FR & S CORP

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: : CASE NO. 08-08659 (ESL)
:
FR & S CORP. : CHAPTER 7
:
:
Debtor :
____________________________________:
OPINION AND ORDER
This case is before the court upon the motion filed by the Treasury Department of the
Commonwealth of Puerto Rico (hereinafter referred to as “PR Treasury”) requesting the allowance
and payment of alleged post-petition administrative expenses for corporate income taxes for the tax
year 2008, taxes withheld from salaries for the period ending on December 31, 2008, and the 7%
withholding of taxes for the payment of professional services for tax year 2008, pursuant to 11 U.S.C.
§§503(b)(1)(B)(i), 507(a)(2) and 507(a)(8)(A) and (D)(Docket Nos. 93 and 128). The chapter 7
trustee objects to the PR Treasury’s request for the 2008 corporate income taxes, employment taxes
and the 7% tax withholding from the payment of professional services for tax year 2008 to be
afforded administrative expense priority based on the following: (i) Debtor filed its bankruptcy
petition on December 19, 2008, and was converted to chapter 7 on May 15, 2009, thus the amount
requested is an unsecured priority; (ii) The 2008 corporate income taxes, employment taxes and the
7% withholding of taxes for the payment of professional services are pre-petition taxes even though
the tax payment was due post-petition. Thus, the PR Treasury is not entitled to administrative expense
priority; and (iii) There was no tax incurred by the estate because Debtor’s taxable activity occurred
pre-petition, before there was an estate. Thus, the first requirement of Section 503(b)(1)(B)(i) is not
satisfied (Docket Nos. 101 & 129). For the reasons stated herein, the PR Treasury’s request is granted
in part and denied in part.
Facts and Procedural Background
FR & S Corp. (hereinafter referred to as “Corporate Debtor”) filed a bankruptcy petition under
Chapter 11 of the Bankruptcy Code on December 19, 2008. Debtor included the PR Treasury in its
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Schedule E (Creditors Holding Unsecured Priority Claims) as a creditor having a claim for sales taxes
in the amount of $79,904.08 (Docket No. 31). The 341 meeting of creditors under Chapter 11 was
held and closed on January 26, 2009 (Docket No. 34). On May 15, 2009, the court granted Debtor’s
request for conversion to chapter 7 (Docket Nos. 61 & 64). On May 22, 2009, the PR Treasury filed
proof of claim #20-1 as an unsecured nonpriority claim in the amount of $1,227.81 and an unsecured
priority claim in the amount of $4,066.77, for a total amount of $5,294.58. The 341 meeting under
Chapter 7 was scheduled for June 23, 2009 and was continued to July 14, 2009 (Docket Nos. 66 &
70). The 341 meeting was further continued to August 4, 2009 and closed on August 20, 2009
(Docket Nos. 74 & 88). The case was held open for potential asset recovery.
On November 24, 2009 the PR Treasury filed a motion requesting the allowance of
administrative payment for alleged post-petition administrative expenses for corporate income taxes
for the tax year 2008, taxes withheld from salaries for the period ending on December 31, 2008, and
the 7% withholding of taxes for the payment of professional services for tax year 2008, pursuant to
11 U.S.C. §§503(b)(1)(B)(i) and 507(a)(2) (Docket No. 93). The PR Treasury alleges that Debtor has
failed to file the corporate income tax return for the year 2008, which was due on April 15, 2009, and
the employee tax returns for the year 2008, for which Debtor as of November 12, 2009 (date of
assessment per Exhibit I) owes post-petition taxes in the amount of $14,091.20, interests in the
amount of $1,000.04, penalties in the amount of $3,975.51 and surcharges in the amount of
$1,409.12 for a total of $20,469.87 (Docket No. 93, pg. 2 & Exhibit I). The assessment for the1
principal amount of post-petition taxes is broken down in the following manner: (i) corporate2
income taxes for the year 2008 amounts to $5,000; (ii) employment taxes for the year 2008 amounts
to $3,441.22; and (iii) the 7% withholding of taxes for professional services for the year 2008
The court notes that the total amount should be $20,475.87 not $20,469.87. The total debt	1
assessed for the 7% withholding (which the PR Treasury classifies as #400) should add to
$8,531.30.
