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Rizzo v. MI Dep’t of Treasury – Bankruptcy and Taxes

Blogs from February, 2014

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Small business owners must be meticulous about their financial decisions‚ and that includes personal finance decisions – especially those that involve bankruptcy filings.

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As the recent case of Rizzo v. MI Dep’t of Treasury reveals‚ oversights or filing for the wrong kind of bankruptcy altogether can leave entrepreneurs blindsided by debt – even after the other debts are discharged.

In the Rizzo case‚ the officer of a small business was successful in receiving a general discharge through a personal Chapter 7 bankruptcy. However‚ what he had not anticipated was single business tax responsibilities that the government had calculated as nondischargeable excise tax‚ per 11 U.S.C. 507(a)(8)(E).

Our Woodland Hills bankruptcy lawyers understand that the defendant in this case had attempted to argue that his liability for the tax bill was derivative‚ rather than primary. However‚ the appellate court rejected this argument.

According to court records‚ the case started in 2011‚ when the debtor filed for a personal Chapter 7 bankruptcy. In doing so‚ he received a general discharge. Despite this‚ the state treasury department began sending him numerous collection letters‚ demanding he pay $73‚000 in delinquent Single Business Tax payments that had been assessed against a company for which he had been an officer‚ but that had since gone under.

In response to these collection notices‚ the defendant filed an adversary action in bankruptcy court‚ contending that his personal liability for those unpaid taxes had been discharged in the bankruptcy.

The government moved to dismiss this action‚ claiming that the debt was nondischargeable under federal law pertaining to excise tax debt. The bankruptcy court sided with the government and dismissed the adversary action‚ a decision that was ultimately affirmed by both the district and appellate courts.

While both sides agreed that a bankruptcy discharge does not free an individual debtor for any debt for a tax or a customs duty of the kind set out in sections 507 and 523 of 11 U.S.C. Those include excise taxes on transactions that occurred within the last three years.

While the defendant never disputed that he was personally liable for the firm’s Single Business Taxes as a corporate officer‚ he did insist that he had been relieved of this liability by way of the personal bankruptcy. In fact‚ he was not.

In a case like this‚ the defendant may have wanted to explore either a bankruptcy repayment plan (via a Chapter 13 filing) that would have established manageable repayments of that tax debt‚ or possibly even a business bankruptcy filing.

Tax debts in general‚ along with domestic support obligations and student loan bills‚ are nondischargeable in a bankruptcy filing. This is why filers must tread carefully with the help of an experienced bankruptcy lawyer who can explain all potential future liabilities.

If you are contemplating bankruptcy in Woodland Hills‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334.

Additional Resources:
Rizzo v. MI Dep’t of Treasury‚ Feb. 4‚ 2014‚ U.S. Court of Appeals for the Sixth Circuit

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