A bankruptcy court lacks subject matter jurisdiction to determine a tax refund claim under Section 505(a)(2)(B) of the Bankruptcy Code where the refund was requested by a liquidating trustee appointed pursuant to a plan, as opposed to a pre-confirmation bankruptcy trustee or debtor-in-possession, the Second Circuit held in United States v. Bond, Docket No. 12-4803 (2nd Cir. Aug. 13, 2014).
PT-1 Communications, Inc. and certain affiliates filed Chapter 11 petitions on March 9, 2001. During their bankruptcy cases, the debtors-in-possession filed a post-petition tax return and paid the tax due as shown on the return. The IRS then filed an administrative expense claim for approximately $2 million in post-petition interest and penalties. Before the government’s administrative expense claim had been resolved, the bankruptcy court confirmed a Chapter 11 plan for the debtors. The plan transferred certain assets – including all tax refund claims – to a liquidating trust, and appointed Edward P. Bond as liquidating trustee of the liquidating trust pursuant to Section 1123(b)(3)(B) of the Bankruptcy Code.
After the effective date of the plan, the liquidating trustee asserted a counterclaim to the IRS’s administrative expense claim in the bankruptcy court, seeking a refund of the post-petition taxes paid by the debtors. The liquidating trustee subsequently filed an administrative request with the IRS for a refund of those taxes as well. In a series of decisions, the bankruptcy court ultimately dismissed the government’s administrative expense claims and granted the liquidating trustee summary judgment on his counterclaim for a tax refund. The bankruptcy court also held that the government’s setoff and recoupment rights had been extinguished under the debtors’ plan, and that sovereign immunity did not bar the liquidating trustee’s counterclaim against the government.
On appeal, the district court affirmed the bankruptcy court’s jurisdiction to determine the tax refund claim, but agreed with the government that the plan improperly extinguished the government’s setoff and recoupment rights. Both parties initially appealed to the Second Circuit; however, the government then withdrew its appeal, but declined to pay the refund based on the district court having reinstated its recoupment and setoff rights. The liquidating trustee then moved the district court to direct payment of the refund, and the IRS filed a separate action in the district court under the Judgment Setoff Act, 31 U.S.C. § 3728, seeking to set off the refund against the debtors’ post-petition tax liabilities. The district court in the appeal denied the liquidating trustee’s request for payment, but clarified that setoff or recoupment may be possible. The district court in the Judgment Setoff Act action, however, stayed that matter pending the liquidating trustee’s appeal to the Second Circuit.
In the liquidating trustee’s appeal of the district court’s decision on the bankruptcy appeal, the Second Circuit declined to address directly the government’s sovereign immunity arguments, and instead ruled on jurisdictional grounds, holding that a bankruptcy court does not have subject matter jurisdiction to determine a tax refund claim under Section 505(b)(2)(B) unless a refund was properly requested by a bankruptcy trustee or a debtor-in-possession. Because the refund here was requested by a liquidating trustee appointed pursuant to a plan – and not by a bankruptcy trustee or debtor-in-possession under the Bankruptcy Code – the jurisdictional prerequisite under Section 505(b)(2)(B) had not been satisfied, and the bankruptcy court therefore lacked subject matter jurisdiction to determine the tax refund claim.
Bankruptcy Code Section 505(a)(1) grants jurisdiction to bankruptcy courts to adjudicate certain tax disputes, and states:
Except as provided in paragraph (2) of this subsection, 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.
One of the exceptions in paragraph (2) of the statute relates to tax refunds, and states that the bankruptcy court may not:
determine . . . any right of the estate to a tax refund, before the earlier of—
(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or
(ii) a determination by such governmental unit of such request.
11 U.S.C. § 505(a)(2)(B) (emphasis added).
Because neither a bankruptcy trustee nor a debtor-in-possession (which has the powers of a trustee under Section 1107 of the Bankruptcy Code) requested the refund, but instead the refund was requested by the liquidating trustee appointed pursuant to the plan, the Second Circuit held that the statutory prerequisite to bankruptcy court jurisdiction under Section 505(b)(2)(B)(i) had not been satisfied, and the bankruptcy court lacked subject matter jurisdiction to determine the refund claim. In so holding, the Second Circuit distinguished trustees and debtors-in-possession on the one hand, whose powers are established by Congress and set forth in the Bankruptcy Code, from liquidating trustees on the other, whose powers are established under a plan and liquidating trust agreement. Based on this distinction, the Second Circuit strictly construed the statute and held that a liquidating trustee appointed pursuant to Section 1123(b)(3)(B) is not a “trustee” under Section 505(a)(2)(B)(i), and therefore the bankruptcy court lacked jurisdiction to determine the refund claim because the refund claim was not requested by “the trustee.”
The Second Circuit did not, however, reject the notion that, under Section 1123(b)(3)(B), the tax refund claim could be assigned to the liquidating trust and pursued by the liquidating trustee. Rather, the Second Circuit held only that because the liquidating trustee – as opposed to a pre-confirmation bankruptcy trustee or debtor-in-possession – had requested the refund, the statutory prerequisite for bankruptcy court jurisdiction over a tax refund claim under Section 505(b)(2)(B) of the Bankruptcy Code had not been satisfied, and that the bankruptcy court therefore lacked subject matter jurisdiction to determine the refund claim.
The takeaway from the Bond decision is that Chapter 11 debtors-in-possession with potential tax refund claims must properly request the refunds before confirmation of a plan, if they want to preserve the ability to ultimately have the bankruptcy court determine the refund claim (even if later transferred to a liquidating trust and pursued by a liquidating trustee). Absent satisfaction of this statutory prerequisite, a post-confirmation liquidating trustee may still be able to pursue a refund claim, but would have to bring that claim in District Court or the Court of Federal Claims pursuant to applicable tax law and within the applicable statute of limitations.