In re Northwest Beverage, Inc., Bankruptcy No. 82 B 7771
| Decision Date | 21 February 1985 |
| Docket Number | Bankruptcy No. 82 B 7771,Adv. No. 83 A 1103. |
| Citation | 46 BR 631 |
| Parties | In re NORTHWEST BEVERAGE, INC., Debtor. NORTHWEST BEVERAGE, INC., Plaintiff, v. J. Thomas JOHNSON, as Director of Revenue, State of Illinois, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Brown & Shinitzky, Michael A. Moses, Siegel, Denberg, Vanasco, Shukovsky, Moses & Schoenstadr, Chicago, Ill., for debtor, Northwest Beverage, Inc.
Joel Nathan, Janice L. Cox, Asst. Attys. Gen., Revenue Litigation Div., Chicago, Ill., for Dept. of Revenue, State of Illinois.
This action comes to be heard on a motion by the defendant, the Illinois Department of Revenue ("Department"), requesting that the court abstain from further proceedings on, or dismiss the complaint of, plaintiff, Northwest Beverage, Inc. ("Northwest"). Northwest's adversary complaint asks the court to vacate assessments which the Department caused to be issued, and for other appropriate relief. The Department, in its motion for absention or dismissal presently at issue, argues that Section 505(a)(2) of the Bankruptcy Code precludes the court from redetermining a debtor's tax liability. Resolution of the Department's motion will require this court to determine whether Northwest's taxes have been previously "contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction" pursuant to § 505 of the Bankruptcy Code. 11 U.S.C. § 505(a)(2)(A).
Northwest is a retailer of alcoholic beverages required to pay Retailers' Occupation Tax pursuant to Illinois Law. Ill.Rev.Stat. 1981, Ch. 120, Par. 451. Northwest submitted several tax payments during the period of September 1968 through December 1981 which the Department determined to be insufficient. Three of eight assessments of deficiency made during that period remain at issue: numbers F-48459, F-52504 and F-5981. In regard to the periods represented by those three numbers, the Department issued notices of tax liability to Northwest. Northwest protested the notices within the statutory 20 day period and exercised its right to request hearings before the Department.
An officer of the Department subsequently conducted hearings in order to review each of the three assessments. Northwest attended and was represented by counsel at each hearing. Although Northwest was entitled to put on evidence and present its own witnesses, Northwest did not do so. Instead, Northwest confined itself to cross-examining the Department's witnesses and arguing for dismissal of the claims on several legal bases set out in a motion.1 After considering the record of the hearing, and all applicable laws and regulations, the hearing officer caused the director of the Department to issue final assessments in each case.
Northwest sought review of this decision by the circuit court but due to its financial condition, Northwest was unable to supply the bond which was required before an appeal would be allowed. Northwest, therefore, requested that the court impose a lien on its assets in lieu of bond, as permitted by Illinois law. The circuit court declined this request on the grounds that Northwest's assets were insufficient to protect the Department's interests during appeal. Since Northwest failed to meet the bond requirement, the circuit court dismissed its complaint for administrative review of assessment numbers F-48459 and F-525042 and entered judgment against Northwest for the amount of the final assessments, plus interest. Northwest appealed this decision to the Illinois Court of Appeals, which affirmed the circuit court. Avondale Liquor Store v. Dept. of Rev., 116 Ill.App.3d 804, 72 Ill.Dec. 354, 452 N.E.2d 607 (1983).
During the litigation of the assessments, on June 14, 1982, Northwest filed for reorganization under Chapter 11 of the Bankruptcy Code. On April 11, 1983, Northwest filed an adversary complaint requesting that the bankruptcy court vacate the assessments of the Department and the subsequent orders of the circuit and appellate courts. Northwest's complaint states that Section 505 of the Bankruptcy Code imbues this court with the authority to set aside the previous rulings and make its own substantive findings as to the amount of taxes Northwest owes. The Department responded by moving for either dismissal or abstention, arguing that Section 505 does not authorize the bankruptcy court to set aside substantive decisions rendered by another competent tribunal. It is this motion, involving assessment numbers F-48459, F-52504 and F-5981, which is presently before this court.
