UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

 

IN RE: MICHAEL CALABRESE, :

: Appeal from Bankruptcy

Appellant. : Case No. 10-6583

:

 : OPINION

 

APPEARANCES:

NICHOLAS S. HERRON

LAW OFFICES OF SEYMOUR WASSERSTRUM

205 W. LANDIS AVE.

VINELAND, NJ 08360 

Attorney for Appellant

MARIKAE G. TOYE

DIVISION OF LAW

R.J. HUGHES JUSTICE COMPLEX

25 MARKET STREET

P.O. BOX 106

TRENTON, NJ 08625 

Attorney for State of NJ, Division of Taxation

DONNA L. WENZEL

ISABEL C. BALBOA 

CHERRY TREE CORPORATE CENTER

535 ROUTE 38

SUITE 580

CHERRY HILL, NJ 08002

CHAPTER 13 Standing Trustee

HILLMAN, District Judge

I. INTRODUCTION

Before the Court is an appeal from an Order Denying Debtor’s

Motion to Expunge or in the Alternative to Reclassify (“Order”)

entered on November 17, 2010, by the United States Bankruptcy

Court for the District of New Jersey (“Bankruptcy Court”). For

the reasons expressed below, the Order entered by the Bankruptcy

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Court will be affirmed. 

II. BACKGROUND

Appellant had conducted business under the trade name “Don’s

What a Bagel, Inc.” which business filed for bankruptcy under

Chapter 11 on February 9, 2009. Unable to confirm a Chapter 11

plan of reorganization, the Bankruptcy Court ordered Chapter 7

liquidation on April 19, 2010. Appellant was unable to derive

any funds from the business and sought relief by filing for

individual Chapter 13 Bankruptcy protection on January 18, 2010. 

The State of New Jersey filed a secured proof of claim that was

subsequently amended on August 12, 2010. 

Central to this appeal is the amended proof of claim filed

by the State of New Jersey which states that Appellant owes sales 

taxes for the time period of 2003 to 2009. The sales taxes are

monies collected from Appellant’s customers at the time of sale

and owed to the State as required by state law. Appellant argues

that the sales taxes are “excise taxes” and, therefore,

dischargeable under the Bankruptcy Code after three years. The

State argues that the taxes are “trust fund” taxes and,

therefore, not dischargeable under Bankruptcy.

The Bankruptcy Court held a hearing on September 27, 2010,

and subsequently instructed the parties to file supplemental

briefing. The Bankruptcy Court held a telephonic hearing on

November 1, 2010, at which time the Court found that the sales

and usage taxes owed by Appellant are trust fund taxes pursuant

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to 11 U.S.C. § 507(a)(8)(c) rather than excise taxes under 11

U.S.C. § 507(a)(8)(e). The Bankruptcy Court entered an order on

November 17, 2010 stating that the sales tax liability owed by

Appellant on behalf of Don’s What a Bagel, Inc., in the amount of

$56,679.78, is non-dischargeable. 

Appellant filed a timely appeal of the Order entered by the

Bankruptcy Court.

III. JURISDICTION

The Order entered on November 17, 2010 is a final,

appealable order. This Court exercises mandatory jurisdiction to

hear appeals from final orders of bankruptcy judges pursuant to

28 U.S.C. § 158(a)(1).

IV. STANDARD

On appeal from Bankruptcy Court, factual disputes are

governed by the clearly erroneous standard. See In re

Continental Airlines, 203 F.3d 203, 208 (3d Cir. 2000); In re

Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989). Legal

conclusions are given plenary review. Id.; see also In re

McKeesport Steel Castings Co., 799 F.2d 91, 93 (3d Cir. 1986). 

The parties do not dispute the underlying facts. The issue turns

on a question of law and, therefore, we apply plenary review

regarding the appeal. 

V. DISCUSSION

This appeal requires interpretation of Section 507(a) of the

Bankruptcy Code which prioritizes creditors’ claims,

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particularly, item number eight, which permits allowed unsecured

claims of governmental units under certain conditions. See 11

U.S.C. § 507(a)(8).

Appellant argues that the State’s claim for sales taxes

falls under section 507(a)(8)(e), which permits unsecured claims

of governmental units, only to the extent that such claims are

for an “excise tax” on:

(i) a transaction occurring before the date of the

filing of the petition for which a return, if

required, is last due, under applicable law or

under any extension, after three years before the

date of the filing of the petition; or 

(ii) if a return is not required, a transaction

occurring during the three years immediately

preceding the date of the filing of the petition; 

See 11 U.S.C. § 507(a)(8)(e).

