Can a company's responsible officer discharge in bankruptcy the interest on the company's unpaid sales tax, or does interest survive along with the tax?

Plain-English summary

Mary Glanzel was the sole shareholder, officer, and director of Mill Tavern, Inc., which filed New York sales tax returns for certain periods but didn't pay the tax due. The corporation and Ms. Glanzel both filed bankruptcy, scheduled the sales tax liability (with penalties and interest), and she received a discharge. She was then assessed for the corporation's unpaid sales tax plus interest (no penalties). She conceded the tax but argued she was not liable for the interest, reasoning that the Bankruptcy Reform Act of 1978 excepts only the tax itself — not interest — from discharge.

The Department held she remains liable for the interest.

• These are non-dischargeable "trust fund"-type taxes. New York sales and use taxes are taxes "required to be collected or withheld and for which the debtor is liable in whatever capacity" under 11 U.S.C. § 507(a)(6) (citing In Re Fox, 609 F.2d 178), and § 507 taxes are excepted from discharge by 11 U.S.C. § 523(a)(1)(A) "whether or not a claim for such tax was filed or allowed."
• Interest is part of the tax debt. In Bruning v. United States, 376 U.S. 358, the Supreme Court held that a debtor stays personally liable after bankruptcy for post-petition interest on a pre-petition tax debt, because interest is an integral part of the tax — even though the discharge statute named only taxes. The Department reasoned that under Bruning the debtor's liability for pre-petition interest likewise survives, and noted Bruning has been followed under the 1978 Act (In Re Busman, 5 B.R. 332).
• Result. Ms. Glanzel is liable for the accrued interest on her unpaid sales and use tax debt, and the Tax Commission's assessment of that interest was proper.

What this means for you

Sales tax is a "trust fund" tax that bankruptcy usually can't wipe out. Because sales tax is money a business collects and holds for the state, it — and the responsible people liable for it — generally can't discharge it in bankruptcy under §§ 507(a)(6) and 523(a)(1)(A).

Interest rides with the tax. You can't separate the interest from the underlying non-dischargeable tax and shed it alone. Courts treat interest as an integral part of the tax debt, so it survives the bankruptcy right along with the tax.

Responsible-officer liability is personal. A sole officer/shareholder who was responsible for the company's unpaid sales tax remains personally on the hook for the tax and its interest even after a personal discharge.

Common questions

Q: My company went bankrupt owing sales tax. Can I discharge the interest even if I owe the tax?
A: No. Interest is treated as an integral part of the tax debt, so it is non-dischargeable along with the tax under 11 U.S.C. §§ 507(a)(6) and 523(a)(1)(A).

Q: Why is sales tax non-dischargeable?
A: It's a tax "required to be collected or withheld and for which the debtor is liable in whatever capacity" — a trust-fund-type tax excepted from discharge.

Q: Does it matter whether the interest accrued before or after the bankruptcy filing?
A: The Department applied Bruning to both: post-petition interest clearly survives, and it reasoned pre-petition interest survives as well.

Citations and references

Federal statutes:

• 11 U.S.C. § 505 — the bankruptcy court's determination of tax liability
• 11 U.S.C. § 507(a)(6) — priority for a tax required to be collected or withheld for which the debtor is liable in any capacity
• 11 U.S.C. § 523(a)(1)(A) — such taxes are excepted from discharge

Authority cited:

• Bruning v. United States, 376 U.S. 358 (interest is an integral part of a tax debt and survives discharge)
• In Re Fox, 609 F.2d 178
• In Re Busman, 5 B.R. 332 (following Bruning under the Bankruptcy Reform Act of 1978)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(34)S
Sales Tax
September 7, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820312A

On March 12, 1982, a Petition for Advisory Opinion was received from Mary Glanzel, 63
E. Main Street, Wolcott, New York 14590.
The issue raised is whether Petitioner, a former officer and stockholder of Mill Tavern, Inc.,
a bankrupt corporation, is liable for interest owed by the corporation on unpaid sales tax.
Petitioner was the sole shareholder, officer and director of Mill Tavern, Inc. The corporation
filed New York State Sales Tax returns for certain periods but failed to submit the sales tax due.
Subsequently, the corporation and Petitioner filed petitions in bankruptcy. The sales tax liability,
including penalties and interest, to the date of the filing of the petitions in bankruptcy were scheduled
in the petitions. Petitioner received her discharge in bankruptcy.
Petitioner was assessed for the unpaid sales tax liability of Mill Tavern, Inc., plus interest.
No penalties were assessed. Petitioner acknowledges that she is liable for the unpaid sales tax but
contends that she is not liable for the interest due. It is Petitioner's contention that the interest is
dischargeable in a bankruptcy proceeding because the Bankruptcy Reform Act of 1978 does not
specifically except interest from discharge, but rather excepts from discharge only the tax itself.
Section 505 of Title 11 of the United States Code provides, in relevant part, as follows:
"Determination of tax liability (a)(1) . . . the court may determine the amount or legality of any tax,
any fine or penalty relating to a tax, or any addition to tax . . . . (c) . . . after determination by the
court of a tax under this section, the governmental unit charged with responsibility for collection of
such tax may assess such tax against the estate, the debtor, or a successor to the debtor, as the case
may be, subject to any otherwise applicable law."
Section 507 of Title 11 provides, in relevant part, as follows: "Priorities (a) The following
expenses and claims have priority in the following order: . . . (6) . . . allowed unsecured claims of
governmental units, to the extent that such claims are for - . . . (C) a tax required to be collected or
withheld and for which the debtor is liable in whatever capacity; . . . ."
Section 523 of Title 11 provides, in relevant part, as follows: "Exceptions to discharge (a)
A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor
from any debt - (1) for a tax . . . (A) of the kind and for the periods specified in Section 507 . . .(a)
(6) of this title, whether or not a claim for such tax was filed or allowed; . . .".

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82(34)S
Sales Tax
September 7, 1982

The sales and compensating use taxes imposed by Article 28 and pursuant to the authority
of Article 29 of the Tax Law are taxes which are "required to be collected or withheld and for which
the debtor is liable in whatever capacity" within the meaning of section 507(a)(6) of Title 11 of the
Unites States Code. See In Re Fox, 609 F. 2d 178.
The Supreme Court of the United States held in Bruning v. United States, 376 US 358, 11
L ed 2d 772, 84 S CT 906, that under section 17 of the former Federal Bankruptcy Act, a debtor
remains personally liable after bankruptcy proceedings for interest that has accrued after the filing
of a petition in bankruptcy on a tax debt incurred prior to the filing of the petition. The Court
reasoned that interest is an integral part of a tax debt. Liability for interest should therefore survive
bankruptcy proceedings even though section 17 of the former Federal Bankruptcy Act specifically
excepted only taxes from discharge. Bruning did not address the issue of the dischargeability of
interest accruing prior to the date of filing of a petition in bankruptcy since the debtor in that case
conceded that such interest was not dischargeable. Under the reasoning of the Court in such decision,
however, it must be concluded that the liability of the debtor for such pre-petition interest also
survives bankruptcy proceedings. It is to be noted that Bruning has been followed in construing the
Bankruptcy Reform Act of 1978. See In Re Busman, 5 B.R. 332.
Accordingly, Petitioner is liable for the interest accrued on her unpaid sales and
compensating use tax debt. The assessments issued by the Tax Commission were therefore not
inappropriate in asserting such liability.

DATED: August 20, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau