Central Valley Ag Enterprises v. U.S.

• Decision Date: 25 June 2008
• Docket Number: No. 05-16177.,05-16177.
• Citation: 531 F.3d 750
• Parties: CENTRAL VALLEY AG ENTERPRISES, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

531 F.3d 750

CENTRAL VALLEY AG ENTERPRISES, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 05-16177.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 13, 2007.

Filed June 25, 2008.

Scott M. Reddie, Hilton A. Ryder and Todd W. Baxter, McCormick, Barstow, Sheppard, Wayte & Carruth LLP, Fresno, CA; and Myron L. Frans and Walter A. Pickhardt, Faegre & Benson LLP, Minneapolis, MN; Edward O.C. Ord and Jenny C. Lin-Alva, Ord & Norman, San Francisco, CA, for the plaintiff-appellant.

Thomas J. Clark, Gilbert S. Rothenberg and Michelle B. O'Connor, Tax Division, U.S. Department of Justice, Washington, DC, for the defendant-appellee.

Appeal from the United States District Court for the Eastern District of California; Anthony W. Ishii, District Judge, Presiding. D.C. No. CV-03-06366-AWI (SMS).

Before: MELVIN BRUNETTI, W. FLETCHER, and CARLOS T. BEA, Circuit Judges.

BRUNETTI, Circuit Judge:

This bankruptcy appeal involves the intersection of 11 U.S.C. § 505(a) of the Bankruptcy Code, which generally authorizes bankruptcy courts to redetermine a debtor's tax liability, and the Tax Equity And Fiscal Responsibility Act of 1982 ("TEFRA"), which provides that the tax treatment of partnership items ordinarily must be determined at the partnership level. After Chapter 11 debtor Central Valley Ag Enterprises filed an objection to the Government's $13.1 million tax claim in its bankruptcy proceeding, the district court dismissed the action on the basis that the statutory res judicata provision in 11 U.S.C. § 505(a)(2)(A) deprives it of subject matter jurisdiction to review the tax treatment of any partnership item that has been administratively determined by the Internal Revenue Service and has become final pursuant to TEFRA. We disagree with that determination and additionally hold that 11 U.S.C. § 505(a)(1) grants the district court subject matter jurisdiction to review the tax treatment of Central Valley's partnership items, notwithstanding TEFRA.

I

In 1991, Central Valley's wholly owned subsidiary, Orange Coast Enterprises, acquired a 98 percent partnership share in Astropar Leasing Partnership. Although Central Valley is not a direct partner in Astropar, for TEFRA purposes Central Valley qualifies as an "indirect partner" by virtue of its ownership of Orange Coast, which is a direct partner in Astropar and a "pass-thru partner" in relation to its owner, Central Valley. See I.R.C. § 6231(a)(2), (9), (10). The only other partner in Astropar holding the remaining two percent share is a partnership called STM-CIG.

The owners of STM-CIG are the promoter and the officers of the promoter of a lease-stripping tax shelter,¹ in which Astropar participated. As a result of its lease-stripping arrangements, Astropar reported significant losses on its partnership tax returns for 1993, 1994 and 1995. Because partnerships are not taxed, 98 percent of Astropar's reported losses passed to Orange Coast and then to Central Valley, thereby decreasing its reported tax liability. The losses were eventually disallowed, however, after the IRS determined that there was no economic substance to the tax shelter. Central Valley was accordingly left with a tax deficiency.

The IRS made its adjustments to Astropar's returns in 1996 and 1998. In 1998, Orange Coast and STM-CIG, as the Astropar partners, filed protests on Astropar's behalf regarding the tax years 1993 and 1994, and SMT-CIG filed another protest regarding the tax year 1995. The protests led to a conference with the IRS Appeals Office, with Central Valley participating through the Astropar partners. Despite the Appeals Office's name, such conferences are informal and more closely resemble alternative dispute resolution than an administrative hearing. See Treas. Reg. § 601.106(c). After the conference failed to produce a settlement, the IRS Appeals Office sustained in full the IRS's proposed adjustments to Astropar's tax returns. The IRS mailed the Notice of Final Partnership Administrative Adjustment ("FPAA") on March 28, 2001.

Under TEFRA, the Astropar partners then had 150 days to file a petition for a readjustment in either the Tax Court, a district court, or the Court of Federal Claims. I.R.C. § 6226(a), (b)(1). If any partner did so, all partners would have been deemed parties to the action. Id. § 6226(c). None of the partners filed such a petition, however.

