By Kitty J. Lin
If you own or used to own a business or corporation and you are considered the person responsible for paying the unemployment insurance taxes, one question you may have is whether the unemployment insurance taxes are dischargeable in bankruptcy? This is definitely a concern for business owners that have failing businesses and do not have the resources to pay back the unemployment insurance taxes. Please speak with a bankruptcy lawyer in your jurisdiction before making hard choices. The Ninth Circuit Bankruptcy Appellate Panel (BAP) addressed this issue in State of California Employment Development Department v. Hansen, 470 B.R. 535 (April 2012).
The 9th Circuit BAP in the Hansen case ruled that unemployment insurance taxes were indeed dischargeable in bankruptcy despite the California Employment Development Department (EDD)’s claims. In the Hansen case the EDD claimed that unemployment insurance taxes were considered a priority tax under 11 U.S.C. §507(a)(8)(C), a tax required to be collected or withheld and for which the debtor is liable in whatever capacity, and therefore considered nondischargeable under 11 U.S.C. §523(a)(1)(A). The Hansens argued that unemployment insurance taxes did not fall under §507(a)(8)(C) because the unemployment insurance tax was not a tax that is required to be collected by the debtor from a third party. The unemployment insurance tax is not withheld from employee’s paychecks. Therefore it is not a tax where it is collected from the employee to be paid by the employer to a government agency. The unemployment insurance tax is only paid by the employer to EDD.
The 9th Circuit BAP resolved this issue by taking a look at the legislative history to see if they could determine what Congress meant when they wrote §507(a)(8)(C). We only look at the legislative history when the law itself is ambiguous. The BAP concluded that legislative history showed that under §507(a)(8)(C) the tax must be collected from a third party. In this case, the employer (Hansen) was directly responsible for paying the unemployment insurance taxes to EDD. Since unemployment insurance taxes do not fall under §507(a)(8)(C) it does not fall under the §523(a)(1)(A) category of a nondischargeable debt and therefore unemployment insurance taxes are dischargeable. §523(a)(1)(A) basically states that it must be considered a tax under §507(a)(8) or §507(a)(3).
One thing bankruptcy lawyers should note is that although unemployment insurance taxes do not fall under the §523(a)(1)(A) category of nondischargeability, it must not fall under any other categories of nondischargeability in §523. One category to note is §523(a)(2) which is essentially obtaining credit based on fraud or misrepresentation. If there was no fraud or misrepresentation involved then your unemployment insurance taxes would most likely be dischargeable.