On March 3, 2021, the Commonwealth Court in Mandler and Nuclear Imaging Systems, Inc. v. Commw., No. 483 F.R. 2014, overruled taxpayers’ exceptions to the Court’s decision affirming the denial of the taxpayers’ petition for refund of employer withholding taxes paid to the Pennsylvania Department of Revenue (the “Department”) in satisfaction of $180,000 in liens.  As part of a prior bankruptcy proceeding, a third-party purchaser had received approval to buy equipment from the taxpayers and had agreed to escrow the funds as payments to state taxing authorities.  The bankruptcy trustee, however, used the funds to pay other liabilities of the taxpayers.  Thus, the Department, which had filed proofs of claim for the taxes in the bankruptcy proceeding, was not paid and it thereafter filed liens against the taxpayers for the taxes owed.

As an initial matter, the Court held that the taxpayers had waived arguments asserting civil rights violations by the Department because they had failed to mention them in their original petition for review or Statement of Questions Involved and did not develop those arguments in their brief, and because they had not raised the arguments in their exceptions apart from “mere declarations without accompanying developed arguments, record citations, or legal authorities” in the supporting briefs.

The Court reaffirmed its holding in its prior opinion that the taxpayers had failed to satisfy their burden of proving their entitlement to refunds.  As Pennsylvania employers, the taxpayers were required under the Tax Code to withhold income taxes from their employees’ compensation and hold those funds in trust on behalf of the Commonwealth.  Trust fund taxes of that kind are not dischargeable in bankruptcy and therefore the bankruptcy proceeding did not relieve the taxpayers of their liabilities.  The taxpayers argued that the Department was barred from collecting the taxes because funds had been escrowed for the express purpose of paying the taxes and the Department failed to claim those funds during the bankruptcy proceedings.  But, although the third-party purchaser had agreed to escrow the funds to pay taxes, nothing in the bankruptcy proceeding specified that the funds were set aside for that purpose.  Moreover, the evidence showed the taxpayers knew that the escrowed funds did not satisfy their tax debt because only $66,215.19 was put into the account, and because documents filed during the bankruptcy proceeding showed that the taxpayers owed $300,000 in taxes to various states, including $180,000 to the Commonwealth.  Furthermore, there was no evidence the Department knew the funds existed, especially given that the Commonwealth was not a party to the bankruptcy settlement.

The Court also reaffirmed its holding in its prior opinion that the doctrine of laches did not bar the Department from collecting the taxes through the liens.  Laches, as applicable to a Commonwealth agency, has three requirements:  (1) the agency intentionally or negligently misrepresented a material fact; (2) the agency knew or had reason to know the other party would justifiably rely on the misrepresentation; and (3) the misrepresentation induced the other part to act to its detriment.  In their exceptions, the taxpayers relied on the decision of In re Estate of Leitham, 726 A.2d 1116 (Pa. Cmwlth. 1999) for the proposition that laches can preclude the Commonwealth from collecting past taxes due.  In response, the Court pointed to its decision nine years later in Borough of Braddock v. Sullivan Plumbing Inc., 654 A.2d 672 (Pa. Cmwlth 2008).  The Braddock court held that laches precluded a borough from collecting interest and penalties because those amounts resulted from the borough’s delay in attempting to collect the tax principal.  But the Braddock court also held that the borough could collect the tax principal because the borough’s delay did not change the fact that the taxpayer owed the tax.  Thus, in the current case, the Court held that the taxpayers had failed to establish laches from the Department’s failure to claim the funds during the bankruptcy because:  (1) the Department had not intentionally or negligently misrepresented any material fact that induced the taxpayers to act to their detriment; (2) the escrowed funds had not been set aside specifically for taxes and therefore the Department could not have necessarily claimed them; (3) the taxpayer’s conclusory statement that “there was prejudice” was insufficient to show it; and (4) the taxpayers, quite simply, owed the taxes.

Finally, the taxpayers claimed, for the first time in their exceptions, that the doctrine of collateral estoppel barred the Department from collecting the taxes.  Collateral estoppel requires, among other things, that “the issue decided in the prior adjudication was identical with the one presented in the later action,” and that “there was a final judgment on the merits.”  The taxpayers had not offered a specific argument on the issue in their exceptions.  But, in any event, the Court concluded that the Department was not estopped because the issues in the current case differed from the issues in the bankruptcy proceedings, and because there was no final judgment on the merits since the tax liens were not satisfied in the bankruptcy proceedings.

If you are considering bankruptcy and know that you have outstanding Pennsylvania tax issues, please contact one of our state and local tax attorneys – Adam Koelsch (717-237-5305), Sharon Paxton (717-237-5393) or Paul Morcom (717-237-5364) to ensure that all of your outstanding Pennsylvania tax issues are addressed properly.