The court notes that the PR Treasury classifies the corporate income taxes account as	2
account #200; employment taxes account as account #300; and the 7% withholding of taxes as
account #400 (Docket No. 93, Exhibit 3- Account Classification).
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amounts to $5,649.98 (Docket No. 93, Exhibit I). On December 11, 2009, the chapter 7 trustee filed
an informative motion in response to the PR Treasury’s request for payment of administrative
expenses arguing that the conversion of the case to chapter 7 on May 15, 2009 makes the year 2008
corporate and employment taxes an unsecured priority balance and the tax liabilities in controversy
correspond to pre-petition taxes and thus are not entitled to administrative expense priority (Docket
No. 101). On July 20, 2010, the pre-trial conference was held. The court granted thirty (30) days to
the PR Treasury to file a legal memorandum in support of its position and the chapter 7 trustee was
granted fifteen (15) days to reply to the same (Docket No. 119).
Parties’ Legal Arguments
On September 7, 2010, the PR Treasury filed its legal memorandum by presenting the
following arguments: (i) Sections 503(b)(1)(B) and 507(a)(2) provide for the payment of the estate’s
administrative taxes; (ii) the post-petition tax periods which have administrative priority are the year
2008 corporate income tax return which was due on April 15, 2009, the informative income tax
returns regarding the 7% withholding for the payment of professional services for the year 2008 and
were due on April 15, 2009, and the salaries withholding tax returns for the period ending on
December 31, 2008, which were due on January 31, 2009; (iii) the obligation of filing and paying for
the above referenced year 2008 taxes became due after the filing of the petition, as the PR Treasury
cannot request Debtor for the payment of these taxes, prior to the filing of the bankruptcy petition;
(iv) Section 507(a)(8)(A)(i) and (D) applies to tax years that became due before the filing of a
debtor’s bankruptcy petition; (v) Debtor satisfies the requirements of Section 503(b)(1)(B) because:
(1) “the right to file and payment [of] the tax returns for the year 2008 arose from a post petition
transaction with the Debtor estate” and (2) “[t]he amount claimed is a post-petition debt,
administrative expenses in the amount of $20,469.87; and (vi) the amount claimed by the PR Treasury
is based on an assessment performed by the agency officials (Docket No. 128).
On September 22, 2010, the chapter 7 trustee filed its legal memorandum opposing that the
tax debts in controversy be afforded administrative expense priority due to the following: (i) Debtor
filed its bankruptcy petition on December 19, 2008 and the case was converted to chapter 7 on May
15, 2009. Thus, the amount requested is an unsecured priority; (ii) Before the bankruptcy petition is
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filed there is no estate. Thus, these taxes were not “incurred by the estate” because all taxable activity
occurred pre-petition even though the taxes became due post-petition. United States v. Friendship
College, Inc., 727 F. 2d 430 (4 Cir. 1984) and Towers v. United States, IRS (In re Pacific-Atlanticth
Trading Co., 160 B.R. 136 (N.D. Cal. 1993) aff’d in part and rev’d in part, 64 F. 3d 1292 (9 Cir.th
1995); (iii) In “In re Pacific Atlantic, the IRS’ theory was exactly the same, and [the] Court decided
that ‘Chapter 7 debtor’s 1988 tax liability is not [an] administrative expense under 11 USCS §503 but
should be accorded seventh priority under 11 USCS §507(a)(7)(A)(iii)’ (now (a)(8)(A)(iii)) where
1988 tax was not assessed before commencement of case but became assessable post-petition; and
(iv) “[p]ursuant to 11 USCS §503(b)(1)(B)(i), [a] claim is entitled to allowance as administrative
expense if two requirements are satisfied: tax must be incurred by estate and tax must not be tax of
[the] kind specified in 11 USCS §507(a)(7) (now (a)(8))” citing In re Pacific-Atlantic Trading Co.,
64 F. 3d 1292 (Docket No. 129).
The Issue
The issue before the court is whether the PR Treasury’s claims for a straddling tax year satisfy
the requirements of Section 503(b)(1)(B)(i) and are entitled to be treated as administrative expenses
for the entire tax year.
