Did a partner's Chapter 13 codebtor stay prevent California from collecting partnership business tax from a nonfiling partner?

Plain-English summary

California legal staff concluded that the Chapter 13 codebtor stay did not prevent collection of partnership business tax from a nonfiling partner's separate assets because the tax was not a consumer debt.

That did not allow California to seize property in the filing partner's bankruptcy estate. The memorandum treated the partnership business assets as estate property and said the automatic stay barred a keeper or other collection action against the business for pre-petition liabilities.

Staff said salary paid to the nonfiling liable person could be garnished, and other assets belonging to that person but not forming part of the debtor's estate could be levied.

Common questions

Was partnership tax a consumer debt?

No.

Could California install a keeper at the partnership business?

No, because the memorandum treated the business property as part of the bankruptcy estate.

Could California reach the nonfiling partner's separate assets?

Yes.

Citations and references

• 11 U.S.C. section 1301(a) — Chapter 13 codebtor stay discussed
• 11 U.S.C. section 362(a)(3) — estate-property stay quoted
• 11 U.S.C. section 541(a)(1) — composition of the debtor's estate 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/170-0305.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

170.0305

Memorandum
To:

Mr. Alan Giorgi
Sacramento District Compliance

From:

Thomas J. Cooke
Tax Counsel

Subject:

Codebtor Stay
REDACTED TEXT

Date:

June 4, 1993

The Legal Division has received your memorandum dated May 10, 1993 in which you discussed 11 U.S.C. § 1301(a) appears to exempt the stay from any “. . .individual [who] becomes liable on or secured such debt in the ordinary course of such individual’s business. . . ” 11 U.S.C. § 1301 imposes a stay on the collection of a “consumer debt” from a codebtor of a Chapter 13 debtor. Business tax liability is not a “consumer debt.” However, the ability of the Board to collect the partnership liability from REDACTED TEXT does not mean that the Board may collect that liability from property in the bankruptcy estate of REDACTED TEXT. The automatic stary pertaining to REDACTED TEXT prohibits the Board from taking “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” (11 U.S.C. § 362(a)(3).) The property of REDACTED TEXT estate contains all of the assets of REDACTED TEXT even if REDACTED TEXT has only an 80 percent interest in the partnership. See 11 U.S.C. § 541(a)(1). If REDACTED TEXT paid a salary by REDACTED TEXT (in addition to any profits due to her), her salary may presently be garnished for the partnership tax liability. However, the “automatic stay” in effect for REDACTED TEXT bankruptcy action prevents any creditor (including the Board) from taking any collection action (including the installation of a keeper) against the business for pre-petition liabilities. If the Board can discover any assets of REDACTED TEXT which are not partnership assets forming part of REDACTED TEXT bankruptcy estate, those assets are not subject to a “stay” and may be levied upon. TJC:cl cc:

Mr.Rick Slater
Mr. Gordon P. Adelman