In re: Wilshire Courtyard

Opinion

FILED APR 07 2015

1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-10-1275-SaPaKi )

6 WILSHIRE COURTYARD, ) Bk. No. 97-10771 )

7 Debtor, )

___________________________________)

8 )

CALIFORNIA FRANCHISE TAX BOARD, )

9 )

Appellant )

10 )

v. ) M E M O R A N D U M1 11 )

WILSHIRE COURTYARD; JEROME H. )

12 SNYDER GROUP I, LTD.; LEWIS P. )

GEYSER REVOCABLE TRUST; GEYSER )

13 CHILDREN’S TRUST, FBO JENNIFER )

GEYSER, LEWIS P. GEYSER, TRUSTEE; )

14 WENDY K. SNYDER; JEROME H. SNYDER; )

GEYSER CHILDREN’S TRUST, FBO )

15 DANIEL GEYSER, LEWIS P. GEYSER, )

TRUSTEE; RUSSELL & RUTH KUBOVEC, )

16 DECEASED, KUBOVEC FAMILY TRUST, )

RITA FARMER, TRUSTEE; WILLIAM N. )

17 SNYDER; JOAN SNYDER; GEYSER )

CHILDREN’S TRUST, FBO DOUGLAS )

18 GEISER, LEWIS P. GEYSER, TRUSTEE; )

LON J. SNYDER; SNYDER CHILDREN’S )

19 TRUST, FBO WILLIAM N. SNYDER, )

LEWIS P. GEYSER, TRUSTEE, )

20 )

Appellees. )

21 ___________________________________) 22 Argued and Submitted on July 25, 2014 at Pasadena, California

23 Filed - April 7, 2015

24 Appeal from the United States Bankruptcy Court 25 for the Central District of California 26

1

This disposition is not appropriate for publication.

27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th 28 Cir. BAP Rule 8024-1.

2

1 Honorable Samuel Bufford, Bankruptcy Judge and Honorable Vincent Zurzolo, Bankruptcy Judge, Presiding2 2 3 Appearances: Lisa W. Chao appeared for Appellant California Franchise Tax Board; Kenneth John Shaffer of Quinn 4 Emmanuel Urquhart & Sullivan, LLP appeared for Appellees Wilshire Courtyard, Jerome H. Snyder 5 Group I, Ltd., Lewis P. Geyser Revocable Trust, Wendy K. Snyder, Jerome H. Snyder, Geyser 6 Children's Trust, FBO Jennifer Geyser, Lewis P.

Geyser, Trustee, Geyser Children's Trust, FBO 7 Daniel Geyser, Lewis P. Geyser, Trustee, Russell & Ruth Kubovec, Deceased, Kubovec Family Trust, Rita 8 Farmer, Trustee, William N. Snyder, Joan Snyder, Geyser Children's Trust, FBO Douglas Geyser, Lewis 9 P. Geyser, Trustee, Lon J. Snyder and Snyder Children's Trust, FBO William N. Snyder, Lewis P.

10 Geyser, Trustee. 11 12 Before: SARGIS,3 PAPPAS, and KIRSCHER, Bankruptcy Judges. 13 The parties to this bankruptcy case, and the appeals arising 14 therefrom, survived the real estate crash of the late 1990s, the 15 Y2K “disaster” with the turning of the Millennium, and the real 16 estate implosion of the 2000s, all while fighting over the effect 17 of the April 1998 confirmation of a chapter 11 plan. The 18 complexities of the arguments have increased and the reasons for 19 supporting or rejecting the reasoning of the bankruptcy court have 20 grown. In considering the appeal, this Panel returns to the 21 basics of what was actually decided by the bankruptcy court, the 22 evidence presented, arguments of the parties, and the plain 23 language of the Bankruptcy and Internal Revenue Codes. 24 For the issues presented on appeal, the ruling of the 25 26 2 Bankruptcy Judges Bufford and Zurzolo each entered orders that are implicated in this appeal.

27

3

The Honorable Ronald H. Sargis, Bankruptcy Judge for the 28 Eastern District of California, sitting by designation.

3

1 bankruptcy court that the order confirming the chapter 11 plan 2 determined whether the plan provided for a sale of property is 3 REVERSED. Based upon this Panel’s de novo review of the summary 4 judgment, the decision of the bankruptcy court granting summary 5 judgment is AFFIRMED. 6 APPELLATE HISTORY 7 This is the second time that the appeal of the bankruptcy 8 court’s order at issue has been before this Panel. Previously, 9 this Panel considered whether proper post-confirmation 10 jurisdiction existed for determination of the underlying issues. 11 Concluding that such post-confirmation jurisdiction did not exist, 12 this Panel reversed and ordered that the matter be remanded with 13 instructions to dismiss. In re Wilshire Courtyard, 459 B.R. 416, 14 (9th Cir. BAP 2011). 15 The Ninth Circuit Court of Appeals reversed, concluding that 16 post-confirmation jurisdiction existed, and remanded to this Panel 17 for further proceedings. Wilshire Courtyard v. Cal. Franchise Tax 18 Bd. (In re Wilshire Courtyard), 729 F.3d 1270 (9th Cir. 2013) 19 (“Wilshire I”). 20 CHAPTER 11 BANKRUPTCY CASE 21 AND CONFIRMED CHAPTER 11 PLAN 22 This dispute began when Wilshire Courtyard, a California 23 general partnership, ("Debtor"), filed a chapter 11 bankruptcy 24 case on January 8, 1997 (“Wilshire Bankruptcy Case”). Debtor 25 developed and owned two commercial complexes on Wilshire Boulevard 26 in Los Angeles containing almost a million square feet of rental 27 office space (the "Property"). The lender holding the debt 28 secured by the first position lien on the Property (“Senior

4

1 Secured Claim”) was Continental Bank, N.A., which secured claim 2 subsequently came to be held by the successor “Senior Secured 3 Creditors” in the Wilshire Bankruptcy Case. Various other 4 entities held subordinated secured debt. Early in the Wilshire 5 Bankruptcy Case, Continental was acquired by Bank of America, N.A. 6 ("BofA"). BofA served as the loan servicer and trustee for the 7 Senior Secured Creditors in the Wilshire Bankruptcy Case. 8 Debtor's total secured debt aggregated almost $350 million. After 9 Debtor defaulted on the Senior Secured Claim in July 1996, and a 10 foreclosure sale was scheduled for January 9, 1997, Debtor filed 11 its chapter 11 bankruptcy petition. 12 Appellant California Franchise Tax Board ("CFTB") was listed 13 in the creditor mailing matrix filed by Debtor in the Wilshire 14 Bankruptcy Case. Though CFTB received notice of the commencement 15 of the case, CFTB did not file a proof of claim, did not assert 16 any other claim, did not oppose the chapter 11 Plan, and did not 17 otherwise investigate or participate in the Wilshire Bankruptcy 18 Case. 19 Confirmed Chapter 11 Plan 20 The Senior Secured Creditors, Debtor, and the Debtor’s 21 partners (“Partners”) negotiated the terms of a joint, consensual 22 chapter 11 plan of reorganization (“Joint Plan”). Under the terms 23 of the Joint Plan, the Debtor was restructured from a California 24 general partnership to a Delaware limited liability company — 25 Wilshire Courtyard, LLC (“Wilshire LLC”). After confirmation, 26 Wilshire LLC continued to own and operate the Property. Under the 27 terms of the Joint Plan, Wilshire LLC arranged for a new, 28 nonrecourse loan for approximately $100,000,000, secured by a

5

1 first deed of trust on the Property (“New Secured Financing”). 2 For their part in the reorganization through the Joint Plan, 3 the Senior Secured Creditors agreed to contribute $23,000,000 to 4 Wilshire, LLC, and to release the balance of their secured 5 indebtedness, in part, for receipt of the New Secured Financing 6 proceeds. Additionally, the Senior Secured Creditors acquired a 7 99% ownership interest in the reorganized Wilshire LLC. For the 8 Partners, confirmation resulted in their receipt of the remaining 9 1% interest in Wilshire LLC. In addition, the Partners also 10 received approximately $3,500,000 in cash, and a $450,000 loan 11 from the Senior Secured Creditors’ entity created to acquire their 12 99% interest in Wilshire LLC. Other creditors holding the junior 13 secured claim (“Co-Investors”), agreed to accept a $2,500,000 14 payment on their $221,000,000 secured claim, and to forgive the 15 balance of the claim. Administrative expenses and general 16 unsecured claims totaling around $900,000 were paid in full 17 through the Joint Plan. These transactions in the Joint Plan by 18 which Wilshire LLC became the successor to the Debtor, the New 19 Secured Financing obtained, claims paid, and the releases granted 20 are referred to as the “Transaction.” 21 Debtor’s Second Amended Disclosure Statement was approved by 22 the bankruptcy court on February 19, 1998. Notice of the 23 confirmation hearing for the Joint Plan was sent by Debtor to 24 interested parties in the Wilshire Bankruptcy Case on February 12, 25 1998. However, CFTB was neither served with a copy of the 26 proposed plan nor given notice of the confirmation hearing. 27 After the confirmation hearing, the bankruptcy court entered 28 an Order Confirming the Joint Plan of Reorganization on April 14,

