Stoecker, In re

Decision Date02 June 1999
Docket NumberNo. 98-3590,98-3590
Citation179 F.3d 546
PartiesIn Re: William STOECKER, Debtor,
CourtU.S. Court of Appeals — Seventh Circuit

A. Benjamin Goldgar (argued), Office of the Atty. Gen., Civil Appeals Div., Chicago, IL, for State of Illinois, Dept. of Revenue.

Robert Radasevich (argued), George M. Hoffman, David A. Eide, Neal, Gerber & Eisenberg, Jeffrey W. Finke, Raleigh, Helms & Finke, Chicago, IL, for Thomas E. Raleigh as Trustee of the Estate of William Stoecker.

Before POSNER, Chief Judge, and BAUER and ROVNER, Circuit Judges.

Posner, Chief Judge.

This bankruptcy appeal has a complicated procedural history that we shall ignore; the curious are referred to 151 B.R. 989 (Bankr.N.D.Ill.1992); 179 B.R. 532 (N.D.Ill.1994), and 202 B.R. 429 (Bankr.N.D.Ill.1996). All that matters is that the bankruptcy court eventually disallowed Illinois's claim against the debtor's estate for some $900,000 in unpaid Illinois use tax (including interest), Ill.Rev.Stat. ch. 120, p 439.12 (1989), which was owed on the purchase of a corporate aircraft. (The current statute, 35 ILCS 105/12, has a narrower scope, but we shall cite to it because the provisions that we discuss are materially the same.) The district court affirmed the disallowance, precipitating this appeal by the state against the trustee in bankruptcy.

The plane had been bought by Chandler Enterprises, Inc., an Illinois company (now defunct) of which Stoecker was president. The state claims that Stoecker is liable for the tax as a "responsible officer" of Chandler. 35 ILCS 735/3-7. If this is right, the liability is a debt of the estate in bankruptcy.

Chandler had asked Jack Prewitt & Associates (JPA), an established buyer and seller of corporate jets, to find one for it. JPA located a suitable jet that was for sale by Bezwada Investments and agreed with Chandler to broker the purchase. But Chandler did not have the cash to pay the plane's full purchase price, which was in excess of $12 million, right away; so JPA turned to an affiliate, Prewitt Leasing, Inc. (PLI), which does airplane leasing and financing, for help with the sale. JPA bought the plane from Bezwada and transferred the title from itself to PLI. PLI then entered into an "Aircraft/Lease Purchase Agreement" with Chandler under which Chandler agreed to pay PLI $2.4 million immediately to be "applied to the final purchase price of the aircraft" and $10 million more (plus interest denominated "lease payments" on the $10 million) in 90 days if it decided to buy. Until the purchase option was exercised, title would remain in PLI. But during the 90-day option period, Chandler would have the full use of the plane and indeed could modify it as it saw fit. In June 1988, Chandler took delivery of the plane and transported it to Illinois and in September it exercised the option and PLI transferred title to it. Thus the transaction was Bezwada-JPA-PLI-Chandler.

The Illinois use tax is a sales-tax substitute imposed on Illinois residents (which Chandler is conceded to be, or rather to have been, since it is now defunct) who buy from out-of-state sellers. If the seller doesn't pay the tax, the buyer must file a return and pay the tax and in the case of aircraft the return must be filed and the tax paid within 30 days after the aircraft enters the state. 35 ILCS 105/10. When no return is filed--and Chandler filed no return--the Illinois Department of Revenue determines the amount of tax due and issues a Notice of Tax Liability to the taxpayer. 35 ILCS 105/12, 120/4. Unless the taxpayer protests the notice within the time provided, it become a final assessment although it is still subject to judicial review in the Illinois circuit court. 35 ILCS 120/4, 12.

The taxpayer may not be the only one liable for a tax. Under Illinois law, any corporate officer "who has the control, supervision or responsibility of filing returns and making payment of the amount of any ... tax ... who willfully fails to file the return or make the payment ... shall be personally liable for a penalty equal to the total amount of tax unpaid by the [corporation]." 35 ILCS 735/3-7. The Department determines the penalty, and its determination is "prima facie evidence of a penalty due." Id. It embodies this determination in a Notice of Penalty Liability which is sent to the officer. The procedures for challenging a Notice of Penalty Liability are similar to those for challenging a Notice of Tax Liability.

Chandler not only failed to file a use-tax return; it failed to register the plane with the Illinois Department of Aviation, as it was required to do. As a result, it took the Department of Revenue years to discover that Chandler owed use tax and by that time the company was defunct and Stoecker, its president, was in bankruptcy. The Department issued both a Notice of Tax Liability, futilely, against Chandler and a Notice of Penalty Liability against Stoecker.

