Memorandum Decision re Order Denying Section 707b Motion

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re                                                                                              
No. 98-32106SCDM 

NAHLA AND ANTHONY P. BUCHANAN, 
Debtors   
___________________________________/

ORDER DENYING SECTION 707(b) MOTION TO DISMISS On August 10, 1998, the United States Trustee ("UST") filed a motion to dismiss the Chapter 7 case of Nahla and Anthony Buchanan ("Debtors") for substantial abuse pursuant to 11 U.S.C. § 707(b). Debtors filed an opposition, arguing that their debts were not primarily "consumer debts" as required by section 707(b). The court held a hearing on the motion to dismiss on October 16, 1998; the UST appeared through Patricia Cutler, Esq. and Debtors appeared through John Raymond, Esq. For the reasons stated below, the motion to dismiss is hereby DENIED. Section 707(b) provides that the court "may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter." Both the UST and the Debtors concede that while the Bankruptcy Code does not quantify "primarily" for the purposes of section 707(b), the Ninth Circuit has determined that the standard is met when more than half of the dollar amount owed is consumer debt. Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th Cir. 1988). In this case, state and federal income tax liabilities constitute more than fifty percent of Debtors' scheduled debts. Thus, because Debtors' liabilities are "primarily" income tax debts, the court must determine whether those tax obligations constitute "consumer debts" under section 707(b). The Bankruptcy Code defines "consumer debt" as a "debt incurred by an individual primarily for a personal, family or household purpose." See 11 U.S.C. § 101(8). While most cases addressing whether income taxes constitute "consumer debt" involve sections 362 or 1301 of the Bankruptcy Code, the majority of these decisions have interpreted the definition of "consumer debt" in section 101(8) to exclude income taxes.(1) Similarly, those cases arising in the context of section 707(b) have generally held that income tax liability is not a "consumer debt." As noted by the court in In re Brashers, 216 B.R. 59 (Bankr. N.D. Okla. 1998) (section 707(b) case): Tax liability is not "incurred" as part of a consumption activity, but is involuntarily imposed in the course of earning income. [Citations omitted.] A tax "is not 'incurred,' but rather, is involuntarily imposed by a government for the public welfare. Such public purpose is sufficient . . . to take the debt outside the scope of a consumer debt." Id. at 60-61, quoting In re Stovall, 209 B.R. 849, 853-54 (Bankr. E.D. Va. 1997) (collecting cases concluding that unpaid income taxes are not "consumer debts" under section 101(8)). Likewise, in In re Traub, 140 B.R. 286, 288 (Bankr. D. N.M. 1992), the court held income taxes do not qualify as consumer debts for the purposes of section 707(b). The Traub court noted that although most cases addressing the nature of consumer debts involve section 1301, all of the cases were interpreting consumer debts as defined by section 101(8). "[Section] 101(8) is an omnibus section which applies to all sections of the Code." Id. The weight of case law excluding income taxes from "consumer debts" is consistent with the legislative history of section 101. Senate Report 95-989 notes the definition of "consumer debt" in section 101 "is adapted from the definition used in various consumer protection laws. It encompasses only a debt incurred by an individual primarily for a personal, family, or household purpose." See S. Rep. No. 989, 95th Cong., 2d Sess. 1978, 1978 U.S.C.C.A.N. 5787, 1978 WL 8531. Cases interpreting the "various consumer protection laws" have excluded taxes from their scope. See Staub v. Harris, 626 F.2d 275, 277-78 (3d Cir. 1980) (per capita tax was not a "debt" under the Fair Debt Collections Practices Act); Beggs v. Rossi, 994 F. Supp. 114, 116-17 (D. Conn. 1997), aff'd, 145 F.3d 511 (2d Cir. 1998) (personal property taxes assessed on motor vehicles were not "debts" under the Consumer Credit Protection Act). To the extent the legislative history to section 101 refers to other consumer protection laws in defining "consumer debt," taxes are excluded from that definition. The UST, citing three cases, argues that Debtors' income tax liability constitutes "consumer debt" because Debtors minimized their tax withholdings in order to meet living expenses. However, the court disagrees with the legal principle espoused and the cases cited by the UST. Two of the cases are distinguishable, and the third case is not binding and is not persuasive. The first case, In re Stewart, involved student loans, not taxes. Because the loans were used to pay the living expenses of the debtor and his family, the Stewart court considered the debt to be consumer in nature. See Stewart v. United States Trustee (In re Stewart), 215 B.R. 456, 464-65 (10th Cir. BAP 1997).