James Patyrak and N.Y. Thymes & Deli, Inc. v. Director, Division of Taxation

TAX COURT OF NEW JERSEY

TAX COURT MANAGEMENT OFFICE P.O. Box 972
(609) 815-2922 TRENTON, NJ 08625-0972

Corrected Opinion Notice

Date: May 8, 2025

Vincent R. Kramer, Jr., Esq.

Heather Lynn Anderson

From: Shannon M. Tremel

Re: James Patyrak and N.Y. Thymes & Deli, Inc. v. Director, Division of Taxation
Docket number: 013546-2016

The attached corrected opinion replaces the version released on May 8, 2025 The
opinion has been corrected as noted below:

Judge’s signature added on final page of opinion

njcourts.gov – select Courts/Tax Court
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS

TAX COURT OF NEW JERSEY

MALA SUNDAR Richard J. Hughes Justice Complex
PRESIDING JUDGE P.O. Box 975
Trenton, New Jersey 08625-0975
609 815-2922, Ext. 54630 Fax 609 376-3018

May 7, 2025

Vincent R. Kramer, Jr., Esq.
Attorney for Plaintiffs

Heather Lynn Anderson, Esq.
Deputy Attorney General
Attorney for Defendant

Re: James Patyrak and N.Y. Thymes & Deli, Inc., v. Director,
Division of Taxation
Docket No. 013546-2016
Dear Counsel:

This opinion ensues from trial in the above-captioned matter where the only

issue was the validity of defendant’s audited assessments against the corporate

plaintiff for tax periods July 1, 2010, through June 30, 2014, for sales and use tax,

and litter tax, as reflected in defendant’s final determination.

For the reasons that follow, the court finds that (a) defendant’s final

determination must be upheld due to plaintiff’s failure of proof; (b) defendant cannot

collect the tax on its audited assessments for tax periods up to September 27, 2012,

from the corporate plaintiff due to the Consent Order entered by the Bankruptcy

Court in connection with the corporate plaintiff’s Chapter 11 bankruptcy; (c) the

court does not have subject matter jurisdiction to decide whether confirmation of the

corporate plaintiff’s Chapter 11 plan discharges, thus bars collectability of, the
assessed taxes for periods after September 27, 2012 and through 2014, and leaves

the determination of this issue to the Bankruptcy Court; and (d) the corporate

plaintiff’s bankruptcy does not prevent collection of the audited sales tax

assessments for any period under audit, from the individual plaintiff, who this court

has previously found to be a responsible person of the corporate plaintiff.

FACTS

The matter was subject of this court’s prior two decisions on the parties’

respective motions for partial summary judgment, wherein the facts were detailed.

For context of this trial, the court summarizes the pertinent facts. Plaintiff, N.Y.

Thyme and Deli, Inc. (“NYTD”) was engaged in retail sale of food and drink items.

Plaintiff James Patryrak (“Mr. Patyrak”) was the entity’s sole shareholder and

officer. He operated the business from its inception in 1987 until 2008 when he

moved to Florida, leaving the day-to-day business operations to a manager.

NYTD’s Bankruptcy Proceedings

On September 27, 2012, NYTD filed for bankruptcy under Chapter 11 in the

Bankruptcy Court for the District of New Jersey. It listed taxes owed to defendant,

the Director, Division of Taxation (“Taxation”) as “unsecured priority claims,” and

maintained they were “contingent” and “disputed.” The filing indicated that Mr.

Patyrak and Deborah Patyrak were also liable on those taxes.

2
On October 10, 2012, Taxation filed three proofs of claim in NYTD’s

bankruptcy as follows:

(1) A secured claim1 of $16,278.58 - this was for deficient2 Gross
Income Tax - Employer Withholding (“GIT-ER”) for three quarters of
2009; deficient sales/use tax (“SUT”) for three quarters of 2009 and the
first quarter of 2010, plus penalty and interest (but after credit for
payments already made).

