Illinois Dept. of Revenue v. Hayslett/Judy Oil

• Decision Date: 18 October 2005
• Docket Number: No. 04-4053.,04-4053.
• Parties: ILLINOIS DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. HAYSLETT/JUDY OIL, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

426 F.3d 899

ILLINOIS DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. HAYSLETT/JUDY OIL, INC., Defendant-Appellant.

No. 04-4053.

United States Court of Appeals, Seventh Circuit.

Argued September 27, 2005.

Decided October 18, 2005.

Carl Elitz (argued), Office of the Attorney General, Civil Appeals Division, Chicago, IL, for Plaintiff-Appellee.

Bruce Meachum (argued), Meachum & Martin, Danville, IL, for Defendant-Appellant.

Before FLAUM, Chief Judge, and BAUER and SYKES, Circuit Judges.

FLAUM, Chief Judge.

Hayslett/Judy Oil ("Hayslett") has filed for Chapter 11 bankruptcy and has submitted a re-organization plan to the bankruptcy court. The proposed re-organization plan contains a priority payment to the state of Illinois. That payment amounts to three years of unpaid Illinois Motor Fuel Tax ("the Tax") and an additional five percent of the prioritized amount. The Illinois Department of Revenue ("the Department" or "the government") claims that the plan is deficient in two respects. First, the plan characterizes the tax as an "excise tax" under § 507(a)(8)(E) of the Bankruptcy Code ("the Code"), which allows Hayslett to discharge the unpaid motor fuel tax that is more than three years overdue. The Department claims that the tax should fall under § 507(a)(8)(C) of the Code, which does not allow for the discharge of older debt. Secondly, the Department claims that the proposed re-organization plan is unacceptable under § 1129 of the Code because it does not explicitly account for interest payments on the unpaid tax. Hayslett counters that the plan implicitly provides for interest since it will pay the Department five percent more than Hayslett believes is owed.

While the bankruptcy court has approved the plan, the district court has reversed, ruling for the Department on both issues. Hayslett appeals the district court's decision, and asks that this Court reinstate the bankruptcy court's decision. For the following reasons, we affirm the district court and remand the case to the bankruptcy court for further proceedings consistent with this opinion.

I. Background

Hayslett is a corporation that operates a bulk petroleum delivery business. It filed for Chapter 11 bankruptcy in April of 2003. It filed a plan for re-organization in August of that year. The plan included payments to the Department of $1,155.00 monthly for approximately five years, totaling $69,300.00. That amount reflects three years of back taxes, plus an additional amount of about five percent that Hayslett claimed represented implicit interest payments. In October, the Department filed "Claim No. 13" for unpaid Illinois Motor Fuel Tax. The Department believed that Hayslett was liable for all unpaid Motor Fuel Tax, not just the taxes from the past three years as Hayslett claimed. The Department asked that $256,387.44 of unpaid tax be given priority status under § 507(a)(8) of the Code.

The Department objected to Hayslett's proposed re-organization plan on the ground that the plan did not grant priority status to the entire amount owed. The Department also argued that the plan did not provide for interest payments on the amount that was given priority, and therefore failed under § 1129 of the Code. Hayslett argued that the tax was an excise tax, and that therefore, under § 507(a)(8)(E), only the past three years of unpaid tax, or $65,830.44, were entitled to priority status. Moreover, it argued that its re-organization plan, although not explicitly accounting for interest, resulted in total payments to the government of five percent more than the amount owed. Therefore, Hayslett claimed, the plan implicitly provided for interest and met the requirements for approval set out in § 1129 of the Code.

The bankruptcy court heard arguments from both parties and ruled in favor of Hayslett. It relied primarily on an unpublished opinion from the bankruptcy court in the Southern District of Illinois, In re Funk, No. 97-33000, 1999 WL 33596475 (Aug. 16, 1999). The bankruptcy court issued an order confirming Haylett's proposed re-organization plan in December 2003.

The Department appealed the order to the district court in February 2004, raising the same objections that it had raised in bankruptcy court. In October 2004, the district court entered an order stating that the Department was "entitled to interest on the tax claim throughout the payment period," and that the motor fuel tax "falls squarely within the language" of § 507(a)(8)(C) of the Code; thus Hayslett was precluded from discharging the debt beyond the three years preceding filing. Accordingly, the district court entered judgment reversing the bankruptcy court and remanded the case for further proceedings. The district court decision rejected the bankruptcy court's reliance on In re Funk, instead relying on Seventh Circuit cases Rosenow v. Illinois Department of Revenue, 715 F.2d 277 (7th Cir.1983), and Groetken v. Dep't of Revenue, 843 F.2d 1007 (7th Cir.1988). The debtor timely appealed the district court's decision.