6

1 1998 (“Confirmation Order”). CFTB acknowledges that it received 2 the "Notice of Order Confirming Chapter 11 Plan" from the Clerk of 3 the bankruptcy court. The Notice stated in relevant part that, 4 "Notice is hereby given of the entry of an order of this Court 5 confirming a Plan of Reorganization. A copy of the order and the 6 plan itself are contained in the Court file located at the address 7 listed herein." This Confirmation Order is the epicenter from 8 which the present dispute emanates. 9 The Joint Plan having been confirmed, the Wilshire Bankruptcy 10 Case was closed on October 22, 1998. Wilshire LLC contends, and 11 CFTB has not effectively disputed, that the confirmed plan was 12 implemented and consummated. The restructure of the Debtor was 13 accomplished, the Transaction was implemented and the Joint Plan 14 was completed, and Wilshire LLC became the successor to the 15 Debtor. 16 After confirmation and consummation of the Joint Plan, the 17 Partners reported approximately $208,000,000 in aggregate 18 cancellation of debt income ("CODI") on their individual 1998 19 California state tax returns. On November 15, 2002, CFTB sent 20 Wilshire LLC and the Partners an "Audit Issue Presentation Sheet" 21 ("AIPS"). The AIPS informed them that CFTB challenged the 22 Partners' characterization of the tax consequences of the 23 Transaction affected by the confirmed Joint Plan as CODI. Rather 24 than $208,000,000 in CODI, CFTB argued that the Partners should 25 have reported approximately $231,000,000 in capital gain income 26 arising from the Transaction. CFTB contends that the treatment of 27 the Senior Secured Creditors’ Claim and the Co-Investors’ Claim 28 and interests under the Joint Plan constituted a disguised sale of

7

1 the Property. Based on the AIPS, CFTB issued notices of proposed 2 assessments to the Partners on June 15, 2004, totaling 3 approximately $13,000,000 in unpaid income taxes. 4 The Partners disputed CFTB's assertion that the Transaction 5 resulted in income to the Debtor and the Partners. Over the next 6 five years, CFTB and the Partners engaged in several California 7 state administrative hearings relating to this dispute. 8 Enforcement of Joint Plan and Confirmation Order 9 On May 27, 2009, the dispute shifted from the state 10 administrative proceedings back to the bankruptcy court. 11 Wilshire LLC filed an ex parte motion to reopen the Wilshire 12 Bankruptcy Case. Wilshire LLC argued that through the AIPS and 13 the continuing administrative hearings, CFTB was attempting to 14 collaterally attack the Confirmation Order and Joint Plan by 15 recharacterizing the terms of the Joint Plan as effecting a 16 disguised sale of the Property. Wilshire LLC asserted that the 17 Joint Plan provided for Wilshire LLC, as the reorganized Debtor, 18 to retain ownership of the Property and did not provide for a sale 19 of the Property. The bankruptcy court granted the motion and 20 entered an order reopening the Wilshire Bankruptcy Case on June 4, 21 2009. 22 Wilshire LLC then filed a motion for an Order to Show Cause 23 Re Contempt ("OSC") on June 23, 2009.4 The bankruptcy court 24 issued the OSC on August 12, 2009, directing CFTB to appear before 25 26 4 Ex. 4, p. 24. (All references to the Record are from the Exhibits presented by Appellant CFTB, Exhibits 1 - 34, identified 27 by Exhibit (“Ex.”) number and the page number at which the referenced document or specific text may be located in the 28 Record.)

8

1 the bankruptcy court to show why it should not be held in contempt 2 for collaterally attacking, and by refusing to act in accordance 3 with, the Joint Plan and Confirmation Order.5 4 CFTB responded to the OSC on August 27, 2009, arguing that 5 Wilshire LLC had not given CFTB adequate notice of the terms of 6 the Joint Plan prior to confirmation, of the time for objecting to 7 the plan, or of the confirmation hearing.6 Therefore, CFTB 8 asserted it was not bound by the Joint Plan and Confirmation 9 Order. Further, CFTB asserted that Wilshire LLC lacked standing 10 to prosecute the OSC motion and issuance of a contempt order by 11 the bankruptcy court against CFTB would be fundamentally unfair 12 because the state tax consequences of the plan terms were never 13 considered by the bankruptcy court. CFTB also argued that the 14 bankruptcy court lacked the authority to determine such taxes. If 15 the court decided the court had authority to determine and 16 Wilshire LLC had standing to prosecute the motion, Wilshire LLC 17 was guilty of laches. CFTB asserted that laches bars the 18 determination because Wilshire LLC delayed raising these issues in 19 the Wilshire Bankruptcy Case during the six-year period after 20 confirmation that the CFTB was prosecuting the issue in the state 21 administrative proceedings. 22 Wilshire LLC replied on September 9, 2009, arguing that: 23 (1) CFTB had received adequate notice of the filing of the 24 Wilshire Bankruptcy Case and proceedings and entry of the 25 Confirmation Order; and (2) Wilshire LLC had both prudential and 26 27 5 Ex. 22; p. 697.

28 6 Ex. 6; p. 33.

9

1 constitutional standing to seek enforcement of the Confirmation 2 Order. Additionally, Wilshire LLC argued that CFTB could not 3 prove an affirmative defense of laches.7 4 The bankruptcy court held an initial hearing on the OSC on 5 September 15, 2009. Wilshire LLC and CFTB appeared by counsel; 6 however, the Partners were not represented at the hearing. Only 7 Wilshire LLC had sought the issuance of the OSC.8 After hearing 8 arguments of counsel, the bankruptcy court directed the parties to 9 submit further briefing whether a contempt motion was proper under 10 the circumstances of this case, and suggested that the Partners 11 should be joined as parties to the proceedings. 12 After a continued status conference, on March 12, 2010, 13 acting under authority of Rule 7019,9 made applicable in contested 14 matters by Rule 9014(c), the bankruptcy court ordered the joinder 15 of the Partners in the proceedings. None of the Partners objected 16 to the joinder order. 17 Motion for Summary Judgment or Summary Adjudication of Issues 18 19 Eleven months after the OSC was filed, Wilshire LLC and the 20 Partners filed a joint Motion for Summary Judgment or Summary 21 Adjudication of Issues on May 3, 2010 (“Motion for Summary 22 23

7

Ex. 7; p. 50.

24

8

Ex. 4, p. 24; Notice of and Motion for Issuance of Order to 25 Show Cause. 26 9 All Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001–9037, and all Civil Rule references are to 27 the Federal Rules of Civil Procedure 1–86. Rule 7019 makes Fed.

R. Civ. P. 19 for joinder of parties applicable in bankruptcy 28 adversary proceedings.

10

1 Judgment or Summary Adjudication”). In the motion, they repeated 2 Wilshire LLC's earlier contentions concerning CFTB's receipt of 3 adequate notice in the Wilshire Bankruptcy Case, that CFTB's 4 characterization of the Transaction as a disguised sale amounted 5 to a collateral attack on the Joint Plan, and that the 6 Confirmation Order should be enforced under applicable provisions 7 of the Bankruptcy Code. 8 CFTB filed an opposition to the Motion for Summary Judgment 9 or Summary Adjudication on June 9, 2010, generally countering 10 these arguments. In addition to its earlier arguments, CFTB also 11 argued that the bankruptcy court lacked subject matter 12 jurisdiction to decide the motion and that, if it had 13 jurisdiction, the bankruptcy court should abstain from considering 14 the tax issues. Further, CTFB argued that if the bankruptcy court 15 was inclined to resolve the tax issues and determine whether the 16 Transaction did indeed result in CODI rather than capital gain, 17 CFTB requested a six-month continuance to undertake discovery on 18 that issue. 19 Wilshire LLC and the Partners responded to CFTB's opposition 20 on June 16, 2010, generally repeating and supporting their earlier 21 arguments. 22 The bankruptcy court conducted a hearing on both the OSC and 23 summary judgment motion on June 22, 2010, at which all the parties 24 were represented by counsel. The bankruptcy court rejected CFTB's 25 request to submit additional briefing, and denied its request for 26 additional time to conduct discovery. On July 15, 2010, the 27 bankruptcy court issued an Order for Summary Adjudication of

11

1 Issues and Continued Hearing (“Summary Adjudication Order”).10 In 2 the Summary Adjudication Order the court made the following 3 pertinent findings and conclusions: 4 1. That jurisdiction existed under 28 U.S.C. §§ 1334(b) and 1346(a), and 11 U.S.C. §§ 346(a) and 346(j) to interpret the 5 terms of the Joint Plan and Confirmation Order. 6 2. Finding “V” (page 6 line 17) of Confirmation Order11 states, “The Joint Plan and all agreements, settlements, transactions 7 and transfer contemplated thereby do not provide for, and when consummated will not constitute, the liquidation of all 8 or substantially all of the property of the Debtor's Estate under Bankruptcy Code section 1141(d)(3)(A); . . .”

9 3. The bankruptcy court further concluded that “[b]ecause the 10 [Joint] Plan did not implement a sale or exchange, the release or forgiveness under the [Joint] Plan did not create 11 capital gain income reportable by the [Debtor].” 12 The Summary Adjudication Order further provided that within 13 ten days of the entry of that Order, CFTB must vacate the 14 assessments which are based on the Joint Plan effectuating a 15 disguised sale or that the Transaction was a sale or exchange. 16 CFTB was further ordered to cease and desist from taking further 17 action in contempt of the Confirmation Order. The bankruptcy 18 court ordered that it would conduct a further hearing concerning 19 the impact, if any, of Stackhouse v. United States, 441 F.2d 465 20 (5th Cir. 1971), to consider whether there could be a different 21 tax result for the Partners than for the Debtor (the 22 partnership).12 23 24

10

25 Ex. 31, p. 1078. 26 11 Ex. 22, p. 702

27 12 Summary Adjudication Order, Ex. 31, p. 1080; and Hearing Transcript (“Hrg. Tr.”) of June 22, 2010 hearing, Ex. 32, 28 pp. 1124: 16-23, 1125: 1-15.