(2) A priority proof of claim in the amount of $324,583.62 - this was
for audited SUT for tax years 2001 through 2004 (tax $148,291.11;
interest $167,550.63). The balance was for audited litter tax for tax
years 1997 through 2003; deficient corporation business tax (“CBT”)
for tax years 2008-2010; and deficient GIT-ER for the four quarters of
2010 and the first two quarters of 2012.

(3) A general unsecured claim of $1,705.45 for cost of collection for
the “return” period of October 2010.

NYTD’s Chapter 11 reorganization plan, filed in October of 2013, stated that

its “primary liabilities” were predominantly tax claims totaling $601,538.78, and it

had filed for bankruptcy due to the SUT audited liability. The plan proposed to pay

$167,848.90 “in full satisfaction” of Taxation’s claims of $342,567.65 over an 84-

month period, without interest. The plan was to be funded by NYTD’s “future

1
A secured claim is one asserted by a creditor to be subject to a lien on a debtor’s
property. See 11 U.S.C. § 506(a)(1) (“An allowed claim of a creditor secured by a
lien on property in which the estate has an interest, or that is subject to setoff . . . is
a secured claim to the extent of the value of such creditor’s interest in the estate’s
interest in such property”).
2
A deficient tax represents a self-reported but unpaid or underpaid tax.

3
income from operations.” Upon confirmation of its Chapter 11 plan, NYTD would

be discharged “from any debt that arose before confirmation of this Plan, subject to

the occurrence of the Effective Date” (90 days after plan confirmation) and “to the

extent specified in § 1141.”

On December 16, 2013, the Bankruptcy Court entered a Consent Order that

was executed between NYTD and Taxation, as to Taxation’s claims. Per that Order,

(1) Taxation withdrew its general unsecured claim; (2) Taxation’s priority claim was

amended (and reclassified) as a secured claim; and (3) Taxation’s secured claim was

amended and allowed in the amount of $167,848.90 (payable over as 84 monthly

payments, interest-free, unless NYTD defaulted). The Order stated that “parties

acknowledge that the $167,848.90, when payments are completed, will fully satisfy

any and all obligations of” NYTD “for taxes up to the” bankruptcy “petition” (i.e.

filing) date. NYTD agreed to not have Taxation, a federal or state court, modify the

$167,848.90 amount. The Order was deemed final “as to the tax liabilities and tax

periods” recited in Taxation’s proofs of claim, with certain exceptions not relevant

here. The Order also stated that “except for the purpose of enforcing the discharge

provisions of the confirmed plan,” the Bankruptcy Court retained no jurisdiction as

to Taxation’s “claims.”

NYTD’s Chapter 11 plan was confirmed on December 30, 2013. An Order

in this regard was entered on January 1, 2014.

4
On June 5, 2014, NYTD filed a motion to convert its case to one under

Chapter 7 (liquidation) “resulting from [NYTD’s] breach of the Plan and

confirmation Order and attendant obligations,” and to sell its liquor license (the only

asset) for $225,000. The court granted the motion on December 15, 2014, and issued

interim orders as to the proceeds from sale of the liquor license.

On August 15, 2015, the parties submitted a consent order to the court that

from the $232,500 gross proceeds of the liquor license sale,3 Taxation was to get the

first $167,000. The court entered this Order on August 20, 2015.

NYTD’s bankruptcy case closed on November 17, 2015. However, prior to

this, and by mid-August 2014, NYTD ceased operations.

Taxation’s Audit Post-NYTD’s Bankruptcy Filing

In the fall of 2014 (after NYTD filed for bankruptcy but before that case was

closed), Taxation audited NYTD for the tax periods July 1, 2010, through June 30,

2014, at Taxation’s offices in Hackensack. It requested several documents for this

purpose from NYTD.

