BEFORE THE STATE TAX COMMISSION OF UTAH
Petitioner, : INFORMAL DECISION
COLLECTION DIVISION OF THE : Appeal No. 87-0281
STATE TAX COMMISSION OF UTAH, ) Acct. No. XXXXX
STATEMENT OF CASE
This is an appeal to the Utah State Tax Commission from a decision of the Collection Division to assess penalty and interest on sales and use tax account no. XXXXX for the periods XXXXX. An Informal Hearing was held on XXXXX, in the offices of the Utah State Tax Commission. David J. Angerhofer, Hearing Officer, heard the matter for the Commission. XXXXX represented himself. The tax for the periods in question amounted to $$$$$. On XXXXX, Respondent assessed a penalty of $$$$$ and interest of $$$$$. Petitioner has made payments in the amount of $$$$$, leaving a balance due of $$$$$ as of XXXXX. Petitioner filed for a Chapter 13 bankruptcy on XXXXX. This was subsequently converted to a Chapter 7 on XXXXX, and was discharged on XXXXX. Petitioner had paid a sum in the amount of the tax for each of the periods in question prior to the filing of the bankruptcy but did not pay the penalty or interest at that time. Petitioner asserted that tax and interest should be treated the same; since there was no tax due and owing at the time of the bankruptcy, there is no priority of interest. Petitioner agreed that some interest was due and agreed to pay a reasonable interest on the original amount of taxes. Petitioner asserted that the penalty was discharged in bankruptcy and cited bankruptcy code Section 507(a)(7). Since the penalty was not "in compensation for actual pecuniary loss" it was discharged.
A sales tax is not dischargeable in bankruptcy. It is a tax measured by "gross receipts" pursuant to Section 507(a)(7) and is, consequently, nondischargeable pursuant to Section 523(a)(1)(A). In DeChiaro v. New York State Tax Commission, 760 F.2d 432 (2nd Cir. 1985), the U.S. Court of Appeals held the sales tax to be a "trust fund" tax and nondischargeable. Prepetition interest is treated the same as a prepetition tax claim and is not discharged in bankruptcy. In re XXXXX, 15 BCD 384 (S.D. W. Va. 1986). Respondent properly assessed interest in the present case, which interest was not discharged. Penalty is not entitled to priority under 11 U.S.C. 507(a)(7)(G) unless it meets three requirements: "first it must be a penalty; second, it must be related to a claim of a kind entitled to priority under Section 507(a)(6) [507(a)(7)]; and third, it must be in compensation for actual pecuniary loss." In re XXXXX, 35 B.R. 651, 655 (Bkrtcy. D. Utah 1983) However, priority of a penalty is not the issue here. The issue in this matter is whether the penalty is dischargeable. 11 U.S.C. Section 523 lists the exceptions to discharge. Specifically Subsection (a)(7) reads:
(a) a discharge under Section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt (7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition; Subsection (a)(7) requires the tax and the penalty to be treated the same. "In other words, 'a penalty relating to a tax cannot be nondischargeable unless the tax itself is nondischargeable'." In re XXXXX, 19 B.R. 73, 74 (D. N.M. 1982)(Citing 3 Collier on Bankruptcy 523.17 (15th ed. 1979)). XXXXX also cited the legislative history of Section 523(a)(7) as support for the statement that tax penalties are nondischargeable if the underlying tax is also nondischargeable. Since the sales and use tax is nondischargeable, the penalty is also nondischargeable in this matter. The fact that the penalty did not have priority status during bankruptcy is irrelevant.
DECISION AND ORDER
It is the Decision and Order of the Utah State Tax Commission that Petitioner's request for waiver of penalty and interest on sales and use tax account No. XXXXX for the XXXXX be denied. The assessment of penalty and interest by the Collection Division of the Utah State Tax Commission is hereby affirmed.
DATED this 5 day of October, 1987.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis