Hayslett/Judy Oil v. IL Dept Revenue ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-4053
ILLINOIS DEPARTMENT OF REVENUE,
Plaintiff-Appellee,
v.
HAYSLETT/JUDY OIL, INC.,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 04-2023—Michael P. McCuskey, Chief Judge.
____________
ARGUED SEPTEMBER 27, 2005—DECIDED OCTOBER 18, 2005
____________
Before FLAUM, Chief Judge, and BAUER and SYKES, Circuit
Judges.
FLAUM, Chief Judge. Hayslett/Judy Oil (“Hayslett”) has
filed for Chapter 11 bankruptcy and has submitted a re-
organization plan to the bankruptcy court. The proposed re-
organization plan contains a priority payment to the state
of Illinois. That payment amounts to three years of unpaid
Illinois Motor Fuel Tax (“the Tax”) and an additional five
percent of the prioritized amount. The Illinois Department
of Revenue (“the Department” or “the government”) claims
that the plan is deficient in two respects. First, the plan
characterizes the tax as an “excise tax” under § 507(a)(8)(E)
of the Bankruptcy Code (“the Code”), which allows Hayslett
2 No. 04-4053
to discharge the unpaid motor fuel tax that is more than
three years overdue. The Department claims that the tax
should fall under § 507(a)(8)(C) of the Code, which does not
allow for the discharge of older debt. Secondly, the Depart-
ment claims that the proposed re-organization plan is
unacceptable under § 1129 of the Code because it does not
explicitly account for interest payments on the unpaid tax.
Hayslett counters that the plan implicitly provides for
interest since it will pay the Department five percent more
than Hayslett believes is owed.
While the bankruptcy court has approved the plan, the
district court has reversed, ruling for the Department
on both issues. Hayslett appeals the district court’s decision,
and asks that this Court reinstate the bankruptcy court’s
decision. For the following reasons, we affirm the district
court and remand the case to the bankruptcy court for
further proceedings consistent with this opinion.
I. Background
Hayslett is a corporation that operates a bulk petroleum
delivery business. It filed for Chapter 11 bankruptcy in
April of 2003. It filed a plan for re-organization in August
of that year. The plan included payments to the Department
of $1,155.00 monthly for approximately five years, totaling
$69,300.00. That amount reflects three years of back taxes,
plus an additional amount of about five percent that
Hayslett claimed represented implicit interest payments. In
October, the Department filed “Claim No. 13” for unpaid
Illinois Motor Fuel Tax. The Department believed that
Hayslett was liable for all unpaid Motor Fuel Tax, not just
the taxes from the past three years as Hayslett claimed.
The Department asked that $256,387.44 of unpaid tax be
given priority status under § 507(a)(8) of the Code.
The Department objected to Hayslett’s proposed re-
No. 04-4053 3
organization plan on the ground that the plan did not grant
priority status to the entire amount owed. The Department
also argued that the plan did not provide for interest
payments on the amount that was given priority, and
therefore failed under § 1129 of the Code. Hayslett argued
that the tax was an excise tax, and that therefore, under §
507(a)(8)(E), only the past three years of unpaid tax, or
$65,830.44, were entitled to priority status. Moreover, it
argued that its re-organization plan, although not explicitly
accounting for interest, resulted in total payments to the
government of five percent more than the amount owed.
Therefore, Hayslett claimed, the plan implicitly provided for
interest and met the requirements for approval set out in §
1129 of the Code.
The bankruptcy court heard arguments from both parties
and ruled in favor of Hayslett. It relied primarily on an
unpublished opinion from the bankruptcy court in the
Southern District of Illinois, In re Funk, No. 97-33000, 1999
WL 33596475 (Aug. 16, 1999). The bankruptcy court issued
an order confirming Haylett’s proposed re-organization plan
in December 2003.
The Department appealed the order to the district court
in February 2004, raising the same objections that it
had raised in bankruptcy court. In October 2004, the
district court entered an order stating that the Department
was “entitled to interest on the tax claim throughout the
payment period,” and that the motor fuel tax “falls squarely
within the language” of § 507(a)(8)(C) of the Code; thus
Hayslett was precluded from discharging the debt beyond
the three years preceding filing. Accordingly, the district
court entered judgment reversing the bankruptcy court and
remanded the case for further proceedings. The district
court decision rejected the bankruptcy court’s reliance on In
re Funk, instead relying on Seventh Circuit cases Rosenow
v. Illinois Department of Revenue, 715 F.2d 277 (7th Cir.
4 No. 04-4053
1983), and Groetken v. Dep’t of Revenue, 843 F.2d 1007 (7th
Cir. 1988). The debtor timely appealed the district court’s
decision.
II. Discussion
Under § 507 of the Code, governmental claims are
eighth in payment priority when a bankruptcy claim is
filed. 11 U.S.C. § 507(a)(8). The type of tax involved de-
termines what amount of back taxes are prioritized. Under
§ 507(a)(8)(C), government claims are prioritized to the
extent that such claims are for “a tax required to be col-
lected or withheld and for which the debtor is liable in
whatever capacity.” 11 U.S.C. § 507(a)(8)(C). This sub-
section applies to so-called “trust fund taxes.” Rosenow
v. Ill. Dep’t of Revenue, 715 F.2d 277, 279 (7th Cir. 1983).
