In re: Daniel Bruce Carpenter and Mary Esther Carpenter

FILED NOV 18 2015 1 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. MT-14-1499-KlPaJu ) 7 DANIEL BRUCE CARPENTER and ) Bk. No. 2:13-bk-61192-RBK MARY ESTHER CARPENTER, ) 8 ) Debtors. ) 9 _______________________________) ) 10 DANIEL BRUCE CARPENTER; MARY ) ESTHER CARPENTER, ) 11 ) Appellants, ) 12 ) v. ) O P I N I O N 13 ) MONTANA DEPARTMENT OF LABOR ) 14 AND INDUSTRY UNEMPLOYMENT ) INSURANCE CONTRIBUTIONS BUREAU,) 15 ) Appellee. ) 16 _______________________________) 17 Argued by Video Conference and Submitted on July 23, 2015 18 Filed – November 18, 2015 19 Appeal from the United States Bankruptcy Court 20 for the District of Montana 21 Honorable Ralph B. Kirscher, Chief Bankruptcy Judge, Presiding _________________________ 22 Appearances: Harold V. Dye, Dye & Moe, PLLP, argued for 23 appellants; Joseph Richard Nevin argued for appellee. 24 _____________ 25 Before: KLEIN,1 PAPPAS, and JURY, Bankruptcy Judges. 26 27 1 Hon. Christopher M. Klein, U.S. Bankruptcy Judge, Eastern 28 District of California, sitting by designation.

1 KLEIN, Bankruptcy Judge: 2 3 This appeal involves the interplay between priority tax 4 status under 11 U.S.C. § 507(a)(8) and Montana’s statute imposing 5 individual liability on “responsible officers” of corporations 6 that do not pay their taxes. 7 The joint debtors owned and managed a corporation that did 8 not pay its state unemployment taxes within three years before 9 they filed their personal chapter 11 case. The bankruptcy court 10 held that Montana’s tax claim for unpaid corporate taxes is a 11 § 507(a)(8)(E) excise tax priority claim in their personal case. 12 The court rejected the debtors’ argument that, by negative 13 inference from language in § 507(a)(8)(C), the § 507(a)(8)(E) 14 excise tax priority cannot apply to responsible officers. In 15 their view, the tax debt would be a § 507(a)(8)(E) priority tax 16 as to the corporate taxpayer but merely a non-priority tax claim 17 as to them as vicariously-liable individuals. This theory would 18 enable them to confirm a chapter 11 plan without paying the tax 19 debt in full and to escape the incidental consequence of 20 nondischargeable status under § 523(a)(1) for any unpaid portion. 21 The debtors’ negative-implication argument, while plausible, 22 runs counter to too much precedent. We AFFIRM. 23 24 FACTS 25 The debtors Daniel and Mary Carpenter were officers and 26 owners of Big Sky Fire Protection, Inc., which sold and serviced 27 fire protection equipment. They were officers responsible for 28 filing Big Sky tax returns and paying its taxes.

1 Unemployment tax contributions owed by Big Sky pursuant to 2 Montana Code Annotated § 39-51-1103(1)2 were not paid from 3 October 2011 through June 2013. 4 The Montana Department of Labor and Industry, Unemployment 5 Insurance Contributions Bureau, filed a proof of claim asserting 6 § 507(a)(8) priority status for $78,757.29, including $125.00 in 7 penalties. Attached was a statement of account addressed to “Big 8 Sky Fire Protection Inc Attn Daniel Carpenter.” 9 The debtors objected to the claim, asserting that Big Sky’s 10 tax debt was not a priority claim as to them despite Montana’s 11 responsible persons statute, which makes officers personally 12 liable for unpaid corporate taxes. MONT. CODE ANN. § 39-51-1105.3 13 2 Montana’s unemployment tax “contributions” accrue and are 14 payable as follows: 15 (1) Contributions accrue and become payable by each employer 16 for each calendar year in which the employer is subject to this chapter with respect to wages, as defined in 39-51-201, 17 paid for employment, as defined in this chapter, occurring during the calendar year. 18 19 MONT. CODE ANN. § 38-51-1103(1). 3 20 Montana’s responsible person liability statute provides:

21 (1) The officer of a corporation whose responsibility is to pay the taxes, penalties, and interest, as provided by 39-51- 22 404, 39-51-1103(1) and (2), 39-51-1125(1), and 39-51-1301, 23 is liable for the taxes, penalties, and interest due.

