Yousef I. Abuteir v. State

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-00-00162-CV

Yousef I. Abuteir, Appellant

The State of Texas, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT

NO. 99-05326, HONORABLE W. JEANNE MEURER, JUDGE PRESIDING

Yousef I. Abuteir ("appellant") appeals from a district court judgment that ordered him to pay to the Comptroller of Public Accounts of the State of Texas ("the Comptroller") delinquent motor fuels taxes, penalties, and interest. We will affirm.

Background

In 1988, the Comptroller began conducting an audit of appellant's convenience store business operations regarding the sale of motor fuel. On June 18, 1993, the Comptroller issued a Texas Notice of Tax Due to appellant and assessed a total of $2,386,468.31 for tax, penalty, and interest for the taxing period August 1 through December 31, 1988. On July 19, 1993, appellant timely requested an administrative redetermination hearing to dispute the audit findings. Prior to his hearing, the Comptroller assessed appellant an additional 75% fraud penalty. During the redetermination hearing, the administrative law judge ("ALJ") upheld the audit assessment, including the 75% fraud penalty. However, the Comptroller was required to approve the ALJ's decision before it would take effect. See 34 Tex. Admin. Code § 1.28(a) (2000). On March 13, 1995, while his appeal was still pending, appellant filed for bankruptcy in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. On September 12, 1995, his bankruptcy case was closed. On November 12, 1997, the Comptroller approved and adopted the recommendations of the ALJ. On May 7, 1999, the State of Texas ("the State") filed suit against appellant to collect the taxes, penalties, and interest for which he was delinquent. The district court rendered judgment for the State for the full amount it sought. Appellant brings this appeal, raising two issues. First, he asserts that the State's action is barred by the statute of limitations. Second, he argues that the taxes, penalties, and interest were discharged by his intervening bankruptcy.

Discussion

A. Statute of Limitations

The motor fuels taxes that the State seeks to collect from appellant are imposed by title 2 of the Texas Tax Code ("the Tax Code"). See Tex. Tax Code Ann. § 153.101 (West 1992). Section 111.201 of the Tax Code provides that "[n]o tax imposed by this title may be assessed after four years from the date that the tax becomes due and payable." Id. § 111.201 (West Supp. 2000). Section 111.202 of the Tax Code provides that "[a]t any time within three years after a deficiency or jeopardy determination has become due and payable . . . the comptroller may bring an action in the courts . . . to collect the amount delinquent together with penalties and interest." Id. § 111.202 (West 1992).

Appellant asserts that the district court erred because it failed to find that the collection of taxes, penalties, and interest was prohibited by the statute of limitations as set forth in sections 111.201 and 111.202 of the Tax Code. It is undisputed that the taxes which the State seeks to collect in this action are for the final six months of 1988. Appellant contends that those taxes became due and payable on January 25, 1989.⁽¹⁾ See id. § 153.118(a) (West Supp. 2000). Appellant reads sections 111.201 and 111.202 together and concludes that there is a total limitations period of seven years, four years for assessment and three years for filing suit. Thus, he maintains that the State had to file its suit against him by January 1996. Since the State did not file its suit until May 7, 1999, appellant argues that the statute of limitations had run.

Contrary to appellant's view, we rely on section 111.207(a)(3) of the Tax Code to hold that the statute of limitations had not run. See id. § 111.207(a)(3) (West 1992). Section 111.207(a)(3) states, "[i]n determining the expiration date for a period when a tax imposed by this title may be assessed or collected, the following periods are not considered: . . . the period during which an administrative proceeding is pending before the comptroller for a redetermination of the tax liability." Id. Therefore, the limitations period was tolled from July 19, 1993, when appellant requested a redetermination hearing, through November 12, 1997, the date when the Comptroller approved the ALJ's recommendations. Because the three-year suit limitations began to run on November 12, 1997, it would not have expired until November, 12, 2000, well after the State initiated this suit. Based on our reading of the Tax Code and the procedural history in this case, the State was not barred by limitations from bringing this suit.