There are two principal issues. The first, which the district court resolved in favor of the state, is whether Chandler owed use tax on the purchase of the plane. The second, which the court resolved in favor of the trustee, is whether, if Chandler did owe use tax, Stoecker is liable for that tax as a responsible officer. Since Chandler, now a ghost, cannot pay the tax, the court's second ruling spelled defeat for the state. The trustee defends the second ruling but attacks the first, arguing that no use tax was owed, in which event Stoecker had no responsible-officer liability regardless.

The district court thought itself and the bankruptcy court barred by the Tax Injunction Act, 28 U.S.C. § 1341, from reexamining Chandler's liability for use tax. The Act forbids federal courts to enjoin the assessment or collection of state taxes unless the taxpayer has no adequate remedy in the state courts. But Illinois is not trying to extract taxes from Chandler. It is trying to get a penalty in lieu of taxes from Stoecker's estate in bankruptcy. Its right to do so depends on whether Chandler owed use tax, and the district judge thought that a federal court cannot decide an issue of state tax law. That is incorrect. The Bankruptcy Code expressly authorizes bankruptcy courts to decide tax issues, 11 U.S.C. § 505(a)(1), and although state taxes are not specified, the courts have interpreted the statute to cover them. Adams v. Indiana, 795 F.2d 27, 29 (7th Cir.1986); City Vending of Muskogee, Inc. v. Oklahoma Tax Comm'n, 898 F.2d 122, 123-24 (10th Cir.1990) (per curiam). The Act is anyway addressed only to injunctive remedies (or a declaratory judgment viewed as a preliminary to an injunction, National Private Truck Council, Inc. v. Oklahoma Tax Comm'n, 515 U.S. 582, 586, 115 S.Ct. 2351, 132 L.Ed.2d 509 (1995)), and no one is seeking an injunction against the state's going after Chandler for the taxes that the state believes Chandler owes it. If federal courts could not determine the debtor's liability for state taxes--if they had to abstain pending a determination of that liability in state court--bankruptcy proceedings would be even more protracted than they are.

So we can consider the trustee's argument against that liability, and it is that PLI's sale of the aircraft to Chandler was an "isolated or occasional sale of tangible personal property at retail by a person who does not hold himself out as being engaged (or who does not habitually engage) in selling such tangible personal property at retail." 35 ILCS 105/2. An example would be a good bought at a garage sale; no use tax would be due. See 86 Ill. Admin. Code § 130.110(b) (1991); cf. Knowledge Data Systems v. Utah State Tax Comm'n, 865 P.2d 1387 (Utah App.1993); Nevada Tax Comm'n v. Bernhard, 100 Nev. 348, 683 P.2d 21 (1984) (per curiam).

PLI, unlike its affiliate JPA, was not engaged in the regular sale of aircraft at retail (or at wholesale, for that matter). In fact the sale to Chandler was apparently the first sale of an aircraft that PLI had made. The trustee thus wants us to confine our attention to the transfer of title from PLI to Chandler. But that would be myopic. PLI is the financing arm of JPA, which is a retailer of aircraft. JPA found the plane for Chandler, took title to it from its previous owner, Bezwada, and brought PLI in to finance Chandler's purchase of it. Bezwada was (so far as we can tell) not a retailer. But JPA was and it acted as the intermediary in the sale to Chandler, at one point actually holding title, as in the ordinary retail sale where the retailer buys from a supplier and resells to a consumer. The fact that title passed from the retailer to its affiliate before coming to rest with Chandler did not make PLI the real seller. Otherwise transactions would be easily structured to avoid use tax by having an out-of-state retailer transfer title to its nonretailer affiliate for retransfer to the in-state purchaser. The "substance over form" doctrine of tax law, on which see Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); Segal v. Commissioner, 41 F.3d 1144, 1148 (7th Cir.1994); Yosha v. Commissioner, 861 F.2d 494 (7th Cir.1988); ACM Partnership v. Commissioner, 157 F.3d 231, 246-47 (3d Cir.1998), would presumably allow the state to defeat the bankruptcy trustee's attempt to invoke the "isolated or occasional sale" exemption by recharacterizing the transaction as a sale by JPA to Chandler. Cf. Continental Illinois Leasing Corp. v. Department of Revenue, 108 Ill.App.3d 583, 64 Ill.Dec. 189, 439 N.E.2d 118 (1982).

But this analysis is incomplete, because there is another and equally good way of playing "substance over form" in this case, and that is to treat the "real" sale as Bezwada to Chandler, with JPA and PLI holding title merely as security for financing the sale. See UCC §§ 1-201(37), 9-102, 810 ILCS 5/1-201(37), 5/9-102; Orix Credit Alliance, Inc. v. Pappas, 946 F.2d 1258 (7th Cir.1991); Tilghman Hardware, Inc. v. Larrimore, 331 Md. 390, 628 A.2d 215...

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