By letter of September 14, 2014, Mr. Patyrak advised Taxation that (a) due to

resolution of Taxation’s claims in NYTD’s bankruptcy, any information request

prior to the conclusion of NYTD’s bankruptcy were improper; (b) he was enclosing

general ledger and bank statements, and other documents such as invoices could be

3
The $232,000 was due to an additional contribution of $7,500 from Mr. Patyrak.
5
picked up at NYTD’s counsel’s office; and (c) a quick review of the “relevant period,

2014” indicated NYTD owed about $7,500 “for unremitted sales tax for the period.”

Taxation responded by letter of September 23, 2014, that “all periods in statute

are open for audit” per its bankruptcy section, since the “audit period is 7/10-6/14.”

It also noted that it could not discuss the audit with NYTD’s counsel since his power

of attorney was only for 2014.

Taxation then concluded the audit based on the information provided by

NYTD. An audit worksheet (Schedule R-2 for the sample period January to August

2014) showed the gross sales per the general ledger, and the amount of those sales

categorized and sub-categorized (e.g., the category “sales” was sub-categorized as

“sales-bakery;” “sales-package;” “sales-salads;” “sales-dinner”), as taxable by the

auditor. Of the $448,453.74 reported sales for the sample period, the auditor deemed

91.9%, or $412,198.33, as taxable. She applied this 91.9% error rate to the gross

receipts reported on NYTD’s CBT returns for the last quarter of 2010, tax years

2011-2013, and for January through August of 2014, applied the 7% sales tax rate

to the same for a total tax (after credits) of $67,433. She added $7,132.41 as use tax

for NYTD’s purchases of supplies and cards on which sales tax was not collected

when purchased. This provided a total SUT liability of $74,565.41 for the periods

October 2010 through September 30, 2014 (and $91,107.31 with interest and

penalties). She also assessed $171.45 as litter tax for tax year 2013.

6
By letters dated December 24, 2014, and December 31, 2014, Mr. Patyrak, as

President of NYTD, wrote to the auditor objecting to the “initial audit report dated

12.8.2014.” He stated that the auditor erred in deeming four categories as taxable;

bakery ($28,514.48); salads ($10,360.16); retail beverage ($50,425.29); and retail

juice ($6,819.08). He noted that the category of “bakery contains baked goods made

in the store such as those sold in a bakery and is nontaxable.” Likewise, he stated,

the category of salads “represents those bulk salads sold by the pound as well as

salads manufactured in the store and sold as a single item” as was done in grocery

stores. Similarly, he noted, the category of beverages was “non-carbonated [items]

such as juices, iced teas and water,” such as those sold in grocery stores as compared

to the “small number of carbonated beverages and coffee,” which were taxable.

With these adjustments, he noted, the “non-taxable amount” listed by the auditor

would increase to $127,331.89 (thus about 28.4% of NYTD’s sales), as compared to

the auditor’s nontaxable amount of $36,255.41, which in turn would make the

“taxable amount” at “71.6%” as opposed to the auditor’s 91.9% calculation.

Mr. Patyrak also objected to the use tax assessment, claiming that the auditor’s

basis for the same was unclear. He further stated that the assessments were

foreclosed since NYTD “exited” its bankruptcy in late December 2013, and had

settled Taxation’s claims through that date. He however agreed that the viable

(assessable) tax periods were January 2014 through September 2014.

7
On January 8, 2015, Taxation issued a Notice of Finding of Responsible

Person Status. Per that Notice, Mr. Patyrak was deemed to be personally liable for

NYTD’s sales tax assessment ($67,433) plus interest and penalties for a total of

$80,614.99, for the third quarter of 2010 through the third quarter of 2014.