B. Impact of Bankruptcy Proceedings

Appellant argues that the district court erred in rendering judgment for the State in the full amount of $5,601,544.63 because the taxes, penalties, and interest for which he was once liable were discharged by his bankruptcy proceedings.

1. Tax Analysis

Appellant argues that the motor fuels taxes are dischargeable because: (1) motor fuels taxes are not trust fund taxes, and (2) the State did not participate in the bankruptcy hearing. In the alternative, he argues that even if the taxes are trust fund taxes, the court should follow the lowest intermediate balance rule. We reject these contentions.

The United States Bankruptcy Court for the Southern District of Texas, Houston Division, granted appellant a general discharge under chapter seven of the United States Bankruptcy Code ("the Bankruptcy Code"). The Bankruptcy Code states that a general discharge "does not discharge an individual debtor from any debt for a tax . . . of the kind and for the periods specified in section . . . 507(a)(8) of this title . . . ." 11 U.S.C.A. § 523(a)(1)(A) (West Supp. 2000). The taxes enumerated in section 507(a)(8) are unsecured claims of governmental units that are "required to be collected or withheld and for which the debtor is liable in whatever capacity . . . ." Id. § 507(a)(8)(C) (West Supp. 2000). In plain language, section 507(a)(8)(C) of the Bankruptcy Code says that if the government tax is a trust fund tax, it is not dischargeable.

Section 111.016 of the Tax Code reads, "[a]ny person who receives or collects a tax . . . from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected." Tex. Tax Code Ann. § 111.016(a) (West Supp. 2000). This Court has relied on section 111.016 to hold, on numerous occasions, that taxes collected on behalf of the State are trust fund taxes. See State v. Mink, 990 S.W.2d 779, 783 (Tex. App.--Austin 1999, pet. denied); Stoker Mgmt., Inc. v. Sharp, 958 S.W.2d 286, 288 (Tex. App.--Austin 1997, pet. denied); Davis v. State, 904 S.W.2d 946, 953 (Tex. App.--Austin 1995, no writ); Dixon v. State, 808 S.W.2d 721, 723 (Tex. App.--Austin 1991, writ dism'd w.o.j.). While most of these cases involved state sales taxes, Dixon established that motor fuels taxes are trust fund taxes. Dixon, 808 S.W.2d at 723. Additionally, a fiduciary relationship exists between the State, as principal, and the corporation, as agent, for the tax money that the corporation collects on behalf of the State under section 111.016 of the Tax Code. Dixon, 808 S.W.2d at 723. The motor fuels tax sought by the State in this case is a trust fund tax, and thus appellant's tax liability was not dischargeable in the bankruptcy proceedings.

Our conclusion does not change even though the State did not participate in appellant's bankruptcy proceedings. Section 523(a)(1)(A) of the Bankruptcy Code says that trust fund taxes due to the government are not dischargeable "whether or not a claim for such tax was filed" in the bankruptcy proceeding. 11 U.S.C.A. § 523(a)(1)(A). The State did not need to participate in appellant's bankruptcy hearing to maintain its claim in this case.

Appellant's alternative theory, that the court must follow the lowest intermediate balance rule, likewise does not change our conclusion. Appellant cites In re Al Copeland Enterprises, Inc., 133 B.R. 837 (Bankr. W.D. Tex. 1991) to support the proposition that the State was limited to collecting the total amount of his cash assets in his bankruptcy proceedings, or, $50. In Copeland, the bankruptcy court held that the State could collect the full amount of the trust fund tax due because the debtor had sufficient funds on hand equal to or in excess of the amount owed to the State: (1) at all times between the date that the debtor collected the taxes and the date he filed for bankruptcy, and (2) on the date the debtor filed for bankruptcy. Id. at 839. However, this case is distinguishable. Copeland was an original chapter eleven corporate bankruptcy proceeding in which the State sought to collect the principal and interest for sales taxes that came due after the bankruptcy petition had been filed. Here we are reviewing a district court judgment in a suit in which the State seeks to collect a non-dischargeable obligation after the closure of a chapter seven individual bankruptcy proceeding. The bankruptcy court in appellant's case explicitly set out which debts would be dischargeable, in its Discharge of Debtor. The court neither discharged the State's claim of motor fuels taxes, penalties, and interest, nor limited the State's recovery.

