In Re Darrel v. Shank, Debtor. Darrel v. Shank v. Washington State Department of Revenue, Excise Tax Division, Defendant

The Washington Department of Revenue appeals from the judgment of the district court that debtor’s sales tax liability is an excise tax for purposes of the Code and is dischargeable in bankruptcy. The narrow issue on appeal is 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. We reverse.

The Code provisions in question are section 507(a)(6)(C), which covers a tax “required to be collected,” commonly referred to as a “trust fund” tax, and section 507(a)(6)(E), which covers an “excise” tax. 1

A trust fund tax is always given a priority and is never subject, to discharge in bankruptcy. 11 U.S.C. §§ 507 (a)(6)(C), 523(a)(1)(A). An excise tax, however, is given a priority and is not subject to discharge if the transaction occasioning the tax occurred less than three years prior to the filing of the bankruptcy petition. 11 U.S.C. §§ 507 (a)(6)(E), 523(a)(1)(A). Consequently, “stale” claims for excise taxes are not entitled to a priority and are discharge-able.

Darrel Shank (debtor) operated a retail establishment in the State of Washington. As…

dissenting:

I dissent from the majority’s conclusion that a merchant’s liability for Washington State sales tax is a nondischargeable debt under 11 U.S.C. § 507 (a)(6)(C). 1

Under section 507(a)(6)(C) liabilities for taxes “required to be collected or withheld and for which the debtor is liable in whatever capacity” are not dischargeable. On the other hand, under section 507(a)(6)(E), liabilities for “excise tax[es]” are dis-chargeable if the transaction giving rise to the tax occurred more than three years prior to the commencement of the bankruptcy case. The parties agree that the tax liabilities in this case are more than three years old and are thus dischargeable if the Washington State sales tax is an “excise tax”, but are not dischargeable if the tax is one “required to be collected or withheld.”

The majority, in reaching its conclusion, first determines that the words of the statute do not provide a means for determining whether the sales tax at issue is an “excise tax” or a tax “required to be collected.” The majority then goes on to examine the law under the Bankruptcy Act of 1898 (the predecessor to the Bankruptcy Code of 1978), the legislative history of the Senate…

792 F.2d 829 14 Bankr.Ct.Dec. 893 , Bankr. L. Rep. P 71,197 In re Darrel V. SHANK, Debtor. Darrel V. SHANK, Plaintiff-Appellee, v. WASHINGTON STATE DEPARTMENT OF REVENUE, EXCISE TAX DIVISION, Defendant- Appellant. No. 85-4042. United States Court of Appeals, Ninth Circuit. Argued and Submitted March 6, 1986. Decided June 18, 1986. Kary L. Krismer, Bruce T. Thurston, Woodley & Thurston, Kirkland, Wash., for plaintiff-appellee. James R. Tuttle, Asst. Atty. Gen., Olympia, Wash., for defendant-appellant. Appeal from the United States District Court for the Western District of Washington. Before WRIGHT, TANG and REINHARDT, Circuit Judges. TANG, Circuit Judge: 1 The Washington Department of Revenue appeals from the judgment of the district court that debtor's sales tax liability is an excise tax for purposes of the Code and is dischargeable in bankruptcy. The narrow issue on appeal is 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. We reverse. 2 The Code provisions in question are section 507(a)(6)(C), which covers a tax "required to be…