These taxes are collected from individuals by a third
party who then remits the tax to the government. Income
tax and social security tax are common examples of “trust
fund taxes.” Id. This Circuit has also concluded that the
Illinois Use Tax, a sales tax, falls under this subsection. Id.Taxes that fall under § 507(a)(8)(C) can never be discharged
in bankruptcy, regardless of their temporal distance from
the date of bankruptcy filing. 11 U.S.C. § 507(a)(8)(C).
Excise taxes, however, are treated differently under the
statute. Under § 507(a)(8)(E), governmental claims are
prioritized to the extent that they are for an “excise tax.”1
11 U.S.C. § 507(a)(8)(E). Under this subsection, claims may
1
Excise tax is defined in Black’s Law Dictionary as, “A tax
imposed on the manufacture, sale, or use of goods (such as a
cigarette tax), or on an occupation or activity (such as a license tax
or an attorney occupation fee).” BLACK’S LAW DICTIONARY 605 (8th
ed. 2004).
No. 04-4053 5
be discharged after three years.2
This Court is now asked to resolve whether the Illinois
Motor Fuel Tax falls under § 507(a)(8)(C) or § 507(a)(8)(E),
an issue of first impression. The Motor Fuel Tax Law, 35
ILL. COMP. STAT. 505/6, sets out the following obligations for
distributors like Hayslett:
A distributor who sells or distributes any motor fuel,
which he is required by Section 5 to report to the
Department when filing a return, shall . . . collect at the
time of such sale and distribution, the amount of tax
imposed under this Act on all such motor fuel sold and
distributed, and at the time of making a return, the
distributor shall pay to the Department the amount so
collected . . . and shall also pay to the Department an
amount equal to the amount that would be collectible as
a tax in the event of a sale thereof on all such motor
fuel used by said distributor during the period covered
by the return.
35 ILL. COMP. STAT. 505/6 (2002).
The Department argues that because this tax requires
a distributor to “collect at the time of . . . sale . . . the
amount of tax imposed under this Act on all such motor fuel
2
The relevant statutory text provides that governmental claims
can receive priority to the extent that they 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 filing
of this petition.
11 U.S.C. § 507(a)(8)(E).
6 No. 04-4053
sold . . . and pay to the Department the amount so col-
lected,” it is a “tax required to be collected” within the
meaning of § 507(a)(8)(C).
Hayslett counters that the Tax is an excise tax within the
meaning of § 507(a)(8)(E). It states four principal argu-
ments to support its position:
1. The tax is listed under the section titled “excise taxes” in
the table of contents of the Illinois Compiled Statutes, and
is listed under the general heading “excise taxes” in the
code’s index.
2. The Department assigned Hayslett an “excise tax
number” in its claim filed with the bankruptcy court.
3. The Department’s bankruptcy claim contains Notices
of Lien for the Motor Fuel Taxes. Each of these notices
includes, on the second page, the heading “excise tax,” with
the tax liabilities that are the subject of each notice listed
under that heading.
4. The forms for the Motor Fuel Tax liability have a
different format than the forms that a retail seller uses
to compute tax liability. The Motor Fuel Tax is based on
gallons of fuel that pass through the distributor’s inventory
during the month, while typical sales taxes are based on the
amount of receipts that were generated from the distribu-
tor’s sales that month. Hayslett argues that this difference
reflects a fundamental difference between the two taxes.
The Illinois Use Tax, which Rosenow v. Illinois Department
of Revenue, 715 F.2d 277 (7th Cir. 1983), held fell under §
508(a)(8)(C), is an “add on” tax which is added to the price
that a retail customer pays to purchase a product. In
contrast, the Tax is hidden from the customer, who pays it
directly through the retail price instead of through an add-
on at the end of the purchase. The distributor remains free
to internalize the tax and not pass it along to the consumer,
Hayslett therefore argues, that the tax cannot fairly be
characterized as a “trust fund tax” which requires the
No. 04-4053 7
distributor to collect the consumer’s money in trust for the
government.
The Department argues that none of these factors prevent
the tax from falling under the purview of § 507(a)(8)(C).
Under Rosenow, a tax can be both an excise tax and a non-
delegable “trust fund tax.” Rosenow, 715 F.2d at 280 (“We
. . . conclude that excise taxes which a retailer has collected
from purchasers are nondischargeable despite their age
[under § 507(a)(8)(C)].”) Citing both the legislative history
and the plain statutory language of the current statute’s
predecessor (which has identical wording to the current
statute), the court held that subsection C applied to excise
taxes that a retailer had collected from purchasers. Id. The
Court ruled that any tax, including an excise tax, that 1) is
required to be collected and withheld and 2) the debtor is
liable for in whichever capacity, is non-dischargeable under
§507. Id.
