Did California have to turn a sales-tax security deposit over to a debtor's Chapter 11 trustee?

Plain-English summary

California legal staff refused a Chapter 11 trustee's request to turn over the debtor's sales-tax security deposit.

Revenue and Taxation Code section 6701 allowed the Board to require security and required cash, government bonds, or insured deposits to be held in trust for use only as provided in sections 6701 and 6815. Section 6815 treated security applied after a business ended as a payment on the taxpayer's Board liability as of discontinuance.

The letter relied on 11 U.S.C. section 541(c)(2), which preserved an enforceable nonbankruptcy-law restriction on transfer of a debtor's beneficial interest in a trust. Staff concluded that the state-law restriction remained effective in bankruptcy, so the Board could not release the deposit to the trustee.

Common questions

Was the taxpayer still the beneficial owner of the deposit?

The letter described the deposit as held in trust for the taxpayer's beneficial interest, but subject to statutory use restrictions.

Could the Board use the security for any purpose?

No. Staff said it could be used only as sections 6701 and 6815 allowed.

Did bankruptcy remove that restriction?

No, according to the letter's application of section 541(c)(2).

Citations and references

• California Revenue and Taxation Code section 6701 — sales-tax security and trust restriction discussed
• California Revenue and Taxation Code section 6815 — application of security after business discontinuance discussed
• 11 U.S.C. section 541(c)(2) — enforceable trust-transfer restriction in bankruptcy cited

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/170-0075.pdf

Original ruling text

170.0075

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION MIC: 82
450 N STREET, SACRAMENTO, CA 94279-0082
(P.O. BOX 942879, SACRAMENTO, CA 94279-0082)
TELEPHONE: (916) 324-2655
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

October 23, 1995

KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER

REDACTED TEXT
Re:

Executive Director

REDACTED TEXT, Case No. REDACTED TEXT

Dear Mr. REDACTED TEXT:
This is in response to your letter of June 19, 1995, in which you refer to an earlier letter sent to the Collections Unit. You state as follows: “Our office represents REDACTED TEXT, the trustee in the above-referenced bankruptcy case. In my letter to you dated September 9, 1994, I explained that the sales tax deposit you are holding for REDACTED TEXT is an asset of the bankruptcy estate and should be turned over to the trustee. A copy of my letter is enclosed for your convenience. “Our office has received neither a check representing the deposit nor a response to my letter. May I please hear from you as soon as possible so that we may resolve this matter. Thank you for your anticipated cooperation.” Revenue and Taxation Code section 6701 provides that the Board, whenever it deems it necessary to ensure compliance with the Sales and Use Tax Law, may require any person subject thereto, to place with it such security that the Board may determine. Any security in the form of cash, government bonds, or insured deposits in banks or savings and loan institutions shall be held by the Board in trust for use solely in the matter provided in this section and Revenue and Taxation Code section 6815. Revenue and Taxation Code section 6815 provides that if a business is discontinued and the Board holds security pursuant to Revenue and Taxation Code section 6701, such security when applied to the account of the taxpayer shall be deemed to be a payment on account of any liability of the taxpayer to the Board on the date the business is discontinued. The Bankruptcy Code provides that if there is a restriction placed on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law, that restriction also applies in the bankruptcy proceeding. (11 USC § 541(c)(2).) The sales tax deposit required by Revenue and Taxation Code section 6701 is required to be held in trust for the beneficial interest of the taxpayer (the debtor in this case) and used solely in the manner provided in section 6701 and 6815. That is, the Board is restricted under state law

Mr. REDACTED TEXT

-2-

October 23, 1995
170.0075

from using the security for any purpose other than as specified in these sections. This restriction is equally applicable in the bankruptcy proceedings. Hence, the Board of Equalization may not release the sales tax deposit to the trustee. If you have any further questions in regard to this matter, please do not hesitate to write. Your very truly, Anthony I. Picciano Staff Counsel AIP:cl cc:

San Jose District Administrator