1985). This tax is imposed directly on retailers.

To insure that the tax is paid the Act contains a detailed registration, filing, and enforcement scheme. See generally Ill.Rev.Stat. ch. 120, paragraphs 442-451 (1985). As noted earlier, the Occupation Tax Act also allows the State to hold an officer of a corporation "personally liable to a penalty equal to" the amount of a corporation's unpaid tax if the officer "has the control, supervision or responsibility of filing returns and making payment" of the tax and willfully fails to pay the tax. Ill.Rev.Stat. ch. 120, p 452 1/2 (1985). Furthermore, the Act contains criminal penalties for, among other things, failing to file returns and filing fraudulent returns. Ill.Rev.Stat. ch. 120, p 452 (1985).

The Occupation Tax Act is complemented by the Use Tax Act. The Use Tax Act imposes a 5% use tax "upon the privilege of using in this State tangible personal property ... purchased at retail from a retailer." Ill.Rev.Stat. ch. 120, p 439.3 (1985). Illinois enacted the Use Tax Act to protect its retailers from the diversion of business to out-of-state retailers and to prevent evasion of the Occupation Tax. See Klein Town Builders, Inc. v. Department of Revenue, 36 Ill.2d 301, 222 N.E.2d 482, 484 (1966); Turner v. Wright, 11 Ill.2d 161, 142 N.E.2d 84, 87, appeal dismissed, 355 U.S. 65, 78 S.Ct. 140, 2 L.Ed.2d 106 (1957). The Use Tax Act applies to retail purchases made in-state as well as purchases made out-of-state. See id. Retailers are required to collect Use Tax from purchasers. Ill.Rev.Stat. ch. 120, p 439.3. Like the Occupation Tax Act, the Use Tax Act contains a detailed registration, filing, and enforcement scheme. See Ill.Rev.Stat. ch. 120, paragraphs 439.6-439.15 (1985). It also incorporates by reference many of the Occupation Tax Act's enforcement provisions, including the provision that allows the State to collect a penalty from responsible corporate officers. See Ill.Rev.Stat. ch. 120, p 439.12 (1985).

Fortunately for Illinois retailers and consumers, the Occupation Tax and the Use Tax are not imposed cumulatively. The Use Tax Act expressly relieves a retailer from remitting any Use Tax it collects if the retailer pays the Occupation Tax. See Ill.Rev.Stat. ch. 120, paragraphs 439.8 and 439.9 (1985). Moreover, although the Occupation Tax Act does not contain a similar provision, the Illinois Court of Appeals has indicated that a retailer who pays the Use Tax does not have to pay the Occupation Tax. See Department of Revenue v. Steinkopf, 160 Ill.App.3d 1008, 112 Ill.Dec. 407, 410, 513 N.E.2d 1016, 1019 (1st Dist.1987), appeal denied, 118 Ill.2d 542, 117 Ill.Dec. 223, 520 N.E.2d 384 (1988). "Therefore, although there are two taxes actuated by the same sale and purchase, only one of the two payments is remitted to the State, and the single payment satisfies both taxes." Id.

III.

This circuit addressed the discharge in bankruptcy of a retailer's obligations under this unusual tax scheme in In Re Rosenow, 715 F.2d 277 (7th Cir.1983). In Rosenow, two retailers sought to discharge their obligations under the Occupation Tax Act and the Use Tax Act. The bankruptcy court discharged the Occupation Tax claims but granted judgment against the retailers on the Use Tax claims. The bankruptcy court held that the Use Tax was a non-dischargeable "trust fund" tax.

On appeal to this circuit, the debtors' sole challenge was that the Use Tax is not a "trust fund" tax. Even though retailers are required to collect the Use Tax, the debtors argued that the "trust fund" provisions of the Bankruptcy Code applied...