CA Franchise Tax Board v. Wilshire Courtyard (In re Wilshire Courtyard)
- Citation:
- Ninth Circuit Bankruptcy Appellate Panel, BAP No. CC-10-1275-SaPaki (April 7, 2015)
- Tag(s):
-
- Ruling:
- Bankruptcy court order determining that characterization of transaction in confirmed plan was binding on taxing authority was reversed. Upon de novo review, bankruptcy court order determining that transaction was a restructure and not a sale, so the transaction resulted in cancellation of indebtedness and not capital gains, which meant that the debtor and its partners did not have taxable income, was affirmed.
- Procedural context:
- Appeal from summary judgment in favor of the debtor and its partners that the transactions consummated pursuant to the confirmed plan did not generate taxable income for the debtor and its partners.
- Facts:
- The debtor owned real estate. Pursuant to the confirmed plan, the debtor was converted from a partnership to an LLC, the secured creditors became 99% shareholders of the LLC, and the partners became 1% shareholders. The California franchise tax board was not served with notice of the plan confirmation, but was served with the notice of commencement of the case and entry of the confirmation order. Post-confirmation, the partners reported over $200 million of nontaxable cancellation of indebtedness income. The tax board challenged the characterization, arguing the transaction was a sale that generated taxable capital gains. The dispute was eventually litigated in the bankruptcy court, which granted summary judgment in favor of the debtor and partners. On appeal, the BAP held (1) the debtor had standing to litigate the issues even though the tax attributes were passed through to the partners because the tax was an obligation of the debtor and the liability of the partners was derivative, (2) the tax board received adequate notice of the plan confirmation order because it could have filed a request for special notice, (3) the bankruptcy court erred in holding that the characterization of the transaction in the plan was binding on the tax board because the notice of confirmation did not make clear that the plan would determine the characterization of the transaction, (4) the bankruptcy court did not abuse its discretion in denying the tax board's request to continue the summary judgment hearing to permit discovery because the tax board had adequate time prior to the hearing to take discovery, and (5) the bankruptcy court did not err in determining that the transaction was a restructure and not a sale, because the plan was negotiated at arms'-length by a multitude of parties, the structure was consistent with the discharge of indebtedness, and there was no evidence of a collusive transaction intended as a tax avoidance scheme.
- Judge(s):
- Sargis, Pappas and Kirscher
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