How To Defend A Tax Claim In Bankruptcy Court

Transcription

1 Forum Shopping and Limitations on Bankruptcy Court Jurisdiction John D. Snethen Section Chief, Tax Litigation Office of the Attorney General of Indiana 1

2 Bankruptcy Background What is Forum Shopping? Taxpayer dissatisfaction with state court remedies (or the speed of those remedies). Searching for taxpayer-friendly forums. 2

3 Bankruptcy Background The Bankruptcy code, Title 11 of the United States Code, allows taxpayers to litigate state tax controversies Section 505 Section 1146 Section

4 Why Bankruptcy Court? It can hear state tax disputes Other federal courts can t hear state tax claims The Tax Injunction Act prevents federal courts from hearing most state tax claims The Tax Injunction Act does not prevent the bankruptcy courts from hearing state tax claims. 4

5 How to get a state tax claim into bankruptcy court There are three requirements Case or controversy Core bankruptcy proceeding Bankruptcy court must have constitutional and statutory authority to enter a judgment 5

6 How to get a state tax claim into bankruptcy court First requirement: Case or controversy It is a constitutional limitation on federal jurisdiction Federal district courts have jurisdiction over bankruptcy cases or controversies The federal district courts then refer the case to a bankruptcy court 6

7 How to get a state tax claim into bankruptcy court What s the definition of a case or controversy? It is a matter that is appropriate for judicial determination It must be definite and concrete and touch the legal relations of parties having adverse legal interests It must be a real controversy and not merely seek an advisory opinion about what the law would be as applied to hypothetical facts 7

8 How to get a state tax claim into bankruptcy court Second requirement: Core proceeding The concept of core proceeding limits the bankruptcy court s jurisdiction A core proceeding either arises under the bankruptcy code, or is by its nature the type of case that could arise in bankruptcy only Bankruptcy courts can hear non-core proceedings, but they have to propose to the district court how to rule on the case 8

9 How to get a state tax claim into bankruptcy court Third requirement: Constitutional and statutory authority The U.S. Supreme Court has ruled that a bankruptcy court may have statutory authority to hear a claim, and yet lack constitutional authority to hear the claim Federal district courts are sidestepping this problem with standing referral orders that allow bankruptcy courts to propose findings when they believe they (the BR courts) lack constitutional authority to enter a final judgment 9

10 The statutes governing state tax claims in bankruptcy court 11 U.S.C. 505(a)(1) Determination of Tax Liability.... the 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. 10

11 The statutes governing state tax claims in bankruptcy court Limits to Section 505 Taxpayers can t re-litigate questions they ve already litigated The State gets a chance to decide tax refunds first Only the actual debtor gets to use Section

12 The statutes governing state tax claims in bankruptcy court Limits to Section 505 continued Bankruptcy courts don t have to exercise authority under Section 505 Section 505 applies to existing, not future, tax liabilities A taxpayer may still challenge the amount or legality of future taxes, but must use the State s courts and procedures 12

13 The statutes governing state tax claims in bankruptcy court 11 U.S.C & 1231 Permit a proponent of a plan of reorganization to seek a determination of the state tax consequences of the plan prior to acceptance of the plan Almost no litigation about the scope of Section 1146 State tax authorities should argue for a narrow application of Section

14 Forum Shopping In re Indianapolis Downs, LLC, 462 B.R. 104 (Bankr. D. Del. 2011), appeal docketed No (3d Cir. Mar. 6, 2012) In re Kmart Corp., 2011 WL (Bankr. N.D. Ill.) In re Appleseed s Intermediate Holdings, LLC, No (Bankr. D. Del. filed Jan. 19, 2011); No (D. Del. filed Dec. 29, 2011) In re Washington Mutual, 485 B.R. 510 (Bankr. D. Del. 2012) 14

15 Forum Shopping " Indianapolis Downs: a Section 505 case Downs sought a determination of its present and future tax obligations Downs did not ask the bankruptcy court for a refund (but it did file a claim for refund with the State, which was denied and appealed by Downs to the Indiana Tax Court) The bankruptcy court granted Downs prospective relief under Section 505, holding that Downs did not owe Indiana tax 15

16 Forum Shopping " Kmart: a Section 1146 case Kmart sought a determination of its Illinois tax liability seven years after its reorganization plan had been confirmed by the bankruptcy court The bankruptcy court said it lacked jurisdiction to decide the issue because Section 1146 applies to proposed plan only Never assume that a bankruptcy court has subject matter jurisdiction 16

