Opinion ID: 160974
Heading Depth: 2
Heading Rank: 1

Heading: Determination of Tax Liabilities

Text: 11 The Declaratory Judgment Act empowers courts to declare the rights and other legal relations of any interested party seeking such a declaration. 28 U.S.C. § 2201(a). The grant of authority, however, explicitly excludes cases with respect to Federal taxes. Id. The Act exempts specified proceedings from this general exclusion, thereby allowing declaratory judgments in certain cases that involve federal taxes. See id. The exemptions include civil actions involving an antidumping or countervailing duty proceeding and actions brought under 26 U.S.C. § 7428, which allows for a declaratory judgment with respect to tax-exempt status, and 11 U.S.C. §§ 505 or 1146, both of which provide for a determination of taxes for entities in bankruptcy. See id. In its motions to the district court regarding the tax liabilities of the five corporations, the receiver requests relief that the Declaratory Judgment Act specifically prohibits the court from granting. Absent the application of an exception to the statutory prohibition, the Declaratory Judgment Act plainly bars the district court from declaring that the corporations in question owe no additional federal taxes. To hold otherwise would impede the government's ability to assess and collect taxes. See Wyo. Trucking Ass'n, Inc. v. Bentsen, 82 F.3d 930, 932-33 (10th Cir. 1996). 12 As for IMMI, the corporation in receivership, and IMC, a corporation owned by the receiver, there are no relevant exceptions under the Declaratory Judgment Act that permit the district court to determine their tax liabilities. In its motion to the district court regarding the tax liabilities of IMMI and IMC, the receiver did not invoke any exception to the statutory bar and it is apparent from this court's own review that none apply. Thus, the Declaratory Judgment Act explicitly prohibits the district court from granting the requested relief for IMMI and IMC. 13 In its motion involving the bankruptcy estates' tax liabilities, however, the receiver invoked the power of a district court to make a determination of taxes under 11 U.S.C. § 505, with 28 U.S.C. § 1334(b) providing the jurisdictional authority. 6 Although a proceeding under 11 U.S.C. § 505 is exempted from the statutory bar against declaratory judgments with respect to federal taxes, the exception does not apply in this case because the receiver's motion in federal district court does not properly invoke § 505. 14 Section 505 authorizes bankruptcy courts to 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. 11 U.S.C. § 505(a)(1). This court has previously indicated that [s]section 505 gives federal courts authority to determine, in bankruptcy proceedings, the amount and legality of any tax. City Vending of Muskogee, Inc. v. Okla. Tax Comm'n, 898 F.2d 122, 124 (10th Cir. 1990) (emphasis added). The receiver cannot invoke § 505 in this case because the proceeding in federal district court is a receivership action, not a bankruptcy proceeding. Even though § 1334(b) confers jurisdiction on a district court to make a determination of tax liability under § 505, the purpose of § 1334(b) is to allow district courts in which the bankruptcy case is filed to adjudicate bankruptcy- related actions. Gruntz v. County of L.A. (In re Gruntz), 202 F.3d 1074, 1083 (9th Cir. 2000). The receiver's request for a determination of taxes is not related to a bankruptcy proceeding under title 11 in federal district court because there is no such proceeding in the district court. Thus, the district court does not have jurisdiction to provide the requested relief pursuant to § 1334(b) because the action neither arose in, nor was related to, a bankruptcy action in the district court. 7 15 Furthermore, the bankruptcy court's attempt to cede jurisdiction over the determination of tax liabilities did not effectuate a transfer of the bankruptcy proceeding to the district court in Colorado pursuant to 28 U.S.C. § 1412, which might have conferred jurisdiction on the district court over a § 505 action. See 28 U.S.C. § 1412 (A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.). The bankruptcy court did not address the applicability of § 1412 during its hearing on the bankruptcy trustee's motion to approve final accounts or in its order entered two days after the hearing. The court simply indicated that it would cede jurisdiction over the determination of federal taxes to the district court in Colorado because the receiver had the greatest stake in the outcome. Because the bankruptcy court did not transfer the case, there was no bankruptcy proceeding before the district court which would render proper a motion filed under § 505 in Colorado's federal court. Accordingly, the § 505 exception to the prohibition against declaring the rights of parties with respect to federal taxes does not apply in this case. This court concludes the Declaratory Judgment Act prohibits the district court from declaring that the bankruptcy estates owe no additional federal taxes.