Appellant argues that sales taxes are “excise taxes” and,

therefore, dischargeable after three years pursuant to section

507(a)(8)(e).

Conversely, the State argues that the sales taxes are “trust

fund” taxes and fall under section 507(a)(8)(c), which permits 

unsecured claims of governmental units only to the extent that

such claims are for “a tax required to be collected or withheld

and for which the debtor is liable in whatever capacity.” See 11

U.S.C. § 507(a)(8)(c). There is no three year limitation under

subsection (c), thereby resulting in the full claim being

nondischargeable.

The Bankruptcy Court ruled in favor of the State and held

that sales taxes are trust fund taxes and, therefore,

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nondischargeable in Bankruptcy. Appellant argues on appeal that

treating sales taxes as trust fund taxes violates the goal of

relieving a debtor from the weight of oppressive indebtedness and

of providing a debtor in bankruptcy a “fresh start.” See Ins.

Co. Of N. America v. Cohn (In re Cohn, 54 F.3d 1108, 1113 (3d

Cir. 1995). Also, treating sales taxes as trust fund taxes

requires a broad reading of the statute which violates the

standard that priority under the tax code should be founded on a

clear statutory purpose and narrowly construed. See In re

Continental Airlines, Inc., 148 B.R. 207, 211 (Bankr. D. Del.

1992). 

Appellant argues that since the statutory language of

Section 507(a)(8)(c) is silent as to whether it includes “sales”

or “usage” taxes, that there is no clear purpose to include such

taxes. Appellant also argues that the Bankruptcy Court conceded

that it could be interpreted in a “myriad” of ways, thus

committing reversible error. Moreover, Appellant argues that

granting priority status to the State is inconsistent with the

policy of equality of distribution.

There is no case law in this District interpreting whether

sales taxes are excise taxes or trust fund taxes under the

Bankruptcy Code. The Bankruptcy Court relied upon decisions by

the Second Circuit, in In re DeChiaro, 760 F.2d 432 (2nd Cir.

1985), and by the Ninth Circuit in In re Shank, 792 F.2d 829, 832

(9th Cir. 1986). Both Courts held that sales taxes collected

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from third parties to be paid to the State should be treated as 

trust fund taxes under 11 U.S.C. § 507(a)(8)(c). 

The Second Circuit began its discussion with a review of the

treatment of tax debts under the former bankruptcy Act to

determine Congress’s intent when it enacted the 1978 Code

provisions. In re DeChiaro, 760 F.2d at 434. The Court found

that in 1966, Congress changed its long-standing position that

tax debts were not dischargeable, and permitted most tax debts

more than three years old to be discharged. Id. (citing Section

17a(1) of the Bankruptcy Act of 1898, ch. 541, § 17a(1), 30 Stat.

544, 550 (formerly codified as amended at 11 U.S.C. § 35(a)(1))

(repealed 1978); Act of July 5, 1966, Pub.L. No. 89-496, § 2, 80

Stat. 270). The Court noted that a proviso was added by the 1966

amendment leaving certain tax debts nondischargeable even though

the tax debt was more than three years old, one of which was a

trust fund tax. Id. (citing Act, § 17a(1)(e)).

The Second Circuit discussed that section 17a(1)(e) excepted

from discharge, taxes the debtor “has collected or withheld from

others.” Id. The Court stated that “Congress added the trust

fund tax exception to the 1966 amendment in response to the

Treasury Department’s argument that a debtor should not be

relieved of his obligation for taxes he had collected from third

parties but had not paid over to the taxing authority.” Id.

(citing H.R.Rep. No. 372, 88th Cong., 1st Sess. 5 (1963); S.Rep.

No. 114, 89th Cong., 1st Sess. 6 (1965)). The Court noted that

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the definition for trust fund tax did not include “sales taxes.” 

Rather, the primary example used for such a tax was a withholding

tax collected by an employer from his employees. Id. 

