| by Richard Armknecht,IIIIn bankruptcy proceedings, the treatment of tax debts attempts to reconcile two conflicting policies. Although the government is interested in collecting taxes, bankruptcy policy is intended to give honest debtors a fresh start (while protecting creditors) by providing for the orderly liquidation or reorganization of the debtor's estate.
Partly because of this underlying tension, the provisions of the Bankruptcy Code (11 U.S.C.) regarding the dischargeability of tax debts in bankruptcy are quite complex. A debtor's ability to discharge any tax debt is based upon the classification of that particular tax debt. For the purposes of the Bankruptcy Code, a tax claim can be characterized as either a trust fund tax, a secured claim, an administrative tax claim, a priority tax claim, a general unsecured claim, or a penalty claim.
TRUST FUND TAXES
Trust fund taxes that have been collected by the debtor from third parties (e.g., sales taxes and income tax withholdings) are held in trust by the debtor for the appropriate taxing authority. Such amounts held in trust are simply not property of the debtor or of the bankruptcy estate. If, however, the debtor has failed to collect and/or remit to the appropriate taxing authority a trust fund tax, then the relevant taxing authority will have a priority tax claim pursuant to 11 U.S.C. 507(a)(8)(C).
SECURED CLAIMS
Secured claims are those claims that are secured by a lien on the
debtor's propert...
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