17 Forum Shopping " Appleseed s: a constitutional challenge to a State tax Appleseed's filed for bankruptcy, and Ohio filed claims for unpaid tax. Appleseed s argued that Ohio s tax violated the U.S. Constitution. Ohio convinced the district court to take the case from the bankruptcy court, and argued various reasons why the bankruptcy court lacks subject matter jurisdiction Appleseed s provides a good model for defending a state tax against a constitutional attack in bankruptcy court 17

18 Forum Shopping " Washington Mutual: a constitutional challenge to a State tax Oregon assessed WaMu $30 million in tax. WaMu appealed, and then file for bankruptcy in Delaware WaMu argued that Oregon s tax was unconstitutional The bankruptcy court agreed, holding that Oregon s tax violated Due Process and the Commerce Clause. The bankruptcy court said that WaMu didn t have to pay Oregon any tax. 18

19 Protect your state s interests " Challenge the bankruptcy court s jurisdiction to decide the tax issue " Argue that the bankruptcy code does not provide the relief sought by the taxpayer 19

20 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction The tax issue does not present a case or controversy, but instead seeks an advisory opinion The principle of federalism precludes federal court involvement The doctrine of comity precludes federal court involvement 20

21 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Federalism explained: The national government will fare best if the states and their institutions are left to perform their separate functions in separate ways. 21

22 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Comity explained: Comity dictates that if federal jurisdiction results in federal interference with the administration of a state s taxing authority, the federal court will refrain from exercising jurisdiction. 22

23 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Abstention doctrines Mandatory abstention (28 U.S.C. 1334(C)(2)) Permissive abstention (28 U.S.C. 1334(C)(1)) Permissive abstention (11 U.S.C. 505(A)(1)) 23

24 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Mandatory abstention 1. Your motion must be timely 2. The action must be based on state law 3. The action has already commenced in state court 4. The state court action can be timely adjudicated 5. There is no independent basis for federal jurisdiction 6. The matter is non-core (not a bankruptcy case) 24

25 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Permissive abstention At the bankruptcy court s discretion In the interests of justice or comity Out of respect for difficult or unsettled state law 25

26 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued Permissive abstention factors 1. Complexity of tax issue 2. Need for order and efficiency in bankruptcy case 3. Debtor s asset and liability structure 4. Prejudice to debtor and prejudice to the State 5. Burden on the bankruptcy court s docket 6. The length of a trial 26

27 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued The Tax Injunction Act Case law says the TIA doesn t apply to bankruptcy courts You argue that the TIA applies to district courts Bankruptcy courts are part of district courts Therefore the TIA should apply to bankruptcy courts too Note that a bankruptcy court cannot issue an injunction that contravenes the TIA 27

28 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued The bankruptcy court s constitutional authority The U.S. Supreme Court has at least implied that bankruptcy courts cannot issue judgments on matters concerning private rights (Stern v. Marshall) A private right is not closely intertwined with a federal regulatory program, and it doesn t belong or exist against the federal government (Granfinanciera) State tax litigation would qualify as a private right At the very least, you might get the case sent back to district court 28

29 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued The bankruptcy court s statutory authority Make sure the bankruptcy court is authorized by statute to grant the relief sought by the taxpayer For example, Section 505 does not permit the bankruptcy court to grant prospective relief 29

30 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued The Declaratory Judgment Act A bankruptcy court cannot grant declaratory relief under Section 505 or 1146 of the bankruptcy code For example, Section 505 does not permit the bankruptcy court to grant prospective relief 30

31 Protect your state s interests " Arguments challenging the bankruptcy court s jurisdiction, continued The state tax issue is not a core bankruptcy proceeding A core proceeding involves a substantial right under the bankruptcy code or could only arise in bankruptcy If a matter is not a core proceeding, the bankruptcy court will issue proposed findings for the district court to review and accept or reject 31

32 Protect your state s interests " Arguments challenging the taxpayer s cause of action Section 505 can t be used for prospective relief or postconfirmation relief Section 1146 can t be used post-confirmation (Kmart) Section 505 and Section 1146 can t be used together to overcome the limitations in each (In Re UAL, 336 BR 370) 32

33 Summary Bankruptcy courts are courts of equity You can find yourself litigating a state tax claim in bankruptcy court (most likely in Delaware) any time You have to make all your arguments to the bankruptcy court or risk waiving them on appeal You need qualified staff who know both tax and bankruptcy to help you with these cases 33

34 Forum Shopping and Limitations on Bankruptcy Court Jurisdiction Questions? Discussion? Thank you. John D. Snethen Section Chief, Tax Litigation Office of the Indiana Attorney General Telephone: (317)