In re Carpenter

• Decision Date: 03 October 2014
• Docket Number: No. 13–61192–11.,13–61192–11.
• Parties: In re Daniel Bruce CARPENTER and Mary Esther Carpenter, Debtors.
• Court: U.S. Bankruptcy Court — District of Montana

519 B.R. 811

In re Daniel Bruce CARPENTER and Mary Esther Carpenter, Debtors.

No. 13–61192–11.

United States Bankruptcy Court,

D. Montana.

Signed Oct. 3, 2014.

Harold V. Dye, Missoula, MT, for Debtor.

MEMORANDUM of DECISION

RALPH B. KIRSCHER, Bankruptcy Judge.

In this Chapter 11 bankruptcy, after due notice, a hearing was held September 9, 2014, in Billings on the Debtor's July 10, 2014, Objection to Proof of Claim No. 5 filed by the Montana Department of Labor and Industry Unemployment Insurance Contributions Bureau. Harold V. Dye of Missoula, Montana appeared at the hearing on behalf of the Debtors and the Montana Department of Labor & Industry was represented at the hearing by Joseph Nevin of Helena, Montana. The Court heard attorney argument at the September 9, 2014, hearing. Daniel Carpenter testified and the Court granted the parties time to file post-hearing briefs. The parties have filed their briefs and the matter is ready for decision.

Debtors object to Proof of Claim No. 5 arguing the claim should be allowed as a general unsecured claim, rather than a priority claim. Proof of Claim No. 5 stems from unpaid unemployment insurance taxes owed by Big Sky Fire Protection, Inc.,¹ which, pursuant to Mont.Code Ann. (“MCA”) 39–51–1105,² makes Debtors,as officers of Big Sky Fire Protection, Inc. “liable for the taxes, penalties and interest due.” Debtors contend that the amount owed is an excise tax on employers and that Big Sky Fire Protection, Inc.,³ and not the Debtors, was the employer. Debtors, citing the Ninth Circuit Bankruptcy Appellate Panel's (“BAP”) decision in In re Hansen, 470 B.R. 535 (9th Cir. BAP 2012), argue that Debtors' liability under MCA § 39–51–1105 does not constitute a tax against the Debtors under 11 U.S.C. § 507(a)(8).

The Montana Department of Labor & Industry, Unemployment Insurance Division (“UID”) counters that Debtors' reliance on Hansen is misplaced because the claim in Hansen was based solely on 11 U.S.C. § 507(a)(8)(C), which is distinguishable from the claim herein, which is based on § 507(a)(8)(E). Debtors and UID agree that the unemployment taxes in question are excise taxes. The sole issue is whether, under MCA § 39–51–1105, Debtors' personal liability for the excise taxes of Big Sky Fire Protection, Inc. is an excise tax on the Debtors. Citing In re Rizzo, 2012 WL 3201902, *4, 2012 Bankr.LEXIS 3713, *9–11 (Bankr.E.D.Mich.2012) (“Giving plain meaning to the words of § 523(a)(1)(A) or § 507(a)(8)(E) precludes finding demarcation between direct and vicarious liability. The SBT is undoubtedly an excise tax, and nothing is presented to show that the nature of the SBT debt changed as it passed from the Company to Plaintiff”); In re Quiroz, 450 B.R. 699, 702 (Bankr.E.D.Mich.2011) (“Quiroz takes the position that the personal assessment of the SBT changes the nature of the tax.... There is no language requiring that the debt must have originally accrued to the debtor, only that the debtor be liable for the debt;”) In re McAdam, 402 B.R. 473, 477–479 (Bankr.D.N.H.2009); and In re Mueller, 243 B.R. 346, 349 (Bankr.D.Wis.1999) (in addressing the plaintiff's claim under § 507(a)(8)(E), the bankruptcy court found it “immaterial that the return was due by IPBMC and not the Plaintiff individually”), UID urges the Court to reject Debtors' argument.

The Court agrees that the instant case is distinguishable from Hansen. Like the Debtors in this case, Hansen was an officer of certain corporate entities and was determined to be a responsible person for unpaid unemployment insurance taxes owed by the corporate entities to the California Employment Development Department. Hansen, 470 B.R. at 537. Hansen and others entered into an agreement for the payment of the unemployment insurance taxes, but defaulted on the payments required by that agreement. Id. at 538. Hansen then filed for bankruptcy protection and the California Employment Development Department sought a determination from the Bankruptcy Court that the unemployment insurance taxes were a tax of the kind specified in § 507(a)(8)(C) and that such taxes were excepted from Hansen's discharge under § 523(a)(1)(A). Id. at 539. The Bankruptcy Court ruled in favor of Hansen.

