ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BANKRUPTCY DISCHARGES AND THE OFFICE OF TAX APPEALS; A QUESTION OF JURISDICTION
By Robert S. Schriebman 2020
If corporation A owed sales taxes, penalties and interest that have been discharged in a bankruptcy proceeding, may the CDTFA subsequently issue an assessment against a responsible individual for those same discharged taxes and penalties? This was the question brought before the Office of Tax Appeals (OTA) In the Matter of the Appeal of M. Savage, OTA Case No. 18012052.
The Appeal of M. Savage
Mr. Savage owned and operated BFI Corporation that operated a restaurant in Orange County California between 2005 and 2009. It failed to timely pay sales taxes for several quarters between 2007 and 2009. In August 2011, it filed for bankruptcy under Chapter 7. In December 2011, the Bankruptcy Court granted BFI a discharge except for taxes, but penalties on those taxes were discharged.
In April 2013, the CDTFA issued a Notice of Assessment against Savage as a responsible person for BFI’s unpaid taxes including the discharged penalties. In his appeal, Savage conceded that he is personally liable as a responsible person for BFI’s remaining unpaid taxes and interest. Savage argued that he is not responsible for BFI’s unpaid penalties on the basis that the penalties (but not taxes and interest) were discharged in 2011 by the Bankruptcy Court.
The primary issue in the case was whether or not the OTA has the jurisdiction under law to hear issues of discharge in a federal bankruptcy proceeding.
Whether the OTA Has Jurisdiction to Resolve This Appeal
The attorney for M. Savage argued that back in 1976 a case called Willett allowed the then SBE to exercise jurisdiction to determine whether a personal income tax liability had been discharged in a Chapter 11 individual bankruptcy proceeding. With regard to the Willett case, the SBE summarized the pertinent bankruptcy law at the time as follows: “the confirmation of a Chapter XI arrangement does not discharge the debtor from any debts or liabilities which are not provided for by the arrangement or which are not dischargeable pursuant to section 17 of the Bankruptcy Act.” The SBE went on to opine that the taxpayer’s personal income taxes were not discharged in bankruptcy because they were not provided for in the Chapter XI arrangement and were also non-dischargeable under section 17 of the Bankruptcy Act (as applicable in 1976).
After discussing the Willett case, the OTA referred to the Appeal of Smith (81-SBE-145) and concluded that the Smith case, a more recent case, stood for the modern view that the OTA lacks jurisdiction to determine if a personal income tax liability had been or should have been discharged in bankruptcy. The OTA concluded that the Willett case no longer represented the law. The OTA concluded that it did not have jurisdiction to decide any bankruptcy dischargeability issues.
The OTA has no statutory authority to administer the Sales and Use Tax Law. OTA also has no statutory obligation to adjudicate disputes over application of the United States Bankruptcy Code. These types of disputes are resolved by the United States Bankruptcy Courts. Savage should reopen his bankruptcy case and file an adversary complaint seeking a determination that his personal tax debt was discharged. (In Re Ilko, 651 F.3d 1049 (2011))
Many years ago, I argued a case before the then Board of Equalization concerning whether the SBE could assess and collect delinquent sales tax against a corporation. The corporation filed for Chapter 11 protection and the delinquent sales tax deficiency was discharged by the Bankruptcy Court. I successfully argued that the SBE was barred from collecting any of these taxes. The Savage case caught my attention because it involved an assessment against a targeted individual. When I argued my SBE case, there was no claim that the SBE did not have jurisdiction to hear my client’s matter. I guess things have changed over the years.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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