In re Indianapolis Downs, LLC

• Citation: 55 Bankr.Ct.Dec. 170,462 B.R. 104
• Decision Date: 26 October 2011
• Docket Number: No. 11–11046 (BLS).,11–11046 (BLS).
• Parties: In re INDIANAPOLIS DOWNS, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

462 B.R. 104

55 Bankr.Ct.Dec. 170

In re INDIANAPOLIS DOWNS, LLC, et al., Debtors.

No. 11–11046 (BLS).

United States Bankruptcy Court, D. Delaware.

Oct. 26, 2011.

Christopher A. Ward, Polsinelli Shughart PC, Wilmington, DE, David A. Suess, Bose, McKinney & Evans LLP, Indianapolis, IN, Dennis A. Meloro, Greenberg Traurig, Wilmington, DE, Elizabeth M. Connolly, Matthew L. Hinker, Nancy A. Mitchell, Greenberg Traurig, LLP, New York, NY, James P. Madigan, James G Richmond, Kevin D. Finger, Greenberg Traurig, LLP, Chicago, IL, Jean Soh, Monica J. Machen, Polsinelli Shughart PC, Chicago, IL, Justin K. Edelson, Shanti M. Katona, Polsinelli Shughart PC, Wilmington, DE, Matthew L. Hinker, Scott D. Cousins, Victoria Watson Counihan, Greenberg Traurig, LLP, Wilmington, DE, for Debtor.

U.S. Trustee, Wilmington, DE.

Scott Alberino, Antonio Delgado, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Jayme Goldstein, Stroock & Stroock & Lavan LLP, New York, NY, Matthew Barry Lunn, Young, Conaway, Stargatt & Taylor, Wilmington, DE, L. John N. Bird, Fox Rothschild LLP, Wilmington, DE, Christopher R. Belmonte, Satterlee Stephens Burke & Burke LLP, New York, NY, Shaw Gussis Fishman Glantz Wolfson & Towbin LLC, Littleton, CO, Kurt F. Gwynne, Reed Smith LLP, Wilmington, DE, Warren Howard Smith, Warren H. Smith & Associates, P.C., Dallas, TX, for Other Parties.

OPINION¹

BRENDAN LINEHAN SHANNON, Bankruptcy Judge.

Before the Court is Indianapolis Downs, LLC's (“Indianapolis Downs” or the “Debtor”) motion for a determination of the legality of certain taxes under § 505(a) of the Bankruptcy Code ² (the “Tax Motion”). ³ This contested matter ⁴ presents a dispute between Indianapolis Downs, a corporate debtor in the gaming industry, and the Indiana Department of Revenue (the “Department”),⁵ a state taxing authority. The parties disagree over whether an Indiana tax reaches all, or only part, of the Debtor's revenue from slot-machine wagering. The Debtor claims the latter, arguing that the tax does not extend to slot-machine revenue that it must, by statute, transfer to third parties. The Department insists, however, that the tax extends to all slot-machine receipts, without exception. The Department also challenges the Court's jurisdiction over this dispute on the basis of sovereign immunity, the Tax Injunction Act, and various abstention doctrines.

The Court concludes that it has jurisdiction and that the Debtor's view of the Indiana tax is correct. First, jurisdiction lies because § 505(a) of the Bankruptcy Code gives the Court the express authority to determine the Debtor's tax obligations. Second, the state tax does not reach the slot-machine revenues that the Debtor must set aside for others because the Debtor acts as a mere conduit for those funds; that is, it cannot use and does not enjoy the benefits of that money. The Court will grant the Tax Motion.

I. BACKGROUND

Indianapolis Downs, a debtor in these chapter 11 cases, operates a combined horse racing track and casino—“racino,” for short—in Shelbyville, Indiana. It employs over 1,000 people and provides its patrons a wealth of wagering options. In addition to betting on horse races, visitors to Indianapolis Downs can try their luck at roughly two thousand electronic wagering games, including slot machines. The games are available at Indianapolis Downs thanks to a 2007 law (as codified at Ind.Code § 4–35–1–1 et seq. (2011), the “Racino Statute”) that extended the privilege of operating slot machines beyond riverboat casinos, where they had been on offer since 1993, to the state's horse racing tracks. Under the statute, two tracks may be licensed to run racinos; the Debtor is one of them.⁶ As a licensee, the Debtor is subject to all of the Racino Statute's provisions, two of which give rise to this dispute.

The Graduated Tax: The Racino Statute imposes a graduated tax (the “Graduated Tax”) on the adjusted gross receipts (“AGR”) that the Debtor receives from slot-machines wagering.⁷ Id. § 4–35–8–1(a) (the “Graduated Tax Provision”). AGR includes “all cash and property ... received by a” racino from slot-machine wagering, minus what is “paid out to patrons as winnings” and certain “uncollectible” amounts. Id. § 4–35–2–2. Depending on how much AGR the Debtor takes in each year, the Graduated Tax rate ranges from 25% (on the first $100 million of AGR) to 35% (on AGR above $200 million). Id. § 4–35–8–1(a)(1)–(3). After applying the proper rate, the Debtor remits what it owes to the Department “before the close of ... business” the next day. Id. § 4–35–8–1(b).

