In re OPM Leasing Services, Inc.
| Decision Date | 09 May 1986 |
| Docket Number | 81 B 12193 and 83 B 10776.,81 B 11850,81 B 11203,Bankruptcy No. 81 B 10533,81 B 11749 |
| Citation | 60 BR 679 |
| Parties | In re O.P.M. LEASING SERVICES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Zalkin, Rodin & Goodman by Peter Levine, New York City, for trustee.
Atty. Gen. of Texas by Sue F. Eley, Austin, Tex., for State of Tex.
DECISION AND ORDER DENYING PRIORITY TO CLAIM OF STATE OF TEXAS
The State of Texas ("State") filed a proof of claim in the O.P.M. Leasing Services, Inc. ("O.P.M.") bankruptcy proceeding seeking, inter alia, $46,010.35 in unpaid franchise taxes. The State contends that its claim is entitled to priority status under § 507(a)(7)(A) of the Bankruptcy Reform Act of 1978 ("Code"). While not objecting to the amount of the claim, James P. Hassett, the Trustee for O.P.M. ("Trustee"), contends that the claim does not fall within § 507(a)(7)(A), but is properly classified as a general unsecured claim.
O.P.M. filed its Chapter 11 petition on March 11, 1981, and the Trustee was appointed by the United States Trustee pursuant to a March 24, 1981 order of this court. The State subsequently filed a number of claims against the O.P.M. estate, to which the Trustee objected. On December 17, 1985, the parties settled the Trustee's objections to all but one of the claims filed by the State.
The parties agree that the sole issue to be determined is whether unpaid franchise taxes are taxes "on or measured by income or gross receipts" within the meaning of § 507(a)(7)(A) of the Code. The State argues that the assessment O.P.M. owes under the Texas Franchise Tax is "measured by gross receipts" and is entitled to priority. The Trustee contends that the tax is not "measured by gross receipts."
For the reasons which follow, this court agrees with the Trustee that the State's claim is not entitled to priority status under § 507(a)(7)(A).
Section 507 of the Code assigns priorities to certain kinds of claims and expenses. In particular, subsection (a)(7)(A) provides that "allowed unsecured claims of governmental units are entitled to a priority, but only to the extent that such claims are for — (A) a tax on or measured by income or gross receipts, . . . (emphasis added). This section derives from § 64(a)(4) of the Bankruptcy Act of 1898 ("Act"), 11 U.S.C. § 104(a)(4) (repealed 1978), which gave priority to "taxes which become legally due and owing by the bankrupt to the United States or to any state or any subdivision thereof." In In re Lorber Industries of California, Inc., 675 F.2d 1062 (9th Cir.1982), the Court examined the legislative amendments made to § 64(a) of the Act and concluded that "the trend . . . has been to erode the preferred status of taxes," id. at 1068 (citations and footnote omitted), because "as accelerating taxation absorbed greater percentages of the bankrupt's estate, Congress recognized that broad priority classifications hampered the goal of equitable distribution of the estate and penalized general creditors." Id. at 1067-68 (citation omitted). Thus, for a claim to attain priority under § 64(a), "that status must be justified by clear statutory authorization." Id. at 1066 (citations omitted).
The Lorber court observed that § 507 of the Code was consistent with the trend of limiting taxes entitled to priority. Id. at 1068 n. 5. See also In re Adams, 40 B.R. 545, 546 n. 1 (E.D.Pa.1984) (); In re South Atlantic Packers Association, Inc., 28 B.R. 80, 81 (Bankr.D.S.C.1983) (). In Trustees of the Amalgamated Insurance Fund v. McFarlin's, Inc., 789 F.2d 98 (2d Cir.1986), the Second Circuit agreed, stating:
because the presumption in bankruptcy cases is that the debtor\'s limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed. Joint Industry Board v. United States, 391 U.S. 224, 228 88 S.Ct. 1491, 1493, 20 L.Ed.2d 546 (1968); In re United Merchants & Manufacturers, Inc., 597 F.2d 348, 349 (2d Cir.1979); In re Mammoth Mart, Inc., 536 F.2d 950, 953 (1st Cir.1976). `If one claimant is to be preferred over others, the purpose should be clear from the statute.\' Nathanson v. N.L.R.B., 344 U.S. 25, 29 73 S.Ct. 80, 83, 97 L.Ed. 23 (1952). See also Matter of Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984).