24 (2)(a) The department shall consider the officer of the corporation individually liable with the corporation for 25 filing reports and unpaid taxes, penalties, and interest 26 upon a determination that the corporate officer:

27 (i) possessed the responsibility to file reports and pay taxes on behalf of the corporation; and 28 (continued...)

1 The debtors conceded that unemployment taxes are an “excise 2 tax” on employers under § 507(a)(8)(E). But, they contended that 3 as to them as the employer’s vicariously-liable officers, the tax 4 debt is entitled to priority status only to the extent provided 5 by § 507(a)(8)(C), which applies to so-called “trust fund” taxes 6 “required to be collected or withheld” and for which the debtors 7 are “liable in whatever capacity.” 11 U.S.C. § 507(a)(8)(C). 8 The debtors relied on our 2012 Hansen decision, holding that 9 unemployment insurance contributions were not taxes “to be 10 3 (...continued) 11 (ii) possessed the responsibility on behalf of the 12 corporation to direct the filing of reports or payment of other corporate obligations and 13 exercised the responsibility that resulted in failure to file reports or pay taxes due. 14 15 (b) The department is not limited to considering the elements set forth in subsection (2)(a) to establish 16 individual liability and may consider other available information. 17 (3) The liability imposed upon an individual by this section 18 remains unaffected by the bankruptcy of a business entity to 19 which a discharge cannot be granted under 11 U.S.C. 727. The individual is liable for the unpaid amount of taxes, 20 penalties, and interest.

21 (4) In the case of a limited liability company treated as a partnership pursuant to 39-51-207, the liability for 22 unemployment insurance taxes, penalties, and interest owed 23 extends jointly and severally to each member and to each manager, if any. 24 (5) In the case of a limited liability company that is not 25 treated as a partnership pursuant to 39-51-207, liability 26 for unemployment insurance taxes, penalties, and interest owed extends jointly and severally to the managers and 27 members of the limited liability company.

28 MONT. CODE ANN. § 39-51-1105.

1 collected,” i.e. trust fund taxes, hence not entitled to 2 § 507(a)(8)(C) priority. Cal. Employment Dev. Dep’t v. Hansen 3 (In re Hansen), 470 B.R. 535 (9th Cir. BAP 2012). 4 The state clarified that its basis for claiming priority tax 5 status was a § 507(a)(8)(E) excise tax for which it asserted the 6 debtors are individually liable, not a § 507(a)(8)(C) trust fund 7 tax. It urged that its unemployment tax qualifies as an excise 8 tax under the Ninth Circuit Lorber test. Cal. Self-Ins. Sec. 9 Fund v. Lorber Indus. of Cal. (In re Lorber Indus. of Cal.), 564 10 F.3d 1098, 1101 (9th Cir. 2009) (“Lorber”). 11 Following an evidentiary hearing to establish the facts, the 12 bankruptcy court overruled the objection and allowed the Montana 13 claim as a priority claim to the extent of $78,632.29 and as a 14 general unsecured claim to the extent of the $125.00 penalty. In 15 re Carpenter, 519 B.R. 811, 818 (Bankr. D. Mont. 2014). 16 The debtors timely appealed. 17 18 JURISDICTION 19 Federal subject matter jurisdiction is founded on 28 U.S.C. 20 § 1334. A bankruptcy judge may hear and determine an objection 21 to claim. 11 U.S.C. § 157(b)(2)(B). We have appellate 22 jurisdiction under 28 U.S.C. § 158(a)(1). 23 24 ISSUE ON APPEAL 25 Whether the claim for a corporation’s unpaid Montana 26 unemployment insurance taxes is an 11 U.S.C. § 507(a)(8)(E) 27 priority claim against vicariously-liable individuals. 28 ///

1 STANDARD OF REVIEW 2 As no findings of fact are questioned, the issues are 3 questions of law reviewed de novo. Litton Loan Serv’g, LP v. 4 Garvida (In re Garvida), 347 B.R. 697, 703 (9th Cir. BAP 2006). 5 6 DISCUSSION 7 The battle over § 507(a)(8) priority tax status matters for 8 two main reasons in chapter 11 cases. First, a confirmable plan 9 must provide for full payment of priority taxes within five years 10 after the order for relief (unless the taxing entity agrees 11 otherwise). 11 U.S.C. § 1129(a)(9)(C). Second, as to the 12 individual chapter 11 debtors, unpaid § 507(a)(8) priority taxes 13 are excepted from discharge. 11 U.S.C. § 523(a)(1)(A). 14 15 I 16 The debtors argue from a negative inference based on 17 comparison of the language of various § 507(a)(8) subsections. 18 19 A 20 The foundation for the debtors’ argument lies in the 21 structure of § 507(a)(8). 22 Subsections (A) through (F) identify six tax categories that 23 qualify as priority debts: 24 (1) taxes measured by income or gross receipts, 11 U.S.C. § 507(a)(8)(A); 25 (2) property taxes, 11 U.S.C. § 507(a)(8)(B); (3) trust fund taxes (i.e., taxes “required to be collected 26 or withheld”), 11 U.S.C. § 507(a)(8)(C); (4) employment taxes on § 507(a)(4) priority wage claims, 11 27 U.S.C. § 507(a)(8)(D); (5) excise taxes, 11 U.S.C. § 507(a)(8)(E); and 28 (6) customs duties, 11 U.S.C. § 507(a)(8)(F).

1 Each of these 11 U.S.C. § 507(a)(8) priority tax categories, 2 except trust fund taxes, is temporary and measured by specified 3 lookback periods ranging from 240 days to three years. Taxes 4 older than the lookback periods are non-priority claims that do 5 not necessarily have to be paid in full in a chapter 11 case and 6 that do not automatically give rise to nondischargeable debts. 7 The § 507(a)(8)(C) trust fund provision is unique in three 8 respects. First, there is no lookback limitation. Thus, trust 9 fund taxes are perpetually § 507(a)(8) priority taxes and, hence, 10 are always nondischargeable under § 523(a)(1). Second, it is the 11 only provision in § 507(a)(8) that refers to who is liable for 12 the taxes; it contains the phrase “for which the debtor is liable 13 in whatever capacity.” Third, it is focused on a method of 14 collection, rather than describing a separate type of tax. 15 In other words, there really are only five categories of 16 impositions that can be described as taxes or customs duties, all 17 of which are entitled to priority status and potential exception 18 from discharge only if not stale. The sixth, the trust fund tax, 19 category does not constitute a separate type of tax, but rather 20 prescribes circumstances of collection for which priority status 21 and accompanying nondischargeable status is perpetual. 22 23 B 24 The debtors seize on the phrase “for which the debtor is 25 liable in whatever capacity” in § 507(a)(8)(C) to argue that the 26 absence of such a reference in the other § 507(a)(8) subsections 27 is significant. 28 The argument is that Congress knows how to provide that

1 persons other than the primary tax debtor are exposed to priority 2 tax status, which it has done in the “trust-fund” portion of 3 § 507(a)(8) with the “liable-in-whatever-capacity” language. 4 The debtors, relying on the canon of statutory construction 5 that effect must be given to each word, argue that it follows, by 6 negative implication, that the absence of “liable-in-whatever- 7 capacity” language in the other subsections means that persons 8 who are not the primary taxpayers are not required to bear the 9 burden of priority claim status. Since the “liable-in-whatever- 10 capacity” provision is not part of the § 507(a)(8)(E) excise tax 11 provision, it is argued that tax claims against persons who are 12 vicariously liable as “responsible officers” for the excise tax 13 debt of a corporation are not entitled to priority status. 14 Extra traction for the debtors’ argument comes from the 15 proposition that priorities are narrowly construed because they 16 derogate from the principle of equality of distribution among 17 unsecured creditors. Howard Delivery Serv., Inc. v. Zurich Am. 18 Ins. Co., 547 U.S. 651, 667 (2006); Lorber, 564 F.3d at 1100. 19 Underlying premises of the argument are that the subsections 20 of § 507(a)(8) are mutually exclusive and that a trust fund tax 21 is a separate type of tax. The difficulty is that key precedents 22 treat the categories as overlapping and not necessarily separate. 23 24 II 25 In order to assess the debtors’ argument, a review of the 26 history of the priority tax provisions and of judicial 27 constructions is in order. 28 ///

1 A 2 The phrase “for which the debtor is liable in whatever 3 capacity” is a legacy of the Supreme Court’s 1978 interpretation 4 of the 1966 amendments to the former Bankruptcy Act in which 5 Congress permitted, for the first time, discharge of most taxes 6 due and owing more than three years before bankruptcy and 7 prescribed a distribution priority for taxes that were not 8 discharged. Act of July 5, 1966, Pub. L. 89-496, 80 Stat. 270.4 9 One exception to discharge was for trust fund taxes. Those 10 were defined as taxes “which the bankrupt has collected or 11 4 12 The 1966 tax discharge provision in the Bankruptcy Act made dischargeable all taxes except those that: 13 (1) are taxes which became legally due and owing by the 14 bankrupt to the United States or to any State or any 15 subdivision thereof within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not 16 release a bankrupt from any taxes (a) which were not assessed in any case in which the bankrupt failed to make a 17 return required by law, (b) which were assessed within one year preceding bankruptcy in any case in which the bankrupt 18 failed to make a return required by law, (c) which were not 19 reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on 20 assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt, (d) with 21 respect to which the bankrupt made a false or fraudulent return, or willfully attempted in any manner to evade or 22 defeat, or (e) which the bankrupt has collected or withheld 23 from others as required by the laws of the United States or any State or political subdivision thereof, but has not paid 24 over; but a discharge shall not be a bar to any remedies available under applicable law to the United States or to 25 any State or any subdivision thereof, against the exemption 26 of the bankrupt allowed by law and duly set apart to him under this Act: And provided further, That a discharge in 27 bankruptcy shall not release or affect any tax lien.

28 Act of July 5, 1966, § 2, 80 Stat. at 270.

1 withheld from others as required by the laws of the United States 2 or any State or political subdivision thereof, but has not paid 3 over.” Bankruptcy Act of 1898, § 17a(1)(e), codified at 11 4 U.S.C. § 35(a)(1)(e) (1976 ed.). Those taxes were never stale. 5 A fourth distribution priority was created for all taxes not 6 released by discharge, with the restrictive proviso that “no 7 priority over general unsecured claims shall pertain to taxes not 8 included in the foregoing priority.” Bankruptcy Act of 1898, 9 § 64a(4), codified at 11 U.S.C. § 104(a)(4) (1976 ed.).5 In 10 short, all claims for stale taxes were general unsecured claims 11 and dischargeable, while taxes within the lookback periods and 12 other exceptions were priority taxes and not discharged. 13 In 1978, the Supreme Court construed the trust fund 14 provision of the 1966 amendment in the context of federal tax 15 liability of responsible parties for withholding taxes. United 16 States v. Sotelo, 436 U.S. 268 (1978). Under Internal Revenue 17 Code § 6672, 26 U.S.C. § 6672, responsible parties are assessed a 18 5 19 The new priority section was:

20 Sec. 3. Clause (4) of subdivision a of section 64 of such [Bankruptcy] Act, as amended (11 U.S.C. 104), is amended to 21 read as follows: “(4) taxes which became legally due and owing by the 22 bankrupt to the United States or to any State or any 23 subdivision thereof which are not released by a discharge in bankruptcy: Provided, however, That no priority over general 24 unsecured claims shall pertain to taxes not included in the foregoing priority: And provided further, That no order 25 shall be made for the payment of a tax assessed against any 26 property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the 27 court;”

28 Act of July 5, 1966, § 3, 80 Stat. at 271.

1 “penalty” equal to the amount of the tax not paid over. The 2 bankrupt responsible persons objected that they should not be 3 liable for the taxes of the corporation and that the designation 4 of the obligation as a “penalty” made it dischargeable. 5 Although the statute made no reference to responsible 6 officers, the Court held that, despite the designation as 7 “penalty,” the essential nature of the debt was a tax for 8 purposes of the Bankruptcy Act, which tax debt is not discharged. 9 Sotelo, 436 U.S. at 274-75 & 280-81. 10 11 B 12 Five months after Sotelo was decided, Congress enacted the 13 Bankruptcy Code of 1978, with the phrase “for which the debtor is 14 liable in any capacity” included in § 507(a)(8)(C).6 15 The legislative history explained that the priority section 16 reached the same result as Sotelo.7 17 6 What is now § 507(a)(8) was originally § 507(a)(6). In 18 1984, it became § 507(a)(7). Bankruptcy Amendments & Federal 19 Judgeship Act of 1984, Pub. L. No. 98-353, § 350(2), 98 Stat. 333, 358. In 1994, it became § 507(a)(8). Bankruptcy Reform Act 20 of 1994, Pub. L. No. 103-394, § 304(c)(2), 108 Stat. 4106, 4132. 21 7 The House and Senate floor leader statements are identical: 22 Taxes which the debtor was required by law to withhold or 23 collect from others and for which he is liable in any capacity, regardless of the age of the tax claims. This 24 category covers the so-called “trust fund” taxes, that is, income taxes which an employer is required to withhold from 25 the pay of his employees, and the employees’ share of social 26 security taxes. In addition, this category includes the liability of a 27 responsible officer under the Internal Revenue Code (sec. 6672) for income taxes or for the employees’ share of social 28 (continued...)

1 Since the basic reasoning of Sotelo was carried forward into 2 the Bankruptcy Code, that decision retains vitality. 3 One instructive thing about Sotelo is that the Supreme Court 4 construed responsible officer liability as qualifying for 5 priority status even though Bankruptcy Act § 17a(1)(e) did not 6 mention responsible officers and notwithstanding the statutory 7 proviso that “no priority over general unsecured claims shall 8 pertain to taxes not included in the foregoing priority.” 9 Since the Sotelos were held liable as responsible officers 10 on a bankruptcy tax priority that did not mention responsible 11 officers, Sotelo appears to stand for the proposition that a tax 12 priority applies against anyone who is liable for any priority 13 tax within the period specified by the particular priority. 14 There is no indication in the 1978 legislative history that 15 Congress intended to limit the Sotelo responsible-officer 16 analysis to trust fund taxes and no other category of tax when it 17 enacted the Bankruptcy Code. 18 19 7 (...continued) 20 security taxes which that officer was responsible for withholding from the wages of employees and paying to the 21 Treasury, although he was not himself the employer. This priority will operate when a person found to be a 22 responsible officer has himself filed in title 11, and the 23 priority will cover the debtor’s responsible officer liability regardless of the age of the tax year to which the 24 tax relates. The U.S. Supreme Court has interpreted present law to require the same result as will be reached under this 25 rule. U.S. v. Sotelo, 436 U.S. [268] (1978). 26 Statement of Rep. Don Edwards, Sep. 28, 1978, 124 Cong. Rec. 27 32415-16 & Statement Sen. Dennis DeConcini, Oct. 6, 1978, 124 Cong. Rec. 34015, reprinted at 1978 U.S.C.C.A.N. 6436, 6497 & 28 6505, 6566.

1 So viewed, there is nothing inconsistent with Sotelo about 2 applying responsible officer liability under applicable 3 nonbankruptcy law to any category of priority tax. But a 4 responsible officer for a tax in any category that is not a trust 5 fund tax would enjoy the same protection from stale tax claims as 6 the taxpayer for whom the officer is responsible. 7 8 C 9 The new 1978 Bankruptcy Code remodeled the tax discharge and 10 priority tax provisions but did not make significant changes. 11 Under the Bankruptcy Act, the exceptions to discharge for 12 “taxes,” without specifying which types of taxes, were in the 13 § 17 discharge exception section, while the priority provisions 14 at § 64a merely afforded priority to any tax debt not discharged. 15 Compare Bankruptcy Act § 17, as amended in 1966, with id. § 64a. 16 The Bankruptcy Code introduced greater specificity by naming 17 categories of taxes and transferred the tax provisions to the 18 priorities section, § 507(a). Now, the discharge exceptions 19 provide only that any priority tax is not discharged. Compare 11 20 U.S.C. § 523(a)(1), with id. § 507(a)(8) (formerly § 507(a)(6)). 21 The exceptions relating to unfiled, late, and fraudulent 22 returns and willful attempts to evade or defeat taxes remained in 23 the discharge provisions. Compare Bankruptcy Act §§ 17a(1)(a)- 24 (d), as amended in 1966, with 11 U.S.C. § 523(a)(1)(B)-(C). 25 As relevant here, the trust fund tax provision moved from 26 the discharge section to the priority tax section, with the 27 addition of the phrase “for which the debtor is liable in 28 whatever capacity.” Compare Bankruptcy Act § 17a(1)(e), as

