In re Mantz
| Decision Date | 16 September 2003 |
| Docket Number | No. 02-16113.,02-16113. |
| Citation | 343 F.3d 1207 |
| Parties | In re: Roger E. MANTZ and Sandra J. Mantz, Roger E. Mantz; Sandra J. Mantz, Appellants, v. California State Board of Equalization, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John S. Bartlett, Carson City, Nevada, for the appellants.
Peter L. Duncan, Barbara R. Gross, Pyle, Sims, Duncan & Stevenson, San Diego, California; J. Michael Oakes, Las Vegas, Nevada, for the appellee.
Appeal from the United States District Court for the District of Nevada; David Warner Hagen, District Judge, Presiding. D.C. No. CV-01-00556-DWH.
Before: DOROTHY W. NELSON, WILLIAM A. FLETCHER, Circuit Judges, and WILLIAM ALSUP,* District Judge.
Roger and Sandra Mantz filed for Chapter 11 bankruptcy on May 23, 2000. The California State Board of Equalization ("SBE") filed a proof of claim for over $1 million in taxes, interest, and penalties. The Mantzs objected to the SBE's proof of claim. The bankruptcy court found that it lacked subject matter jurisdiction under 11 U.S.C. § 505(a)(2)(A) to consider the Mantzs' objection because the amount of state tax liability had already been adjudicated. Alternatively, it found that res judicata barred relitigation of the state tax liability. The district court affirmed the bankruptcy court's jurisdictional holding.
We hold that because there was no final administrative determination of the Mantzs' tax liability prior to the commencement of the bankruptcy proceedings, the bankruptcy court had jurisdiction. We further hold that res judicata does not prevent the bankruptcy court from redetermining the Mantzs' tax liability. We reverse and remand for further proceedings.
The Mantzs owned two vacuum cleaner businesses in California — a used vacuum cleaner store in Livermore and a door-to-door sales business. On November 15, 1996, after conducting a sales tax audit on the businesses, the SBE issued a deficiency determination asserting that the Mantzs owed sales tax, interest, and penalties totaling over $1 million. The Mantzs filed a petition for redetermination, and an administrative hearing was held on October 27, 1997. The hearing officer issued a decision and recommendation against the Mantzs on March 24, 1998. The Mantzs appealed to the SBE, which held a hearing on October 6, 1999. SBE staff members prepared a Recommendation for Final Action to the Board, and the SBE orally approved the Final Action on March 16, 2000, assessing sales tax, interest, and penalties.
On May 1 and May 3, 2000, the SBE served the Mantzs with two notices of redetermination regarding the Final Action (one for each business). Under California law, an order of the SBE upon a petition for redetermination becomes final thirty days after service of notice. Cal. Rev. & Tax.Code § 6564. On May 8, 2000, Sandra Mantz e-mailed Governor Gray Davis protesting the result. The Governor's office forwarded the e-mail to the SBE, which treated it as a timely motion for rehearing. The SBE denied the motion on September 14, 2000.
Meanwhile, on May 23, 2000, before the SBE had denied the motion for rehearing and before the decisions had become final under California law, the Mantzs filed for Chapter 11 bankruptcy. On October 30, 2000, the SBE filed a proof of claim in bankruptcy court for taxes and interest totaling $1,064,190.50. The Mantzs filed an objection to the proof of claim, challenging the merits of the claim and the priority of the taxes and interest.
The bankruptcy court held that 11 U.S.C. § 505(a)(2)(A) deprived it of subject matter jurisdiction to consider the Mantzs' objection. Section 505(a)(2)(A) provides that the bankruptcy court may not determine "the amount or legality of a tax, fine, [or] penalty ... if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the [bankruptcy] case." The bankruptcy court found that the amount of tax liability had been contested before and adjudicated by an administrative tribunal of competent jurisdiction prior to the commencement of the bankruptcy case. Alternatively, the court found that even if it had subject matter jurisdiction under § 505, once the Mantzs' petition for rehearing was denied, the doctrine of res judicata barred the Mantzs from objecting to the SBE's assertion of tax liability.