The issue sub judice is whether there previously has been a contested hearing on the merits which would preclude this court from setting aside the final decision of the state tribunal pursuant to § 505 of the Bankruptcy Code. Section 505 provides in pertinent part:
Section 505 is derived from the Bankruptcy Act sections which allowed the court to hear and determine questions concerning the amount or legality of unpaid taxes. Bankruptcy Act § 64(a)(4), 11 U.S.C. § 104a(4), amended by Bankruptcy Act § 2a(2A), 11 U.S.C. § 11a(2A) (repealed 1979); H.R.Rep. No. 595, 95th Cong., 1st Sess. 356 (1977), S.Rep. No. 989, 95th Cong., 2d Sess. 67 (1978), reprinted in, 1978 U.S.Code Cong. & Ad.News 5787, at 5853, 6312.
Several Act cases3 have construed the language used in the predecessor Section to § 505 to mean that:
Where, after a hearing, a quasi-judicial body . . . determines the amount of a tax due, with the right on the part of the taxpayer to a judicial review of the determination, all conformable with the requirements of due process, such determination, upon becoming final by operation of law, is conclusive upon a court of bankruptcy, save for mathematical error in the computation of the amount of the tax or legal error in its assessment.
In Re Monogahela Rye Liquors, 141 F.2d 864, 868 (3rd Cir., 1944). See also Arkansas Corp. Comm. v. Thompson, 313 U.S. 132, 61 S.Ct. 888, 85 L.Ed. 1244 (1941); Quinn v. Aero Services, 172 F.2d 157, 161 (9th Cir., 1949), cert. den. 338 U.S. 816, 70 S.Ct. 55, 94 L.Ed. 494 (1949). A bankruptcy court cannot redetermine questions of tax liability which have been contested prepetition in a state or federal court or a quasi-judicial agency. In re Century Vault Company, 416 F.2d 1035, 1041 (3d Cir., 1969); City of Amarillo v. Eakens, 399 F.2d 541, 543 (5th Cir.1968), cert. den., 393 U.S. 1051, 89 S.Ct. 688, 21 L.Ed.2d 692 (1969); In re New England High Carbon Wire Corp., 39 B.R. 886, 889 (Bankr.D. Mass., 1984); In re Continental Credit Corp., 1 B.R. 680, 685 (Bankr.N.D.Ill., 1979). In light of these cases, the proper inquiry appears to be whether Northwest's objections to the claims for tax deficiency have been contested and determined on the merits pursuant to an adversarial hearing.
Northwest maintains that it has not had a substantive administrative or judicial determination as to the propriety of the assessments. Concededly, the circuit and appellate courts did not get to the merits of Northwest's contentions because Northwest failed to meet the mandatory bond requirement.4 However, Northwest overlooks the fact that prior to the filing of the petition for reorganization, it appeared and had full hearings before the Department regarding each of the assessments now at issue.
At each hearing, an officer presided, represented the Department and made recommendations to the Director. 86 Ill.Adm. Code § 200.115(b), 200.130. The hearings were adversarial and similar to court proceedings. 86 Ill.Adm.Code §§ 200.101(a), 200.115(c). Northwest was represented by counsel. It had the opportunity to request that the Department issue subpoenas to compel: (1) the attendance of witnesses, (2) the production of documents, or (3) witnesses to submit to depositions. Ill.Rev.Stat. Ch. 120 ¶ 449; 86 Ill.Adm.Code § 200.120. Northwest had the opportunity to present evidence. It chose not to do so and relied upon cross-examination of the Department's witnesses. Northwest also had the opportunity to file a brief with the Director after the hearing was concluded. 86 Ill. Adm.Code § 200.135.
The Department of Revenue acted as a quasi-judicial agency when it conducted hearings and then issued final assessments adverse to Northwest. The questions Northwest seeks to raise in this court were all, therefore, "contested before and adjudicated by . . . an administrative tribunal of competent jurisdiction before the commencement of the case under title 11" as required by § 505(a)(2)(A). In accordance with the policy embodied in 505(a)(2)(A) when an administrative agency acts in a judicial capacity, resolving disputed issues of fact, and the parties have had an...
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