12

1 Second Hearing on Motion for Summary Judgment and August 31, 2010 Written Decision 2 The bankruptcy court held a second hearing on July 20, 2010, 3 on the Motion for Summary Judgment or Summary Adjudication. Early 4 in the hearing, the court noted that the Summary Adjudication 5 Order interpreting Finding “V” was effective only as to Wilshire 6 LLC, but only tentative as to the individual Partners based on the 7 court having ordered further briefing and argument on the 8 “Stackhouse issue.” After hearing the arguments of the parties, 9 the bankruptcy court announced it would grant summary judgment in 10 favor of both Wilshire LLC and the Partners. Among the statements 11 made by the bankruptcy court at the hearing were that:

12 (a) “Section 1141 provides that all creditors are bound by the 13 plan. This includes [CFTB];” (b) “In this case the plan’s results 14 also apply to the Debtor’s partners,. . .;” and (c) “so [CFTB’s]

15 actions are in contempt of the confirmation order and [CFTB] is 16 ordered to cease and desist.”13 17 On August 31, 2010, the bankruptcy court issued a written 18 Decision entitled “Opinion on the Summary Judgment Motion”

19 (“August 31 Decision”).14 No further order was issued after the 20 July 20, 2010 continued hearing. In the August 31 Decision the 21 bankruptcy court made the following determinations:

22 1. “[B]ecause [CFTB] received both the case commencement notice 23 and a notice of entry of the confirmation order, the notice provided to [CFTB] was constitutionally adequate and did not 24 deny [CFTB] its due process rights.” Ex. 38, p. 1486. 25 26 13 Ex. 37; Hr'g Tr., p. 1479:1-3; 8-9; 18-19 (July 20, 2010 Continued Hearing on Motion for Summary Judgment or Summary 27 Adjudication). 28 14 Ex. 38, p. 1483.

13

2. “[T]he interests of the Partners are wholly derivative from 2 the status of the Property in the partnership.” Id., p. 1483.

3 3. “The confirmation order specifically provided that the plan 4 and transactions thereunder ‘do not provide for, and when consummated will not constitute, the liquidation of all or 5 substantially all of the property of the Debtor's estate.’”

Id., p. 1484

6 4. “Because the [CFTB] is bound by the chapter 11 plan, . . ., 7 the action now taken by [CFTB] [to recharacterize the Transaction as a disguised sale] in contravention of the plan 8 is an impermissible collateral attack on confirmation order.”

Id., p. 1487.

9 5. “[CFTB’s] attempt to recharacterize the [Transaction] as a 10 disguised sale would nullify the effect of the [1980 Bankruptcy Tax Act which overturned Stackhouse] and would 11 ignore the interplay between § 346 and relevant IRC Provisions [IRC § 108(a)(1)] allowing debtor to exclude CODI 12 from its realizable income.” Id., p. 1488 13 6. [W]hen there is a cancellation of indebtedness at the partnership level . . . , there is no realized taxable 14 income, even at the partner level, when a partnership does not realize CODI.” Id.

15 16 October 4, 2010 Order Granting Summary Judgment 17 On October 4, 2010, the bankruptcy court entered a final 18 "Order Granting Summary Judgment" (“Summary Judgment Order”).15 19 This final order was consistent with the August 31 Decision, with 20 the court making some additional findings and conclusions, which 21 are paraphrased as follows: 22 1. The court summarily adjudicates and interprets Finding “V” of the Confirmation Order to establish that the transaction 23 implemented under the Joint Plan is not a sale or exchange for any purpose.

24 2. The court summarily adjudicates and interprets Finding X of 25 the Confirmation Order and the Joint Plan Article VI.A.2 to establish that the transfers and transactions implemented 26 under the Joint Plan are not a sale of partnership interests by the existing Partners.

27 28 15 Ex. 39, p. 1491.

14

3. The court summarily adjudicates and interprets Finding “X” of 2 the Confirmation Order to establish that the transfers and transactions contained in Joint Plan Article VI.A., and 3 specifically Article VI.A.2., to be a capital contribution to Wilshire LLC in return for receiving the LLC interests.

4 4. The court summarily adjudicates and interprets Finding “Y” of 5 the Confirmation Order and Joint Plan Article VII.A and C to establish that the junior secured claim in the approximate 6 amount of $221 Million is released and discharged for payment of $2.5 Million as provided in Joint Plan Article V.C-2.

7 5. The court summarily adjudicates and interprets Bankruptcy 8 Code § 346 (as it existed in 1997) as applying to the State of California so that income is not realized by (1) the 9 bankruptcy estate, (2) debtor, or (3) successor to debtor by reason of forgiveness or discharge of indebtedness under 10 Title 11. 11 6. The excluded discharge of indebtedness is income subject to passthrough pursuant to IRC Section 702(a) resulting in a 12 basis increase under IRC Section 705. 13 7. The CFTB Assessments (Ex. 14, pp. 223-257) of taxes on the Partners constitute an impermissible collateral attack on the 14 Confirmation Order and Joint Plan based on the requirement on a government unit to raise the tax avoidance issue either at 15 or before the confirmation hearing, or in the event of fraud within 180 days thereafter as provided in 11 U.S.C.

16 §§ 1129(d) and 1144. 17 8. CFTB is ordered to vacate the Assessments within ten days of the entry of this Order Granting Summary Judgment.

18 THE SUMMARY ADJUDICATION ORDER, SUMMARY JUDGMENT ORDER, 19 AND THE AUGUST 31 DECISION ARE PROPERLY ON APPEAL 20 On July 26, 2010, CFTB filed a Notice of Appeal (“First 21 Notice of Appeal”) in connection with the Motion for Summary 22 Judgment or Summary Adjudication.16 The First Notice of Appeal 23 states that CFTB appeals to the Bankruptcy Appellate Panel from: 24 (1) the Summary Adjudication Order (filed July 15, 2010), (2) the 25 “July 20, 2010 Decision,” and (3) “any judgment, order or decree 26 related to such decision, which has not, as yet, been issued.” 27 28 16 Ex. 33, p. 1128.

15

1 On October 13, 2010, CFTB filed a second Notice of Appeal in 2 connection with the Motion for Summary Judgment or Adjudication 3 (“Second Notice of Appeal”).17 The second Notice states that CFTB 4 appeals to the Bankruptcy Appellate Panel from: (1) the July 15, 5 2010 Order for Summary Adjudication and Continuing Hearing, 6 (2) the July 20, 2010 oral decision of the bankruptcy court and 7 any judgment, order or decree related to that oral decision, which 8 has not, as yet been issued, (3) the August 31 Decision, and 9 (4) the Order Granting Summary Judgment. 10 CFTB argues that the bankruptcy court lacked jurisdiction to 11 issue the Summary Judgement Order on October 4, 2010, because CFTB 12 filed a Notice of Appeal of the Summary Adjudication Order on 13 July 25, 2010. CFTB contends that the Summary Judgment Order 14 filed on October 4, 2010, altered and expanded the Summary 15 Adjudication Order previously filed on July 15, 2010, which was 16 the subject of the July 25, 2010 Notice of Appeal. In support of 17 this contention, CFTB cites Rains v. Flinn (In re Rains), 428 F.3d 18 893, 904 (9th Cir. 2005) for the basic legal principle that, once 19 a notice of appeal is filed, the bankruptcy court may not finally 20 adjudicate substantial rights directly involved in the appeal. 21 CFTB concludes that the August 31 Decision is the judgment or 22 order from which it has appealed, and the October 4, 2010 Order 23 altered that judgment or order. CFTB’s arguments miss the mark on 24 several points. 25 First, subject to exceptions not applicable here, an appeal 26 may be taken as a matter of right only from a final judgment or 27 28 17 Ex. 40, p. 1496.

16

1 order. 28 U.S.C. § 158(a)(1). The final judgment or order 2 requirement is intended to preclude piecemeal litigation, conserve 3 judicial energy, and eliminate delays caused by interlocutory 4 appeals. Catlin v. United States, 324 U.S. 229, 233-34 (1945). 5 “In the ordinary course a ‘final decision’ is one that ends the 6 litigation on the merits and leaves nothing for the court to do 7 but execute the judgment.” Ray Haluch Gravel Co. v. Cent. Pension 8 Fund of the Int’l Union of Operating Eng’rs & Participating 9 Emp’rs, 134 S. Ct. 773, 779 (2014)(quoting Catlin, 324 U.S. at 10 233). 11 It is clear from the history of hearings and orders in the 12 Wilshire Bankruptcy Case beginning with the Summary Adjudication 13 Order, through the hearings and oral statements from the 14 bankruptcy court at the July 20, 2010 hearing, the issuance of the 15 August 31 Decision, and ultimately the Summary Judgment Order, the 16 final order from which an appeal could be taken as a matter of 17 right was not issued by the court until October 4, 2010. The CFTB 18 incorrectly seeks to treat the August 31 Decision, the Summary 19 Adjudication Order, and the statements of the court at the two 20 hearings as the “final orders” for purposes of appeal – all of 21 which predated the issuance of the actual final order, the 22 October 4, 2010 Summary Judgment Order.18 23 In substance, CFTB complains that the bankruptcy court 24 conducted multiple proceedings and afforded the parties several 25 26 18 CFTB’s First Notice of Appeal foretells that a final order is to come, stating that CFTB is appealing from not only the 27 Summary Adjudication Order and Decision, but from any other order or decree relating to the motion “which has not, as yet, been 28 issued.” Ex. 33, p. 1128.