Instead, on December 3, 2001, 250 days after the FPAA issued (or 100 days after the TEFRA readjustment period expired), Central Valley filed a voluntary Chapter 11 bankruptcy petition. The bankruptcy estate included approximately $7.68 million in assets and $7.99 million in liabilities, $7.89 million of which were unsecured, nonpriority claims. In the bankruptcy court, the Government filed an unsecured priority claim for the tax years 1993, 1994 and 1995, totaling $13.1 million — more than all the assets in the estate. Central Valley responded by filing the underlying objection to the tax claim.

On the Government's motion, the district court withdrew the reference, transferring jurisdiction over Central Valley's objection from the bankruptcy court to the district court. The Government then moved for summary judgment, contending that the time to contest the FPAA under TEFRA had elapsed prior to commencement of the bankruptcy case and that, consequently, the district court lacked subject matter jurisdiction to consider the partnership items, which were final under TEFRA. As to 11 U.S.C. § 505 of the Bankruptcy Code, which ordinarily provides for jurisdiction to redetermine a debtor's tax items, the Government conceded that the statutory res judicata provision of subsection (a)(2)(A) was inapplicable because "the default of the FPAA was not `contested' before an `administrative tribunal' and so the tax determination of the debtor does not fall within the exclusionary language of Section 505(a)(2)(A)." Nevertheless, the Government contended that subsection (a)(1) did not grant jurisdiction in the first place because the limitations period on readjustments under TEFRA, I.R.C. § 6226, had expired and therefore the IRS's determinations regarding the partnership items pursuant to TEFRA were final and binding.

Treating the Government's motion for summary judgment as a motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), the district court granted the dismissal. In doing so, however, the court rejected both parties' readings of TEFRA and the Bankruptcy Code. Notwithstanding the Government's concession to the contrary, the district court ruled that the mere "opportunity" for court review under TEFRA brought the IRS's adjustment determinations within the statutory res judicata provision of 11 U.S.C. § 505(a)(2)(A). Consequently, the court dismissed Central Valley's objection to the tax claim for lack of subject matter jurisdiction, deemed the IRS's determination of the partnership items incontestible within the context of the bankruptcy proceedings, and "vacated" its order withdrawing the reference, thereby returning the matter to the bankruptcy court.

We have jurisdiction under 28 U.S.C. § 1291 and review de novo the district court's dismissal for lack of subject matter jurisdiction. Am. Principals Leasing Corp. v. United States, 904 F.2d 477, 480 (9th Cir.1990).

II

We begin with the language of the governing statute. Section 505(a) of the Bankruptcy Code provides:

(a)(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

(2) The court may not so determine— (A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title;....

11 U.S.C. § 505(a). The statute is "jurisdictional" insofar as it "confers on the bankruptcy court authority to determine certain tax claims" or deprives it of that authority. In re Custom Distribution Servs. Inc., 224 F.3d 235, 239-40 (3d Cir. 2000); accord Bunyan v. United States (In re Bunyan), 354 F.3d 1149, 1151 (9th Cir.2004).

Section 505(a) is also a statutory embodiment of traditional principles of res judicata. Mantz v. Cal. State Bd. of Equalization (In re Mantz), 343 F.3d 1207, 1213-14 (9th Cir.2003). If a tax claim has been litigated to a final judgment prior to the commencement of the bankruptcy case, the bankruptcy court lacks jurisdiction to consider the claim. See, e.g., Baker v. IRS (In re Baker), 74 F.3d 906, 909 (9th Cir.1996) (per curiam) (stipulated judgment in Tax Court after petition and answer). Otherwise, the court has jurisdiction notwithstanding a default judgment or a taxpayer's failure to timely pursue its remedies under the applicable tax laws, which would ordinarily (i.e., outside of bankruptcy) prohibit redetermination of the tax assessment. City Vending of Muskogee, Inc. v. Okla. Tax Comm'n, 898 F.2d 122, 124 (10th Cir.1990).

One of the purposes of § 505, and in particular the purpose of the requirement that the tax matter be "contested," is to "protect[ ] a debtor from being bound by a pre-bankruptcy tax liability determination that, because of a lack of financial resources, he or she was unable to contest." Mantz, 343 F.3d at 1211. And correspondingly, § 505 protects a debtor's creditors "from the dissipation of an estate's assets in the event that the debtor failed to contest the legality and amount of taxes assessed against it." New Haven Projects Ltd. v. City of New Haven (In re New Haven Projects Ltd., 225 F.3d 283, 288 (2d Cir.2000) (internal quotation marks omitted)....