The court notes that Debtor’s copy of its 2007 corporate income tax return includes a net
deficit or loss of (-$78,542) (Part I, line item 3 and Part II, line item 5) which resulted in a $0.00 tax
liability for the year 2007. Debtor’s 2007 Corporate Income Tax Return also shows that an excess of
$2,520 was paid to the Commonwealth of Puerto Rico in income taxes (Docket No. 8). Moreover,
Debtor filed with this court its 2008 Estimated Tax Declaration, Form 480-E, in which its total
estimated tax is $0 and it includes a credit of $2,520.00 for income taxes paid in excess (Docket No.
8). However, Debtor nor the Chapter 7 Trustee have filed with this court the 2008 corporate income
tax return. Thus, the PR Treasury’s presumption that Debtor generated taxable net income for the year
2008 has not been rebutted.
Applicable Law & Analysis
Interplay between Sections 507(a)(2), 503(b)(1)(B)(i), 507(a)(8) and 502 (i)
Section 507(a)(2) provides that the expenses and claims that have second priority are,
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“administrative expenses allowed under Section 503(b) of this title, and any fees and charges assessed
against the estate under chapter 123 of title 28.” 11 U.S.C. §507(a)(2). In turn, Section 503(b)
provides in pertinent part;
“[a]fter notice and a hearing, there shall be allowed administrative expenses, other
than claims allowed under section 502(f) of this title, including–
(1)(B)any tax–
(i) incurred by the estate, whether secured or unsecured, including
property taxes for which liability is in rem, in personam, or both,
except a tax of a kind specified in section 507(a)(8) of this title.” 11
U.S.C. §503(b)(1)( B)(i).
For a tax to be afforded administrative expense priority it must satisfy a two prong-test which
consists in determining (1) whether the tax was “incurred” by the estate; and (2) whether the tax claim
is not a claim which must be treated as a pre-petition priority claim under Section 507(a)(8). Allan
N. Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶503.07[1] (16 ed. 2010). “Thus, theth
reference in section 503(b)(1)(B)(i) to section 507(a)(8) means that if a tax qualifies for eighth priority
treatment under section 507(a)(8), it is disqualified from administrative expense priority under
section 503(b)(1)(B).” Id. at ¶503.07[2].
The second prong will be addressed first since this court understands that it warrants less
discussion. Section 507(a)(8)(A) provides in pertinent part;
“(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent
that such claims are for–
(A) a tax on or measured by income or gross receipts for a taxable year
ending on or before the date of the filing of the petition–
(i) for which a return, if required, is last due, including
extensions, after three years before the date of the filing of the
petition;
(ii) assessed within 240 days before the date of the filing of the
petition.” 11 U.S.C. §507(a)(8)(A)(i) and (ii).
Section 507(a)(8)(A) was specifically amended by the Bankruptcy Abuse Prevention Consumer3
Prior to BAPCPA, Section 507(a)(8)(A) stated,	3
“Eighth, allowed unsecured claims of governmental units, only to the extent that such
claims are for–
(A) a tax on or measured by income or gross receipts–
(i) for a taxable year ending on or before the date of the filing of the petition
for which a return, if required, is last due, including extensions, after three
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Protection Act of 2005 (“BAPCPA”) to limit the eighth priority status of income and gross receipts
tax claims to those for taxable years “ending on or before the date of the filing of the petition.” 11
U.S.C. §507(a)(8)(A). Thus, the income and gross receipts tax claims for straddling tax years are
excluded from eighth priority status after the BAPCPA amendments. Some commentators argue that
the result of this particular amendment is that the income and gross receipt taxes for straddle years
will be treated as post-petition administrative expense claims for the entire tax year (unless the debtor
filed for bankruptcy on the last day of its taxable year). See Allan N. Resnick & Henry J. Sommer,
15 Collier on Bankruptcy ¶TX4.03[1] (15 ed. rev. 2010); Carl M. Jenks, The Bankruptcy Abuseth
Prevention and Consumer Protection Act of 2005: Summary of Tax Provisions, 79 Am. Bankr. L.J.
893, 898 (2005).