17

1 opportunities to consider interim rulings and further brief 2 specific issues. Beginning with the bankruptcy court’s July 20, 3 2010 oral statements, and continuing through the August 31 4 Decision and the final Summary Judgment Order on October 4, 2010, 5 the final legal conclusions made by the bankruptcy court evolved 6 as the judge considered the evidence and arguments. Once the 7 Summary Judgment Order was entered, the universe of the bankruptcy 8 court’s findings of fact and conclusions of law was fixed and the 9 final, appealable order issued. The bankruptcy court did not 10 issue such a final order, but continued the hearing on the 11 “Stackhouse Issue” to determine whether the tax assessments could 12 be made against the Partners. 13 The Summary Adjudication Order 14 Cannot Be a Final Order 15 Further, the Summary Adjudication Order did not purport to be 16 a final determination of the Contested Matter, but only a “summary 17 adjudication.” The term “summary adjudication” is not a federal 18 procedural term, but one under California state law. “Summary 19 adjudication” is a procedure by which the state court judge may 20 determine some of the claims or issues, but does not conclude the 21 action before the court. The final judgment is, and must be, 22 subsequently issued.19 23 In federal court the analogous rule is found in Civil 24 Rule 56(a), as incorporated by Rule 7056, providing for partial 25 summary judgment on a claim or defense. As noted in MOORE’S FEDERAL 26 27 19 See 6 Witkin, Cal. Proc. 5th, §§ 267 - 277, Proceedings Without Trial, for general discussion of the state law principle 28 of summary adjudication.

18

1 PRACTICE, CIVIL § 56.122 (Matthew Bender 3d Ed.), “Of course, the 2 reference to ‘judgment’ in the term ‘partial summary judgment’ is 3 a misnomer. Any ruling that disposes of less than all issues and 4 fewer than all parties in an action is not a judgment within the 5 meaning of Rule 54.” A partial summary judgment order is “not an 6 inherently final order.” Mueller v. Auker, 576 F.3d 979, 1002 7 (9th Cir. 2009); SEIU, Local 102 v. Cnty. of San Diego, 60 F.3d 8 1346, 1350 (9th Cir. 1994). 9 Further, CFTB’s assertion that the Summary Adjudication Order 10 is a “final order” does little to avoid piecemeal litigation, and 11 actually has the effect of creating piecemeal, fragmented, 12 potentially inconsistent litigation between the CFTB and Wilshire 13 LLC on the one hand, appealing the Summary Adjudication Order, and 14 then CFTB and Partners in appealing the Summary Judgment Order. 15 The Summary Judgment Order is the final order from which CTFB 16 could appeal. The bankruptcy court properly exercised 17 jurisdiction over the Motion for Summary Judgment or Summary 18 Adjudication through and including the issuance of the Summary 19 Judgment Order. CFTB timely appealed the final order. 20 STANDARDS OF REVIEW 21 The bankruptcy court’s decision to grant or deny a summary 22 judgment is reviewed de novo by the appellate court. Botosan v. 23 Paul McNally Realty, 216 F.3d 827, 830 (9th Cir. 2000). The same 24 standards used by the bankruptcy court under Civil Rule 56, as 25 made applicable by Rules 7056 and 9014, apply upon appellate 26 review. Meade v. Cedarapids, Inc., 164 F.3d 1218, 1221 (9th Cir. 27 1999). Facts determined for summary judgment proceedings are not 28 entitled to the clearly erroneous standard of appellate review.

19

1 Audrey, Inc. v. Casey (In re Audre, Inc.), 216 B.R. 19, 25 (9th 2 Cir. BAP 1997); Gertsch v. Johnson & Johnson, Finance Co. 3 (In re Gertsch), 237 B.R. 160, 165 (9th Cir. BAP 1999). Summary 4 judgment is not proper if material factual issues exist for trial. 5 Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). 6 An appellate court may base its ruling on any ground 7 supported by the record. Danning v. Miller (In re Bullion Reserve 8 of N. Am.), 922 F.2d 544. 546 (9th Cir. 1991); Gilbert v. Ben- 9 Asher, 900 F.2d 1407, 1410 (9th Cir. 1990), cert. denied, 498 U.S. 10 865 (1990). 11 STANDING, CONSTITUTIONALLY SUFFICIENT NOTICE, BINDING ORDER CONFIRMING PLAN, 12 AND NO DETERMINATION OF NATURE OF TRANSACTION 13 CFTB first asserts that Wilshire LLC, as successor to the 14 reorganized Debtor, does not meet the minimum Constitutional 15 standing requirements for a party with an actual case or 16 controversy to be adjudicated by the federal courts. U.S. CONST. 17 art 3, sec. 2. A determination of standing is subject to de novo 18 review on appeal. La Asociacion de Trabajadores de Lake Forest v. 19 City of Lake Forest, 624 F.3d 1083, 1087(9th Cir. 2010). 20 Federal courts are not forums for hypothetical claims or 21 litigation by persons who do not have rights which are the subject 22 of the federal court proceeding (with limited exceptions to this 23 rule, such as class action and other special representative 24 proceedings authorized by Congress). Ne. Fla. Chapter of the 25 Associated Gen. Contractors of Am. v. City of Jacksonville, Fla., 26 508 U.S. 656, 663 (1993). Standing must be determined to exist 27 before the court can proceed with a case. Sacks v. Office of 28 Foreign Assets Control, 466 F.3d 764, 771 (9th Cir. 2006).

20

1 A person must have a legally protected interest, for which 2 there is a direct stake in the outcome, to have standing in 3 federal court. This fundamental requirement arises under the 4 Constitution. Arizonans for Official English v. Ariz., 520 U.S. 5 43, 64 (1997). The Supreme Court provided a detailed explanation 6 of the Constitutional case or controversy requirement in 7 Northeastern Florida Chapter of the Associated General Contractors 8 of America v. City of Jacksonville, Florida, supra 508 U.S. at 9 663. In that decision, the court explained that a party seeking 10 to invoke federal court jurisdiction must demonstrate: (1) injury 11 in fact, not merely conjectural or hypothetical injury; (2) a 12 causal relationship between the injury and the challenged conduct; 13 and (3) the prospect of obtaining relief from the injury as a 14 result of a favorable ruling is not too speculative. Id. 15 CFTB asserts that Wilshire LLC lacks standing because the 16 taxes at issue are to be paid by the Partners, not the Debtor, 17 citing Culver, LLC v. Chiu (In re Chiu), 266 B.R. 743, 748 (9th 18 Cir. BAP 2001), aff’d, 304 F.3d 905 (9th Cir. 2002). Wilshire LLC 19 counters, arguing that as the entity in which the tax event is 20 determined, and then passed through to the Partners, it has 21 standing to determine the taxes arising from the operation of its 22 business, citing Sprint Communications Co., L.P. v. APCC Servs., 23 Inc., 554 U.S. 269, 287 (2008). 24 The tax liabilities or benefits of the Partners are wholly 25 derivative of the tax consequences of the Transaction created by 26 and for Debtor through the Joint Plan. Determination of taxable 27 income for a partnership is done in the same manner as for an 28 individual, with that income or loss then passed through from the

21

1 partnership to the partners. United States v. Basye, 410 U.S. 2 441, 448 (1973); 26 U.S.C. §§ 703, 701. The partnership is 3 regarded as an independently recognizable entity apart from the 4 aggregate of its partners. Only once its income is ascertained 5 and reported, then the existence of the partnership may be 6 disregarded and then each partner is attributed a tax attribute 7 for a portion of the total, treating the partnership as merely a 8 conduit through which the partnership’s income has passed. Id.20 9 For partnerships, the California Revenue and Taxation Code 10 incorporates the provisions of Subchapter K of Chapter 1 of 11 Subtitle A of the Internal Revenue Code (26 U.S.C. §§ 701-776). 12 Cal. Rev. & Tax Code § 17851 (with specific statutory exceptions 13 not applicable to the issue before the court). 14 Wilshire LLC, as the successor to Debtor, is the “person” 15 whose transaction is the subject of the controversy to determine 16 whether income was generated for tax purposes for the partnership. 17 After the taxation income determination from the Transaction is 18 made for the partnership (Debtor), then the partnership serves as 19 the conduit through which the income (or loss) is passed through 20 21 20 Footnote 8 in United States v. Basye, 410 U.S. at 448, quotes the legislative history, echoing the Solicitor General’s 22 remarks that it is odd to be debating the issue of income being determined at the partnership and that being then passed through 23 to the partners. “The legislative history indicates, and the commentators agree, that partnerships are entities for purposes of 24 calculating and filing informational returns but that they are conduits through which the taxpaying obligation passes to the 25 individual partners in accord with their distributive shares. See, e. g., H. R. Rep. No. 1337, 83d Cong., 2d Sess., 65-66 (1954);

26 S. Rep. No. 1622, 83d Cong., 2d Sess., 89-90 (1954); 6 J. Mertens, Law of Federal Income Taxation § 35.01 (1968); S. Surrey & 27 W. Warren, Federal Income Taxation 1115-1116 (1960); Jackson, Johnson, Surrey, Tenen & Warren, The Internal Revenue Code of 28 1954: Partnerships, 54 Col. L. Rev. 1183 (1954).”

22

1 to the Partners. Wilshire LLC, the successor which emerged from 2 the confirmed Joint Plan, has standing to litigate the Joint Plan 3 issues concerning the nature of the Transaction. Once such 4 determination is made, then Wilshire LLC can properly report such 5 income or losses (or correct previously reported information) to 6 the Partners for inclusion on their tax returns. 7 The bankruptcy court’s determination that Wilshire LLC has 8 standing to prosecute the Order to Show Cause and obtain a 9 determination of the Transaction is correct and is affirmed. 10 CFTB Was Provided Constitutionally Sufficient Notice 11 Of The Wilshire Bankruptcy Case 12 This Panel having determined that Wilshire LLC has standing, 13 next considers CFTB’s assertion that it is not bound by the 14 provisions of the Confirmation Order. This argument operates on 15 two levels: first, whether CFTB was bound by the reorganization of 16 the Debtor and Transaction provided for in the Joint Plan and the 17 Confirmation Order; and second, whether specific findings made in 18 the Confirmation Order bind Wilshire LLC, the Partners, and CFTB 19 concerning the nature of the Transaction (whether it was a sale or 20 a non-sale reorganization of the Debtor with debt forgiveness 21 under the Bankruptcy Code). CFTB conflates these two separate 22 issues. 23 In the Summary Adjudication Order, the bankruptcy court 24 determined that Finding “V” of the Confirmation order establishes 25 that the Transaction was not a sale or exchange for any purpose.21 26 The bankruptcy court subsequently issued the August 31 Decision 27 28 21 Ex. 31; Summary Adjudication Order, p. 1078.