Nonetheless, the Court thought the history strongly suggested

that Congress did not intend to limit the section 17a(1)(e) trust

fund exception to just withholding taxes, but to encompass taxes

that “employers and other persons ... have collected ... from

third parties.” Id. (citing H.R.Rep. No. 372, supra, at 6

(reprinting letter from Assistant Secretary of Treasury to

Chairman of House Judiciary Committee) (emphasis added in

original); S.Rep. No. 114, supra, at 10).1

In their discussion of The Bankruptcy Reform Act of 1978,

the Second Circuit noted that the House and Senate each drafted

significantly different versions of section 507 in their

treatment of trust fund and excise taxes. Id. at 434-35. The

differences between the House and Senate were summarized by the

Court:

Appellant disagrees with the Court’s recitation of the 1

legislative history surrounding the 1966 amendments since the

later 1978 Bankruptcy Act “fundamentally restructured bankruptcy

law.” See Begier v. Internal Revenue Service, 496 U.S. 53, 58

(1990). Appellant’s view is short-sighted. Prior enactments,

even if later changed, can shed light or provide context to a

statutory provision. See Hayden v. Pataki, 449 F.3d 305, 315 (2nd

Cir. 2006)(finding that broad language could include certain

provisions if read without the benefit of context and background

assumptions supplied by other statutory and Constitutional

wording, by history, and by the manifestations of intent by

Congress at the time of the statute’s enactment and thereafter). 

This Court finds the historical perspective provided in DeChiaro

and in Shank to be well-reasoned.

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Under the House bill, the trust fund tax provision

covered only ‘taxes required to be withheld from

wages, salaries, commissions, dividends, interest,

or other payments that were paid by the debtor.’ 

H.R. 8200, 95th Cong., 1st Sess. § 507(6)(C)

(1977), reprinted in App. 3 Collier on Bankruptcy

(15th ed. 1985). The House bill also had a

provision covering ‘excise taxes.’ Id. §

507(6)(E). Under the House version, a discharge

was not available for withholding taxes that became

due within two years preceding bankruptcy or for

excise taxes on transactions occurring within one

year of bankruptcy. The Senate bill, on the other

hand, included a trust fund tax provision not

limited to withholding taxes. Rather, the Senate

bill contained a provision, similar to section

17a(1)(e), that excepted from discharge a tax

‘required to be collected or withheld’ no matter

how stale the debt. S. 2266, 95th Cong., 2d Sess. §

507(a)(6)(C) (1978), reprinted in App. 3 Collier on

Bankruptcy, supra. The Senate bill had no

provision explicitly covering excise taxes.

The section ultimately enacted into law contained

the Senate’s version of the trust fund tax

provision and the House’s version of the excise tax

provision (though changing the time limitation on

nondischargeable excise taxes from one to three

years). 

Id. at 435.

The Second Circuit found that the statutory language created

“an overlap between the provisions for trust fund and excise

taxes.” Id. The Court held that “the overlap between these

provisions must be resolved by holding that Congress intended to

differentiate between two categories of excise taxes and that the

trust fund tax provision excepts from discharge those excise

taxes required to be collected from third parties.” Id. The

Court stated it found nothing to indicate that Congress intended

to change the policy reflected in prior law concerning sales

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taxes collected from others. Id. It also noted that “in

proposing its version of the trust fund tax provision, the Senate

intended to include in the trust fund category excise taxes that

‘a seller of goods or services is required to collect from a

buyer and pay over to a taxing authority.’” Id. at 435-36.

(citing S.Rep. No. 989, 95th Cong., 2d Sess. 71 (1978) (report of

Senate Judiciary Committee), reprinted in 1978 U.S.Code Cong. &

Ad.News 5787, 5857; see S.Rep. No. 1106, 95th Cong., 2d Sess.

15-16 (1978) (report of Senate Finance Committee)). The Second

Circut found this history persuasive “since the compromise

version rejected the House’s limited trust fund tax provision in

favor of the Senate’s broader language.” Id. at 436. 

The Second Circuit did acknowledge that some remarks lent

support to the debtors’ position, particularly: “‘All Federal,

State or local taxes generally considered or expressly treated as

excises ..., including sales taxes ...’ are dischargeable under

the excise provision.” Id. (citing 124 Cong.Rec. 34016 (1978)

(remarks of Senator DeConcini, Senate subcommittee chairman),

reprinted in 1978 U.S.Code Cong. & Ad.News 6505, 6567; 124

Cong.Rec. 32416 (1978) (remarks of Representative Edwards, House

subcommittee chairman), reprinted in 1978 U.S.Code Cong. &

Ad.News 6436, 6498). Nevertheless, the Court rejected the

position that “the excise tax provision was intended to carve out

an exception to the trust fund tax provision.” Id.