Hayslett claims that the Rosenow decision is inapplicable
to the Tax, citing differences between the Tax and the Use
Tax at issue in the Rosenow case. This argument is uncon-
vincing, however. Regardless of the particulars of the tax at
issue in the case, Rosenow’s framework for evaluating
whether § 507(a)(8)(C) applies to a tax is equally useful
here. In both Rosenow and its complementary case,
Groetkin v. Dep’t of Revenue, 843 F.2d 1007 (7th Cir. 1988),
the Seventh Circuit determined whether a tax falls within
the purview of subsection C by asking if the tax is imposed
on the consumer or the retailer.
In Rosenow, the Use Tax was determined to be imposed
on the consumer passed through the retailer, and thus
constituted the sort of “trust fund tax” contemplated in
subsection C. See Rosenow, 715 F.2d at 280 (“The Senate
reports thus underline the fact that there are really two
types of sales tax liabilities at issue: those which are owed
personally by a debtor, for example, on purchases he
8 No. 04-4053
himself has made, and those incurred by a retailer’s
customers, which are collected by the retailer under the
authority of the state and then owed by the retailer to
the state. In relation to the latter, the retailer in fact
appears to be holding for the benefit of the state taxes
which his customers would otherwise owe[.]”). In Groetken,
the court ruled that the Illinois Occupation Tax, the
complementary tax to the Use Tax at issue in Rosenow, was
imposed directly on the retailer and thus did not fall under
subsection C. Groetken, 843 F.2d at 1013 (“Under Section
C’s plain language, the Occupation Tax is not a “trust fund”
tax. The Occupation Tax is imposed directly upon retail-
ers.”).
This distinction is eminently reasonable. The Code is
not designed to unjustly enrich a company that con-
verted consumers’ tax dollars to its own use, but is designed
to allow forgiveness of debts that a company accrued for
itself. These cases and their logic are applicable to any tax,
and therefore the relevant question in this case becomes
whether the Tax was imposed on the consumer or the
distributor.
Illinois state law is illuminating on the issue of wheth-
er the Tax is imposed directly on consumers. Although
this Court is not bound by the State of Illinois’s inter-
pretation of the Tax as it relates to the federal Bankruptcy
Code, a state court’s interpretation of its own statute should
still play “an important role in determining how a debtor’s
liabilities will be characterized under the Bankruptcy
Code.” Groetken, 843 F.2d at 1013. As the Court stated in
Groetken, “In applying the various code provisions, the
federal courts look to state law to determine the exact
nature of a person’s rights and obligations under state law.”
Id. (citing New Jersey v. Anderson, 203 U.S. 483, 491 (1906);
City of New York v. Feiring, 313 U.S. 283, 285 (1941); In re
Adams, 40 B.R. 545, 547 (E.D. Pa. 1984). The Illinois
Supreme Court has ruled that a prior version of the Tax
No. 04-4053 9
was assessed on the consumer and not the distributor.
American Oil Co. v. Mahin, 273 N.E.2d 818, 821 (Ill. 1971)
(“[I]t is clear to us that the Motor Fuel Tax Law is imposed
on the consumer of fuel and that the retailer or distributor
acts only as the collection agent for the State.”).
The plain language of the statute itself leads to the
same conclusion. Most convincingly, under the “Purpose”
section of the Motor Fuel Tax Law, the legislature writes,
“It is the purpose of Section[ ] 2 . . . of this Act to impose a
tax upon the privilege of operating each motor vehicle . . .
upon the public highways and waters of this State.” 35 ILL.
COMP. STAT. 505/17 (2004). Section 2 of the statute also
explicitly states, “A tax is imposed on the privilege of
operating motor vehicles upon the public highways[.]” 35
ILL. COMP. STAT. 505/2 (2004).
Hayslett’s contention that because the tax could be
internalized, it cannot fairly be assumed that it is im-
posed on the consumer, is not so convincing as to override
such strong statutory language and state law precedent.
Indeed, Illinois law is clear that the Tax is not part of
a retailer’s selling price. See Jones v. Dep’t of Revenue, 60
Ill. App. 3d 886, 893 (Ill. App. 1978). Moreover, the ad-
vertised price of the fuel generally gives notice to consumers
that the price includes tax.
In sum, the Tax meets the two part test for inclusion
under § 507(a)(8)(C) found in Rosenow and Groetken. The
tax is “required to be withheld.” See 35 ILL. COMP. STAT.
505/6 (2002) (“A distributor . . . shall . . . collect at the time
of such sale and distribution the amount of tax imposed
under this Act[.]” (emphasis added)). Additionally, Hayslett
is a debtor who is “liable in whatever capacity,” since it
collected those taxes from consumers. The Tax may be an
excise tax, but we see no reason why it cannot be an excise
tax imposed on consumers that is collected by a third party,
the distributor. Excise taxes such as this one also fall under
10 No. 04-4053
subsection C.
Because Hayslett’s re-organization plan is invalid for
not properly prioritizing the government’s fuel tax claim, we
need not reach the issue of whether the compensation plan
contained adequate provisions for interest.
III. Conclusion
For the foregoing reasons, the judgment of the district
court is AFFIRMED and the case is REMANDED to the bank-
ruptcy court for a decision consistent with this opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-18-05