23

1 which concluded that notice of filing of the Wilshire Bankruptcy 2 Case and the subsequent notice that the Confirmation Order had 3 been entered provided constitutionally sufficient notice that 4 CFTB’s rights and interests were determined through confirmation 5 of the Joint Plan. 6 The touchstone for a question of whether sufficient notice 7 was provided for Constitutional Due Process purposes for a 8 determination of a person’s rights or interest in property is 9 Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). 10 Such constitutionally sufficient notice must be “[r]easonably 11 calculated, under all the circumstances, to apprise interested 12 parties of the pendency of the action and afford them an 13 opportunity to present their objections.” Id. at 314. In the 14 context of bankruptcy proceedings, the issue of Due Process was 15 recently addressed by the Supreme Court in United Student Aid 16 Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). Having received 17 notice of the plan and its contents prior to the bankruptcy court 18 confirming the chapter 13 plan, the Supreme Court found that such 19 notice satisfied United Student Aid Funds, Inc.’s Due Process 20 rights. Id. at 272. As restated in Tulsa Professional Collection 21 Services, Inc. v. Pope, 485 U.S. 478, 484 (1988), notice is 22 constitutionally sufficient when it is reasonably calculated, 23 under all the circumstances, to apprise interested parties of the 24 pendency of the action and afford them an opportunity to present 25 their objections. 26 Here, CFTB received notice of both the Wilshire Bankruptcy 27 Case and the Confirmation Order. Had it chosen to act, such as 28 requesting special notice, CFTB could have monitored the Wilshire

24

1 Bankruptcy Case. CFTB cannot now complain that it was not invited 2 by the Debtor to assert whatever rights or objections CFTB might 3 possibly have to the Joint Plan which was moving toward 4 confirmation. 5 The bankruptcy court’s determination that CFTB received 6 sufficient notice of the Wilshire Bankruptcy Case and the 7 proceedings which led to the Confirmation Order is affirmed. The 8 terms of the Joint Plan and Confirmation Order bind Wilshire LLC, 9 the Partners, and CFTB to the Joint Plan. 10 Findings in the Confirmation Order Stating the 11 Nature of the Transaction Are Not Binding on CFTB 12 As the Panel reads Wilshire LLC’s and the Partners’ briefs, 13 they contend that the Confirmation Order not only confirms the 14 Joint Plan, but “binds” CFTB to a determination stated in the 15 Confirmation Order that, for purposes of tax treatment, the 16 Transaction is not a sale of the partnership assets or interests. 17 This argument overstates the effect of the Confirmation Order. 18 For this proposition, Wilshire LLC and the Partners direct 19 the Panel to the progeny of Lawrence Tractor Co. v. Gregory 20 (In re Gregory), 705 F.2d 1118, 1123 (9th Cir. 1983). In Gregory 21 the Ninth Circuit Court of Appeals affirmed the lower courts, 22 concluding that notice of a chapter 13 bankruptcy case was 23 sufficient notice to the creditor that confirmation of the plan 24 could lead to the discharge of its debt. The notice of the 25 bankruptcy case put the creditor on inquiry notice that its claim 26 could be affected, including discharged as provided by the 27 Bankruptcy Code, which required the creditor to investigate the 28 case. If the creditor had so acted, it would have seen that

25

1 debtor was seeking to confirm a chapter 13 plan which provided a 2 0% percent dividend for the creditor’s claim and a discharge of 3 that debt upon completion of the Chapter 13 plan. 4 In 2009, the Ninth Circuit again addressed this issue in Joye 5 v. Franchise Tax Board (In re Joye), 578 F.3d 1070 (9th Cir. 6 2009). In Joye, the CFTB (same party as in this appeal) received 7 notice of the Joye bankruptcy case having been filed and that 8 September 3, 2001, was the claims bar date set for governmental 9 claims. The CTFB, with knowledge of the Joye bankruptcy case, did 10 not file a proof of claim until October 15, 2001. In Joye, the 11 court concluded that while having notice of the bankruptcy case, 12 the CFTB “[i]gnored the Joyes’ bankruptcy proceeding ‘at its 13 peril.’” Id. at 1080. 14 In the present case, Wilshire LLC does not contend that the 15 proposed Chapter 11 plan or the bankruptcy court file provided 16 notice that confirmation of the Joint Plan would constitute a 17 determination that the Transaction was not a sale. Nor is it 18 asserted that notice was provided that confirmation of the Joint 19 Plan would determine the tax consequences flowing from the 20 Transaction. Rather, Wilshire LLC only argues that by virtue of 21 adding language stating such a “determination” to the order 22 subsequently signed by the bankruptcy judge, that language now 23 binds CFTB. 24 A review of the Second Amended Disclosure Statement, 25 Section III, Part H, titled “Tax Consequences of Joint Plan,” 26 imparts the following information with respect to the tax 27 consequences of confirmation: “CREDITORS AND INTEREST HOLDERS 28 CONCERNED WITH HOW THE JOINT PLAN MAY AFFECT THEIR TAX LIABILITY

26

1 SHOULD CONSULT WITH THEIR OWN ACCOUNTANTS, ATTORNEYS, AND/OR 2 ADVISORS.”22 It continues to state, “The Proponent CANNOT and DOES 3 NOT represent that the tax consequences contained below are the 4 only tax consequences of the Joint Plan because the Tax Code 5 embodies many complicated rules that make it difficult to state 6 completely and accurately all of the tax implications of any 7 action.”23 This Section H of the Second Amended Disclosure 8 Statement restates several times that no representation concerning 9 the actual tax consequences of confirmation and performance of the 10 plan would be made by Debtor. 11 For the Partners, the Second Amended Disclosure Statement 12 states that there will be a discharge of indebtedness and Partners 13 will recognize cancellation of indebtedness income (“CODI”). The 14 Second Amended Disclosure Statement continues, stating that the 15 Partners may elect to treat the CODI as provided in § 108 of the 16 Internal Revenue Code. Such § 108 treatment may allow the CODI to 17 be excluded from income or Partners may elect to offset it against 18 operating losses.24 The Joint Plan does not contain any provision 19 either characterizing the Transaction or the tax effects of the 20 Transaction.25 21 The Joint Plan and the Confirmation Order do not constitute 22 the final determination of the Transaction for tax purposes. Such 23 determination was properly the subject of the subsequent post- 24

22

25 Id., p. 496:20-22.

23

26 Id., p. 496:25-27, 497:1-2. 27 24 Id., p. 498:3-13.

28 25 Ex. 12; Second Amended Disclosure Statement, pp. 515-561.

27

1 confirmation judicial proceedings in the bankruptcy court which 2 are the subject of this appeal. The bankruptcy court properly 3 considered CFTB’s contentions, rejecting Wilshire LLC’s contention 4 that the Joint Plan and Confirmation Order is a final order 5 previously determining that issue between Wilshire LLC and CFTB. 6 THE BANKRUPTCY COURT CORRECTLY DETERMINED 7 THAT THE TRANSACTION WAS NOT A SALE 8 The Ninth Circuit Court of Appeals remanded this appeal to 9 the Bankruptcy Appellate Panel to make a merits determination of 10 whether the bankruptcy court gave “due consideration to the 11 ‘economic realities’ of the transaction as structured through the 12 [Joint] Plan and Confirmation Order.” These “economic realities” 13 are a consideration of whether there are “tax independent 14 considerations” for the transaction and that the economic 15 substance of the transaction “is not shaped solely by tax- 16 avoidance features that have meaningless labels attached . . . .” 17 Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978). So 18 long as there are significant and genuine non-tax attributes to 19 the transaction, the form of the transaction adopted by the 20 parties governs for tax purposes. Id. See also Sollberger v. 21 Commissioner, 691 F.3d 1119, 1124, n.6 (9th Cir. 2012) (The court 22 conducts a flexible, case-by-case analysis of whether the burdens 23 and benefits of ownership have been transferred. There are not 24 hard and fast rules of thumb which can be used for such a 25 determination, and no single factor is controlling. The 26 transaction must be viewed in light of realism and practicality.) 27 The bankruptcy court determined the Transaction eleven months 28 after the Order to Show Cause was issued. The bankruptcy court

28

1 issued three documents stating the findings and conclusions upon 2 which the Summary Judgment Order is based. For the flexible, 3 case-by-case analysis of whether “tax independent considerations” 4 exist and the economic substance of the Transaction, this Panel, 5 through its de novo review, considers the evidence presented and 6 the findings of fact and conclusions of law to be drawn therefrom. 7 First Hearing on Motion for 8 Summary Judgment or Summary Adjudication 9 The hearing on the Motion for Summary Judgment or Summary 10 Adjudication was conducted on June 22, 2010. In its Opposition26 11 and at the June 22, 2010 hearing27 CFTB did not argue that tax 12 independent considerations did not exist or that the economic 13 realities of the Transaction demonstrated that they were only tax 14 driven. Rather, CFTB’s arguments focused on why the bankruptcy 15 court did not have jurisdiction (which jurisdiction the Ninth 16 Circuit established does exist in Wilshire I) and why 11 U.S.C. 17 § 346(j) did not apply to the Transaction under the confirmed 18 Joint Plan. CFTB stated at the hearing, “We’re not challenging, 19 your Honor, the aspects of the plan.”28 Rather, CFTB asserted that 20 the court does not have jurisdiction to determine the issue if 21 11 U.S.C. § 346 applied, and the application of the Internal 22 Revenue Code to treat the Transaction as a sale of partnership 23 24 25

26

Ex. 24; Opposition to Motion for Summary Judgment or 26 Adjudication, p. 875. 27 27 Ex. 32; Transcript, p. 1085.

