In re Calabrese

• Decision Date: 13 September 2011
• Docket Number: Appeal from Bankruptcy Case No. 10-6583
• Court: U.S. District Court — District of New Jersey
• Parties: In re: MICHAEL CALABRESE, Appellant.

IN RE: MICHAEL CALABRESE, Appellant.

Appeal from Bankruptcy Case No. 10-6583

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Dated: September 13, 2011

OPINION

APPEARANCES:

NICHOLAS S. HERRON

LAW OFFICES OF SEYMOUR WASSERSTRUM

205 W. LANDIS AVE.

VINELAND, NJ 08360

Attorney for Appellant

MARIKAE G. TOYE

DIVISION OF LAW

R.J. HUGHES JUSTICE COMPLEX

25 MARKET STREET

P.O. BOX 106

TRENTON, NJ 08625

Attorney for State of NJ, Division of Taxation

DONNA L. WENZEL

ISABEL C. BALBOA

CHERRY TREE CORPORATE CENTER

535 ROUTE 38

SUITE 580

CHERRY HILL, NJ 08002

CHAPTER 13 Standing Trustee

HILLMAN, District Judge

I. INTRODUCTION

Before the Court is an appeal from an Order Denying Debtor's Motion to Expunge or in the Alternative to Reclassify ("Order") entered on November 17, 2010, by the United States Bankruptcy Court for the District of New Jersey ("Bankruptcy Court"). For the reasons expressed below, the Order entered by the BankruptcyCourt will be affirmed.

II. BACKGROUND

Appellant had conducted business under the trade name "Don's What a Bagel, Inc." which business filed for bankruptcy under Chapter 11 on February 9, 2009. Unable to confirm a Chapter 11 plan of reorganization, the Bankruptcy Court ordered Chapter 7 liquidation on April 19, 2010. Appellant was unable to derive any funds from the business and sought relief by filing for individual Chapter 13 Bankruptcy protection on January 18, 2010. The State of New Jersey filed a secured proof of claim that was subsequently amended on August 12, 2010.

Central to this appeal is the amended proof of claim filed by the State of New Jersey which states that Appellant owes sales taxes for the time period of 2003 to 2009. The sales taxes are monies collected from Appellant's customers at the time of sale and owed to the State as required by state law. Appellant argues that the sales taxes are "excise taxes" and, therefore, dischargeable under the Bankruptcy Code after three years. The State argues that the taxes are "trust fund" taxes and, therefore, not dischargeable under Bankruptcy.

The Bankruptcy Court held a hearing on September 27, 2010, and subsequently instructed the parties to file supplemental briefing. The Bankruptcy Court held a telephonic hearing on November 1, 2010, at which time the Court found that the sales and usage taxes owed by Appellant are trust fund taxes pursuantto 11 U.S.C. § 507(a)(8)(c) rather than excise taxes under 11 U.S.C. § 507(a)(8)(e). The Bankruptcy Court entered an order on November 17, 2010 stating that the sales tax liability owed by Appellant on behalf of Don's What a Bagel, Inc., in the amount of $56,679.78, is non-dischargeable.

Appellant filed a timely appeal of the Order entered by the Bankruptcy Court.

III. JURISDICTION

The Order entered on November 17, 2010 is a final, appealable order. This Court exercises mandatory jurisdiction to hear appeals from final orders of bankruptcy judges pursuant to 28 U.S.C. § 158(a)(1).

IV. STANDARD

On appeal from Bankruptcy Court, factual disputes are governed by the clearly erroneous standard. See In re Continental Airlines, 203 F.3d 203, 208 (3d Cir. 2000); In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989). Legal conclusions are given plenary review. Id.; see also In re McKeesport Steel Castings Co., 799 F.2d 91, 93 (3d Cir. 1986). The parties do not dispute the underlying facts. The issue turns on a question of law and, therefore, we apply plenary review regarding the appeal.

V. DISCUSSION

This appeal requires interpretation of Section 507(a) of the Bankruptcy Code which prioritizes creditors' claims,particularly, item number eight, which permits allowed unsecured claims of governmental units under certain conditions. See 11 U.S.C. § 507(a)(8).

Appellant argues that the State's claim for sales taxes falls under section 507(a)(8)(e), which permits unsecured claims of governmental units, only to the extent that such claims are for an "excise tax" on:

(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or

(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;

See 11 U.S.C. § 507(a)(8)(e).

Appellant argues that sales taxes are "excise taxes" and, therefore, dischargeable after three years pursuant to section 507(a)(8)(e).

Conversely, the State argues that the sales taxes are "trust fund" taxes and fall under section 507(a)(8)(c), which permits unsecured claims of governmental units only 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." See 11 U.S.C. § 507(a)(8)(c). There is no three year limitation under subsection (c), thereby resulting in the full claim being nondischargeable.