II. Discussion

Under § 507 of the Code, governmental claims are eighth in payment priority when a bankruptcy claim is filed. 11 U.S.C. § 507(a)(8). The type of tax involved determines what amount of back taxes are prioritized. Under § 507(a)(8)(C), government claims are prioritized to the extent that such claims are for "a tax required to be collected or withheld and for which the debtor is liable in whatever capacity." 11 U.S.C. § 507(a)(8)(C). This subsection applies to so-called "trust fund taxes." Rosenow v. Ill. Dep't of Revenue, 715 F.2d 277, 279 (7th Cir.1983). These taxes are collected from individuals by a third party who then remits the tax to the government. Income tax and social security tax are common examples of "trust fund taxes." Id. This Circuit has also concluded that the Illinois Use Tax, a sales tax, falls under this subsection. Id. Taxes that fall under § 507(a)(8)(C) can never be discharged in bankruptcy, regardless of their temporal distance from the date of bankruptcy filing. 11 U.S.C. § 507(a)(8)(C).

Excise taxes, however, are treated differently under the statute. Under § 507(a)(8)(E), governmental claims are prioritized to the extent that they are for an "excise tax."¹ 11 U.S.C. § 507(a)(8)(E). Under this subsection, claims may be discharged after three years.²

This Court is now asked to resolve whether the Illinois Motor Fuel Tax falls under § 507(a)(8)(C) or § 507(a)(8)(E), an issue of first impression. The Motor Fuel Tax Law, 35 ILL. COMP. STAT. 505/6, sets out the following obligations for distributors like Hayslett:

A distributor who sells or distributes any motor fuel, which he is required by Section 5 to report to the Department when filing a return, shall ... collect at the time of such sale and distribution, the amount of tax imposed under this Act on all such motor fuel sold and distributed, and at the time of making a return, the distributor shall pay to the Department the amount so collected ... and shall also pay to the Department an amount equal to the amount that would be collectible as a tax in the event of a sale thereof on all such motor fuel used by said distributor during the period covered by the return.

35 ILL. COMP. STAT. 505/6 (2002).

The Department argues that because this tax requires a distributor to "collect at the time of ... sale ... the amount of tax imposed under this Act on all such motor fuel sold ... and pay to the Department the amount so collected," it is a "tax required to be collected" within the meaning of § 507(a)(8)(C).

Hayslett counters that the Tax is an excise tax within the meaning of § 507(a)(8)(E). It states four principal arguments to support its position:

1. The tax is listed under the section titled "excise taxes" in the table of contents of the Illinois Compiled Statutes, and is listed under the general heading "excise taxes" in the code's index.

2. The Department assigned Hayslett an "excise tax number" in its claim filed with the bankruptcy court.

3. The Department's bankruptcy claim contains Notices of Lien for the Motor Fuel Taxes. Each of these notices includes, on the second page, the heading "excise tax," with the tax liabilities that are the subject of each notice listed under that heading.

4. The forms for the Motor Fuel Tax liability have a different format than the forms that a retail seller uses to compute tax liability. The Motor Fuel Tax is based on gallons of fuel that pass through the distributor's inventory during the month, while typical sales taxes are based on the amount of receipts that were generated from the distributor's sales that month. Hayslett argues that this difference reflects a fundamental difference between the two taxes. The Illinois Use Tax, which Rosenow v. Illinois Department of Revenue, 715 F.2d 277 (7th Cir.1983), held fell under § 508(a)(8)(C), is an "add on" tax which is added to the price that a retail customer pays to purchase a product. In contrast, the Tax is hidden from the customer, who pays it directly through the retail price instead of through an add-on at the end of the purchase. The distributor remains free to internalize the tax and not pass it along to the consumer, Hayslett therefore argues, that the tax cannot fairly be characterized as a "trust fund tax" which requires the distributor to collect the consumer's money in trust for the government.

The Department argues that none of these factors prevent the tax from falling under the purview of § 507(a)(8)(C). Under Rosenow, a tax can be both an excise tax and a non-delegable "trust fund tax." Rosenow, 715 F.2d at 280 ("We ... conclude that excise taxes which a retailer has collected from purchasers are nondischargeable despite their age [under § 507(a)(8)(C)].") Citing both the legislative history and the plain statutory language of the current statute's predecessor (which has identical wording to the current statute), the court held that subsection C applied to excise taxes...