28 28 Ex. 32; Transcript, p. 1114:8-9.

29

1 interests by the Partners.29 At the conclusion of the June 22, 2 2010 hearing the bankruptcy court did not state any findings of 3 fact or conclusions of law on the record. 4 Request for Continuance Was Properly Denied 5 As part of its Opposition, CFTB requested a six-month 6 continuance so that it could conduct discovery on the issue of 7 whether the Transaction resulted in cancellation of indebtedness.30 8 The scope of the requested discovery is set forth in Paragraph 22 9 of the Declaration of Robert Babcock (“Babcock Declaration”) filed 10 in opposition to the Motion for Summary Judgment or Summary 11 Adjudication.31 The scope of the discovery described relates to 12 the underlying substance of the Transaction, with discovery to be 13 conducted of the Debtor, creditors, Partners, and Wilshire LLC. 14 CFTB also filed an Ex Parte Motion for Continuance if the 15 bankruptcy court did not discharge the Order to Show Cause based 16 on CFTB’s legal arguments. CFTB requested the continuance to 17 allow an additional six months to conduct discovery.32 18 The continuance for CFTB to undertake such discovery was not 19 granted by the court. The bankruptcy court’s denial of the 20 request for further discovery before ruling on the motion for 21 summary judgment is reviewed for abuse of discretion. Chance v. 22 Pac-Telerac, Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2011). The 23 24

29

Ex. 32; Transcript, p. 1114: 1-4, 18-22.

25

30

Ex. 24; Opposition, p. 1:19-21, 2:1-14.

26

31

Ex. 34; Babcock Declaration, p. 1138.

27

32

Ex. 19; Conditional Ex Parte Motion to Continue Hearing, 28 p. 316.

30

1 burden is on the party seeking further discovery to show that it 2 diligently pursued its previous discovery opportunities and that 3 evidence it seeks exists. Id., citing Nidds v. Schindler Elevator 4 Corp., 113 F.3d 912 920 (9th Cir. 1996), and Conkle v. Jeong, 5 73 F.3d 909, 914 (9th Cir. 1995). 6 In the Opposition, CFTB theorized that the Transaction 7 resulted in capital gain, and therefore there was no cancellation 8 of indebtedness income which could have been excluded pursuant to 9 Internal Revenue Code (“IRC”) § 108 (26 U.S.C. § 108) and 10 11 U.S.C. § 346(j) would not be applicable. CFTB argued that the 11 Transaction consisted of a sale of 99% of the properties of Debtor 12 for $3,500,000 and cancellation of $284,570,000 of indebtedness.33 13 CFTB treated the Transaction as in substance being a sale by the 14 Partners of 99% of their partnership interests to the Senior 15 Secured Creditors who acquired such 99% interest in the Debtor to 16 be their 99% interest in Wilshire LLC. CTFB further contended 17 that the Transaction violated IRC § 701 (which provides that a 18 partnership shall not be subject to the income tax imposed), and 19 that by applying the step-transaction doctrine CFTB can treat the 20 Transaction as one by which Debtor sold a 99% interest in the 21 properties or that the Partners sold 99% of their interests in the 22 Debtor. Evidence was not presented to support these arguments. 23 As Wilshire LLC and the Partners argue, the briefing and 24 hearing schedule on the Motion for Summary Judgment or Summary 25 Adjudication was set pursuant to a stipulation between CFTB and 26 27 28 33 Ex. 24; Opposition, p. 916:1-9.

31

1 Wilshire LLC (“Scheduling Stipulation”).34 As part of the 2 Stipulation, dated April 22, 2010, CFTB, Wilshire LLC, and the 3 Partners agreed and stipulated to several matters. First, the 4 bankruptcy court had issued an order joining all of the Partners 5 into this Contested Matter. Second, no objection to the joinder 6 by any of the Partners was filed and the Partners were parties to 7 this Contested Matter. CFTB, Wilshire LLC, and the Partners then 8 stipulated that the hearing on the Motion for Summary Judgment or 9 Summary Adjudication occur on June 22, 2010. Further, the Motion 10 for Summary Judgment or Adjudication would be filed by May 3, 11 2010, Opposition filed by June 7, 2010, and Replies filed by 12 June 15, 2010. 13 In denying the request for a continuance to undertake 14 discovery, the bankruptcy court noted that no discovery had been 15 attempted by CFTB during the one year that this Contested Matter 16 had been pending. CFTB argued that the issues relating to 17 11 U.S.C. § 346(j) had not been raised until the filing of the 18 Motion for Summary Judgment or Summary Adjudication. The 19 bankruptcy court noted that the issue of whether 11 U.S.C. § 346 20 applied had been fully briefed by the parties. 21 The bankruptcy court further noted that in its September 8, 22 2009 Reply to CFTB’s Response to the Order to Show Cause, 23 Wilshire LLC asserted that the grounds for contempt included the 24 assertion that CFTB’s conduct constituting a collateral attack on 25 the Confirmation Order and Joint Plan in violation of 11 U.S.C. 26 27 28 34 Ex. 13; Joint Status Report, p. 166.

32

1 § 346(j).35 The Reply expressly quoted the language of 11 U.S.C. 2 § 346(j)(1) stating that no income is realized from the 3 forgiveness or discharge of indebtedness in a case under 4 Title 11.36 There was no “surprise” that 11 U.S.C. § 346 was a 5 basis for the relief requested (contempt for a collateral attack 6 on the Confirmation Order and Joint Plan) from September 8, 2009 7 forward, and the record shows that CFTB was aware that 11 U.S.C. 8 § 346 was at issue when it entered into the Scheduling 9 Stipulation. 10 No adequate basis is shown for reversing the bankruptcy 11 court’s denial of the Ex Parte Motion for Continuance. No basis 12 is shown for granting relief to CFTB from the stipulation setting 13 the schedule for filing and hearing cross-summary judgment 14 motions. Neither in its brief nor at oral argument on this appeal 15 has CFTB provided any explanation of how it was prevented from 16 conducting discovery during that one-year period after the motion 17 for the OSC was filed. Denial of the request for a continuance is 18 affirmed. 19 Bankruptcy Court Determination That 20 The Transaction Was Not A Sale 21 In the Summary Adjudication Order the bankruptcy court 22 determined that: (1) Finding “V” of the Confirmation Order 23 establishes “[T]hat the transaction implemented under the Plan is 24 not a sale or exchange;” and (2) that since the transaction was 25 26

35

Ex. 7; Wilshire LLC’s Reply to Opposition to CFTB Response 27 to Order to Show Cause, pp. 67:1 - 68:17. 28 36 Id.; p. 67:3-6.

33

1 not a sale or exchange, “[t]he release or forgiveness of 2 indebtedness under the Plan did not create capital gain income 3 reportable by [Debtor].”37 The court then continued the hearing 4 for further briefing and oral argument on the Stackhouse issue. 5 The bankruptcy court conducted a further hearing and issued 6 the August 31 Decision.38 It first determined that the Joint Plan 7 “does not effect a sale of the partners’ interest in the 8 partnership property.” The bankruptcy court further stated, 9 consistent with the Summary Adjudication Order, that the Joint 10 Plan restructured the Debtor from a general partnership into a 11 limited liability company (Wilshire LLC), with Wilshire LLC, the 12 restructured Debtor, continuing to own the Properties. The 13 bankruptcy court repeated the prior finding and determination 14 pursuant to Finding “V” of the Confirmation Order. 15 The bankruptcy court, in connection with the substance of the 16 Transaction, made the determination that CFTB’s interpretation of 17 the tax laws and the Transaction “would nullify the effect of the 18 [Bankruptcy Tax Act of 1980] at the partner level in a 19 [cancellation of indebtedness] scenario and would ignore the 20 interplay between § 346 and relevant IRC provisions allowing the 21 debtor to exclude [cancellation of indebtedness income] from its 22 realizable income.” The bankruptcy court concluded that the 23 Bankruptcy Tax Act of 1980 overruled Stackhouse v. United States, 24 441 F.2d 465 (5th Cir. 1971), which had previously interpreted the 25 IRC to allow for income to be determined in one manner for a 26 27 37 Ex. 31; p. 1079.

28 38 Ex. 38; p. 1483.

34

1 partnership and then in a different manner by the IRS for the 2 individual partners. 3 The August 31 Decision concludes with the bankruptcy court 4 expressly stating that the Transaction: (1) resulted in discharge 5 of indebtedness; (2) was not a disguised sale; and (3) did not 6 result in a capital gain. 7 The court then issued the Summary Judgment Order on 8 October 4, 2009, which includes the following determinations by 9 the court concerning the Transaction. First, the court 10 interpreted and adjudicated Finding “X” of the Confirmation Order 11 to establish that the Transaction was not a sale of the 12 partnership interests. Second, that there was a capital 13 contribution by the Senior Secured Creditors for their interest in 14 the restructured Debtor, Wilshire LLC, as part of the Transaction. 15 Third, that Finding “Y” of the Confirmation Order established that 16 the $221,000,000 claim secured by the second deed of trust was 17 released and discharged solely in exchange for the payment of 18 $2,500,000 as provided in the Joint Plan. 19 Upon De Novo Review, The Evidence Presented Supports the 20 Determination That The Transaction Was Not a Sale 21 The CFTB complains that the bankruptcy court did not, and 22 could not, have really considered the “economic realities” of the 23 transaction because it was not presented with evidence of the 24 transaction by CFTB. As discussed above, this Panel, upon 25 completing its de novo review, concurs with the decision of the 26 bankruptcy court in denying CFTB’s request for a continuance to 27 begin discovery on the eve of the stipulated hearing on the Motion 28 for Summary Judgment or Summary Adjudication. CFTB was aware

