In re Hunt

• Decision Date: 01 February 1989
• Docket Number: Bankruptcy No. 388-35726-HCA-11.
• Parties: In re Nelson Bunker HUNT and Caroline Lewis Hunt, Debtors.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

95 B.R. 442 (1989)

In re Nelson Bunker HUNT and Caroline Lewis Hunt, Debtors.

Bankruptcy No. 388-35726-HCA-11.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

February 1, 1989.

Russell L. Munsch, Michael F. Wurst, Decker, Hardt, Kopf, Harr, Munsch & Dinan, P.C., Dallas, Tex., for Nelson Bunker Hunt and Caroline Lewis Hunt, Debtors.

Grover Hartt, III, Linda C. Groves, Attys., Tax Div., Dept. of Justice, Dallas, Tex., for U.S.

Clive D. Bode, Vinson & Elkins, Dallas, Tex., Special Tax Counsel for debtor.

MEMORANDUM OPINION

HAROLD C. ABRAMSON, Bankruptcy Judge.

This case involves the infrequently encountered issue of whether a bankruptcy court should exercise its jurisdiction to determine a debtor's tax liability. The Debtors filed a Motion for Determination of Tax Liability Pursuant to 11 U.S.C. § 505 ("Motion for Determination"). The Internal Revenue Service ("IRS") responded by simultaneously filing both a general response and the United States of America's Motion to Modify Automatic Stay ("IRS MOTION"). Counsel for the Debtors and counsel for the IRS characterize the motions as the "flip side" of one another. The Debtors' Motion for Determination asks this Court to determine numerous and potentially substantial claims asserted by the IRS. The IRS Motion requests modification of the automatic stay to permit the IRS to proceed with liquidation of various tax claims pending in the United States Tax Court.

The IRS figures to be the largest creditor in this proceeding. It anticipates filing a proof of claim in excess of $600,000,000. The anticipated claim is based on the "1974-1978 Sourcing Cases", the "1979 Tax Case", the "1980 Uncollectible Debt/Gift Tax Dispute", the "1981 Claim for Refund", the "1982 Tax Case", the "1983 Tax Case", the Debtors' taxes for 1984, 1985, 1986, 1987 and a 1988 short year return. The parties have agreed to a modification of the automatic stay to enable the United States Tax Court to complete unresolved matters in the 1974-1978 Sourcing Cases, the 1979 Tax Case and the 1980 Uncollectible Debt/Gift Tax Dispute. The parties dispute the proper forum for resolution of the 1982 Tax Case. Following a preliminary hearing on the motions, the Court recommended a procedure whereby the parties would attempt to outline the facts underlying the 1982 Tax Case, the legal contentions involved, an estimate of witnesses and documents, the differences (if any) between the Debtors' case and those of Mr. and Mrs. Lamar Hunt (non-debtors and Mr. N.B. Hunt's brother) and an analysis of a trial in the Tax Court versus the Bankruptcy Court. The parties graciously agreed to the procedure and the Court conducted follow up conferences and hearings on the issue.

FACTUAL BACKGROUND

The forum to resolve the 1982 Tax Case remains for decision.¹ On February 22, 1988 the IRS issued a statutory notice of deficiency (90 day letter) advising the Debtors that a $154,919,798.50 deficiency existed with respect to the Debtors' joint federal income tax return filed for the year ended December 31, 1982 and proposed assessment of such tax liability plus interest of $122,116,353.23. On May 13, 1988 the Debtors filed a Petition in the United States Tax Court contesting the entire amount of the proposed deficiency. The case is styled N.B. and Caroline L. Hunt v. Commissioner of Internal Revenue, Docket No. 10141-88 ("1982 Tax Court Case"). Mr. N.B. Hunt filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on September 21, 1988. Ms. Caroline Lewis Hunt, Mr. N.B. Hunt's wife, filed a voluntary petition under Chapter 11 on September 23, 1988. The filing of the bankruptcy petitions automatically stayed the continuation of the 1982 Tax Court Case.² Prior to the Debtors' petitions, the parties were in the early stages of preparing for a February 1989 trial of the 1982 Tax Case before the United States Tax Court.

