Majestic Star Casino, LLC v. Barden Dev., Inc. (In re Majestic Star Casino, LLC)

• Decision Date: 24 January 2012
• Docket Number: Adversary No. 10–56238 (KG).,Bankruptcy No. 09–14136 (KG).
• Citation: 55 Bankr.Ct.Dec. 284,466 B.R. 666,2012 USTC P 50175,109 A.F.T.R.2d 2012
• Parties: In re The MAJESTIC STAR CASINO, LLC, et al., Debtors.The Majestic Star Casino, LLC, et al., Plaintiffs, v. Barden Development, Inc., Don H. Barden, John M. Chase, Jr.,1 United States of America on behalf of the Internal Revenue Service, and State of Indiana Department of Revenue, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

109 A.F.T.R.2d 2012-698

2012-1 USTC P 50,175

466 B.R. 666

55 Bankr.Ct.Dec. 284

In re The MAJESTIC STAR CASINO, LLC, et al., Debtors.The Majestic Star Casino, LLC, et al., Plaintiffs,

v.Barden Development, Inc., Don H. Barden, John M. Chase, Jr.,1 United States of America on behalf of the Internal Revenue Service, and State of Indiana Department of Revenue, Defendants.

Bankruptcy No. 09–14136 (KG).

Adversary No. 10–56238 (KG).

United States Bankruptcy Court, D. Delaware.

Jan. 24, 2012.

James E. O'Neill, Pachulski Stang Ziehl & Jones LLP, Wilmington, DE, for Plaintiffs.

Anthony Ilardi, Jr., Dykema Gossett PLLC, Bloomfield Hills, MI, Gerald M. Gordon, Teresa M. Pilatowicz, Gordon & Silver, Ltd., Las Vegas, NV, Mary Caloway, Mona A. Parikh, Buchanan Ingersoll & Rooney PC, Wilmington, DE, Wayne Roberts, Dykema Gossett PLLC, Grand Rapids, MI, Melissa L. Dickey, U.S. Dept. of Justice, Tax Division, Washington, DC, Steven D. Carpenter, Indianapolis, IN, for Defendants.

MEMORANDUM OPINION ²

KEVIN GROSS, Bankruptcy Judge.

The Court has before it the Majestic Star Casino, LLC's and affiliated entities' (“Debtors”) Motion for Summary Judgment Against All Defendants (the “Summary Judgment Motion”) (D.I. 43) on Counts I and II of the Debtors' Complaint filed in the above captioned adversary proceeding on December 31, 2010 (the “Complaint”) (D.I. 1). The Debtors' seek to avoid a transfer and disposition of alleged property of the estate under §§ 549, 550 and 362 of title 11 of the United States Code (the “Bankruptcy Code”). Defendant United States of America on Behalf of the Internal Revenue Service (the “IRS”) filed its Motion to Dismiss on February 14, 2011 (the “Motion to Dismiss”) (D.I. 23). Defendants Don H. Barden (“Barden”) and Barden Development, Inc. (“BDI”), filed their joint Motion for Judgment on the Pleadings and Memorandum in Support on February 28, 2011 (D.I. 33, 34). The Debtors filed their Summary Judgment Motion on March 16, 2011. Thereafter, Defendant Indiana Department of Revenue filed its Opposition to Debtor–Plaintiff's Motion for Summary Judgment Against All Defendants on April 13, 2011 (D.I. 49). The Court heard oral argument on July 29, 2011. At issue is whether a non-debtor parent's revocation of its “S” corporation status, which subsequently by operation of the Internal Revenue Code, 26 U.S.C. § et seq. (the “IRC”) revoked the debtor-subsidiary's “qualified subchapter ‘S' subsidiary” (“QSub”) status, is an avoidable transfer of estate property in violation of Bankruptcy Code § 549. The Court must first determine whether the Debtors' QSub status is property of the estate. For the reasons discussed below, the Court will grant the Debtors' Motion for Summary Judgment, and deny both Defendants BDI and Barden's Motion for Judgment on the Pleadings, and the IRS's Motion to Dismiss.

I. JURISDICTION

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

II. FACTS

Founded in 1993, the Debtors operate as a multi-jurisdictional gaming company that owns casino properties in Indiana and other states. Compl. at ¶ 10. Defendant BDI is the non-debtor parent of the Debtors, including The Majestic Star Casino, II (“MSC II”). Compl. at ¶¶ 2, 16. Prior to and as of November 23, 2009, (the “Petition Date”), BDI was classified as an “S” corporation under subchapter S ³ of the IRC and, effective 2005, BDI elected to classify its wholly-owned subsidiary, MSC II, as a QSub ⁴. Id. at ¶ 2. Defendant Barden is the sole shareholder of BDI and is the President and Chief Executive Officer of MSC II. Id. at ¶ 12.

Because it was a QSub, MSC II was not required to pay federal and state income taxes on its net taxable income under chapter 1 of the IRC and chapter 2 of the Indiana Code. Id. at ¶¶ 2, 17–20. See 26 U.S.C. §§ 1361(b)(3)(A), 1362(a), 1366(a)-(b); Ind.Code § 6–3–2–2.8(2); 26 C.F.R. § 1.1361–4(a). Additionally, MSC II was not required to file income tax returns separate from BDI. Compl. at ¶ 2 n. 2. Instead, since a QSub is treated as a flow-through entity, BDI's income tax return included all items of income or loss generated by MSC II. Id. Although this income and loss must be reported on its tax return, an “S” corporation like BDI generally is not required to pay tax on such income; rather, the items of income and loss are reported on the personal tax return of the “S” corporation's shareholders (in this case, BDI's sole shareholder, Barden), who may be required to pay tax on the income. Id. at ¶ 2 n. 2. See 26 C.F.R. § 1.1366–1(a).

