IRS Issues new Bankruptcy Tax Guide, Publ 908 (10/27/12)

The IRS has issued a new version of the Bankruptcy Tax Guide, Publication 908 (October 2012).  The pdf version is here and the html version is here.

The following is the discussion of discharge of tax liability in bankruptcy:

Discharge of Unpaid Tax 

If you are a debtor in a bankruptcy case, the bankruptcy court may enter an order providing you with a discharge of debts. However, not all of your debts may be discharged. The scope of the bankruptcy discharge depends on the chapter you are in and the nature of the debt. Many tax debts are excepted from the bankruptcy discharge. 

If you are an individual under chapter 7, the following tax debts, including interest, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Corporations and other entities that are not individuals do not receive a discharge in chapter 7 cases. 

The same exceptions to discharge that apply to individuals in chapter 7 cases apply to individuals in chapter 11 cases. Different rules apply for corporations. A corporation in chapter 11 may receive a broad discharge when the plan is confirmed, but secured and priority claims must be satisfied under the plan and there is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat, for bankruptcy cases filed after October 16, 2005.

Trust Fund Taxes, Including Collected State Sales Taxes, Are Not Dischargeable in Bankruptcy (7/21/12)

In In re: Calabrese, ___ F.3d ___, 2012 U.S. App. LEXIS 14897 (3d Cir. 2012), here, the Third Circuit held that state sales taxes that a seller collects from purchasers is a trust fund tax that is not dischargeable in bankruptcy.  The bankruptcy statute exempts from discharge "trust fund" taxes.  

The issue as posited by the Court was:

We must decide whether the sales taxes held by Calabrese are "trust fund" or "excise" taxes under 11 U.S.C. § 507(a)(8). Excise taxes receive priority, and are non-dischargeable, if they are less than three years old, as measured from the date of the bankruptcy petition. See 11 U.S.C. § 507(a)(8)(E) (priority); 11 U.S.C. § 523(a)(1)(A) ("A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for a tax or a customs duty . . . of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed . . . ."). Trust fund taxes are always prioritized and are never dischargeable irrespective of the age of the debt. See 11 U.S.C. §§ 507(a)(8)(C), 523(a)(1)(A). 

Three of our sister courts of appeals have considered the question presented here. In each case, the court determined that the statutory text of § 507(a)(8) does not resolve the dispute. See Shank v. Wash. State Dep't of Revenue, Excise Tax Div. (In re Shank), 792 F.2d 829, 832 (9th Cir. 1986); DeChiaro v. N.Y. State Tax Comm'n, 760 F.2d 432, 435 (2d Cir. 1985); Rosenow v. State of Ill., Dep't of Revenue (In re Rosenow), 715 F.2d 277, 279 (7th Cir. 1983). Proceeding to analyze the legislative history, all three concluded that a sales tax paid by a third party is a trust fund tax within the meaning of subsection (C), and not an excise tax under subsection (E).