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Bankruptcy Court Rules that State Tax Debt Is Dischargeable in Chapter 7 Bankruptcy Case

Joseph Mischyshyn [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA California bankruptcy court ruled that sales tax obligations owed by a debtor in connection with a convenience store she owned were subject to discharge in the debtor’s Chapter 7 bankruptcy case. In re Athar, No. 1:11-bk-23947, Adv. No. 1:12-ap-01038, memorandum (Bankr. C.D. Cal., Feb. 27, 2014). The debtor argued that she should not be held personally liable for the sales tax, claiming that she was not a “partner” in the business. The State Board of Equalization (BOE), which administers and collects various types of state taxes, disagreed and claimed that the tax debt was excepted from discharge. The court held that the debtor was a partner under California law but also ruled that the sales tax debt was not excepted from discharge.

A business venture by two or more people with no formal legal entity, such as a corporation, is usually considered a “general partnership.” Unlike a corporation, owners in a general partnership, known as “partners,” are personally liable for business debts. The debtor and her father signed a BOE application for a permit to operate a convenience store in July 2001. They also filed a Fictitious Business Name Statement in Los Angeles County that month. They did not, according to the court, form a business entity, such as a corporation, to operate the store. They obtained a beer and wine license in August 2001 that named the debtor as the primary owner of the store.

The BOE issued a notice to the debtor in 2009 stating the store owed more than $86,000 in sales tax. The debtor’s father passed away in June 2011. She formally closed the BOE permit in March 2012, stating that the store’s effective closing date was June 30, 2011. In December 2011, the debtor filed for personal Chapter 7 bankruptcy.

The BOE determined that the debtor was a general partner in the convenience store in late 2012, and it issued a written decision in February 2013. The debtor had filed an adversary proceeding the previous year, claiming that she was not liable for the sales tax debt, while the BOE claimed that the debt was not subject to discharge under 11 U.S.C. § 523(a)(1).

The court found that the debtor had held herself out as a “partner” in the convenience store on multiple occasions, such as by listing the beer and wine license as an asset in her Chapter 7 schedules. California law, the court found, treats a person as a general partner if they hold themselves out as one and others rely on that representation. Cal. Corp. Code § 16308.

The debtor argued that she did not know that the BOE documents she signed identified her as a “partner” along with her father. She stated that English is her second language and that she did not understand everything she signed. The court cited California case law holding that a person is presumed to understand the documents they sign unless they can show “fraud, overreaching or excusable neglect.” Roldan v. Callahan & Blaine, 219 Cal. App. 4th 87, 93-94 (2013).

The court found that the debtor was a general partner and that the sales tax debt was properly included in the bankruptcy case. It was also subject to discharge, the court held, since it did not meet the criteria of § 523(a)(1).

Bankruptcy attorney Devin Sawdayi has represented Los Angeles individuals and families in Chapter 7 and Chapter 13 cases, helping them rebuild their finances with respect and dignity. To schedule a free and confidential consultation, contact us today online or at (310) 475-939.

More Blog Posts:

How Bankruptcy Might Help with Some California License Suspensions, Los Angeles Bankruptcy Lawyer Blawg, October 6, 2014

Discharging Tax Debts in Chapter 7 or Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 4, 2014

Court Does Not Allow Chapter 13 Debtor to Strip Unsecured Amount of IRS Tax Lien, Los Angeles Bankruptcy Lawyer Blawg, May 19, 2014

Photo credit: Joseph Mischyshyn [CC BY-SA 2.0], via Wikimedia Commons.

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