How should California pursue sales tax when a Chapter 11 trustee operating the debtor's business filed or paid late?

Plain-English summary

California legal staff advised filing an administrative claim for the full post-petition sales-tax liability, including late-filing and late-payment penalties, when a Chapter 11 trustee operating the debtor's business failed to file or remit on time.

The memorandum said a bankruptcy trustee operating a business had a duty under 11 U.S.C. section 346(f) to pay collected amounts to government agencies as local tax law required. The confirmed plan could provide for that post-petition liability.

Until plan confirmation ended the stay under the analysis used, California should not levy the estate account, revoke the trustee's seller's permit, or take other administrative collection action. Staff suggested considering conversion or dismissal if a trustee failed to perform duties, but recommended coordination in this case because the trustee appeared to be trying to pay. The memorandum expressly declined to generalize to receivers or other court-appointed trustees.

Common questions

Was the trustee personally assessed in this memorandum?

No. Staff directed an administrative claim in the debtor's bankruptcy.

Could California revoke the seller's permit before confirmation?

No, according to the memorandum.

Did the same rule automatically apply to receivers?

No.

Citations and references

• 11 U.S.C. section 346(f) — trustee's tax-payment duty cited
• 11 U.S.C. section 362(c)(2) — duration of the automatic stay quoted
• 11 U.S.C. section 1141(d)(1) — Chapter 11 plan confirmation and discharge referenced

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/170-0008.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

170.0008

Memorandum
To:

Mr. Robert Colivas
Sacramento District Office, Compliance - KH

From:

Thomas Cooke, Staff Counsel
Legal Division, MIC:82

Subject:

J--- E. T---, TRUSTEE IN BANKRUPTCY
ACCOUNT NO. SR -- XX-XXXXXX

Date:

October 20, 1993

The Legal Division has received your memorandum dated October 12, 1993, in which you state that the above trustee is indebted to the Board for taxes due for the first and second quarters of 1993 and for the July 1993 prepayment. You state that it is your understanding that trustees are not personally liable for the taxes due while they are operating a business. You ask if the Board could send a levy to the bank account for the estate involved which is held by the trustee or revoke the seller's permit. You also ask if the same principles apply to receivers or other court-appointed persons. A review of the file indicates that on July 24, 1992, J--- T--- applied for a Seller's Permit as a trustee in bankruptcy. Mr. T--- provided the Board with a bankruptcy court order authorizing him to take possession of a convenience store. Mr. T--- has been making payments to the Board on the tax liability accruing since he began operating the business, but his payments have not been timely and there is an outstanding balance. One of the duties of a trustee who is appointed to assume control of a debtor's business in a bankruptcy action is to pay collected amounts to appropriate governmental units at the time and in the manner required by the local tax law. 11 U.S.C. § 346 (f). If a trustee fails to timely file tax returns or timely remit tax for periods that he operates the debtor's business, the Board should file an administrative claim in the debtor's bankruptcy action for the full post-petition liability including penalties for late-filed returns or late remittances. The debtor's confirmed plan may provide for payment of this post-petition liability. Under Chapter 11 bankruptcy law, the confirmation of a plan operates as a discharge of any dischargeable pre-confirmation debt. Any allowable post-petition tax liability should be "dealt with" in the confirmed plan.

Mr. Robert Colivas

-2-

October 20, 1993
170.0008

11 U.S.C. § 362 (c)(2) provides that the "automatic stay" in a bankruptcy action continues until the earliest of "(A)

the time the case is closed;

"(B)

the time the case is dismissed; or

"(C) if the case is a case under Chapter 7 of this title concerning an individual or a case under Chapter 9, 11, 12 or 13 of this title, the time a discharge is granted or denied." As indicated earlier, in a Chapter 11 bankruptcy case, the confirmation of a plan operates as a discharge (11 U.S.C. § 1141(D)(1).) The Board should consider referring actions in which a trustee is not fulfilling his duties for a motion to "convert or dismiss." Until the Chapter 11 plan has been confirmed by the court, the "automatic stay" is in effect and the Board should take no administrative action to satisfy post-petition tax liability including revoking the seller's permit issued to the trustee. These principles do not apply to other receivers or court-appointed trustees. In many cases, there are particular statutes which govern the liability of these receivers or trustees. We cannot respond to the liability of these receivers or trustees unless we are presented with a particular factual situation. This particular bankruptcy has been very difficult on the trustees because of in-fighting by the debtor and his family. It is our belief that Mr. T--- is attempting to pay the tax liability but the problems caused by the debtor have delayed the payments. It is our recommendation that your office coordinate your activities on this account with Dewey Roberts of the Collection Section. He is also attempting to obtain payment of the outstanding liability.

TJC:plh
cc:

Mr. Gordon Adelman - MIC:82
Mr. Rick Slater - MIC:55