On appeal and referring to legislative history after finding § 507(a)(8)(C) ambiguous, the BAP affirmed the Bankruptcy Court, concluding that the unpaid California unemployment insurance taxes were not entitled to priority under § 507(a)(8)(C). Hansen, 470 B.R. at 543–44. The BAP explained:

Based on the legislative history, we resolve § 507(a)(8)(C)'s ambiguity in favor of the Debtors. Doing otherwise would frustrate congressional intent. The legislative history shows that under § 507(a)(8)(C), a “tax required to be collected” must be collected from a third party. The UI Tax at issue here is not collected from a third party. Rather, as the EDD explained at oral argument, unemployment insurances taxes are payable directly by the employer; here, that was Onvoi. As such, it is not a “tax required to be collected” from anyone; Onvoi was responsible for its own debts. For this reason, we cannot conclude that the UI Tax is a tax of the kind specified in § 507(a)(8)(C). See 4 Collier, supra, ¶ 507.11[4] (identifying five elements that must be present for a claim to achieve priority under § 507(a)(8)(C) and emphasizing the requirement that “the tax at issue must be owed by a party other than the debtor and then collected or withheld by the debtor from the other party”). See also 3 Norton Bankruptcy Law & Practice 3d § 49.52 (2012).

Id. at 544–45. The BAP specifically noted in Hansen that “[a]s we have determined that the UI Tax at issue here is not a tax of the kind specified in § 507(a)(8)(C)—the only provision as to which the EDD seeks to qualify the UI Tax as a tax within the meaning of § 523(a)(1)(A)—we must find that it does not give rise to a nondischargeable debt.” Id. at 545.

Unlike the California Employment Development Department in Hansen, UID in this case is claiming priority status under § 507(a)(8)(E). Section 507(a)(8)(E), unlike § 507(a)(8)(C), does not have a requirement that the tax at issue “be collected or withheld[.]” Rather, § 507(a)(8)(E) grants priority status to “an excise tax on ... a transaction” occurring within a three-year limitations period.

As explained in 4 Collier on Bankruptcy ¶ 507.11[6] (Alan N. Resnick & Henry J. Sommer eds. 16th ed.), “[t]he first step in determining whether a claim is entitled to priority is determining whether the claim asserted by a governmental entity is a tax or is another type of obligation. This is the most frequently litigated issue under section 507(a)(8)(E).” In determining whether a license fee or franchise tax constituted a “tax” for purposes of the Bankruptcy Code, the Court in New Jersey v. Anderson, 203 U.S. 483, 492, 27 S.Ct. 137, 51 L.Ed. 284 (1906), wrote:

Generally speaking, a tax is a pecuniary burden laid upon individuals or property for the purpose of supporting the government. We think this exaction is of that character. It is required to be paid by the corporation after organization in invitum.

The amount is fixed by the statute, to be paid on the outstanding capital stock of the corporation each year, and capable of being enforced by action against the will of the taxpayer. As was said by Mr. Justice Field, speaking for the court in Meriwether v. Garrett, 102 U.S. 472, 513:

‘Taxes are not debts. It was so held by this court in the case of Lane County v. Oregon, 7 Wall., 71, 19 L.Ed. 101 [ (1900) ]. Debts are obligations for the payment of money founded upon contract, express or implied. Taxes are imposts levied for the support of the government, or for some special purpose authorized by it. The consent of the taxpayer is not necessary to their enforcement. They operate in invitum. Nor is their nature affected by the fact that in some states—and we believe in Tennessee—an action of debt may be instituted for their recovery. The form of procedure cannot change their character.’

See also New York v. Feiring, 313 U.S. at 285, 61 S.Ct. 1028 (The Court determined that a city-imposed sales tax constituted a “tax” under the Bankruptcy Act as “the priority commanded by [the Bankruptcy Act] extends to those pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.”).

Years later, in Cnty. Sanitation Dist. No. 2 of Los Angeles Cnty. v. Lorber Indus. of Cal., Inc. (In Lorber Indus. of Cal., Inc.), 675 F.2d 1062, 1066 (9th Cir.1982), the Ninth Circuit Court of Appeals fashioned a four-pronged, ⁴ but often criticized,⁵ analysis for determining whether an obligation is a tax:

(T)he elements which characterize an exaction of a “tax” within the meaning of said Section 64, sub. a(4) are as follows:

(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;

(b) Imposed by, or under authority of the legislature;

(c) For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it;

(d) Under the police or taxing power of the state.

Utilizing the foregoing analysis, the Court in Lorber determined that a debtor's voluntary discharge of unusually high quantities of wastewater into a sewer system operated by the county sanitation district was a non-tax fee because the assessment or imposition of fees was more akin to a contractual obligation that resulted from the debtor's “decisions to acquire a permit and to engage in a high level of system use.” Lorber, at 1067. The Ninth Circuit again emphasized in Industrial Comm'n of Arizona v. Camilli (In re Camilli), 94 F.3d 1330, 1333 (9th Cir.1996), that the obligation in Lorber “was not created by the statute authorizing imposition of the fees. Id. at 1067. Rather, the obligation was created by the debtor's voluntary act of using the system. See id. at 1067,...