35

1 since September 2009 that the 11 U.S.C. § 346 discharge or 2 forgiveness of indebtedness was at the core of Wilshire LLC’s 3 contention that CFTB was engaging in an impermissible collateral 4 attack of the confirmed Joint Plan and Confirmation Order. CFTB’s 5 strategy decision to not present any additional evidence does not 6 mean that the bankruptcy court did not have evidence from which it 7 made its decision, and this Panel can conduct its de novo review. 8 The federal judicial process is not a GIGO (garbage in, 9 garbage out) system. Irrespective of the sufficiency of the legal 10 briefs, a federal judge has the responsibility to make his or her 11 decision based on the correct law. United Student Aid Funds, Inc. 12 v. Espinosa, 559 U.S. at 277. However, the federal judge is 13 dependant on the parties to present the competent, credible 14 evidence from which the judge is to make the required findings of 15 fact. In making the requisite findings of fact and making the 16 conclusions of law therefrom, the judge should not go outside the 17 record unless the facts are matters of common knowledge or capable 18 of certain verification (Fed. R. Evid. 201, Judicial Notice). 19 Clicks Billards, Inc. v. Sixshooters, Inc., 251 F.3d 1252, 1267 20 (9th Cir. 2001). A party cannot complain that it would have 21 conducted discovery or presented other evidence if it had known in 22 advance the findings of fact and conclusions of law which the 23 court was going to draw from the discovery and other evidence 24 presented at the hearing or trial. 25 For the bankruptcy court, the evidence of the Transaction 26 provided by Wilshire LLC, the Partners, and CFTB consists 27 substantially of the Disclosure Statement and Joint Plan. The 28 bankruptcy court concluded that the Transaction was not a sale or

36

1 exchange, but a restructure by which the Debtor partnership was 2 reorganized into Wilshire LLC, a limited liability company. While 3 CFTB theorizes whether, if evidence existed and were produced, a 4 court at sometime in the future might determine that the 5 Transaction is not as stated in the Joint Plan, no such evidence 6 was presented by CFTB to the bankruptcy court. 7 In conducting the de novo review, this Panel concurs that 8 (1) there is not any conflicting evidence of any material fact and 9 (2) there are no genuine issues of material fact – only a dispute 10 as to the legal conclusions drawn from the undisputed evidence. 11 From the evidence presented, the bankruptcy court did not err in 12 concluding that the Joint Plan and Transaction constituted a 13 reorganization of the Debtor into Wilshire LLC, and such 14 reorganization was not a sale, transfer, or a disguised 15 foreclosure or deed in lieu of foreclosure. The Disclosure 16 Statement describes a very complex business transaction by which 17 the Senior Secured Creditors acquire a 99% interest in Wilshire, 18 LLC, the successor reorganized Debtor that emerges from bankruptcy 19 through the Joint Plan. For the Partners, 99% of their interests 20 in the Debtor are lost, with them having only a 1% interest in 21 Wilshire LLC, the reorganized successor to Debtor. 22 The Joint Plan and Disclosure Statement identify the 23 following assets and claims to be addressed. As of the Second 24 Amended Disclosure Statement, the assets of the Debtor and 25 bankruptcy estate are listed to have a value of $164,645,000, 26 which are subject to the Senior Secured Creditors’ lien 27 ($173,570,000 claim) and the Co-Investors’ Junior lien

37

1 ($221,000,000 claim).39 Under the Debtor’s liquidation analysis, 2 this exhausts any value in the assets, or as may be more commonly 3 stated, all creditors and interest holders, other than the Senior 4 Secured Creditors (on at least a portion of their secured claim), 5 are “out of the money.” The Liquidation Analysis identifies an 6 additional $850,000 to $900,000 in general unsecured claims which 7 would also “be out of the money” in a Chapter 7 liquidation. 8 The Disclosure Statement also informs creditors that a 9 settlement was reached and approved by the Court among the Debtor, 10 acting as the then debtor in possession,40 Senior Secured 11 Creditors, and California Federal Bank. The settlement resolved a 12 lease dispute with California Federal Bank and provided for a new 13 lease of the Property for the Joint Plan. Under the settlement, 14 California Federal Bank also agreed to pay the Estate $27,825,000, 15 assign its existing leases and subleases to the Estate, enter into 16 a new five year lease, dismiss the pending adversary proceeding, 17 and execute mutual releases. 18 The Joint Plan provides for Wilshire LLC to obtain New 19 Secured Financing of $95,000,000 to $100,000,000 to be paid to the 20 Senior Secured Creditors. The difference between the $123,000,000 21 portion of the Senior Secured Claim and the payment from the New 22 Secured Financing would constitute the Senior Secured Creditors’ 23 capital contribution to acquire the 99% interest in Wilshire LLC. 24 25 39 Ex. 21; Disclosure Statement, p. 509 Liquidation Analysis, and pp. 491-492, Article III, D, Class B and C-2 (Senior Secured 26 Claim), and Class C-2 (Co-Investor Secured Claim). 27 40 The debtor in possession serves as the fiduciary of the bankruptcy estate in the place of, and exercising many of the 28 powers of, a Chapter 11 trustee. 11 U.S.C. § 1107.

38

1 The $40,570,000 balance of the Senior Secured Creditors’ Claim was 2 to be paid $40.57, with the remainder of the Senior Secured claim 3 discharged and the parties executing releases. 4 For the Co-Investors’ Claim in the amount of $221,000,000, 5 they were to be paid $2,500,000, with the balance of the 6 obligation being discharged and the parties executing releases.41 7 Under the Joint Plan the creditors holding $850,000 to 8 $900,000 in general unsecured claims were paid in full. 9 The Disclosure Statement provides information about the pre- 10 and post-petition operation of the Property by the Debtor and the 11 Bankruptcy Estate. This included a discussion of the dispute with 12 California Federal Bank and commencing the Wilshire Bankruptcy 13 Case to prevent the Senior Secured Creditors from proceeding with 14 a foreclosure sale. It further discussed the active prosecution 15 of the case by the Debtor and the Secured Creditors, including an 16 attempt to have a bankruptcy trustee appointed. The final 17 approved disclosure statement was forged from drafts advanced by 18 the Debtor and objections asserted by the U.S. Trustee, Secured 19 Creditors, and California Federal Bank. During the Wilshire 20 Bankruptcy Case the creditors who chose to be active conducted 21 discovery, investigated the operation of the Debtor’s business, 22 evaluated competing claims, and participated in advancing a 23 chapter 11 plan. By early October 1997, Debtor, Secured 24 Creditors, and Co-Investors entered into a Memorandum of 25 Understanding which was the foundation for the Joint Plan. 26 Ultimately, the parties in the Wilshire Bankruptcy Case structured 27

41

Ex. 21; Disclosure Statement 491-492. Ex. 21; Plan Art.

28 VII A. and C., pp. 545, 546.

39

1 the Joint Plan and moved forward to implement the Transaction 2 through confirmation of the Joint Plan.42 3 The uncontested evidence presented shows that this was not 4 only a highly complex real estate partnership bankruptcy case, but 5 one in which the various parties (Debtor, competing creditors with 6 secured claims, third-party lessee – all natural enemies) acted in 7 their own economic self-interests. This is not a case in which 8 the only active parties were the debtor and insider creditors 9 constructing a reorganization based on personal tax issues, not 10 business economic realities. 11 The evidence presented shows that the Joint Plan was created 12 by the Debtor, BofA, Senior Secured Creditors, Co-Investors 13 holding the Junior Secured claim, California Federal Bank, and 14 creditors holding general unsecured claims based on the economic 15 realities of the assets and claims, not as a tax avoidance plan. 16 This is a case where the Debtor had limited assets and extensive 17 debts which far outstripped the assets. The creditors and Debtor 18 fashioned a plan which made the economic results for creditors, 19 even those holding general unsecured claims, dramatically better. 20 To the extent that the Partners considered the tax consequences of 21 the Transaction, such consideration did not drive the economic 22 realities decision of the creditors in supporting the Joint Plan.43 23 24

42

Ex. 21: Disclosure Statement, pp. 483-487.

25

43

It should not be forgotten that in the chapter 11 process 26 the creditors not only vote to accept or reject a plan, but creditors are not dependent on a “take it or leave it” plan put 27 forward by the debtor. Creditors may advance their own chapter 11 plan to compete in the bankruptcy marketplace for creditor votes.

28 11 U.S.C. §§ 1121(c), 1129(a)(7) and (b).

