That issue was addressed in In re Perry, 521 B.R. 370 (Bankr. N.D. AL 2014). In Perry, a medical doctor sought a determination that the $46,461 business license fees assessed against the doctor were discharged when the doctor received the Chapter 7 general bankruptcy discharge. The City assessing the business license fees argued that the fees constituted an “excise tax” that was excepted from the general discharge and had to be paid after the bankruptcy.
The Perry court started its analysis by noting the language in 11 U.S.C. §523(a)(1) excepts certain tax obligations from the general bankruptcy discharge. This U.S. Bankruptcy Code (“Code”) section incorporates a different Code section that identifies which types of taxes are excepted from the general bankruptcy discharge, including the “excise tax.” See 11 U.S.C. §507(a)(8)(E).
The first issue raised is whether the business license fee was a “tax” as used in the U.S. Bankruptcy Code. However, the term “tax” is not defined in the Code. The U.S. Supreme court considered a tax to be a “pecuniary burden laid upon individuals or property for the purpose of supporting the government.” United States v. Reorganized CF & I Fabricators of Utah, 518 U.S. 213, 220 (1996). Therefore, a court must look to the substance of the statute or ordinance that establishes the obligation to determine whether the obligation bears the characteristics of a tax. The statute’s mere characterization of the obligation as a “tax” is not controlling. A measure is considered a “tax” when the enacting statute or ordinance’s purpose is to raise revenue and not to regulate and not to defray costs of a specific service.
The Perry court found that the business license fees assessed against professions like the debtor-doctor were “taxes” since the revenues raised by the license were placed in the City’s General Fund to be used for the City’s general obligations and not set aside to defray the costs of a specific service.
The second issue raised is whether the tax was and an “excise tax” as contemplated in 11 U.S.C. §507(a)(8)(E). The Code does not define “excise” either. But, the Perry court incorporated the definition used in Black’s Law Dictionary as a tax imposed on the performance of an act or the engaging in an occupation. Doctors are definitely professionals and the court found that the license fees were excise taxes.
The third issue raised by the doctor is whether the excise tax was an “excise tax on a transaction” as contemplated in 11 U.S.C. §507(a)(8)(E). The debtor-doctor argued that the business license fee was an occupation tax calculated on the doctor’s gross revenues and was not based on any “transaction.” The court disagreed and found that debtor’s medical practice involved multiple transactions, from receiving payment for the care and treatment of patients to employing and paying others to work for the doctor. The court chose to interpret the term “transaction” broadly.
Consequently, the court found the business license fees not discharged by the doctor’s bankruptcy because the fees were “excise taxes on a transaction” as contemplated in 11 U.S.C. §507(a)(8)(E).
because the fees were “excise taxes on a transaction” as contemplated in 11 U.S.C. §507(a)(8)(E).
Practice Pointer: A proper analysis of the dischargeability of certain license fees begins with an analysis of the statute or ordinance that creates the fees. The purpose of the legislation should be examined as well as the utilization of the collected fees. Are the fees earmarked for a special purpose or deposited into the General Revenue Fund? Next, examine whether the fees are an “excise” tax and also whether the tax related to a “transaction” or merely a status (e.g. license fee assessed against retired doctors who no longer practice would probably NOT be a “transaction” tax).
Finally, an issue not raised in the Perry case should be considered. The business license fee found to be non-dischargeable by the Court could have been discharged if the debtor-doctor had waited to file the bankruptcy case. An “excise tax on a transaction” is excepted from discharge only if it’s a tax on a transaction occurring before the date of the bankruptcy filing for which a return, if required, is last due, less than three years before the date of the bankruptcy filing. See 11 U.S.C. §507(a)(8)(E)(i). Stated in reverse, an excise tax is discharged if the tax return that reports the excise tax was due more than three years before the bankruptcy case was filed.
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