Was restitution requiring a corporate president to pay the corporation's sales tax proper after the corporation filed Chapter 7 bankruptcy?

Plain-English summary

California tax counsel concluded that a court properly required a corporation's president to pay restitution measured by the corporation's unpaid sales tax because the corporation's Chapter 7 filing did not discharge its tax debt.

The officer had been convicted after operating the corporation without the required seller's permit and failing to file sales-tax returns. As a probation condition, the municipal court required restitution to the Board for taxes owed by the corporation.

The letter relied on Bankruptcy Code section 727(a), which bars Chapter 7 discharge when the debtor is not an individual. Because the corporate liability was not discharged, counsel said the restitution order was proper.

Common questions

Did the corporation receive a Chapter 7 discharge?

No, according to the letter.

Was the officer's obligation described as a tax assessment?

No. It was restitution imposed as a condition of probation.

Did the source reproduce the court's full reasoning?

No. The letter summarizes the prosecution and order.

Citations and references

• California Revenue and Taxation Code section 7153 — seller-permit and return offense cited
• 11 U.S.C. section 727(a) — individual-debtor requirement for Chapter 7 discharge
• Legislative history of 11 U.S.C. section 727 for modifications adopted in 1977 and 1978 — policy against corporate and partnership discharges in liquidation cases quoted

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/170-1235.pdf

Original ruling text

170.1235

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 445-6496
FAX (916) 323-3387

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

August 19, 1996

KATHLEEN CONNELL
Controller, Sacramento
_______
E. L. SORENSEN, JR.
Executive Director

REDACTED TEXT

Re:

People v. REDACTED TEXT
REDACTED TEXT

Dear REDACTED TEXT:
I am a tax counsel employed by the State Board of Equalization. I have reviewed the Board’s file on REDACTED TEXT. REDACTED TEXT was prosecuted in REDACTED TEXT Municipal Court for violation of Revenue and Taxation Code section 7153 in that he, as President of REDACTED TEXT, engaged in business without obtaining the required seller’s permit from the Board and failed to file the required sales tax returns. After conviction, REDACTED TEXT was required, as a condition of probation, to pay restitution to the Board in the form of taxes due by REDACTED TEXT. On March 17, 1994, REDACTED TEXT filed Chapter 7 bankruptcy. 11 U.S.C. § 727 provides that: “[t]he court shall grant the debtor [in a Chapter 7 bankruptcy] a discharge, unless -1) the debtor is not an individual;” states:

The Legislative History of 11 U.S.C. § 727 for modifications adopted in 1977 and 1978

“Subdivision (a) requires the court to grant a debtor a discharge unless one of eight conditions is met. The first condition is that the debtor is not an individual. This is a change from present law, under which corporations and partnerships may be discharged in liquidation cases, though they rarely are. The change in policy will avoid trafficking in corporate shells and in bankrupt partnerships. . . .”

REDACTED TEXT

-2-

August 19, 1996
170.1235

11 U. S. C. § 727(a) prohibits Arc-Crete Precast Inc. from obtaining a bankruptcy discharge of its tax liability to the Board in a Chapter 7 proceeding. The court’s order requiring Mr. Rudolf to pay restitution to the Board in the form of the taxes due from the corporation was proper as the corporate tax liability was not discharged. Very truly yours, Thomas J. Cooke Tax Counsel

TJC:sr