Tax issues in a failing business can feel like a maze to the bankruptcy lawyer. Towering walls and no vision of the path forward.
Let’s break down the components and see how that influences the choice of chapter and the decision about who files the bankruptcy case.
Types of taxes
Start by identifying the kinds of taxes the business may have incurred.
- Income
- Payroll
- Sales
- Personal property
- Franchise
- Excise
There may be other taxes associated with the kind of business or the nature of the hazardous materials that the business handles. Ask open ended questions (“any other kinds of taxes you owe?”) til you have the whole story.
Proprietorship
When the business is simply an extension of the individual, all the business taxes fall to the owner. There is no other entity to share responsibility.
The gating questions become whether the tax is dischargeable in a Chapter 7. Taxes lead the list of non dischargeable debts in section 523. That section “helpfully” refers us to §507(a)(3) and §507(a)(8) to define the kinds of taxes that are non dischargeable and the periods for which they are non dischargeable.
Sales taxes
Sales taxes are worth your scrutiny. The nature of sales taxes varies among the states.
Some places the tax is imposed on the buyer, and collected by the retailer. The retailer becomes a fiduciary with respect to the tax, and if unpaid, the tax is non dischargeable per the definition in §507(a)(8)(C).
Other states impose the tax on the retailer. It is a tax measured by “income or gross receipts” within the meaning of §507(a)(8)(A). Why does it matter? Because taxes described in (a)(8)(A) become dischargeable three years after the return for the tax was due.
Timing becomes critical.
Also critical is pinning down whether the return is due quarterly or annually. Gotta read the cases where you are to know.
And like all taxes within this subsection, the return has to have been filed and the taxes not assessed within 240 days of filing.
Remember, as well, that the two year rule is found back in §523(a)(1); the tax may be older than three years but not dischargeable if the return was not timely filed and has been on file less than two years.
Saturated? We’ll deal with payroll, or trust fund taxes, next time.
Image courtesy of golbenge