(2) In the second case cited by the UST -- In re Gentri, 185 B.R. 368, 372-73 (Bankr. M.D. Fla. 1995) -- the debtors defaulted on their home mortgage loan, which was forgiven by the lender. Consequently, the debtors incurred tax liability for the forgiveness of the debt. The Gentri court treated the tax liability as a consumer debt because, absent the triggering event (the forgiveness of the loan), the debt would have been consumer in nature. Because the nexus between the underlying consumer loan and the resulting tax debt was so clear and direct, the Gentri court held that the tax retained the same character as the original loan. In contrast, in this case, Debtors did not borrow money from a lender to pay consumer debts, thereby distinguishing both Stewart (where student loan was incurred to support family) and Gentri (where forgiveness of consumer loan directly resulted in tax liability). The third case cited by the UST - In re Westberry, 219 B.R. 976 (Bankr. M.D. Tenn. 1998) - is more closely on point, but is not binding; moreover, while this court appreciates the reasoning of Westberry, it disagrees with the analysis. The Westberry court held that income tax liability could constitute a "consumer debt" because consumer debt does not require "consumption" by the debtor. In making this analysis, the Westberry court noted that Congress could have used "consumer credit transaction" versus "consumer debt" and, absent the more particular reference, a court interpreting section 101(8) is not bound by the definitional limitations contained in consumer credit regulatory statutes. The Westberry court thus disregarded prior bankruptcy court interpretations of "consumer debt," as well as the legislative history to section 101(8). As discussed above, the legislative history to section 101(8) indicates that the definition of "consumer debt" is adapted from the definition used in consumer protection laws; cases interpreting those laws are instructive and exclude "taxes" from their scope. The Westberry court held that income tax liability can constitute "consumer debt" if the debtor paid living expenses with funds which could have otherwise been withheld from earnings for tax payments. This court, however, chooses not to adopt the reasoning of Westberry that an income tax is a "consumer debt" merely because a debtor fails to withhold sufficient income to pay taxes and uses distributed income to pay consumer or living expenses. The connection is too tenuous to justify characterizing income tax liability as a "consumer debt." Income tax liability is not determined at the time of withholding but is set at the end of the tax year. Many factors other than withholding affect the liability: deductions, adjustments, additional income. Many reasons exist to adjust withholding, including a desire to earn interest on income. This court will not characterize a decision to minimize withholdings as an affirmative act of consumer consumption absent a clear legislative mandate. In light of the foregoing, the court hereby DENIES the UST's motion to dismiss.

Dated: October 27, 1998

_________________________________
Dennis Montali
United States Bankruptcy Judge
1. See In re Gault, 136 B.R. 736, 738 (Bankr. E.D. Tenn. 1991) (section 1301 case) (applying section 101(8), court noted that an "income tax liability is simply not a consumer debt because it is not incurred in the course of a consumptive activity"); see also Goldsby v. United States (In re Goldsby), 135 B.R. 611, 613 (Bankr. E.D. Ark. 1992) (section 1301 case) (citing extensive authority that "federal income taxes do not constitute a consumer debt"). 2. Another court has recognized the inapplicability of the Stewart decision to tax debts. In In re Wisher, 222 B.R. 634, 636 (Bankr. D. Colo. 1998), the court cited Stewart when concluding that "[a]lthough tax obligations are not considered consumer debts, there is legal authority for characterization of both student loans and prior marital obligations as consumer d