On the Petition Date, both BDI and MSC II retained their status as an “S” corporation and QSub, respectively. Compl. at ¶¶ 2, 17, 30. After the Petition Date, but before March 16, 2010, BDI filed a notice with the IRS revoking its status as an “S” corporation as of January 1, 2010 (the “Revocation”). Id. at ¶ 21. As a result, U.S. Treasury regulations dictated that, MSC II's QSub status was automatically terminated as of the end of the prior tax year,⁵ December 31, 2009, and both BDI and MSC II became “C” corporations as of January 1, 2010. Id. at ¶ 21. 26 U.S.C. §§ 1361(b)(3)(B)–(C), 1362(d); 26 C.F.R. §§ 1.1361–4(a), 1.1361–5(a)– (b), 1.1362–2(a).

As a consequence of becoming a “C” corporation, MSC II became responsible for filing its own tax returns and paying income taxes on its holdings and operations (26 C.F.R. §§ 1.11–1(a); 1.6016–1–1.6016–4), which include the Majestic Star II riverboat casino and the Majestic Star Hotel at Buffington Harbor in Gary, Indiana. Compl. at ¶¶ 22, 25.

Neither BDI nor Barden sought or obtained authorization from the Court for the Revocation. Id. at ¶ 23. The Complaint alleges that BDI and Barden did not consult with the Debtors or the Debtors' advisors before the Revocation. Id. The Debtors did not learn of the termination of MSC II's QSub status until July 19, 2010, which is believed to be at least four months after BDI and Barden filed the Revocation with the IRS. Id. at ¶ 24.

The Debtors allege that because MSC II was not informed about the Revocation, it was unaware that it had a new obligation to report and pay income taxes. Id. at ¶ 27. The Debtors allege that due to the change of MSC II's tax status, MSC II has had to pay approximately $2.26 million in estimated income tax to the Indiana Department of Revenue for 2010 that it otherwise would not have had to pay. Id. However, as of April 2011, the Debtors had paid no federal income taxes to the IRS as a result of the Revocation. If the Debtors owe any federal taxes, they had to make their estimated tax payments for MSC II to the IRS on April 15, 2011. Additionally, the Debtors had to make their estimated tax payments and penalties for the year ended December 31, 2010, to the Indiana Department of Revenue, on April 20, 2011. Id.

III. DISCUSSION

Debtors seek summary judgment on both counts alleged in the Complaint against all Defendants pursuant to Fed.R.Civ.P. 56(a) and Fed. R. Bankr.P. 7056. Defendants Indiana Department of Revenue, BDI, Barden, and the IRS have filed oppositions to the Summary Judgment Motion. Additionally, the IRS has filed a Motion to Dismiss the Complaint for lack of jurisdiction under Fed.R.Civ.P. 12(c), incorporated by Fed. R. Bankr.P. 7012(b), or alternatively F.R. Civ. P. 12(b)(6), for failing to state a claim upon which relief can be granted. Finally, Defendants Barden and BDI have filed their Motion for Judgment on the Pleadings under Fed.R.Civ.P. 12(c). With respect to the IRS's Motion to Dismiss and Defendants Barden and BDI's Motion for Judgment on the Pleadings the question is whether the Debtors have sufficiently stated facts which, if proven, would entitle them to relief. Secondly, with respect to the Summary Judgment Motion, the question is whether there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.

The IRS's Motion to Dismiss

Lack of Jurisdiction

The IRS argues that this Court does not have jurisdiction under § 505(a)(1) over the claims alleged in the Complaint because the Debtors have not alleged that MSC II has not paid any federal corporate income taxes or filed any federal income tax returns. The IRS argues that the only relief the Debtors seek is restoration of BDI's “S” Corporation status and MSC II's QSub status for use in future tax returns. As a result, the IRS argues that the request is not yet ripe for review because there is no actual controversy between the parties at this time. Motion to Dismiss at 2, 4–5. The IRS argues that in essence, the Debtors “are seeking a ruling concerning MSC II's tax status to assist them in computing their future corporate income tax liabilities.” Motion to Dismiss, at 5.

The Court disagrees with the IRS's argument that it does not have jurisdiction over the Debtors' claims. The IRS's position is based on a fundamental flaw that the Debtors' claims against the IRS, regard the amount or legality of any tax claim under section 505(a)(1). The Debtors are not seeking a declaratory judgment of the amount of any tax under section 505(a)(1), rather, the Debtors are seeking to avoid the revocation of MSC II's QSub status as an unauthorized transfer of estate property under § 549. This Court has jurisdiction under 28 U.S.C. § 157(b)(2) to determine an avoidable transfer under § 549, and the IRS's lack of jurisdiction argument.

Failure to State a Claim

The IRS also argues that the Motion to Dismiss should be granted because the Debtors failed to state a claim upon which relief can be granted. A motion to dismiss pursuant to Rule 12(b)(6) serves to test the sufficiency of the factual allegations in a plaintiff's complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929, (2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). To survive a motion to dismiss under Rule 12(b)...