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Federal Court Schmears Taxpayer's Bankruptcy Claim

The U.S. Court of Appeals for the Third Circuit took a bite out of a bagel store’s bankruptcy petition by holding that sales taxes are non-dischargeable “trust fund” taxes rather than excise taxes.

The U.S. Court of Appeals for the Third Circuit took a bite out of a bagel store’s bankruptcy petition by holding that sales taxes are non-dischargeable “trust fund” taxes rather than excise taxes. In Re: Michael Calabrese, Jr., No. 11-3793 (3d. Cir. July 20, 2012). After not having enough dough to pay their debts, Don’s What a Bagel, Inc. and its individual owner both filed for bankruptcy protection.

The court boiled the issue down to whether sales taxes owed by the owner were considered “trust fund” or “excise” taxes under the Bankruptcy Code. Under the Bankruptcy Code, trust fund taxes are always non-dischargeable, while excise taxes are non-dischargeable only if they are less than three years old. The court found that third-party sales taxes more closely resemble trust fund taxes. These third-party sales taxes are paid by the debtor’s customer and are held by the debtor, rather than paid by the debtor.

The Third Circuit now follows the holdings of the Second Circuit, Seventh Circuit, and Ninth Circuits on this issue. To avoid being toasted, corporate officers should take these decisions into consideration prior to a bankruptcy filing.

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