Priority tax in Chap 7 vs Chap 13

[azdebtor]

Hi again, it's been a long time since posting any questions. Due to the beginning of wage garnishment, we are going to file BK, but we're not sure of the Chapter yet, so I will ask this question here.

An attorney I am considering using surprised me with the notion that unpaid sales tax might be discharged in Arizona if it's City sales tax and possibly if it's State sales tax. Is there any truth to this and how does it work?

Thank you for any and all responses.

[justbroke]

It would certainly depend on whether they are the "trust fund" type of taxes, which are almost never dischargeable in a personal bankruptcy. I thought I had some of these from a prior business, but I did not owe anything (luckily). It would be interesting to see what Despritfreya has to say about this specific issue in Arizona.

I would shop around more attorneys and see if they are all in alignment.

[despritfreya]

This issue is still unsettled in Arizona. If the tax is deemed "trust fund" and was, in fact, collected separately from the customer, it will be deemed non-dischargeable. Otherwise it is subject to the 3 year rule. See the Action Marine case for more info:

http://caselaw.findlaw.com/az-supreme-court/1014781.html

Des.

[justbroke]

It reads as though a debtor, who has this type of tax issue, will need to prepare for a fight with the Arizona DOR and the City taxing authorities. What would you do as a pre-emptive strike, Des? Would you actually file an adversary Dischargeability Complaint, or see what the DOR/City does? I suppose that would be one strategy, but the debtor would probably need some $$$ in order to litigate this, or at least be prepared that it may come down to litigation.

azdebtor, just how much money are we talking? (It doesn't need to be exact, but are we talking < $5,000? < $10,000? < $100,000? or something astronomical?

[azdebtor]

It's at $19000 to AZ Dept of Revenue last paid in 2009 and $9500 to City of Glendale last paid in 2004. These are all Transaction Privilege taxes (sales tax) and have accrued since last paid.

[despritfreya]

It's at $19000 to AZ Dept of Revenue last paid in 2009 and $9500 to City of Glendale last paid in 2004. These are all Transaction Privilege taxes (sales tax) and have accrued since last paid.

Did you collect these taxes from the customers as a separate line item?

I am going to suggest that you pull up the Action Marine case and contact the attny who represented Action Marine and the Randalls. You might as well go to the horse's mouth sorta-speak. You should be able to find him through the State Bar of Arizona web site.

Des.

[justbroke]

I wanted to know the amount to see if it's worth spending $2-3K in potential litigation costs for the bankruptcy attorney to fight any issues. (Of course, it could be $5K to actually do this, but I know nothing of pricing and what at rate an attorney (in your area) would charge or require for retainer.)

At the debt you are speaking, it is worth speaking with other attorneys as Des wrote.

[azdebtor]

Did you collect these taxes from the customers as a separate line item?

I am going to suggest that you pull up the Action Marine case and contact the attny who represented Action Marine and the Randalls. You might as well go to the horse's mouth sorta-speak. You should be able to find him through the State Bar of Arizona web site.

Des.

Des,

These taxes were collected as a separate line item called sales tax.

I read the majority of the case you provided a link to and I believe that without a legal fight I would be held liable: "A person who fails to remit any additional charge made to cover the [TPT] or truthfully account for and pay over any such amount is, in addition to other penalties provided by law, personally liable for the total amount of the additional charge so made and not accounted for or paid over." Are these taxes then considered to be Trust Fund taxes, or does that even matter?

We aren't sure yet if we will be in a CH7 or 13, but in a 13, will these taxes still be considered Priority Taxes to be paid over the course of the plan? We won't have any available cash to fight this separately so it looks like I should just plan on this being included as part of our BK.

Thanks for the attention to this matter guys.

[despritfreya]

We aren't sure yet if we will be in a CH7 or 13, but in a 13, will these taxes still be considered Priority Taxes to be paid over the course of the plan? We won't have any available cash to fight this separately so it looks like I should just plan on this being included as part of our BK.

In the context of the 13, ADOR will file a claim. If the taxing agency believes it to be priority the claim will reflect this. As to the City, it is anyone’ guess as to whether or not a claim will be filed. You may need to file a claim on the City’s behalf or otherwise prod it into doing so just to bring the issue to a head. Assuming the tax is deemed “trust fund” interest will accrue over the life of the Plan but will not be paid under the Plan and will survive discharge.

In the context of the 7 you will just have to deal with the taxes on your own once the discharge is entered, assuming they are trust fund type taxes.

Again, to be sure the tax meets Action Marine’s “definition” contact the attny who handled the case. He should be able to comment on the ramifications of doing the bk.

Des.