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In Re: Michael Calabrese

July 20, 2012

IN RE: MICHAEL CALABRESE, JR., APPELLANT


On Appeal from the United States District Court for the District of New Jersey (D.C. No. 10-cv-06583) District Judge: Honorable Noel L. Hillman

The opinion of the court was delivered by: Hardiman, Circuit Judge.

PRECEDENTIAL

Argued April 11, 2012

Before: McKEE, Chief Judge, HARDIMAN, Circuit Judge, and JONES, II,*fn1 District Judge.

OPINION OF THE COURT

We consider for the first time whether retail sales taxes are "excise" taxes or "trust fund" taxes under the Bankruptcy Code. The distinction is significant because trust fund taxes are never dischargeable in bankruptcy. See 11 U.S.C. §§ 507(a)(8)(C), (E), 523(a)(1)(A).

I

Appellant Michael Calabrese operated "Don's What a Bagel, Inc.," which filed for reorganization under Chapter 11 of the Bankruptcy Code. As proprietor of a restaurant, Calabrese was required by New Jersey law to collect sales tax from his customers. N.J. Stat. Ann. §§ 54:32B-3(c)(1), 54:32B-12(a), 54:32B-14(a). After failing to confirm a reorganization plan, the bankruptcy was converted to Chapter 7. Calabrese also filed a bankruptcy petition under Chapter 13.

The State of New Jersey Department of Taxation (New Jersey) filed several secured proofs of claim in Calabrese's individual bankruptcy. Calabrese moved to have the claims reclassified as unsecured, and the Bankruptcy Court granted his motion. New Jersey thereafter filed amended proofs of claim alleging that Calabrese owes $63,437.19 in taxes collected while operating his business from 2003 to 2009.*fn2 Calabrese moved to expunge the claims, and after briefing and a hearing, the Bankruptcy Court held the taxes at issue are trust fund taxes under 11 U.S.C. § 507(a)(8)(C) rather than excise taxes under § 507(a)(8)(E). Calabrese appealed that decision to the District Court, which affirmed.

II

The District Court had jurisdiction over the bankruptcy pursuant to 28 U.S.C. § 1334 and to hear the appeal under 28 U.S.C. § 158(a), and the Bankruptcy Court adjudicated the underlying proceedings under a referral order pursuant to 28 U.S.C. § 157. We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291.

This appeal presents a question of law, which we review de novo. In re Marcal Paper Mills, Inc., 650 F.3d 311, 314 (3d Cir. 2011) (citing Schlumberger Res. Mgmt. Servs., Inc. v. CellNet Data Sys., Inc., 327 F.3d 242, 244 (3d Cir. 2003)).

III

We must decide whether the sales taxes held by Calabrese are "trust fund" or "excise" taxes under 11 U.S.C. § 507(a)(8). Excise taxes receive priority, and are non- dischargeable, if they are less than three years old, as measured from the date of the bankruptcy petition. See 11 U.S.C. § 507(a)(8)(E) (priority); 11 U.S.C. § 523(a)(1)(A)

("A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for a tax or a customs duty . . . of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed . . . ."). Trust fund taxes are always prioritized and are never dischargeable irrespective of the age of the debt. See 11 U.S.C. §§ 507(a)(8)(C), 523(a)(1)(A).

Three of our sister courts of appeals have considered the question presented here. In each case, the court determined that the statutory text of § 507(a)(8) does not resolve the dispute. See Shank v. Wash. State Dep't of Revenue, Excise Tax Div. (In re Shank), 792 F.2d 829, 832 (9th Cir. 1986); DeChiaro v. N.Y. State Tax Comm'n, 760 F.2d 432, 435 (2d Cir. 1985); Rosenow v. State of Ill., Dep't of Revenue (In re Rosenow), 715 F.2d 277, 279 (7th Cir. 1983). Proceeding to analyze the legislative history, all three concluded that a sales tax paid by a third party is a trust fund tax within the meaning of subsection (C), and not an excise tax under subsection (E). These decisions are discussed in greater detail below.

We begin with the text of the statute. The Bankruptcy Code provides in pertinent part:

The following expenses and claims have priority in the following order:

(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for--

(C) a tax required to be collected or withheld and for which the debtor is liable ...


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