On January 9, 2015, NYTD’s counsel wrote to the auditor essentially

repeating Mr. Patyrak’s objections to the audit. He added that NYTD disputed “any

monetary liability . . . which may have been assessed for any period of time prior to

December 20, 2013” because Taxation was bound by its settlement in the bankruptcy

proceedings and did not object to the plan provisions as confirmed. He agreed that

“the period from December 20, 2013[,] down to August 25[,] 2014[,] is subject to

assessment.”4

Mr. Patyrak timely protested the audit and the responsible person status

determination to Taxation’s Conference and Appeals Branch. The protest contended

that because Taxation never conducted a post-audit conference, the audit was not

final, therefore, the assessed amounts were not final (i.e., could have been resolved

if there had been a conference), and Taxation’s Notice of Responsible Person status

was premature as well.

4
In a September 8, 2016, e-mail, Taxation provided NYTD’s counsel an itemization
of deficient taxes, noting that there were “post-petition and were not part of the
settlement agreement.” The taxes listed were CBT for 2013 through 2015, and
deficient SUT for the first, second and last quarter of 2013 and totaled $14,793.90.
8
Taxation issued a final determination on August 10, 2016, upholding the

audit, and noting as follows:

The taxpayer did not report and[/] or remit sales tax due
for taxable sales for the audit period 10/01/2010 through
09/30/2014. A review of Audit work-papers . . . indicates
that Audit utilized the taxpayer’s Sales Journal for the
2014 year since no CBT was filed for 2014 at the time of
the Audit. A review of the filed 2014 CBT return reflects
little more than $4,000 in Gross Receipts vs the Sales
Journal total of $448,454.

Plaintiffs filed a timely complaint with the Tax Court on November 10, 2016,

challenging Taxation’s final determination as to the audit, and the finding that Mr.

Patyrak was a responsible person of NYTD.

Prior Court Orders

Based on motions for summary judgments, the court entered two Orders.5 The

first one, dated January 6, 2023, granted Taxation’s motion for partial summary

judgment based on the undisputed facts that Mr. Patyrak was a responsible person

of NYTD. The court left open the amount of sales tax for which he was personally

liable which would depend on the outcome of the trial as to NYTD’s complaint

against Taxation’s final determination. There was no request for reconsideration,

nor an appeal of this Order.

5
The matter was initially assigned to, and heard by, a different Tax Court judge who
entered the two prior Orders as to each party’s summary judgment motion.
Thereafter, the matter was assigned to undersigned judge.
9
The second Order, dated April 5, 2024, denied NYTD’s and Mr. Patyrak’s

motion for summary judgment that Taxation’s audited assessment be vacated (thus,

also its finding of Mr. Patyrak as responsible person of NYTD) because Taxation

allegedly violated the statutory Taxpayer Bill of Rights (L. 1992, c. 175, § 44) by

failing to provide an opportunity for a post-audit conference. However, the court

directed the parties to “conduct an in-person settlement conference with the auditor

present within 90 days.” The court retained jurisdiction.

The settlement conference did not occur. Taxation stated that it had reached

out to schedule a conference, however, counsel for plaintiffs declined to engage in

the same. The court thereafter scheduled a trial as to the final determination which

affirmed the audited assessments against NYTD.

On the scheduled trial date, the court heard Mr. Patyrak who reiterated the

reasons why the audit should be vacated viz., due to the alleged violation of the

Taxpayer Bill of Rights because the auditor did not provide a post-audit conference

opportunity. The court ruled that it would not consider the testimony because it was

an attempt to re-argue what was already decided in the April 5, 2024, Order and as

to which no appeal or motion for reconsideration was timely filed. Nor was there

any proof of newly discovered evidence to justify revisiting that Order.

However, because that Order had directed a settlement conference, which did

not happen, the court provided the parties with this opportunity before proceeding

10
to trial. Although the auditor who had performed the challenged audit was no longer

employed at Taxation, her supervising auditor was present at trial. This person had

been personally involved in the audit in that she had reviewed the documents that

NYTD provided for purposes of the audit, as well as the proposed assessment

stemming from the audit, at Taxation’s offices in Hackensack. Thus, she personally

knew of NYTD’s audit, the audit process, and the documents involved.

The parties were unable to reach a settlement. Plaintiffs declined the court’s

offer to adjourn the trial. The matter then proceeded to trial.