Section 502(i) provides in pertinent part, “[a] claim that does not arise until after the
commencement of the case for a tax entitled to priority under section 507(a)(8) of this title shall be
determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under
subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing
of the petition.” 11 U.S.C. §502(i). “Section 502(i) makes it clear that if these taxes are entitled to
priority status under section 507(a)(8), they shall be treated as prepetition priority claims under
section 507(a)(8), and not allowed as administrative expenses under section 503(b)(1).” Allan N.
Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶503.07[2] (16 ed. 2010). In the instant case,th
Debtor, a calendar year taxpayer, filed for bankruptcy on December 19, 2008, eleven days prior to the
closing of its taxable year, thus it satisfies the second prong of the test since Debtor’s 2008 income
taxes does not qualify for eighth priority treatment under Section 507(a)(8)(A).
However, the first prong of the test is more difficult to determine, that is, whether the income
years before the date of the filing of the petition;
(ii) assessed within 240 days, plus any time plus 30 days during which an
offer in compromise with respect to such tax that was made with 240 days
after such assessment was pending, before the date of the filing of the
petition; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or
523(a)(1)(C) of this title, not assessed before, but assessable, under
applicable law or by agreement, after, the commencement of the case.”
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tax in controversy was “incurred by the state.” The term “incurred” is not defined under the
Bankruptcy Code. Whether the income tax was incurred by the estate is determined by the
corresponding state tax laws, in this case, the Puerto Rico Internal Revenue Code of 1994, as
amended (the “PR Code”). See Allan N. Resnick & Henry J. Sommer, 4 Collier on Bankruptcy
¶503.07[1] (16 ed. 2010) (“When the tax is a state tax, state law will determine when the tax isth
incurred, and variations in state law will often lead to different results on similar facts”). This court
in the case of In re Ramirez Padua (Case No. 04-01065, Docket No. 129) was confronted with this
particular issue, except for the fact that it involved individual debtors. The court held that, “[a] tax
is incurred when it accrues, generally the tax year ending December 31 (13 L.P.R.A. §8441), but itsst
payment is due the 15 of April of the following year (13 L.P.R.A. §8453).” In the instant case, theth
Debtor filed for bankruptcy prior to the close of its calendar year, thus the tax for taxable year 2008
accrued subsequent to the filing of the bankruptcy petition meaning that the first prong of the test is
satisfied and the income tax liability for the year 2008 was “incurred by the estate.” Therefore, the
court concludes that the PR Treasury’s right to payment or claim arises in the case of a corporate4
debtor, on the last day of its taxable year, that is, December 31, 2008.
The court notes that there is jurisprudence based on pre-BAPCPA language (refer to footnote
3 of this Opinion and Order) of Section 507(a)(8)(A) in which courts relying on the plain language
of the statute found that income taxes failed to satisfy the second prong of Section 503(b)(1)(B)(i),
thus enabling the same to bifurcate the straddle year into pre-petition and post-petition income tax
liabilities. See In re Pacific-Atlantic Trading Co., 64 F. 3d 1292, 1301-1302 (9 Cir. 1995)(“It isth
undisputed that PATCO’s 1988 income taxes do not satisfy §507(a)(7)(A)(i) because the taxable year5
Section 101(5)defines the term claim as, “(A) right to payment whether or not such right	4
is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured.; or (B) right to an equitable remedy
for breach of performance if such breach gives rise to a right to payment, whether or not such
right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, or unsecured.” 11 U.S.C. §101(5)(A).
The court notes that the Bankruptcy Reform Act of 1994 changed the numbering of this	5
section to 507(a)(8). However, the cases cited are prior to the 1994 Bankruptcy Amendments.
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did not end ‘on or before the date of the filing of the petition.’ PATCO’s 1988 taxable year ended
December 31, 1988; the petition was filed September 15, 1988. Similarly, §507(a)(7)(A)(ii) is not
satisfied because the 1988 tax liability was not assessed any time within 240 days before the petition
date. The tax at issue, however, fits in its face within the narrow parameters set by
§507(a)(7)(A)(iii)”); Missouri Dep’t of Revenue v. L.J. O’Neill Shoe Co. (In re L.J. O’Neill Shoe
Co.), 64 F. 3d 1146 (8 Cir. 1995)(“[the court] interpret[ed] section 507(a)(7)(A)(iii) to address taxesth
derived from prepetition events ‘not assessed before, but assessable ...after, the commencement of
the case.”); United States v. Hillsborough Holdings Corp. (In re Hillsborough Holdings Corp.), 116
F. 3d 1391 (11 Cir. 1997). The 2005 BAPCPA amendments to Section 507(a)(8)(A) provide thatth
income taxes for the straddle year are entirely post-petition administrative expenses. See Allan N.
