2009 Chapter 11 Recent Developments (Part I)

(2) The bankruptcy court is only precluded under § 505(a)(2)(A) when there has been a proceeding and judgment in Tax Court prior to the bankruptcy.

Holding: "11 U.S.C. § 505(a)(1) grants the... [court] with subject matter jurisdiction to review the tax treatment of Central Valley's partnership items, notwithstanding TEFRA."

Reasoning: Purpose of § 505 is to "'protect a debtor from being bound by a pre-bankruptcy tax liability determination that, because of a lack of financial resources, he or she was unable to contest.'... and protects a debtor's creditors 'from the dissipation of an estate's assets in the event that the debtor failed to contest the legality and amount of taxes assessed against it."

(2)

Under the IRC, individual partners are separately and individually taxed for the partnership's earnings. TEFRA did not change this seminal rule. Instead, TEFRA provided that "'the tax treatment of any partnership item...shall be determined at the partnership level.... Accordingly, each partner's individual income tax return ordinarily must be consistent with the partnership's informational return."

(3)

Prior to TEFRA, § 505 did not apply to non-debtor partners but was no obstacle to the bankruptcy court's jurisdiction over the debtor-partner. The bankruptcy court had jurisdiction to redetermine a debtors-partner's tax treatment. After the enactment of TEFRA, the bankruptcy court's jurisdiction does not change.

(4)

Due to the fact that TEFRA required that all partners be deemed parties of a tax proceeding, which created problems if one of the partners declared bankruptcy, the Treasury issued regulation § 301.6231(c)-7T, which severed the debtor-partner from a Tax Court proceeding by "deeming any 'partnership items' of the debtor-partner to be 'nonpartnership items' not subject to TEFRA."

(5)

A conference in the IRS Appeals Office, which results in the issuance of an FPAA, was not a contested hearing for purposes of § 505(a)(2)(A). They more closely resemble settlements than administrative tribunal.

(6)

Although the possibility exists that inequities may arise due to the fact that a debtor-partner's tax liability may be different than the remaining partners' tax liability as determined in the Tax Court. However, if the inequity is too large, the bankruptcy court may decline to redetermine a debtorpartner's tax liability. Section 505(a)(1) is a permissive statute.

Broadhollow Funding, LLC v. Bank of Am., NA (In re Am. Home Mortg. Holdings), 390 B.R. 120 (Bankr. D. Del. 2008)

Facts: Broadhollow Funding, LLC ("Broadhollow"), Melville Funding, LLC ("Melville") and American Home Mortgage Servicing, Inc. ("AHMSI," collectively, the "Plaintiffs") sued Bank of America, N.A. ("BofA") for the recovery of payments under certain swap agreements entered into between AHMSI and BofA related to mortgage securitization transactions. Of the Plaintiffs, the only debtor is AHMSI. American Home Mortgage Acceptance, Inc. ("AHMA") (a debtor but not a plaintiff) managed Melville (a non-debtor) and American Home Mortgage Corp. ("AHMC") (a debtor but not a plaintiff) managed Broadhollow (a non-debtor). The claim arose from a series of agreements between a number of parties. First, under two mortgage loan purchase and servicing agreements ("MLPSA"), Broadhollow and Melville were set up as special purpose vehicles or entities (an "SPE") and purchased from AHMA and/or AHMC, respectively, newly created first mortgage loans. To fund the purchase, Melville issued a note to Broadhollow in exchange for a loan and, in turn, Broadhollow issued commercial paper and subordinated notes to raise the needed capital. Under the MLPSAs, if a termination event occurred, the servicer - AHMSI - was required to sell or securitize the mortgage loans held by the SPEs. Second, Broadhollow and Melville also entered into