“Special Charges” Not Included in Priority Tax Debt

Posted by NCBRC - August 19, 2022

The City of Milwaukee failed to present evidence that the “special charges” on the debtor’s delinquent property tax bill were in the nature of property taxes entitled to priority in the debtor’s chapter 13 plan. In re Peete, No. 21-23863 (Bankr. E.D. Wisc. June 30, 2022).

When the debtor filed for bankruptcy, the City of Milwaukee filed a claim for delinquent property taxes of which it claimed $26,754.99 as an unsecured priority debt. Ninety percent of the claim, however, represented special charges consisting of delinquent municipal services, delinquent storm water account, delinquent water account, and “total other special.” Only $903.36 of the claim represented “tax principal.” Additionally, $2,242.87 of the total amount represented interest and penalties.

The debtor objected to the claim’s priority status arguing that the special charges were not property tax debt entitled to priority under section 507(a)(8)(B). He filed a chapter 13 plan consistent with that view, and the City objected to confirmation.

On addressing the opposing objections, the court considered whether each of the special charges were entitled to priority, as well as the separate question of whether the charge for “interest and penalties” was entitled to priority.

Section 507(a)(8)(B), grants priority status to “allowed unsecured claims of governmental units, only to the extent that such claims are for . . . a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition.”

The court began its analysis by noting that the determination of whether given charges were taxes depended not on how the charges were characterized by the taxing authority, but by “whether the charges generate revenue for general public purposes, or for the regulation and benefit of the parties upon whom the fees are imposed.”

Beginning with the special charges related to water services, the court observed that such service charges are frequently for services provided to the homeowner based on usage rather than homeownership. On the other hand, the court noted, there may be instances where such charges, such as storm water management, are based on a general public need and are properly considered to be taxes. Here, however, the City failed to carry its burden of explaining which category the water charges fell under. Without evidence that the water charges were not for a public purpose, the court found they were not entitled to priority.

The other “total other special” charges were explained by the City as being for “health abatement” and “property inspection,” involving cleaning up littler at the debtor’s property and performing inspections for housing code violations the debtor had failed to remedy. The court found these charges were not for the purpose of generating revenue for the benefit of the general public but to discourage homeowners from neglecting their property and defraying the costs of the services provided by the City to the individual homeowner. As such, they were not in the nature of taxes and not entitled to priority.

Finally, the court looked to whether the $2,242.87 in interest and penalties was entitled to priority under section 507(a)(8)(G) which prioritizes “a penalty related to a claim of a kind specified in this paragraph [i.e., a tax] and in compensation for actual pecuniary loss.” It found the City failed to offer any reason the penalty portion of the City’s claim fell under this statute.

As to the interest, the court found the $54.20 tied to the $903.36 tax debt was, like that debt, entitled to priority status. The rest was not.

The court concluded that $957.56 was entitled to priority, the remaining portion of the City’s claim would be treated as a general unsecured debt.

Peete Bankr ED Wisc June 2022


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