Resnick & Henry J. Sommer, 15 Collier on Bankruptcy ¶ TX 1.05[5][a] (15 ed. rev. 2010)(“Severalth
U.S. Court of Appeals panels have held that the income tax liability of a corporate debtor for the year
of bankruptcy filing (the ‘Straddle Year’) must be bifurcated into a pre-petition component and an
administrative expense component, notwithstanding that the filing of the petition does not terminate
the corporate debtor’s taxable year. BAPCPA amend[ed] section 507(a)(8) governing the priority of
taxes to provide that income and gross receipt taxes for Straddle Years are post-petition
administrative expense claims that must be paid in full in the ordinary course, rather than pre-petition
priority claims that are not payable until emergence (and may at that point be subject to the deferred
payment rules of Section 1129(a)(9)(C))”).
The Chapter 7 Trustee argues that in In re Pacific-Atlantic Trading Co., 64 F. 3d 1292 (9 Cir.th
1995), the Ninth Circuit Court of Appeals held that a chapter 7 debtor’s 1988 tax liability was not an
administrative expense pursuant to Section 503(b)(1)(B)(i) but should be accorded seventh priority
under Section 507(a)(7)(A)(iii), which is now 507(a)(8)(A), for the prepetition portion of the 1988
corporate income tax which was not assessed before commencement of case but became assessable
post-petition. The Appellate Court in In re Pacific-Atlantic Trading Company Co. held (1) that since
the estate existed on December 31, 1988 the corporate income taxes for that year were “incurred by
the estate” and (2) it also held that the income tax claim for the year 1988 in this particular case “fits
squarely” with the “narrow parameters” found in Section 507(a)(7)(A)(iii) because the income taxes
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had not been assessed at the time of the filing of the bankruptcy but were assessable by the
Government (the Internal Revenue Service) after the commencement of the case, thus it failed to
satisfy the first prong of Section 503(b)(1)(B)(i) test. However, this case is inapposite to the instant6
case because the language of Section 507(a)(8)(A) was amended by BAPCPA.
The Chapter 7 Trustee cites the case of United States v. Friendship College, Inc., 737 F. 2d
430 (4 Cir. 1984), to support its contention that the PR Treasury tax claims are pre- petition becauseth
they were incurred before there was an estate and thus are not entitled to administrative expense
status. The Fourth Circuit in United States v. Friendship College, Inc. concluded that the income
taxes withheld from the employees and the FICA taxes withheld from the employees’ wages by debtor
must be afforded administrative expense priority because the same were incurred by the estate
subsequent to the filing of debtor’s bankruptcy petition. This court finds that this case supports the
PR Treasury’s position rather than the Chapter 7 Trustee’s argument. Notwithstanding, this court will
discuss whether the state employment taxes withheld by Debtor should be afforded administrative
expense priority pursuant to Section 503(b)(1)(B)(i) or whether the same are a pre-petition tax claim
under Section 507(a)(8)(C).
The Chapter 7 Trustee, without referencing any section of the Bankruptcy Code or legal
precedent, further argues that the conversion of this case to Chapter 7 on May 15, 2009 makes the
amount requested as an administrative expense an unsecured priority. In the instant case, Debtor did
not file a Disclosure Statement or a Plan of Reorganization. Therefore, a plan of reorganization was
never confirmed. The case was converted to Chapter 7 approximately six (6) months (May 15, 2009)
The Appellate Court concluded in the following manner; “[w]e conclude that PATCO’s	6
income taxes fit squarely with the unambiguous terms of §507(a)(7)(A)(iii). Because the 1988
income tax claim is a tax of a king specified in §507(a)(7), it is not entitled to administrative priority
pursuant to §503 of the Bankruptcy Code. In conclusion, we hold that PATCO’s 1988 income tax
liability for income earned prior to the granting of the order for relief and the appointment of the
Trustee on October 31, 1988 does not qualify as an administrative expense. Even though the taxes
were ‘incurred by the estate’ on December 31, 1988, the plain meaning of the phrase ‘not assessed
before, but assessable, under applicable law or by agreement, after, the commencement of the case,’
persuades us that the 1988 tax claim fits squarely within the definition of §507(a)(7)(A)(iii) and is
therefore not an allowable administrative expense.” In re Pacific-Atlantic Trading Co., 64 F. 3d at
1304.
