In Chapter 7 any debt, including a tax, is dischargeable unless explicitly excepted from discharge

by the Bankruptcy Code. The United States Bankruptcy Code, section 507(a)(8)(E), provides that
an excise tax is non dischargeable in Chapter 7 if a required tax return was due within
three years of filing a bankruptcy, or, where a return is not required, the taxable event
occurred within three years of filing the bankruptcy. Since a sales tax return is typically due
only after the taxing event (i.e., the sale) has occurred, the due date of the return will always be
more recent than the date of sale. Accordingly, where a return is required the rule can be
shortened to state that if the due date of the return is within three years of the Chapter 7
bankruptcy, it is not dischargeable.
In addition, Section 523(a)(1)(B) of the Bankruptcy Code provides that a tax for which a return
is required is non dischargeable if the required return was either not filed at all, or was filed
within two years of the bankruptcy, or where the return was fraudulent, or where the taxpayer
was guilty of a willful attempt to evade or defeat the tax. The California Revenue &
Taxation Code requires a quarterly sales tax return, and thus these rules apply.</P>
In a nutshell, it can be said that a California sales tax for a particular taxable period is nondischargeable in Chapter 7 if it falls into any of the pitfalls described above. For example, In
George v. SBE the corporation stopped paying sales taxes over to the Board of Equalization after
July 1, 1984 and ceased doing business in March, 1985; the individual husband and wife share
holders filed personal bankruptcy on May 29, 1985. Obviously, the sales tax return due dates fell
within three years of the bankruptcy, and if they were excise taxes, were non-dischargeable in
Chapter 7. The debtors unsuccessfully argued that the liability asserted against them was not a
tax. The court rejected this argument and held that their liability was for a non-dischargeable
excise tax.
It might be presumed, then, that as long as the sales tax avoids each of the pitfalls described
above it is dischargeable. But there is a little more to it. In California the sales tax has been held
to be more than a mere excise tax; it is also a tax "on or measured by income or gross receipts."
In In re Raiman the bankruptcy court held that the sales tax was a tax measured on income or
gross receipts. Like sales taxes, personal income taxes in California are assessed on or measured

by income or gross receipts. The significance of the Raiman ruling is that it subjects the
dischargeability of sales taxes to the same criteria for discharge as for personal income taxes.
The criteria for discharge of income tax encompass the same rules as for excise taxes and
adds one more, the 240-day assessment rule. Accordingly, as long as the sales tax satisfies the
rules for discharge of income taxes, the sales tax will be dischargeable and we don't have to
concern ourselves with the rules for discharge of an excise tax
The rules for discharge of the sales tax are the same as for personal income taxes. The rules
for discharge of personal income taxes in Chapter 7 bankruptcy are:
1) The most recent due date for the sales tax return is over three years prior to the
bankruptcy filing date (including any extension of the due date given per R&amp;T Code
&#167; 6459);
2) The tax was assessed personally against the individual at least 240 days prior to the
bankruptcy filing date;
3) The tax return was actually filed more than two years before the bankruptcy filing date;
4) The return was not fraudulent; and
5) For the quarter in question the taxpayer was not guilty of a willful attempt to evade or
defeat the tax.
So, it can be said that a sales tax is dischargeable in Chapter 7 bankruptcy if it satisfies
each of the rules described above.

In evaluating whether a particular sales tax is dischargeable in Chapter 7 careful thought

should be given to the question when, exactly, was the taxpayer assessed personal liability
for the tax?This date must be known in order to determine whether the 240-day assessment
rule has been satisfied (rule #2, above).

The problem is that for sales taxes the Revenue & amp; Taxation Code is not exactly clear when
this date is. For bankruptcy purposes the bankruptcy courts have filled this deficiency by
ruling that a state tax is "assessed" when it becomes administratively final, in other words,
when the taxpayer may no longer appeal the assessment within the taxing entity's appeal
procedures. The trap for the unwary is that the date of personal assessment may be different for
a sole proprietor and a responsible officer of a close corporation, and is different in the case of a
petition for redetermination of a proposed additional assessment pursuant to Rev. &amp; Tax
Code &#167; 6561.
In any event, however, by the time the taxpayer has become desperate enough to seek advice
about bankruptcy it's a good bet the 240-day period has expired.

What if the taxpayer never filed his quarterly sales tax returns? This as a fairly common
situation, and it would make the sales tax liability non-dischargeable in Chapter 7.
However, there is another option. Unlike Chapter 7, the requirements for discharge in a
Chapter 13 bankruptcy do not include a requirement that a tax return be filed. To be
dischargeable in Chapter 13 only two of the five rules need be satisfied ... 1) the due date of
the return must be over three years old, and 2) the tax must have been assessed for at least
240 days; the tax return filing, the no-fraudulent return, and the no-willful evasion rules do
not apply.

In a high percentage of cases the taxpayer has, one way or the other, satisfied the rules for
discharge, if not in Chapter 7 then in Chapter 13. Accordingly, where a taxpayer's
delinquent sales tax liability is impossible to pay, playing the bankruptcy card may be the a
feasible solution.</P>