The district court affirmed the bankruptcy court's determination that it lacked subject matter jurisdiction under § 505(a)(2)(A). The district court noted that the SBE's redetermination did not become final until after the petition for rehearing was denied, but it declined to read into § 505(a)(2)(A) a requirement that the tax liability determination be a final adjudication. The court concluded that because the Mantzs had actively contested the tax liability before the SBE and because the adjudication was rendered before the bankruptcy filing (though no final order had been entered), § 505(a)(2)(A) applied.
We review the district court's decision on appeal from a bankruptcy court de novo. In other words, "we independently review the bankruptcy court's decision and do not give deference to the district court's determinations." Batlan v. Transamerica Commercial Fin. Corp. (In re Smith's Home Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir.2001) (internal quotation marks omitted). We "review the bankruptcy court's findings of fact for clear error and conclusion of law de novo." Id. Jurisdictional issues in bankruptcy are reviewed de novo. McGhan v. Rutz (In re McGhan), 288 F.3d 1172, 1178 (9th Cir.2002).
The Bankruptcy Code vests a bankruptcy court with subject matter jurisdiction to determine the amount and validity of a tax assessment against a debtor unless the debtor's tax liability has been contested before and adjudicated by another tribunal prior to bankruptcy. Section 505 of the Bankruptcy Code provides:
(a)(1) [The bankruptcy court] may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to a 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 (emphasis added). Section 505(a)(1) authorizes a bankruptcy court to determine a debtor's tax liability. But if the debtor's tax liability was contested and adjudicated by a tribunal of competent jurisdiction before the commencement of bankruptcy proceedings, § 505(a)(2)(A) strips the bankruptcy court of the subject matter jurisdiction it otherwise would have had under § 505(a)(1). See Baker v. IRS (In re Baker), 74 F.3d 906, 910 (9th Cir.1996) ().
Section 505(a)(2)(A) requires that the debtor have contested the tax liability in question. This requirement protects 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. As the Tenth Circuit has explained, § 505 protects "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." City Vending of Muskogee, Inc. v. Okla. Tax Comm'n, 898 F.2d 122, 125 (10th Cir.1990) (internal quotation marks omitted); see also New Haven Projects LLC v. City of New Haven (In re New Haven Projects LLC), 225 F.3d 283, 288 (2d Cir.2000) . In this case, however, there is no dispute that the Mantzs contested their tax liability before the SBE.
Section 505(a)(2)(A) also requires that the debtor's tax liability be adjudicated by a judicial or administrative tribunal "before the commencement" of bankruptcy. Adjudicated means that "a `judgment of a court of competent jurisdiction' has been decreed." In re Baker, 74 F.3d at 909 (quoting IRS v. Teal (In re Teal), 16 F.3d 619, 621 (5th Cir.1994)). If the tax liability has not been adjudicated before the commencement of the bankruptcy proceeding, then under § 505(a)(1) the bankruptcy court may consider the tax issue itself or allow another tribunal to do so. The bankruptcy court and the district court found that despite the lack of finality of the state administrative adjudication against the Mantzs at the time of the bankruptcy filing, § 505(a)(2)(A) deprived the bankruptcy court of subject matter jurisdiction because that section does not require a final adjudication. We disagree.
Most courts have required a final adjudication prior to bankruptcy before finding that § 505(a)(2)(A) deprives the bankruptcy court of jurisdiction. The Fifth Circuit in Texas Comptroller of Public Accounts v. Trans State Outdoor Advertising Co. (In re Trans State Outdoor Advertising Co.), 140 F.3d 618 (5th Cir.1998), held that although a state administrative decision determining a debtor's tax liability could be reviewed by the bankruptcy court if the debtor had filed for bankruptcy before the decision became final, the jurisdictional bar of § 505(a)(2)(A) had been triggered because the administrative decision had not been appealed and had become final under state law...
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