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after the same was originally filed (December 19, 2008). The income tax liability accrued on
December 31, 2008. Consequently, it was incurred by the Chapter 11 estate after petition date and
prior to Debtor’s Chapter 7 conversion. Chapter 11 administrative priorities for cases that are
converted to Chapter 7 must be distributed in accordance to 11 U.S.C. §§726(b), 507(a)(2) and
503(b). The Chapter 11 administrative claims continue to have priority in distribution but are
subordinated to the administrative claims that arise after the Chapter 7 conversion. See Allan N.
Resnick & Henry J. Sommer, 6 Collier on Bankruptcy ¶726.03 (16 ed. 2010).th
Employment Taxes and Professional Services Taxes Withheld by Debtor
Employment taxes and professional services taxes withheld by Debtor must also satisfy the
two prong test of Section 503(b)(1)(B)(i). State income taxes withheld by a debtor from its employees
as well as the 7% tax withholding from the payment of professional services are covered under
Section 507(a)(8)(C) which provides the following:7
“Eighth, allowed unsecured claims of governmental units, only to the extent that such claims
are for--
(C) a tax required to be collected or withheld and for which the debtor is liable in
whatever capacity.” 11 U.S.C. §507(a)(8)(C).
A tax claim must satisfy all of the following five (5) factors for it to be pigeonholed into this
particular tax category, namely; “(i) the claim is held by a governmental unit; (ii) the claim is for a
tax; (iii) the tax is owed to a party other than the debtor; (iv) the tax must be collected or withheld
from that party and transmitted to the governmental unit; and (v) the debtor must be liable for
payment of the tax in some capacity.” See Allan N. Resnick & Henry J. Sommer, 4 Collier on
Bankruptcy ¶507.11[4] (16 ed. 2010).th
An employer’s obligation to withhold income taxes from their employees and remit the same
to the PR Treasury is mandated by Section 1141(b) and (j) of the PR Code, 13 L.P.R.A. §8541(b) and
(j). Section 1141 provides in pertinent part:
The court notes that the PR Treasury cited Section 507(a)(8)(D) as being applicable to the	7
withholding of employees state income taxes but that particular section is limited to Federal
unemployment taxes (FUTA), social security taxes (FICA), state unemployment taxes or
contributions to state unemployment taxes. See Allan N. Resnick & Henry J. Sommer, 15 Collier
on Bankruptcy ¶ TX 4.02[1][d][vii] (15 ed. rev. 2010)th
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“(b) Requirement of withholding. Every employer making payment of wages shall deduct and
withhold a tax on the sum of all wages determined according to the withholding schedules
that, in harmony with the tax rates fixed in this Part, shall be approved by the Secretary of the
Treasury and which shall be part of the regulations of this part. For purposes of applying said
schedules, the term ‘amount of salaries’ shall mean the amount by which the wages exceed
the allowable exemption for withholding under section (c)(1) of this section.” 13 L.P.R.A.
§8541(b).
“(j) Return and payment. A person required to deduct and withhold any tax under this section
shall, on or before the last day of the month following the close of each of the quarters ending
March 31, June 30, September 30, and December 31 of each year in lieu of the time
prescribed in §§8453 and 8456 of this title, make a return thereof and pay such tax to the
Secretary or that part thereof which has not been deposited in the form and manner prescribed
in §§8181 and 8069 of this title. Such return shall be filed with the Secretary and shall contain
such information and be made in such manner as the Secretary may by regulation prescribe.”
13 L.P.R.A. §8541(j).
Section 1141(l) imposes liability upon the employer for failure to withhold and remit the
employees’ income taxes by providing the following; “(l). Liability for tax. The employer shall be
liable to the Secretary for the payment of the tax required to be deducted and withheld under this
section, and shall not be liable to any other person for the amount of any such payment.” 13 L.P.R.A.