1 amended in 1966, with 11 U.S.C. § 507(a)(8)(C).8 2 3 III 4 The decisional law interpreting the Bankruptcy Code’s 5 priority tax provisions has focused on categorization because 6 different categories become stale at different times and whether 7 particular liabilities — especially workers’ compensation 8 obligations — are taxes. 9 One consistent theme in the Ninth Circuit decisions is that 10 the § 507(a)(8) priority categories are not mutually exclusive 11 and not applied mechanically. Ilko v. Cal. Bd. of Equalization 12 (In re Ilko), 651 F.3d 1049, 1056-57 (9th Cir. 2011), adopting & 13 publishing, No. SC-09-1119 (9th Cir. BAP 2009); Shank v. Wash. 14 Dep’t of Revenue (In re Shank), 792 F.2d 829, 832 (9th Cir. 15 1986); accord, 4 COLLIER ON BANKRUPTCY ¶ 507.11[4] (Alan Resnick & 16 Henry Sommer eds., 16th ed. 2013) (“COLLIER”). 17 Another theme is that responsible officer taxes are 18 19 8 The 1966 provision excepting trust fund taxes from 20 discharge (which were also entitled to priority) was:

21 which the bankrupt has collected or withheld from others as required by the laws of the United States or any State or 22 political subdivision thereof, but has not paid over. 23 Bankruptcy Act § 17a(1)(e), as amended in 1966. 24 The 1978 provision affording priority to trust fund taxes 25 (which are also excepted from discharge) is: 26 a tax required to be collected or withheld and for which the 27 debtor is liable in whatever capacity.

28 11 U.S.C. § 507(a)(8)(C) (originally § 507(a)(6)).

1 enforceable for any category of priority tax. Ilko, 651 F.3d at 2 1057-59 (§ 507(a)(8)(A)(iii)); Shank, 792 F.2d at 832 3 (§ 507(a)(8)(E)); George v. Cal. Bd. of Equalization (In re 4 George), 95 B.R. 718, 720-21 (9th Cir. BAP 1989), aff’d mem., 905 5 F.2d 1540 (9th Cir. 1990) (§ 507(a)(8)(E)); accord, 4 COLLIER 6 ¶ 507.11[4]. 7 Similarly, not every responsible officer liability is a 8 trust fund obligation. Ilko, 651 F.3d at 1056-57; Hansen, 470 9 B.R. at 542-45. 10 Substance controls form. Thus, a five-part test has emerged 11 for determining what constitutes a § 507(a)(8)(E) priority excise 12 tax. Lorber, 564 F.3d at 1101-02; George v. Uninsured Employers 13 Fund (In re George), 361 F.3d 1157, 1162-63 (9th Cir. 2004); 14 County Sanitation Dist. No. 2 v. Lorber Indus. of Cal., Inc. (In 15 re Lorber Indus. of Cal., Inc.), 675 F.2d 1062, 1066 (9th Cir. 16 1982).9 17 18 IV 19 This brings us back to our decision in Hansen, which the 20 debtors contend is controlling. It is not. 21 22 9 The Ninth Circuit test for a § 507(a)(8)(E) excise tax is: 23 (1) involuntary pecuniary burden, regardless of name, laid upon individual or property; (2) imposed under authority of 24 legislature; (3) for public purposes, including purposes of defraying expense of government or undertakings authorized by it; 25 (4) under the police or taxing power of the state; (5) no private 26 creditor similarly situated to the government can be hypothesized under the relevant statute. Lorber, 564 F.3d at 1101-02. The 27 debtors conceded from the outset that the Montana tax is an excise tax. Our own review of Montana Code § 39-51-1105 confirms 28 that it is an excise tax under the Lorber test.

1 A 2 Hansen was an unemployment insurance tax case in which a 3 corporation’s responsible officer under California Unemployment 4 Insurance Code § 1735 was assessed in March 2004 for underpaid 5 unemployment insurance taxes. Administrative litigation was 6 settled in March 2009. The responsible officer defaulted after 7 making six of the eleven contractual installments and filed a 8 chapter 7 bankruptcy case in January 2010 in which the taxing 9 authority filed an adversary proceeding seeking determination 10 that the debt was excepted from discharge under § 523(a)(1)(A) as 11 a § 507(a)(8) priority tax. 12 But, the passage of nearly six years between the date of 13 assessment and the date of the Hansens’ bankruptcy posed a stale 14 tax problem. Unable to persuade the court that the various 15 § 507(a)(8) lookback periods should be tolled during the period 16 of administrative litigation, the taxing authority was reduced to 17 arguing that the unemployment tax qualified as a § 507(a)(8)(C) 18 trust fund tax for which liability is perpetual. 19 The barrier was the “tax required to be collected” element 20 because California unemployment insurance taxes are payable 21 directly by the employer. 22 Our panel rejected the argument that the phrase “tax 23 required to be collected” in § 507(a)(8)(C) meant required to be 24 collected by the taxing authority. That construction does not 25 square with the legislative history describing trust fund taxes 26 as taxes “which the debtor was required by law to withhold or 27 collect from others.” Hansen, 470 B.R. at 544. And, it proves 28 too much — all taxes are “required to be collected” by a taxing