Id., slip op. at 2643 (emphasis added). It is the claimant's burden to establish entitlement to priority treatment. Standard Oil Co. v. Kurtz, 330 F.2d 178, 180 (8th Cir. 1964).
Under § 507(a)(7)(A), a claim is entitled to priority only if, first, it is a tax as defined by federal law. City of New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941). See also In re Adams, 40 B.R. 545, 547 (E.D.Pa.1984) ("although a state's determination of whether something is a tax is persuasive and entitled to great weight, it is not binding" (citing New Jersey v. Anderson, 203 U.S. 483, 491, 27 S.Ct. 137, 139, 51 L.Ed. 284 (1906)). Second, the tax must also fit within the construct of § 507(a)(7)(A). Specifically, it must be "on or measured by income or gross receipts." The legislative history on this aspect of § 507(a)(7)(A) is scant and does not elucidate the meaning of this phrase.
Case law emphasis under the Act focussed on the first prong of the test, namely whether the claim constituted a tax. See, e.g., Lorber, 675 F.2d at 1066-68. For bankruptcy law purposes, a tax is considered "an involuntary pecuniary burden, regardless of name, imposed by or under the authority of the legislation for public purposes under the police or taxing power of the state." In re Skjonsby Truck Line, Inc., 39 B.R. 971, 973 (Bankr.D.N.D.1984) (quoting Lorber with approval); In re South Atlantic Packers Association, Inc., 28 B.R. 80, 82 (Bankr.D.S.C.1983) (same); In re Payne, 27 B.R. 809, 813 (Bankr.D. Kan.1983) (same).
In the present case, neither the State nor the Trustee dispute that the unpaid franchise taxes are taxes as defined by Skjonsby and Lorber. The parties' disagreement centers on the second prong: whether the Texas Franchise Tax is a tax "on or measured by income or gross receipts." The State contends that the franchise tax falls within this priority category, even though it readily concedes that the franchise tax is on capital. Transcript, at 12. The State argues that the tax is measured by gross receipts and therefore comes within the § 507(a)(7)(A) umbrella. The State is attempting to persuade this court to look only at the terms used in the Texas statute and not what the tax is levied on. This court is not so persuaded. An examination of the substantive impact of the Texas Franchise Tax plainly demonstrates that the tax is on capital and measured by capital, but apportioned or allocated by gross receipts.
Corporations doing business in Texas are required to pay franchise taxes. Tex.Tax Code Ann. § 171.001 (Vernon 1982). These taxes are based on a corporation's taxable capital, which is defined as the sum of its stated capital and surplus. Tex.Tax Code Ann. § 171.101 (Vernon 1982). Two franchise tax rates are set forth in Tex.Tax Code Ann. § 171.002(a) (Vernon 1982 & Supp.1986) as follows:
(1) $5.25 for each $1,000 or fraction of $1,000 of the corporation\'s taxable capital that is allocated to this state under Sections 171.106 or 171.108 of this Code; or (2) $68.
(emphasis added). A corporation pays the greater amount of the two taxes. Tex.Tax Code Ann. § 171.002(b) (Vernon 1982).
For corporations doing business not only in Texas but other states as well, the statute provides a formula for apportioning that part of the corporation's taxable capital subject to the Texas Franchise Tax. Tex.Tax Code Ann. § 171.106 (Vernon 1982), entitled "Determination of Amount of Taxable Capital Allocated to This State," specifically provides that:
the part of a corporation\'s taxable capital that is allocated to this state and that is used to determine the amount of the tax imposed by this Chapter is equal to the corporation\'s total taxable capital multiplied by a fraction, the numerator of which is the corporation\'s gross receipts from business done in this state and the denominator of which is the corporation\'s gross receipts from its entire business.
The franchise tax owing for corporations doing business solely in Texas and corporations doing business in Texas and other states can be visualized as follows:
1) franchise tax owed by corporation total
$5.25
doing business in Texas = either ----- × taxable or $68 whichever
$1,000
only capital is
greater
2) franchise tax owed by corporation total
$5.25
doing business in more = either ------ × taxable ×
$1,000
than one state capital
gross receipts (Texas)
gross receipts (Texas or $68 whichever
and other States) is
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