INTRODUCTION

The determination of a debtor's tax liability constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(B) (Supp. IV 1986), and 11 U.S.C. § 505(a)(1) (1982). As a threshold matter, 11 U.S.C. § 505 empowers the bankruptcy court to determine a debtor's tax liability provided that the merits of the tax claim have not been previously adjudicated in a contested proceeding before a court of competent jurisdiction. 11 U.S.C. § 505(a)(1). One policy behind section 505 reflects an intent to protect creditors from a defaulting debtor. "In enacting § 505, Congress was primarily concerned with protecting creditors from the dissipation of the estate's assets which could result if the creditors were bound by a tax judgment which the debtor, due to his ailing financial condition, did not contest." In re Northwest Beverage, Inc., 46 B.R. 631, 635 (Bankr.N.D.Ill.1985), citing In re Century Vault Co., 416 F.2d 1035, 1041 (3d Cir.1969) and City of Amarillo v. Eakens, 399 F.2d 541, 544 (5th Cir.1968), cert. denied, 393 U.S. 1051, 89 S.Ct. 688, 21 L.Ed.2d 692 (1969). In the present case, the Debtors have neither defaulted nor evidenced an intent to default. Rather, the Debtors vigorously contest the IRS assessment and recognize the absolute need to resolve the assessment through either settlement or litigation in order to successfully reorganize. Accordingly, the policy concerns voiced by Northwest Beverage are not present.³

Section 505 also provides a mechanism to ensure prompt and orderly administration of the bankruptcy estate. ". . . the history of this proviso 11 U.S.C. § 505 makes it clear that its purpose was to afford a forum for the ready determination of the legality or amount of the tax claims, which determination if left to other proceedings, might delay conclusion of the administration of the bankruptcy estate." In re Diez, 45 B.R. 137, 139 (Bankr.S.D.Fla.1984), citing Cohen v. United States, 115 F.2d 505 (1st Cir.1940). This Court is vigilant over prompt administration in view of this Circuit's case management directive.⁴ If these Debtors are to have a meaningful reorganization plan (if any) that fulfills the reorganization requirements, prompt resolution of the 1982 Tax Case is paramount. Accordingly, this Court has grappled with the question of whether to determine the Debtors' tax liability or yield to the Tax Court. As we stated during the hearings on this issue, good reasons support retention of jurisdiction or deferring to the Tax Court.⁵

While the reported decisions uniformly recognize the Bankruptcy Court's jurisdiction to determine a debtor's tax liability,⁶ the same decisions offer little guidance for when the bankruptcy court should exercise its jurisdiction. Our research uncovered only one reported decision after the enactment of the Bankruptcy Reform Act of 1978 which tersely discussed when a Bankruptcy Court should yield to the Tax Court.⁷ Accordingly, we embark on an attempt to draw a general framework to help analyze the issue.⁸

DISCUSSION

In formulating a decision to exercise his discretion, the bankruptcy judge must examine the issue case by case. The analysis necessarily includes balancing the Bankruptcy Court's need to administer the bankruptcy case in an orderly and efficient manner, the complexity of the tax issues to be decided, the asset and liability structure of the debtor, the length of time required for trial and decision, judicial economy and efficiency, the burden on the Bankruptcy Court's docket, prejudice to the debtor and potential prejudice to the taxing authority responsible for collection from inconsistent assessments. With these general factors in mind, we turn to the present case.

TAX ISSUES INVOLVED AND SPECIALIZED TRIBUNAL

We first consider the complexity of the tax issue involved. Without going into great detail, the IRS contends that the Debtors realized $383,194,502 in income during the 1982 tax year from the dissolution of Placid Investments, LTD. ("PIL"). The IRS contention centers upon the realization of income through either one or more of the following theories: discharge from indebtedness income, discharge of guaranty rights income, or a deemed distribution of cash income. Resolution of the IRS claim depends in a large part upon whether PIL may be characterized as a loan vehicle, without any valid business purpose, or as a partnership for federal income tax purposes. The case additionally involves estimating the value of certain properties contributed as capital contributions by the Debtors to PIL at the inception of the transaction. Complex computational adjustments relating to net operating loss carryovers, depreciation, or the like are not involved.

In analyzing the complexity of the issue involved we must not overlook Judge Goldberg's metaphorically elegant opinion in Matter of Gary Aircraft Corp., 698 F.2d 775 (5th Cir.1983). After stimulating analyses (both intellectual and metaphysical) of the Government contract dispute system and the bankruptcy system, the Court held that a bankruptcy court should defer liquidation of a government contracting dispute to the Armed Services Board of Contract Appeals. The holding is premised on the notion that "The ancillary jurisdiction of a bankruptcy court to liquidate claims, however, involves more nearly the administrative convenience of settling all disputes in a single forum; it is not as vital to the purpose of bankruptcy." Id. at 783.

In reaching the conclusion that the bankruptcy court ought to defer, the Gary Court refers to Order of Railway Conductors v. Pitney, 326 U.S. 561, 66 S.Ct. 322, 90 L.Ed. 318 (1946), Smith v. Hoboken Railway Co., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946) and Nathanson v. NLRB, 344 U.S. 25, 73 S.Ct. 80, 97 L.Ed. 23 (1952) "for the general proposition that a bankruptcy court should defer a complicated, technical dispute to a specialized forum." Gary Aircraft, at 783. The Court further explains that deferral is proper because "government contracting law tends to be technical and esoteric" and that "there are specialized fora...