Mr. Patyrak’s testimony comprised of the nature of NYTD’s business, its

operations and his role in the same, NYTD’s bankruptcy, closure of the business, the

performance of the two audits by Taxation, one pre-bankruptcy and the instant one

challenged before this court (all of which were presented to the court in the prior

motions for summary judgment, as undisputed facts). He stated that he provided the

auditor with the necessary records such as bank statements, invoices, daily sale

summaries, and ledgers. He testified to his letters concerning the audit, the lack of

a post audit conference, the protests he filed, and the final determination. All of

plaintiffs’ proffered documents were admitted into evidence without objection

(except for some hand-written notes on two letters).

Testimony elicited from Taxation’s supervising auditor was as to the audit

process and the alleged lack of the post-audit conference. The supervising auditor

11
testified that she recalled having reviewed NYTD’s ledgers and bank records, that

there was no pre-audit conference since Mr. Patyrak was in Florida and the business

was closed in August of 2014, and that Taxation sent a post-audit conference sheet

to Mr. Patyrak in December, but never received a signed copy asking for such a

conference. She also stated that the auditor’s report is for internal record-keeping

purposes, that once the audit is closed, the file is sent to Taxation’s billing

department (as was done here due to lack of response from Mr. Patyrak), and that

after the file is in billing, the audit section no longer is involved in the case.

At the end of plaintiffs’ case-in-chief, Taxation moved to dismiss the

complaint under R. 4:37-2(b). The court indicated that it would consider the same

after briefing on whether NYTD’s bankruptcy and the settlement therein of

Taxation’s claims, barred the imposition of the assessments at issue here.

Taxation filed a brief in this regard on February 27, 2025. It argued that (a)

NYTD’s bankruptcy did not affect the audit at issue because the assessments were

not a “claim” for purposes of bankruptcy, i.e., they were not final since NYTD’s

time to file a protest, and thereafter, to appeal Taxation’s determination to this court

under N.J.S.A. 54:49-18 and 54:51A-14(a), was still open. Taxation maintained that

its right to payment of the assessed taxes became final only after it issued the final

determination on August 10, 2016, by which time NYTD’s bankruptcy case had

closed; (b) the discharge provisions of Chapter 11 do not apply since NYTD was

12
effectively liquidated when it converted its case to one under Chapter 7 and sold its

sole asset (liquor license); and (c) Mr. Patyrak, as responsible person of NYTD, is

personally liable for the assessed sales tax amounts, regardless of NYTD’s liability

vis-à-vis its bankruptcy.

By letter of March 27, 2025, plaintiffs’ counsel advised the court that he had

no objections to the conclusions in Taxation’s brief, and would not oppose the same.

ANALYSIS

A. Validity of the Audited Assessments

A taxpayer is statutorily obligated to maintain adequate and accurate books

and records (such as sales/purchases, credits, discounts, invoices). N.J.S.A. 54:32B-

16. Taxation is statutorily authorized to examine those documents, and if necessary,

reconstruct the taxable receipts. N.J.S.A. 54:32B-19.

Taxation’s assessments and final determinations are deemed presumptively

correct. See generally La Troncal Food Corp. v. Dir., Div. of Taxation, 33 N.J. Tax

435, 456-57 (Tax 2024). A taxpayer therefore has the initial burden to overcome the

presumption, and thereafter, has the burden to prove, by a preponderance of the

evidence, what the assessment should be. Id. at 457 (citation and internal quotation

marks omitted). The proffered evidence should be “definite, positive and certain in

quality and quantity.” Ibid. (citation and internal quotation marks omitted).