The Set–Aside Funds: In addition to paying the Graduated Tax, the Debtor must, each month, “distribute” 15% of its slot-machine AGR (the “Set–Aside Funds”) to various third parties, as detailed in the Racino Statute and its implementing regulations. Id. § 4–35–7–12(b) (the “Set–Aside Funds Provision”); 71 Ind. Admin. Code 1–1–1 et seq (2011).

• The first $1.5 million of Set–Aside Funds goes to “the treasurer of the state for deposit in the Indiana tobacco master settlement agreement fund [.]” Ind.Code § 4–35–7–12(b).

• The next $250,000 goes to “the Indiana horse racing commission, for deposit in the gaming integrity fund[.]” Id.

• Funds beyond that go to horse racing purse trust accounts and to various horsemen's associations to “promot[e] the equine industry or equine welfare [,] or for a benevolent purpose that ... is in the best interests of horse racing in Indiana.” Id. § 4–35–7–12(b), (c); see 71 Ind. Admin. Code 4–2–7.

• Finally, after the Debtor makes all of those distributions, and if certain statutory caps are met, any remaining Set–Aside Funds are deposited in Indiana's general fund. Ind.Code § 4–35–7–12(j).⁸

For as long as it has been a racino, Indianapolis Downs has calculated and paid the Graduated Tax on its slot-machine AGR without excluding the Set–Aside Funds. For instance, in the 2011 fiscal year, it paid Indiana approximately $69 million in Graduated Tax, of which $10.4 million represented taxes paid on the Set–Aside Funds. The Debtor objects to the $10.4 million payment, arguing that because it is statutorily obliged to distribute the Set–Aside Funds to others, it never actually “receives” that money.⁹

In November 2010, five months before filing for bankruptcy, Indianapolis Downs filed a timely claim with the Department seeking a refund of all taxes it had paid to that point on the Set–Aside Funds. The Department denied the claim and the Debtor appealed. On August 31, 2011, it lost the initial appeal at the administrative level.

Meanwhile, in April 2011, Indianapolis Downs voluntarily entered bankruptcy. ¹⁰ Three months later, it filed the Tax Motion, asking the Court to enter an order under § 505(a)(1) of the Bankruptcy Code “declaring that the Debtor need not include the 15% Set–Aside [F]unds in its calculation and payment of the Graduated Tax.” ¹¹ Significantly, the Debtor does not use the Tax Motion to request a refund for the taxes it has already paid—the issue on which it lost its initial appeal in August. Rather, the relief sought in the Tax Motion is limited to fixing the Debtor's present and future tax obligations. The Department objected to the Tax Motion ¹² and, following the Debtor's reply,¹³ the Court heard oral argument. ¹⁴ Because the Department has lodged several challenges to the Court's jurisdiction, the Court's analysis begins there, and then proceeds to the merits.

II. LEGAL ANALYSIS

A. The Department Challenges the Court's Jurisdiction

The Department first contends that either sovereign immunity or the Tax Injunction Act, 28 U.S.C. § 1341, operate to shield it from the Court's jurisdiction. But if the Court finds it has jurisdiction, the Department asks the Court to abstain from hearing this dispute and allow an Indiana state court to decide it. The Court has carefully considered the Department's arguments but rejects them.

The Court plainly has jurisdiction over the parties and the subject matter of the pending Tax Motion. Jurisdiction flows from § 505(a) of Bankruptcy Code, which provides, in relevant part:

[T]he 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.

The Third Circuit has “consistently interpreted § 505(a) as a jurisdictional statute that confers on the bankruptcy court authority to determine certain tax claims.” City of Perth Amboy v. Custom Distrib. Servs. (In re Custom Distrib. Servs.), 224 F.3d 235, 239–40 (3d Cir.2000); Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 923 (3d Cir.1990) ( “Section 505 was intended to clarify the bankruptcy court's jurisdiction over tax claims.”). Though the statute does not specify that this authority extends to determinations of state tax claims, “courts have interpreted the statute to cover them.” In re Stoecker, 179 F.3d 546, 549 (7th Cir.1999) (citations omitted) (Posner, J.), aff'd on other grounds sub nom. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Congress gave bankruptcy courts this broad power under § 505 to promote prompt and centralized estate administration; that is, to avoid making the estate “litigate the tax or assessment in several state jurisdictions.” In re Cable & Wireless USA, Inc., 331 B.R. 568, 575 (Bankr.D.Del.2005).

1. The Department's Sovereign Immunity Defense Has No Bearing on the Court's Jurisdiction

Despite the above authority supporting the Court's jurisdiction, the Department challenges it by invoking sovereign immunity. That argument, grounded in the Eleventh Amendment of the U.S. Constitution,¹⁵ starts from the premise that the Tax Motion is injunctive in nature because it is aimed at “regulat[ing] the future interactions between [Indianapolis Downs] and ... Indiana,” not at “adjudicating ... property of...