Bill description: HB 524 disallows the State Tax Commission from exercising a priority claim in bankruptcy proceedings when such a claim is based on taxes owed on stolen money.

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Under Idaho law, the State Tax Commission can file a “priority claim” in bankruptcy cases so it can get all the back taxes the state is owed before other creditors can have their claims considered.  For most creditors, payments are made proportionately, so if someone who declares bankruptcy has $100,000 in debts and $10,000 in qualifying assets, all creditors would receive 10% of what they are owed. A creditor with a priority claim, however, is paid in full rather than proportionally, so if the value of that claim exceeds the assets available to pay creditors, all other creditors get nothing. 

This problem was vividly illustrated in the case of Charlotte Pottorff. In 2017, she pleaded guilty to two counts of grand theft by embezzlement, perjury, and tax evasion after officials discovered that she had embezzled more than $2.3 million from a transmission business between 2006 and 2017. Pottorff was sentenced to 30 years in prison and ordered to pay more than $1 million in restitution. Instead, she filed for bankruptcy. 

Her bankruptcy estate was worth $132,000 and her outstanding debts came to more than $2.5 million. More than 90% of her debt was money  owed to the business owners from whom she embezzled. The State Tax Commission staked a priority claim of more than $47,000 and a nonpriority claim of more than $127,000, claiming the state was due unpaid income taxes on the stolen money. 

The state was, in fact, paid first, and the victims of the crime saw their meager restitution from a criminal's bankruptcy reduced even further. 

HB 524 proposes to change the rules so this doesn't happen again, though only in very similar cases. This bill would make the State Tax Commission’s priority claims invalid if each of the following five elements are met: 

• The taxpayer has not paid taxes on unreported earnings, or owes taxes on money obtained through a criminal act under Idaho law, including but not limited to theft, embezzlement, or robbery.
• The taxpayer has been convicted of the criminal act and has not appealed the conviction
• The taxpayer files for bankruptcy in the United States bankruptcy court for the district of Idaho
• The victim or victims of the crime, other than the state tax commission, whose funds were illegally obtained by the taxpayer, as determined by a court order or restitution order in the criminal case, files a creditor claim in the bankruptcy estate
• The bankruptcy estate does not have sufficient funds to pay in full both the priority tax claims of the state tax commission and the claims of the victim or victims of the crime

While HB 524 would have helped in the Pottorff bankruptcy case, its narrow language continues to allow creditors to be victimized by the extension of priority status to the claims of the State Tax Commission. A more just remedy would be to repeal the state's ability to put forth a priority claim in bankruptcy proceedings, leaving their claims equal to those put forth by private-sector creditors. 

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