13
The evidence presented to the court showed that NYTD provided certain

books and records to Taxation, Taxation reviewed the same, audited NYTD for SUT

and litter tax, and deemed Mr. Patyrak, as responsible person of NYTD, thus,

personally liable for audited sales tax liability. What the testimonial or other

evidence did not prove was why the audit was improper or incorrect. In its protest

letters, NYTD contended that the audit was partially incorrect because the amounts

listed by the auditor for “bakery” and “salads” and “beverages/juice” are statutorily

nontaxable. See N.J.S.A. 54:32B-3(c)(3)(ii)(B), (C); N.J.A.C. 18:24-12.2 (taxable

prepared food does not include “bakery items, including bread, rolls, buns, biscuits,

bagels, croissants, pastries, donuts, danish, cakes, tortes, pies, tarts, muffins, bars,

cookies, and tortillas” or “food sold in an unheated state by weight or volume as a

single item” provided they are “sold without eating utensils”). However, at trial,

NYTD did not provide any proof (testimonial or otherwise) to show that the entire

amount of food items listed by the auditor, was sold purely as takeout items, thus,

should be nontaxable, or as to the alleged amount of non-taxable beverages. Without

this, the court has no basis to conclude that Taxation’s audit methodology and results

therefrom were aberrational, or determine what the appropriate assessment should

be. In the same vein, NYTD did not provide any proof (testimonial or otherwise) to

establish that the use tax assessment on expenses, or the litter tax assessment, was

14
incorrect or improperly imposed. The court therefore has no choice but to affirm the

audited assessments.

B. Impact of NYTD’s Bankruptcy Upon Collectability of the Audited Assessments

The filing of a bankruptcy petition by a taxpayer does not prevent Taxation

from commencing and completing an audit against that taxpayer. See 11 U.S.C.

§362(b)(9)(A) - (D) (the “filing of a petition” for bankruptcy “does not operate as a

stay . . . of . . . an audit by a governmental unit to determine tax liability” or “the

issuance to the debtor by a governmental unit of a notice of tax deficiency,” or “a

demand for tax returns,” or “the making of an assessment for any tax and issuance

of a notice and demand for payment of such an assessment”); H & H Beverage

Distrib. v. Dep’t. of Revenue, 850 F.2d 165, 165 (3d Cir. 1988) (taxing authority did

not violate the automatic stay when it conducted a sales tax audit of, and issued a

notice of audit assessment to, a Chapter 11 debtor).

However, when a Chapter 11 plan is confirmed, the plan terms are binding

upon the reorganized debtor and creditors, revests property of the bankruptcy estate

in the reorganized debtor, and discharges any claims which arose or is deemed to

have arisen prior to the plan’s confirmation.

NYTD argues that a major portion of Taxation’s audited assessments were

barred by the December 16, 2013, Consent Order, and discharged by its December

30, 2013, Chapter 11 plan confirmation.

15
Taxation argues that since the Bankruptcy Code defines “debt” as a “claim”

and a “claim” as a “right to payment,” the audited assessments at issue here were not

a “debt.” Rather, per Taxation, although the auditor’s 2014 Notice of Assessment

was issued while NYTD’s bankruptcy was still pending, it was not final (i.e.,

collectible as a debt) until Taxation issued a final determination on August 10, 2016.

By this time, NYTD’s bankruptcy was closed, therefore, Taxation argues, it could

not have filed a claim for payment in the bankruptcy court. This means, per

Taxation, the audited liability is unaffected by NYTD’s bankruptcy.

The court is unpersuaded by Taxation’s argument. A “debt” is defined as a

“liability on a claim.” 11 U.S.C. § 101(12). A “claim” is defined as “right to

payment, whether or not such right is reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,

secured, or unsecured.” 11 U.S.C. § 101(5)(A). Thus, a claim “can be . . . merely

contingent,” and a contingent claim “arises at the time the conduct that causes it

occurs, even if the claim is not asserted or does not actually accrue until later.” Dold

v. Rainbows United, Inc., 547 B.R. 430, 431 (Bankr. D. Kan. 2016). The court

therefore examines the audited assessments vis-à-vis NYTD’s bankruptcy.