§8541(l). Section 6181 of the PR Code, 13 L.P.R.A. §8181 and Article 6181-2 of the corresponding8
Regulations establish the rules for those employers that must deposit on a monthly, semiweekly or
quarterly basis (the frequency of the deposits depends on the total aggregated tax withheld on wages
during the lookback period) the income taxes withheld from their employees.
The court finds that the PR Treasury’s tax claim for the withholding of state income taxes of
Section 6181 provides: “Obligation to deposit taxes deducted and withheld from wages.	8
Any person who pays wages and is under the obligation of deducting and withholding any income
tax from any employee under §8541 of this title, or under the regulations promulgated by the
Secretary pursuant to the Code, and to pay over said tax to the Commonwealth of Puerto Rico, shall
deposit the amount of the tax thus deducted and withheld in any of the banking institutions
designated as depositories of public funds which have been authorized by the Secretary to receive
such taxes. Provided, that federal savings and loan associations and federal savings banks doing
business in Puerto Rico shall be deemed to be financial institutions for the purpose of being
designated as depositories of public funds for the purposes of this Code. The tax shall be paid or
deposited as established in the regulations promulgated by the Secretary with respect to the manner,
time, and conditions that shall govern the pay over or deposit of such taxes thus withheld. Upon
promulgating these regulations, the Secretary shall follow the pertinent criteria established in the
regulatory provisions for the collection and deposit of the income tax withheld on the wages paid by
the federal government and the corresponding Social Security taxes.” 13 L.P.R.A. §8181.
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Debtor’s employees’ satisfies all five (5) factors of this particular tax category, namely Section
507(a)(8)(C). In the instant case, the tax liability for the state income taxes withheld by Debtor fails
to satisfy the second prong of Section 503(b)(1)(B)(i) since they are specified in section 507(a)(8),
particularly 507(a)(8)(C), and thus, are not entitled to administrative expense priority to the extent
the same were incurred pre-petition. This court finds that the pre-petition state income tax
withholdings includes the first three quarters of the year 2008 , given that such taxes were incurred9
and accrued as of the last day of the first three quarters. The employer’s quarterly returns of income
taxes withheld for the first three (3) quarters (Form 499 R1-B) were due on or before the last day of
the month following the close of the first three quarters, namely April 30 , July 31 and October 31 ,th st st
2008. This court concludes that the state income tax withholdings for the last quarter of 2008 accrued
post-petition and as such this tax claim is not pre-petition in nature and does not fall under Section
507(a)(8). Thus, the fourth quarter state income tax withholdings for the year 2008 are an
administrative expense since the same satisfy the two (2) prong test of Section 503(b)(1)(B)(i).
A corporation has the obligation to deduct and withhold seven percent (7%) of all payments
for professional services rendered and remit the same to the PR Treasury as mandated by Section
1143 of the PR Code, 13 L.P.R.A. §8543. Section 1143 provides in pertinent part:
“(a). General rule. The Government of Puerto Rico and every natural or juridical person who,
in the exercise of an industrial of business activity of for the production of income in Puerto
Rico, makes payments to another person by reason of services rendered in Puerto Rico, and
every payer who makes payments to a provider of health services for health services rendered
by said provider to any person, shall deduct and withhold seven percent (7%) of said
payments.” 13 L.P.R.A. §8543(a).
This court notes that the PR Treasury is inconsistent in its allegations for the state income	9
taxes for the year 2008. In its legal memorandum it states that administrative expense status should
be afforded to this particular tax category for different time periods, namely: (i) “the employee tax
returns for the year 2008, which were due on April 15, 2009" (Docket No. 128, pgs. 1-2); (ii)
“Salaries Withholdings Tax Returns (300) period ending on December 31, 2008, which Tax Returns
were due on January 31, 2009 (Docket No. 128, pg. 6); and (iii) “the Employees Withholding Tax
Returns (300) for the first trimester of 2009 (Docket No. 128, p. 8). The court notes that in
conformity with Section 1141(j) of the PR Code an employer is required to file quarterly returns of
income taxes withheld (Form 499 R1-B) which are due on or before the last day of the month
following the close of each quarter. There is no employer quarterly return which is due on April
15, 2009 for the entire 2008 calendar year.
