Quiroz v. Michigan

• Decision Date: 27 March 2012
• Docket Number: Civil Action No. 11–CV–12672.,Bankruptcy No. 11–04433.
• Citation: 472 B.R. 434
• Parties: Juan A. QUIROZ, Appellant, v. State of MICHIGAN, DEPARTMENT OF TREASURY, Appellee.
• Court: U.S. District Court — Eastern District of Michigan

472 B.R. 434

Juan A. QUIROZ, Appellant,

v.State of MICHIGAN, DEPARTMENT OF TREASURY, Appellee.

Civil Action No. 11–CV–12672.

Bankruptcy No. 11–04433.

United States District Court,

E.D. Michigan,

Southern Division.

March 27, 2012.

Leon N. Mayer, Ryan D. Heilman, Schafer & Weiner, Bloomfield Hills, MI, for Appellant.

Heather L. Donald, Juandisha M. Harris, Michigan Department of Attorney General, Detroit, MI, for Appellee.

OPINION AND ORDER AFFIRMING THE ORDER OF THE BANKRUPTCY COURT GRANTING APPELLEE'S MOTION TO DISMISS

MARK A. GOLDSMITH, District Judge.

I. INTRODUCTION

This is a bankruptcy appeal. The sole issue is whether a corporation's unpaid Michigan single business tax (“SBT”), for which Appellant Juan A. Quiroz is liable as the responsible corporate official, is non-dischargeable under 11 U.S.C. §§ 507(a)(8)(E) and 523(a)(1)(A). The Bankruptcy Court for the Eastern District of Michigan determined that the obligation is not dischargeable. For the reasons that follow, the Court agrees and, accordingly, affirms the Bankruptcy Court's order granting the motion of Appellee Michigan Department of Treasury to dismiss the adversary proceeding.

II. BACKGROUND

The relevant facts are undisputed. Quiroz was the sole owner of Industrial Waste Cleanup, Inc. (“IWC”) and a corporate officer with responsibility for the tax filings and tax payments of the company.¹ IWC ceased operating in 2006, at which time it owed the State of Michigan approximately $25,450 in unpaid SBT for the years 2005 and 2006.

In 2008, Quiroz and his wife filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code and were granted a discharge under that Chapter. Despite the discharge order, the Michigan Department of Treasury sought to collect from Quiroz, personally, IWC's unpaid SBT under a Michigan statute that renders corporate officers and other business-entity officials with control over tax filings and tax payments personally liable for unpaid state taxes in the event they are not paid by the business-entity taxpayer. SeeMich. Comp. Laws § 205.27a(5). Insisting that his liability for the unpaid SBT was discharged in bankruptcy, Quiroz filed an adversary proceeding in the Bankruptcy Court for a determination of that issue. The Michigan Department of Treasury filed a motion to dismiss, arguing that the SBT qualifies as an excise tax that is excepted from the priority listing of taxes in § 507(a)(8)(E)(i) and thus not dischargeable under § 523(a)(1)(A). The Bankruptcy Court agreed and granted the motion. Quiroz appeals.

III. STANDARD OF REVIEW

The Bankruptcy Court's findings of fact are reviewed for clear error; its conclusions of law are reviewed de novo. In re United Producers, Inc., 526 F.3d 942, 946 (6th Cir.2008). Because the issue in this case is one of statutory construction, the Court reviews the matter de novo. United States v. Plavcak, 411 F.3d 655, 660 (6th Cir.2005).

IV. ANALYSIS

Quiroz asserts two arguments in support of reversal. The first is that the SBT does not satisfy the requirements of § 507(a)(8)(E)(i) because, according to Quiroz, only an excise tax on a particular transaction comes within that provision, and the SBT is not a tax traceable to a particular transaction. Second, Quiroz argues that even if the SBT meets the requirements of that provision as to IWC, his obligation is nonetheless dischargeable, on the theory that only a tax liability for which the debtor is principally liable—and here Quiroz is only derivatively liable—is nondischargeable. The Court addresses both arguments, in turn.

A. “On A Transaction”

The Bankruptcy Code excepts from the discharge of an individual debtor “any debt ... for a tax ... of the kind and for the periods specified in section ... 507(a)(8).” 11 U.S.C. § 523(a)(1)(A). Section 507(a)(8) lists various claims of governmental units, including the following pertinent language:

[A]llowed unsecured claims of governmental units, only to the extent that such claims are for—

(E) 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.