1. Tax Periods Covered by the Consent Order

The Bankruptcy Court’s December 16, 2023, Consent Order controls the

audited assessments for tax periods up to September 2012. Under that Order,

16
payment by NYTD of the agreed to amount of Taxation’s claims ($167,848.90) “will

fully satisfy any and all obligations of” NYTD “for taxes up to the” bankruptcy

“petition date” of September 27, 2012. The plain language of this Consent Order

relieves NYTD of any liability for any New Jersey state tax for any tax period until

September 27, 2012. Nothing in the Consent Order permits Taxation to revive any

tax claims against NYTD such as a post-plan confirmation audit. Taxation did not

reserve a right to keep open (i.e. the right to impose additional audited taxes for) the

tax periods either listed in its proofs of claim, or up until September 2012, in the

Consent Order. Taxation is bound by the terms of the Consent Order as written.

Therefore, Taxation cannot collect sales tax for the fourth quarter of 2010, all four

quarters of 2011, and the first three quarters of 2012 from NYTD.

However, the court agrees with Taxation that Mr. Patyrak, as responsible

person of NYTD, remains personally liable for sales tax for the above-listed tax

periods. The Consent Order applied only to NYTD. Mr. Patyrak did not file for

individual bankruptcy (even if he did, he would still be liable for sales tax, which as

a trust fund tax, is not dischargeable. See 11 U.S.C. § 523(a)(1)(A)).

2. Assessments for Tax Periods after September 2012

11 U.S.C. § 1141(d)(1)(A) discharges, i.e., frees the debtor from liability for

“any debt” which arose prior to a Chapter 11 plan confirmation, and also for a debt

17
specified in 11 U.S.C. § 502(i), which is a pre-petition priority income or sales tax.6

The discharge applies whether a creditor files a claim, whether the claim is allowed

or whether the creditor objects to the Chapter 11 plan. 11 U.S.C. § 1141(d)(1)(A).

However, the discharge does not apply if (a) the confirmed plan “provides for

the liquidation of all or substantially all of the property of the estate;” (b) the “debtor

does not engage in business after consummation of the plan;” and (c) the “debtor

would be denied a discharge under” Chapter 7 of the Bankruptcy Code (11 USCS §

727(a)), had the debtor filed for bankruptcy under Chapter 7. 11 USCS § 1141(d)(3).

“All three elements of § 1141(d)(3) must be established before a Chapter 11 debtor’s

discharge may be denied.” Torrington Livestock Cattle Co. v. Berg, 423 B.R. 671,

677 (B.A.P. 10th Cir. 2010).

Taxation maintains that the discharge exceptions apply because NYTD

liquidated its main asset (liquor license) and ceased operations. Plus, it notes, prong

three of the exception to a Chapter 11 discharge applies since a Chapter 7 discharge

applies only to individual debtors.

6
Under 11 U.S.C. § 502(i), a “claim that does not arise until after the
commencement of the case for a tax entitled to priority under” 11 U.S.C. § 507(a)(8)
will be treated “as if such claim had arisen” prior to the bankruptcy’s filing date.
Under 11 U.S.C. § 507(a)(8), a tax “on or measured by income or gross receipts” for
which a return is due three years prior to the filing of the bankruptcy petition, is
entitled to priority in distribution of the bankruptcy assets.
18
NYTD’s plan was confirmed on December 30, 2013. According to the

bankruptcy documents provided to this court, the plan was one of reorganization,

not liquidation. Therefore, the exceptions to the discharge may not apply since one

of the three conditions is not satisfied.