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“(c). Responsibility of the payor. Every person with the responsibility to deduct and withhold
any taxes under the provisions of this section, will be responsible to the Secretary to pay such
taxes and will not be responsible to any other person for the amount of any of such payments.”
13 L.P.R.A. §8543(c).
“(d). Income tax return and payment of withheld income. Every payer required to deduct and
withhold the tax provided in subsection (a) of this section shall file a return and pay or deposit
the same no later than the tenth day of the month following the close of the calendar month
in which the tax was deducted and withheld. Said return shall be filed with the Secretary and
shall contain such information and shall be made in the manner established through
regulations by the Secretary.” 13 L.P.R.A. §8543(d).
“(e) Failure to withhold. In the event of failure to withhold the amount referred to in
subsection (a) of this section, unless the taxpayer pays the income tax return directly to the
Secretary, it shall be collected directly from the government instrumentality or from the
person in which the responsibility to deduct and withhold was delegated.” 13 L.P.R.A.
§8543(e).
“(f) Any person who fails to meet his responsibilities to deduct and withhold the income tax
described in subsection (a) of this section shall be subject to the penalties set forth in §§8055
and 8065 of this title.” 13 L.P.R.A. §8543(f).
The court also finds that the PR Treasury’s tax claim for the 7% withholding tax from
payments made for professional services satisfies all five (5) factors of this particular tax category,
Section 507(a)(8)(C). In the instant case, the tax liability for the 7% tax withholding for professional
services paid and rendered fails to satisfy the second prong of Section 503(b)(1)(B)(i) since the same
are specified in section 507(a)(8), particularly 507(a)(8)(C) and thus, are not entitled to administrative
expense priority to the extent the same were incurred pre-petition. This court further finds that the
pre-petition 7% tax withholdings for professional services includes the first eleven (11) months of
the year 2008, since such taxes were incurred and accrued as of the last day of each calendar month
and payment of the same is supposed to be remitted to the PR Treasury (Form 480.9A must be
submitted monthly along with the payment) no later than ten (10) days after the close of the month
following the close of the calendar month in which the tax was deducted and withheld. Additionally,10
this court finds that the 7% tax withholdings for the first eleven (11) months of the 2008 calendar year
The court would like to clarify that the Annual Reconciliation Statement of Income	10
Subject to Withholding (Form 460.6B.1) is due no later than the 28 of February of the following	th
year. The PR Treasury in its legal memorandum states that the “Informative Income Tax Returns
(400) regarding the 7% withholding for the payment of Professional Services for the year 2008,
which were due on April 15, 2009” (Docket No. 128, p. 6).
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were incurred and accrued as of the last day of each calendar month. However, this court finds that
the 7% tax withholding for professional services rendered accrued post-petition (December 31, 2008)
and as such the same is not a pre-petition claim in conformity with Section 507(a)(8). Thus, the 7%
tax withholdings for the month of December 2008 are an administrative expense since the same
satisfy the two (2) prong test of Section 503(b)(1)(B)(i).
Conclusion
In view of the foregoing, the court finds and concludes as follows: (1) PR Treasury’s claim
for state income taxes for the entire 2008 calendar year is an administrative expense which satisfies
the two prong test of Section 503(b)(1)(B)(i); (2) the state income tax withholdings for the first three
quarters of the 2008 year were incurred pre-petition and as such are entitled to eighth priority status
in conformity with Section 507(a)(8)(C); (3) the fourth quarter of Debtor’s 2008 calendar year is a
post-petition tax claim and as such the same is afforded administrative expense priority status since
the same does not fall under Section 507(a)(8) and was incurred by the estate on December 31, 2008;
(4) the 7% tax withholdings for the first eleven (11) months of Debtor’s 2008 calendar year were
incurred pre-petition and as such must be afforded eighth priority status pursuant to Section
507(a)(8)(C); and (5) the 7% tax withholding for professional services rendered for the entire month
of December 2008 was incurred post-petition and as such satisfies the two (2) prong test of Section
503(b)(1)(B)(i).
In view of the foregoing, the PR Treasury’s motion is GRANTED IN PART and DENIED IN
PART.
SO ORDERED.
In San Juan, Puerto Rico, this 30th day of March 2011.
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