The Bankruptcy Court ruled in favor of the State and held that sales taxes are trust fund taxes and, therefore,nondischargeable in Bankruptcy. Appellant argues on appeal that treating sales taxes as trust fund taxes violates the goal of relieving a debtor from the weight of oppressive indebtedness and of providing a debtor in bankruptcy a "fresh start." See Ins. Co. Of N. America v. Cohn (In re Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995). Also, treating sales taxes as trust fund taxes requires a broad reading of the statute which violates the standard that priority under the tax code should be founded on a clear statutory purpose and narrowly construed. See In re Continental Airlines, Inc., 148 B.R. 207, 211 (Bankr. D. Del. 1992).

Appellant argues that since the statutory language of Section 507(a)(8)(c) is silent as to whether it includes "sales" or "usage" taxes, that there is no clear purpose to include such taxes. Appellant also argues that the Bankruptcy Court conceded that it could be interpreted in a "myriad" of ways, thus committing reversible error. Moreover, Appellant argues that granting priority status to the State is inconsistent with the policy of equality of distribution.

There is no case law in this District interpreting whether sales taxes are excise taxes or trust fund taxes under the Bankruptcy Code. The Bankruptcy Court relied upon decisions by the Second Circuit, in In re DeChiaro, 760 F.2d 432 (2nd Cir. 1985), and by the Ninth Circuit in In re Shank, 792 F.2d 829, 832 (9th Cir. 1986). Both Courts held that sales taxes collectedfrom third parties to be paid to the State should be treated as trust fund taxes under 11 U.S.C. § 507(a)(8)(c).

The Second Circuit began its discussion with a review of the treatment of tax debts under the former bankruptcy Act to determine Congress's intent when it enacted the 1978 Code provisions. In re DeChiaro, 760 F.2d at 434. The Court found that in 1966, Congress changed its long-standing position that tax debts were not dischargeable, and permitted most tax debts more than three years old to be discharged. Id. (citing Section 17a(1) of the Bankruptcy Act of 1898, ch. 541, § 17a(1), 30 Stat. 544, 550 (formerly codified as amended at 11 U.S.C. § 35(a)(1)) (repealed 1978); Act of July 5, 1966, Pub.L. No. 89-496, § 2, 80 Stat. 270). The Court noted that a proviso was added by the 1966 amendment leaving certain tax debts nondischargeable even though the tax debt was more than three years old, one of which was a trust fund tax. Id. (citing Act, § 17a(1)(e)).

The Second Circuit discussed that section 17a(1)(e) excepted from discharge, taxes the debtor "has collected or withheld from others." Id. The Court stated that "Congress added the trust fund tax exception to the 1966 amendment in response to the Treasury Department's argument that a debtor should not be relieved of his obligation for taxes he had collected from third parties but had not paid over to the taxing authority." Id. (citing H.R.Rep. No. 372, 88th Cong., 1st Sess. 5 (1963); S.Rep. No. 114, 89th Cong., 1st Sess. 6 (1965)). The Court noted thatthe definition for trust fund tax did not include "sales taxes." Rather, the primary example used for such a tax was a withholding tax collected by an employer from his employees. Id. Nonetheless, the Court thought the history strongly suggested that Congress did not intend to limit the section 17a(1)(e) trust fund exception to just withholding taxes, but to encompass taxes that "employers and other persons ... have collected ... from third parties." Id. (citing H.R.Rep. No. 372, supra, at 6 (reprinting letter from Assistant Secretary of Treasury to Chairman of House Judiciary Committee) (emphasis added in original); S.Rep. No. 114, supra, at 10).¹

In their discussion of The Bankruptcy Reform Act of 1978, the Second Circuit noted that the House and Senate each drafted significantly different versions of section 507 in their treatment of trust fund and excise taxes. Id. at 434-35. The differences between the House and Senate were summarized by the Court:

Under the House bill, the trust fund tax provision covered only 'taxes required to be withheld from wages, salaries, commissions, dividends, interest, or other payments that were paid by the debtor.' H.R. 8200, 95th Cong., 1st Sess. § 507(6)(C) (1977), reprinted in App. 3 Collier on Bankruptcy (15th ed. 1985). The House bill also had a provision covering 'excise taxes.' Id. § 507(6)(E). Under the House version, a discharge was not available for withholding taxes that became due within two years preceding bankruptcy or for excise taxes on transactions occurring within one year of bankruptcy. The Senate bill, on the other hand, included a trust fund tax provision not limited to withholding taxes. Rather, the Senate bill contained a provision, similar to section 17a(1)(e), that excepted from discharge a tax 'required to be collected or withheld' no matter how stale the debt. S. 2266, 95th Cong., 2d Sess. § 507(a)(6)(C) (1978), reprinted in App. 3 Collier on Bankruptcy, supra. The Senate bill had

...