The taxes in dispute were not discharged by the bankruptcy proceedings, and the district court did not err in holding appellant liable for those taxes.

2. Penalty Analysis

Penalties are generally dischargeable under the Bankruptcy Code. See 11 U.S.C.A § 727(b) (West 1993). However the statute provides an exception to discharge as follows:

[T]o 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 . . . .

11 U.S.C.A. § 523(a)(7)(A), (B) (West 1993). Appellant argues that the penalties assessed by the State are dischargeable under section 523(a)(7) because the following three criteria must be met in order to find an exception to discharge: (1) the penalty must be compensatory; (2) the penalty must relate to a non-dischargeable tax; and (3) the penalty must relate to a transaction that occurred within three years before filing the bankruptcy petition.

Contrary to the appellant's reading of section 523(a)(7), the statute does not set forth three independent criteria, all of which must be met in order to avoid discharge. Rather, the statute establishes a preliminary threshold, followed by two criteria, either one of which renders the penalty non-dischargeable.

The threshold question in determining the dischargeability of a penalty is whether it is compensatory or punitive. Appellant contends that compensatory penalties are not dischargeable; however, the opposite is true. Compensatory penalties are dischargeable, but punitive penalties are not dischargeable.⁽²⁾ In this case, the penalties are punitive. The initial 10% penalty seems to have been charged for failure to pay motor fuels taxes on time. The Comptroller assessed the 75% fraud penalty as punishment for alleged fraud under section 153.401(c) of the Tax Code. See Tex. Tax Code Ann. § 153.401(c) (West Supp. 2000). Furthermore, the Comptroller did not introduce evidence into the record to suggest that the penalties were assessed to compensate the agency for the costs associated with conducting the audit or other administrative functions. Since the penalties were punitive, not compensatory, the initial threshold to except discharge has been crossed.

Having crossed the preliminary threshold, we must now evaluate whether the penalty in this case either related to a non-dischargeable tax or was imposed within three years of appellant filing for bankruptcy. 11 U.S.C.A. § 523(a)(7)(A), (B). Appellant argues that both criteria must be met. However, courts have ruled otherwise.

A tax penalty is discharged if the tax to which it relates is discharged (in the precise terms of the statute, not non-dischargeable) or if the transaction or event giving rise to the penalty occurred more than three years prior to the filing of the bankruptcy petition. Since the statute uses the disjunctive, a tax penalty that does not qualify for discharge under one of the two aforementioned circumstances may still qualify under the other.

Burns v. United States, 887 F.2d 1541, 1544 (11th Cir. 1989) (emphasis added). We have already determined that the taxes were not dischargeable because they were trust fund taxes. Since the penalties were related to a non-dischargeable tax, the penalties were also non-dischargeable. Thus, it is unnecessary for us to consider whether the penalties were imposed within three years of the time that appellant filed for bankruptcy.

The penalties were not discharged by the bankruptcy proceedings, and the district court did not err in holding appellant liable for those penalties.

3. Interest Analysis

Because we have found that both the taxes and the penalties were not dischargeable, there is no need to discuss the dischargeability of interest. The interest was attached to the taxes and penalties and thus was not dischargeable.

Conclusion

Having found that the State was not barred by the statute of limitations to bring this suit and that the taxes, penalties, and interest were not discharged by the bankruptcy proceedings, the district court did not err in its judgment for the State. We affirm the district court's judgment.

Mack Kidd, Justice

Before Chief Justice Aboussie, Justices Kidd and Yeakel

Affirmed

Filed: December 7, 2000

Do Not Publish

1. Although appellant did not articulate this argument in his brief, he argued the point in oral argument.

2. See In re Zarynski, 771 F.2d 304, 306 (7th Cir. 1985). See also James E. Lockhart, J.D., Annotation, Debts Arising from Penalties as Exceptions to Bankruptcy Discharge Under Sections 523(a)(7), (13), and 1328(a) of Bankruptcy Code of 1978, 150 A.L.R. Fed. 159 (1999).

ore three years before the date of the filing of the petition . . . .