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The Ninth Circuit also faced the issue of whether liability

for a sales tax, required by state law to be collected by sellers

from their customers, is governed by the “trust fund” tax or

“excise” tax provisions of the Bankruptcy Code in In re Shank,

792 F.2d 829 (9 Cir. 1986). The Ninth Circuit went through a th

similar review of the 1966 amendment to the Bankruptcy Act as

well as the 1978 enactments of Section 507. The Ninth Circuit

also remarked that the House and Senate versions were very

different, and the version of subsection (c) ultimately adopted

was the Senate version, i.e., “tax required to be collected or

withheld from others and for which the debtor is liable in any

capacity ...” Id. at 831. 

The Ninth Circuit noted that subsection (c) was accompanied

by the Joint Statement of Congressman Edwards and Senator

DeConcini, which stated:

Taxes which the debtor was required by law to

withhold or collect from others and for which he is

liable in any capacity, regardless of the age of

the tax claims. This category covers the so-called

“trust fund” taxes, that is, income taxes which an

employer is required to withhold from the pay of

his employees, and the employees’ share of social

security taxes.

Id. at 832 (citing 124 Cong.Rec. 32,416 (1978), reprinted in A.

Herzog & L. King, supra, § 507 at 248-49). The Court noted that

“the reference to collected excise taxes in the Senate Report

was, intentionally or unintentionally, deleted from the Joint

Statement.” Id.

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Comparing subsection (c) with subsection (e), the Court

acknowledged that the House version of subsection (e) was

essentially the version enacted with the difference that excise

tax debts were dischargeable if older than three years (instead

of one year). The House Report does not define “excise tax” but

the joint statement of Edwards and DeConcini defines excise taxes

as including the following:

All Federal, State or local taxes generally considered

by this category, including sales tax, estate and gift

tax, gasoline and special fuel taxes, and wagering and

truck taxes.

Id. (citing 124 Cong.Rec. 32,416 (1978), reprinted in A. Herzog &

L. King, supra, § 507 at 250).

The Ninth Circuit, like the Second Circuit, recognized the

overlap in the two subsections, and also determined that Congress

had two different types of sales tax liability in mind: “those

owed personally by a retailer and those incurred by a retailer’s

customers which are collected by the retailer under the authority

of the state, held in trust, and then remitted by the retailer to

the state.” Id. The Ninth Circuit felt this interpretation was

supported by public policy considerations because if an

obligation to pay sales tax can be discharged by a bankruptcy

filing three years after the transaction giving rise to the tax,

then it would create an incentive to default. Id. 

Appellant disagrees with the reasoning of the Second and

Ninth Circuits, and with the Bankruptcy Court’s reliance on these

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decisions in reaching its decision not to discharge Appellant’s

sales tax debt under Section 507(a)(8)(e). Appellant argues

that the Bankruptcy Court should not have relied on these cases,

and instead should have conducted its analysis based on the plain

meaning of the words in the statute. Appellant states that the

Bankruptcy Court failed to give the terms “trust fund tax” or

“excise tax” their ordinary and normal meanings. 

Appellant states that the term “trust fund tax” is not

defined by the Bankruptcy Code, or by Black’s Law Dictionary, and

therefore provides a definition from the Internal Revenue

Service. The term “trust fund tax,” however, is not part of the

statutory language. It is part of the Joint Statement of

DeConcini and Edwards. As such, it provides legislative intent,

but cannot be defined as words of the statute. In fact, it is

more telling that Congress did not use the term “trust fund

taxes” in the words of the statute. Rather, a more expansive

definition was used suggesting that Congress meant for taxes

under that subsection to cover all taxes which are held in trust. 

If Congress meant to limit subsection (c) to just trust fund

taxes as defined, then they could have done so in the language of

the statute. See Rea v. Federated Investors, 431 B.R. 18, 22

(W.D.Pa. 2010) (“Where Congress includes particular language in

one section of a statute but omits it in another section of the

same Act, it is generally presumed that Congress acts

intentionally and purposely in the disparate inclusion or

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exclusion.”) (citing Russello v. U.S., 464 U.S. 16, 23, 104 S.Ct.

296, 78 L.Ed.2d 17 (1983); Barnhart v. Sigmon Coal Co., Inc., 534

U.S. 438, 452–53, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002)). 

The term “excise tax,” however, is part of the statute, but

is not defined in the bankruptcy code. See U.S. v. Reorganized

CF & I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106,

2108 (1996). Appellant provides a definition of “excise tax”

from Black’s Law Dictionary as: “[a] tax on the manufacture,

sale, or use of goods (such as a cigarette tax) or on the

carrying on of an occupation or activity (such as a license tax

or an attorney occupation fee).” This definition of excise tax

comports with the Joint Statement of DeConcini and Edwards, which

also makes reference to “sales tax” in the definition of excise

tax. Thus, we find that the ordinary meaning of excise tax

includes “sales tax.” However, this does not solve the problem

of the two subsections overlapping in meaning since the

definition of excise tax does not specifically exclude sales

taxes that are held in trust. 