Further, as to each tax period, the discharge may or may not apply. For

instance, the audited sales tax for the fourth quarter of 2012 and for all four quarters

of 2013, the use tax for 2013, and the litter tax for 2013, may be dischargeable since

they could be considered as pre-confirmation “debt[s].” However, they could

equally be considered as non-dischargeable because they are not pre-petition priority

taxes under 11 U.S.C. § 502(j). Similarly, the sales tax assessments for the first three

quarters of 2014 could be considered as non-dischargeable since the tax periods are

post-petition and post-confirmation.7

The court holds that it will not decide whether the Chapter 11 discharge

applies to the tax periods after the third quarter of 2012 because it lacks subject

matter jurisdiction. See Cohen v. Dir., Div. of Taxation, 19 N.J. Tax 58, 64 (Tax

2000) (“Although the Bankruptcy Court does not have exclusive jurisdiction of

matters involving dischargeability in bankruptcy” that court “is most qualified to

deal with the issue” since “[t]he question of dischargeability is an everyday issue in

7
As noted above, NYTD conceded that “the period from December 20, 2013[,]
down to August 25[,] 2014[,] is subject to assessment.”

19
that court which has significant expertise”).8 Notably, NYTD’s Chapter 11 Plan

provided that “[n]otwithstanding anything in this plan to the contrary, the

Bankruptcy Court shall not retain jurisdiction with respect to tax claims except for

(i) resolving the amount any tax claims arising prior to confirmation, and (ii)

enforcing the discharge provisions of the confirmed plan.” The court therefore

leaves determination of the discharge issue to the Bankruptcy Court.

That NYTD later converted its bankruptcy to a Chapter 7 proceeding does not

require this court to exercise its subject-matter jurisdiction. Cf. Slater v. Dir., Div.

of Taxation, 26 N.J. Tax 322, 329-30 (Tax 2012) (since taxpayer’s bankruptcy was

dismissed, the “effect” was that Taxation’s assessment “was neither expunged nor

discharged by the Bankruptcy Court” and that “there was nothing within the

bankruptcy documents” to show that the bankruptcy proceedings “divested the Tax

Court of jurisdiction over the present matter”).

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In that case, the taxpayer first appealed Taxation’s gross income tax assessment
before the Tax Court, and after Taxation moved for summary judgment, filed for
Chapter 7 bankruptcy and obtained a discharge. He then argued that the discharge
obviated Taxation’s summary judgment motion in the Tax Court action. Cohen, 19
N.J. Tax at 60. The court held that the “receipt of a bankruptcy discharge does not
invalidate the Tax Court proceedings. Rather, the issue of dischargeability would
arise if the Division moved to collect the taxes at issue. This litigation, instituted by
the taxpayer, is obviously not a collection suit against the taxpayer.” Id. at 62. Here,
Taxation’s assessments were post-NYTD’s bankruptcy, and Taxation seemingly has
every intention of collecting the assessed taxes from NYTD (now non-existent).
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Taxation is correct that regardless of the Chapter 11 discharge (and whether

that discharge is ineffective because of a Chapter 7 conversion), it has unqualified

right to collect the audited sales tax from Mr. Patyrak, who this court held, was a

responsible person of NYTD and is thus, personally liable for the same for all the

tax periods in the audit. See e.g. In re J.J. Re-Bar Corp., 420 B.R. 496 (B.A.P. 9 th

Cir. 2009) (corporate debtor’s Chapter 11 discharge does not extend to the individual

officers, thus, the Internal Revenue Service properly commenced collection of trust

fund taxes from those individuals), aff’d, 644 F.3d 952 (9th Cir. 2011).

CONCLUSION

The court affirms Taxation’s final determination. However, Taxation cannot

collect taxes from NYTD for tax periods up to September 27, 2012, pursuant to the

December 2013 Consent Order of the Bankruptcy Court. The Bankruptcy Court

should decide whether the taxes for periods post September 27, 2012, were

discharged due to NYTD’s Chapter 11 plan confirmation, especially because it

retained jurisdiction to resolve the amount of any tax claims arising prior to

confirmation, and to enforce the plan’s discharge provisions. Regardless of NYTD’s

bankruptcy, Mr. Patyrak remains personally liable for the sales tax liability for all

the tax periods in the audit.

/s/ Mala Sundar
Hon. Mala Sundar, P.J.T.C.

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