1 authority. 2 Concluding that the unemployment insurance taxes were not 3 “required to be collected,” our panel held that the taxing 4 authority had not established the initial essential element for a 5 § 507(a)(8)(C) trust fund tax. 6 There being no other basis for § 507(a)(8) status, the tax 7 debt was discharged as stale. 8 9 B 10 The debtors contend that they are in the “exact situation” 11 as the debtor in Hansen. Not so. 12 The debtor in Hansen was a responsible officer who was 13 vicariously liable with respect to non-trust fund unemployment 14 insurance taxes that were stale under § 507(a)(8)(E) because they 15 were more than three years old. 16 The debtors in this appeal are responsible officers who are 17 vicariously liable with respect to non-trust fund unemployment 18 insurance taxes that are not stale under § 507(a)(8)(E) because 19 they were less than three years old. Therein lies all the 20 difference. 21 Since the Hansens’ unemployment tax debt was too stale for 22 the § 507(a)(8)(E) priority, the state’s only possible route to 23 priority status and the concomitant exception to discharge was 24 the § 507(a)(8)(C) trust fund theory that has no time limit. The 25 insurmountable problem for the state was that the facts did not 26 satisfy the essential element for a trust fund tax that the tax 27 must have been withheld from or collected from third parties. 28 Hansen, 470 B.R. at 44-45. Hence, the unemployment insurance tax

1 was not entitled to priority status and was dischargeable. 2 3 C 4 The debtors’ negative inference argument assumes that the 5 various § 507(a)(8) priorities are mutually exclusive. But Ninth 6 Circuit precedent teaches that the categories are not mutually 7 exclusive. Ilko, 651 F.3d at 1056-57; Shank, 792 F.2d at 832; 8 accord, 4 COLLIER ¶ 507.11[4]. 9 This brings the analysis back to the Supreme Court’s Sotelo 10 decision. The salient point is that the Court did not construe 11 the responsible officer “penalty” in the Internal Revenue Code as 12 being outside the priority tax provision. Since there was no 13 mention of responsible officer liability in the Bankruptcy Act, 14 the Court could have applied a narrow construction to deny 15 priority status to responsible officer liability. Instead, 16 preferring substance over form, it concluded that the responsible 17 officer liability that the tax statute termed a “penalty” was for 18 taxes for purposes of bankruptcy law. Sotelo, 436 U.S. at 275. 19 It follows that the Montana statute imposing responsible 20 officer liability on the debtors is, itself, a tax. Sotelo, 436 21 U.S. at 275; George, 95 B.R. at 720-21. 22 The question becomes, what category of tax? The answer is 23 the same category as the underlying corporate tax — a 24 § 507(a)(8)(E) excise tax. 25 The rationale, which originates with Sotelo, is twofold. 26 First, it should not matter whether an individual operates as a 27 sole proprietorship or through a corporation. Sotelo, 436 U.S. 28 at 281-82. Second, to hold otherwise would function as an

1 incentive to cause a corporation to default on tax obligations. 2 Sotelo, 436 U.S. at 280-81; Shank, 792 F.2d at 832; George, 95 3 B.R. at 720-21. We cannot ignore those precedents. 4 5 Conclusion 6 The liability imposed upon corporate responsible officers by 7 Montana Code § 39-51-1105 is a tax that has the same status as 8 the underlying corporate tax for purposes of § 507(a)(8). Here, 9 it is an “excise” tax under § 507(a)(8)(E) entitled to priority 10 during the three-year period specified in that subsection. As 11 the corporation was not required to collect or withhold the tax 12 from others, it is not a § 507(a)(8)(C) trust fund tax. 13 Accordingly, we AFFIRM the order of the bankruptcy court. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28