Appellant relies on the legislative history and argues that

the Bankruptcy Court did not undertake an independent review of

the legislative history leading up to the passage of Sections

507(a)(8)(c) and (e) in 1978. Appellant highlights the fact that

Congress was unable to hold a conference and, therefore, Senator

DeConcini and House Representative Edwards met to reach

compromises on the differences between the two bills and their

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statements have been treated as persuasive evidence of

Congressional intent. Appellant states that DeConcini and

Edwards stated that the category of taxes covered under

subsection (c) includes “trust fund taxes, that is, income taxes

which an employer is required to withhold from the pay of his

employees, and the employee’s share of social security taxes.” 

Appellant also cites to the remarks of DeConcini and Edwards that

“excise tax” was to include “[a]ll Federal, State or local taxes

generally considered or expressly treated as excises are covered

by this category, including sales taxes, estate and gift taxes,

gasoline and special fuel taxes and wagering and truck taxes.” 

Appellant argues that based on the statutory language and

legislative history, that Congress intended all sales taxes to be

excise taxes dischargeable under Section 507(a)(8)(e). 

Upon review of the statutory language and the legislative

history, it is clear that there is overlap between subsection (c)

and (e) with regard to sales taxes. Subsection (c) covers all

taxes “required to be collected or withheld.” This definition

would include sales taxes collected from the customer, held for

the State, and then paid as a tax to the State. The comments of

DeConcini and Edwards regarding subsection (e), however, include

that the statement that excise taxes include sales taxes, thus

creating an overlap. 

The Courts in DeChiaro and Shank understood this overlap to

mean that Congress had two types of sale taxes in mind, and we

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agree with their reasoning. Although the term “sales tax” is 2

used in statements by DeConcini and Edwards for “excise tax,”

there is a difference between a sales tax that is paid directly

to the State, and a tax paid by a third party at the time of

sale, held in trust, and obligated to be paid over to the State. 

This explanation of treatment of the two types of sales taxes

provides meaning to both sections. See United Steelworkers of

America, AFL-CIO-CLC v. North Star Steel Co., Inc., 5 F.3d 39,

(3d Cir. 1993) (citing canons of statutory construction that

“[c]ourts should avoid a construction of a statute that renders

any provision superfluous” and “a court should avoid an

interpretation of a statute that would lead to absurd or

unreasonable results.”) (citations omitted). 

The Court must also look to the purpose behind the words in

the statute to provide meaning and to ensure that Congress’s

intention is being carried out. See Reorganized CF & I

Fabricators, 518 U.S. at 213 (“In every case in which the Court

considered whether a particular exaction called a ‘tax’ in the

statute creating it was a tax for bankruptcy purposes, the Court

We recognized that other courts that have considered 2

this issue have held that sales taxes are excise taxes and,

therefore dischargeable after three years pursuant to the

Bankruptcy Code. See In re Tapp, 16 B.R. 315 (Bankr. D. Alaska

1981); In re Boyd, 25 B.R. 1003 (Bankr. S.D. Ohio 1982). 

However, we find these cases unpersuasive since they did not

address the argument that Congress had two different types of

sales taxes in mind, one paid directly by the debtor, and one

collected by the debtor from third parties and held in trust for

the State.

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looked behind the label and rested its answer directly on the

operation of the provision.”) (citing United States v. New York,

315 U.S. 510, 514-517, 62 S.Ct. 712, 714-716, 86 L.Ed. 998). The

purpose behind collecting a sales tax from customers at the time

of sale is to pay such taxes to the State. Thus, a sales tax

collected by a third party and owed to the State pursuant to

state law is a tax clearly held in trust and nondischargeable

under 11 U.S.C. § 507(a)(8)(c). 

IV. CONCLUSION 

Accordingly, the Bankruptcy Court was correct in its

application of law to the facts in this case. Therefore, the

final order of the Bankruptcy Court will be affirmed. 

 An Order will be entered consistent with this Opinion.

 

 S/Noel L. Hillman 

NOEL L. HILLMAN, U.S.D.J.

Dated: September 13, 2011 

At Camden, New Jersey

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