11 U.S.C. § 507(a)(8)(E).

Quiroz does not dispute in his appeal that the SBT is an “excise tax,” nor could he. While the Bankruptcy Code does not define the term, case law has recognized its broad scope, as confirmed by the following expansive definition adopted by numerous courts:

A tax imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. A tax on the manufacture, sale, or use of goods or on the carrying on of an occupation or activity, or a tax on the transfer of property. In current usage the term has been extended to include various license fees and practically every internal revenue tax except the income tax.

Black's Law Dictionary 563 (6th ed. 1990). See In re National Steel Corp., 321 B.R. 901, 908 (Bankr.N.D.Ill.2005) (collecting cases).

Michigan's SBT meets this definition of an “excise” tax because it is an indirect tax based on business activity—a tax that the United States Supreme Court has characterized as a value-added tax. Trinova Corp. v. Mich. Dep't of Treasury, 498 U.S. 358, 362, 111 S.Ct. 818, 112 L.Ed.2d 884 (1991). In Trinova, the Supreme Court explained the operation of the tax in the course of finding that it did not offend the Constitution's Due Process Clause or Commerce Clause. The Court observed that the tax is triggered by “business activity,” broadly defined as any “transfer of ... property ... or the performance of services,” Mich. Comp. Laws § 208.3, and levied on a tax base consisting generally of the costs of labor + depreciation + interest + profit, subject to a multitude of adjustments. 498 U.S. at 367, 111 S.Ct. 818. In this case, the parties do not dispute that such a tax constitutes an indirect tax and qualifies as an “excise tax” within the meaning of the Bankruptcy Code.

Where the parties disagree is over the significance in the statute of the phrase “on a transaction.” Quiroz argues that the phrase “on a transaction” evinces a Congressional intent to “directly tie[ ] the tax to a specific transaction.” Appellant's Br. at 11 (emphasis in original). Quiroz contends that the SBT does not tax any particular transaction, but rather combines unrelated activities—such as federal income tax liability, capital cost adjustments, compensation and a variety of deductions and exemptions—so that “not even a series of transactions ... are being taxed.” Id. at 11–12. By contrast, the Michigan Department of Treasury argues that the phrase “on a transaction” should be viewed broadly as encompassing a tax that includes a variety of transactions, and that it is irrelevant that the tax is not confined to a particular transaction. Appellee's Br. at 12.

Quiroz relies principally on In re Albion Health Services, 339 B.R. 171 (Bankr.W.D.Mich.2006), where the bankruptcy court analyzed § 507(a)(8)(E) relative to a State of Michigan reimbursement-demand made to a hospital for the state's payment of unemployment compensation benefits to the hospital's former employees. The bankruptcy court held that the reimbursement-demands were not a “tax” within the meaning of § 507(a)(8), but then stated, in the alternative, that even if they were a tax, the demands were not entitled to nondischargeability treatment because there was simply no “transaction” associated with them. Id. at 177–180.

This Court concludes that Albion Health offers little guidance here. The demands for unemployment reimbursement analyzed there are not at all analogous to the SBT at issue here. In Albion Health, the court found that there was no transaction at all associated with the demands, noting in particular that the hospital was not a party to anything that could be considered a transaction and had not received or paid any of the benefits that were the subject of the dealings between the state and the former hospital employees. By contrast, in the present case, IWC, as a generator of business activity, was a party to the business transactions—such as receipt of revenues and payment of compensation—that gave rise to its SBT liability; and it also directly received the benefit of such transactions. At most, Albion Health stands for the proposition that § 507(a)(8)(E) can have no application where the purported tax has no connection to any transaction involving the alleged taxpayer. However, it does not address the present context where the SBT undisputedly relates to, at least, some transactions involving the taxpayer.

Similarly, Quiroz's citation to In re DeRoche, 287 F.3d 751 (9th Cir.2001), misses the mark. In that case, the Ninth Circuit addressed the “transaction” concept in the context of an employer who had failed to carry workers compensation insurance and was later the subject of assessments by the state fund that paid the injured employee. The court held that these assessments were an “excise tax,” and that the relevant “transaction” was the employer's failure to obtain insurance. Quiroz purports to find support in a statement the court made when it rejected the state's contention that the “transaction” should be deemed to be the on-going assessments by the state of the amount owed, rather than the employer's failure to purchase insurance. It was in that context that the court stated that “a fundamental characteristic of a typical excise tax is that it is a discrete, one-time tax based on a single act by the person or entity taxed, such as a sale of an application for a license.” Id. at 756. For that reason, the court rejected the state's position that each assessment by the state constituted a “transaction” and held that the employer's failure to insure...