Was a petitioned California gross-receipts tax liability discharged in a no-asset Chapter 7 case when the taxpayer's entity type was uncertain?

Plain-English summary

The pending California tax liability was not discharged in the taxpayer's no-asset Chapter 7 case under either debtor classification considered by the memorandum.

If the taxpayer was a corporation, section 727 barred Chapter 7 discharge because the debtor was not an individual. If the taxpayer was an individual, the timely redetermination petition meant the determination had not become final under California law when bankruptcy was filed. Staff therefore treated the gross-receipts tax as not yet “assessed” for the federal 240-day discharge timing rule and as nondischargeable.

The source decided only the discharge question. It did not resolve the petitioned tax liability or clarify why the taxpayer's entity type was uncertain.

Common questions

Would a corporation receive a Chapter 7 discharge?

No, under the memorandum.

What if the taxpayer was an individual?

The nonfinal petitioned tax was still treated as nondischargeable.

Did the no-asset case decide the tax appeal?

No.

Citations and references

• California Revenue and Taxation Code sections 6561, 6564, and 6565 — finality of a petitioned determination
• 11 U.S.C. sections 507(a)(8)(A), 523(a)(1)(A), and 727 — priority timing, nondischargeability, and debtor eligibility analyzed
• King v. Franchise Tax Board (9th Cir. 1992) 961 F.2d 1423 — cited for treating a California tax as assessed when it becomes final

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0007-030.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum

To :

Mr. Steve Adams
Supervising Tax Auditor, Petitions

From :

Thomas J. Cooke
Tax Counsel

Subject:

L--- E--- E--Permit No. SS -- XX-XXXXXX-010

170.0007.030

Date:

Telephone:

June 24, 1997

(916) 445-6496
CalNet 485-6496

Gary Jugum has requested that I respond to your memorandum to him dated June 20, 1997 concerning the above taxpayer. In your memorandum, you state that a Notice of Determination was issued to the taxpayer on June 20, 1995 for the period January 1, 1984 to June 30, 1991. A timely petition for redetermination was filed by the taxpayer on July 6, 1995. On September 6, 1996 the taxpayer filed Chapter 7 bankruptcy. The San Jose District advises that the no asset bankruptcy case was closed on November 27, 1996. You ask whether the liability is subject to discharge. 11 U.S.C. section 727 grants a discharge, under Chapter 7, “unless . . . the debtor is not an individual . . . .” If the above taxpayer is considered a corporation, it could not have received a discharge in a Chapter 7 bankruptcy. Assuming the taxpayer is not considered a corporation, 11 U.S.C. section 523(a) provides, in part: “A discharge under section 727, . . . of this title does not discharge an individual debtor from any debt “(1)

for a tax or a custom duty -

“(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed . . . .”

Mr. Steve Adams

-2-

June 24, 1997
170.0007.030

11 U.S.C. 507(a)(8)(A) specifies:
“a tax on or measured by income or gross receipts “. . .
“(ii)

assessed within 240 days, . . . before the date of the filing of the petition . . . .”

In King v. Franchise Tax Board, 961 F.2d 1423 (9th Cir. 1992), the court stated that taxes measured by income or gross receipts that are assessed within 240 days of the filing of a bankruptcy petition are non-dischargeable in bankruptcy. The court held that, under California law, a tax is “assessed” for bankruptcy purposes when the assessment becomes “final.” Since L--- E--- E--- filed a timely petition for redetermination and no decision on the petition has been issued, the liability is not “final” under California law (see Rev. & Tax. Code §§ 6561, 6564, and 6565). The tax had not been “assessed” at the time that the taxpayer filed its bankruptcy petition and the liability is not dischargeable. It is our opinion that whether or not the taxpayer is considered a corporation, the liability was not subject to discharge in the bankruptcy action. TJC/cmm Attachments cc:

Mr. J. W. Cornelius, (MIC:49)
Mr. Philip W. Spielman (MIC:38)
Ms. Janeth Z. Brower (MIC:39)
Mr. Stanley J. Rose (GH)
San Jose District Administrator (GH)