40

1 There was no conflicting evidence presented to the court, 2 only arguments about the legal conclusions to be drawn from the 3 evidence. The bankruptcy court did not err in concluding that the 4 Joint Plan was based on the economic realities of the Transaction, 5 that the Transaction was not a sale, and that the Transaction was 6 not shaped by tax-avoidance features or purpose. 7 The bankruptcy court’s determination that the Transaction was 8 a restructure of the Debtor and not a sale is affirmed. 9 THE FORGIVENESS OF DEBT THROUGH THE JOINT PLAN DOES NOT RESULT IN REPORTABLE INCOME FOR FEDERAL 10 AND STATE TAXES FOR THE PARTNERS 11 Having concluded that the Joint Plan and Transaction were not 12 a disguised sale or other than the reorganization and restructure 13 of the Debtor as stated in the Joint Plan, the bankruptcy court 14 further determined that the discharge or forgiveness of debt 15 through that Joint Plan was not income to the partnership. 16 It has long been recognized that providing deductions or 17 exclusions for income arising from cancellation or discharge of 18 indebtedness through a bankruptcy case was a necessary and 19 integral part of the bankruptcy laws. Claridge Apartments Co. v. 20 Commm’r, 323 U.S. 141, 149 (1944)(discussing the Chandler Act 21 provisions to encourage the freer use of bankruptcy reorganization 22 and avoid otherwise unnecessary or premature liquidations). 23 The term “gross income,” from which a tax calculation begins, 24 is defined in IRC § 61. This non-exclusive list “means all income 25 from whatever source derived.” Some statutory examples 26 [identified by numbering used in the statute] are (1) compensation 27 for services, (2) gross income from business, (3) gains from 28 dealings in property, (8) alimony, and (12) income from discharge

41

1 of indebtedness. In 2925 Briarpark, Ltd. v. Comm’r, 163 F.3d 313 2 (5th Cir. 1993), the Fifth Circuit Court of Appeals reviewed a 3 decision of the United States Tax Court concerning a sale of 4 property by a partnership. In Briarpark, the partnership sold 5 property subject to $24,562,763 in liens for $10,936,532. As part 6 of the sale, the creditor released Briarpark and the guarantor 7 (who was insolvent) of approximately $14,000,000 of liability in 8 excess of the sales proceeds paid to the creditor. On its tax 9 return, Briarpark reported $14,468,154 of cancellation of 10 indebtedness income relating to the sale. 11 The Fifth Circuit noted that gross income pursuant to IRC 12 § 61 comes in many forms, with two of the examples being “gains 13 derived in dealing in property” (IRC § 61(a)(3)) and “income from 14 discharge of indebtedness” (IRC § 61(a)(12)). Because the 15 practical effect of the Briarpark transaction was to sell the 16 property to a buyer, then the purchase price paid and the debt 17 forgiveness were determined by the Tax Court (the trial court) to 18 be part of a single transaction for income defined as “from a sale 19 or exchange” of property. In closing, the Fifth Circuit 20 emphasized that it is for the trial court, upon consideration of 21 the entire transaction, to determine the factual category (dealing 22 in property or cancellation of indebtedness) of the income for 23 taxation purposes.44 24 The Transaction which occurred in this case is the 25 reorganization of Debtor into Wilshire LLC. The bankruptcy court 26 determined that the reorganization was not a sale or transfer of 27 28 44 Id. at 318.

42

1 property. As part of the reorganization, the former interests of 2 the Partners were cancelled and a creditor obtained a 99% interest 3 in Wilshire LLC for a portion of its secured claim. The 4 confirmation of the Joint Plan included forgiveness of the 5 indebtedness, as part of a complex restructuring of the Debtor and 6 creditors’ rights and interest. 7 After considering the evidence presented, the bankruptcy 8 court determined that the forgiveness of debt through the Joint 9 Plan constituted cancellation of debt income, not capital gain.45 10 Upon de novo review, this Panel makes the same determination. The 11 Transaction and restructuring of the complex rights and interests 12 of the bankruptcy estate, Senior Secured Creditors, Co-Investors, 13 creditors holding general unsecured claims, and Partners, 14 resolving lease disputes, and creating the new successor 15 Wilshire LLC, is consistent with the forgiveness of debt, not with 16 a sale of the Property. 17 Merely because the restructuring of the Debtor, the emergence 18 of the successor entity, the forgiveness of indebtedness, the New 19 Refinance Loan, and issuance of the interests in the reorganized 20 debtor all occur in one document, the Chapter 11 Plan, that does 21 not mean that it is just one big sale transaction. In every 22 bankruptcy case, the confirmation of the Chapter 11 plan fixes the 23 rights and interests, provides for the forgiveness of 24 indebtedness, and binds the parties (11 U.S.C. § 1141) in one fell 25 swoop. 26 The Joint Plan provides for the forgiveness of indebtedness 27 28 45 Ex. 40; August 31 Decision, p. 1507.

43

1 as one of multiple plan provisions. Some creditors forgave 2 substantial amounts for the payment of a modest amount (recovering 3 “only” $2,500,000 on a $212,000,000 claim, rather than getting 4 nothing), while the Senior Secured Creditors forgave indebtedness 5 and contributed $23,000,000 to the reorganized Debtor. As part of 6 this complex Transaction, the Senior Secured Creditors acquired 7 99% of the interest in Wilshire LLC. 8 As noted by the Ninth Circuit Court of Appeals in Wilshire I, 9 bankruptcy plans are often dependent on the cancellation of 10 indebtedness relief in bankruptcy to facilitate a reorganization. 11 A reorganization produces better economic results for all and 12 preserves a business operation, rather than merely shutting 13 everything down and liquidating the pieces. Such a reorganization 14 often, as in the Wilshire Bankruptcy Case, is a complex reordering 15 of rights and interests, forgiving debt, incurring new 16 obligations, making capital contributions, and deferring payment. 17 This is much more complex than - “sell the property and pay the 18 money.” 19 The evidence presented to the bankruptcy court, for which 20 there were no material facts in dispute, supports the 21 determination that the Transaction resulted in the forgiveness of 22 debt and “cancellation of debt income,” not “gains from dealings 23 in property.” 24 The Bankruptcy Code And Internal Revenue Code Provide For No Realization of Income From Forgiveness 25 Of Indebtedness In A Bankruptcy Case 26 To facilitate reorganizations under the Bankruptcy Code 27 rather than forcing liquidations of business and financial 28 enterprises, Congress has provided for special tax treatment when

44

1 indebtedness is discharged or forgiven through a bankruptcy case. 2 In this appeal, the provisions of 11 U.S.C. § 346(a) and (j) as 3 they existed in 1998 are at issue. 4 § 346. Special tax provisions 5 (a) Except to the extent otherwise provided in this section, subsections (b), (c), (d), (e), (g), (h), (i), 6 and (j) of this section apply notwithstanding any State or local law imposing a tax, but subject to the Internal 7 Revenue Code of 1986.

. . .

8 (j)(1) Except as otherwise provided in this 9 subsection, income is not realized by the estate, the debtor, or a successor to the debtor by reason of 10 forgiveness or discharge of indebtedness in a case under this title. . . .

11 12 In addition to § 346, the Internal Revenue Code itself has a 13 specific section addressing income generated from the discharge of 14 indebtedness. In pertinent part, IRC § 108 provides: 15 § 108. Income from discharge of indebtedness 16 (a) Exclusion from gross income. 17 (1) In general. Gross income does not include any amount which (but for this subsection) would be 18 includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer 19 if– 20 (A) the discharge occurs in a title 11 case, . . . 21 (2) Coordination of exclusions. 22 (A) Title 11 exclusion takes precedence.

Subparagraphs (B), (C), and (D) of paragraph (1) shall 23 not apply to a discharge which occurs in a title 11 case. . . .

24 25 The Debtor that was reorganized into Wilshire LLC was a 26 partnership. While the tax liabilities and attributes for a 27 partnership are passed through to the partners, the income or loss 28 (tax attributes) are first determined at the partnership, and then

45

1 those attributes are passed through to the partners. 2 The plain language of 11 U.S.C. § 346(j) states, “income is 3 not realized by the estate, the debtor, or a successor to the 4 debtor by reason of forgiveness or discharge of indebtedness in a 5 case under [Title 11].” IRC § 108 confirms that if a discharge of 6 indebtedness occurs in a case under Title 11, then that basis for 7 such discharge shall control over all others. By Confirmation of 8 the Joint Plan in the Wilshire Bankruptcy Case, Debtor was 9 forgiven debt of $40,570,000 of the Secured Creditors’ Claim and 10 $218,500,000 of the Co-Investor’s Claim.46 11 No income is realized by either the bankruptcy estate or 12 Debtor for such forgiveness of indebtedness. Properly applying 13 the provisions of 11 U.S.C. § 346(j) and IRC 108(a), the Debtor, 14 bankruptcy estate, and Wilshire LLC did not obtain income from the 15 forgiveness of debt. There being no income for the Debtor, there 16 is no income to pass through to the Partners by virtue of the 17 forgiveness of indebtedness in the Wilshire Bankruptcy Case under 18 Title 11. It may well be that there are other adjustments of tax 19 attributes (IRC § 108(b)) or partnership basis (IRC § 705), but 20 the determination of whether there is income or loss is computed 21 at the partnership, not the individual partners.47 22 The determination by the bankruptcy court that discharge or 23 24

46

Ex. 21; Disclosure Statement Classes C-1 and C-2, p. 492.

25 Ex. 21; Joint Plan Classes C-1 and C-2, p. 537, and Article VII Discharge and Release, pp. 545-546.

26

47

IRC § 704 provides that a partner’s share of income, gain, 27 loss, deductions, or creditors (once determined for the partnership) are distributed among the partners pursuant to the 28 partnership agreement.

46

1 forgiveness of indebtedness exclusion from income applies to the 2 Debtor and results in there not being income from discharge of 3 indebtedness for the Partners is affirmed. 4 CONCLUSION 5 We REVERSE the bankruptcy court’s determination that the 6 Confirmation Order itself was a determination whether the 7 Transaction was a sale or not a sale of property. 8 We AFFIRM, upon de novo review, the bankruptcy court’s entry 9 of summary judgment in favor of Wilshire LLC and the Partners. In 10 so affirming, this Panel determines: (1) Wilshire LLC has standing 11 to file and prosecute the OSC; (2) CFTB received sufficient notice 12 for the Confirmation Order to be binding on CFTB; (3) the proper 13 appeal is taken from the Summary Judgment Order filed on 14 October 4, 2010; (4) the Transaction, based upon the economic 15 realities of the Transaction, was not motivated by tax avoidance; 16 (5) the Transaction was not a sale, but provided for the 17 forgiveness of debt owed by the Debtor; (6) the forgiveness of 18 debt through the Joint Plan was subject to the provisions of 11 19 U.S.C. § 346 (in effect as of the confirmation of the Joint Plan) 20 and 26 U.S.C. § 108; (7) the tax consequences of the Transaction 21 are determined at the Debtor, the partnership, and such tax 22 consequences are then passed through to the Partners; and (8) the 23 forgiveness of debt did not result in income realized by the 24 Debtor or passed through to the Partners. 25 26