An appeal pending in the Seventh Circuit since 2016 may end up in the Supreme Court a year or two from now to resolve a circuit split over whether Section 505(a) grants jurisdiction to the bankruptcy court to determine “the amount or legality of any tax, any fine or penalty relating to a tax . . . .”

According to the debtor, there is a circuit split because the Second, Third, Fourth, Fifth and Sixth Circuits all decided that Section 505(a) confers jurisdiction to bankruptcy courts over tax disputes.

Twenty-eight months after oral argument, Seventh Circuit Judge Frank H. Easterbrook handed down his first opinion in the appeal in September 2019, holding that Section 505(a) does not confer jurisdiction. He ruled that the only relevant grants of jurisdiction are in 28 U.S.C. § 1334(b). He found “related to” jurisdiction but ruled that the bankruptcy court must abstain from exercising jurisdiction in favor of the tax court. Bush v. U.S., 939 F.3d 839 (7th Cir. Sept. 20, 2019). To read ABI’s report, click here.

In early October 2019, the debtor filed a motion for rehearing on the abstention ruling. The government also sought rehearing on the jurisdiction ruling. Some four and one-half years after the rehearing motions, Judge Easterbrook filed an amended opinion on April 29, 2024, in which he repeated his original holding that Section 505(a) is not jurisdictional.

The amended opinion was different in that Judge Easterbrook realized that his original opinion was in error because he had undertaken appellate review in the circuit court over a lower court’s abstention decision. Cf. 28 U.S.C. § 1334(d) (“Any decision to abstain or not to abstain . . . is not reviewable . . . by the court of appeals . . . .”). In the new opinion, he said, “we agree . . . that appellate courts must avoid resolving disputes about the application of § 1334(c)(1).”

In contrast to the original opinion, Judge Easterbrook did not decide in the amended opinion whether the bankruptcy court had “related to” jurisdiction over the tax dispute. However, he held that “the related-to jurisdiction must be assessed at the outset of the dispute, and it is satisfied when the resolution has a potential effect on other creditors.”

At the conclusion of the new opinion, Judge Easterbrook remanded for the district court to decide whether there was “related to” jurisdiction and, then, “to decide whether to abstain under 28 U.S.C. § 1334(c).”

To read a blackline comparing the original decision to the amended opinion, click here.

Observations

The government has already filed a motion asking the district court to dismiss the contested tax dispute, arguing that there was no “related to” jurisdiction because the outcome never would have affected distributions to creditors. The debtor has responded by saying that the estate was conceivably large enough that resolving the tax dispute could have an effect on the distribution of the estate.

If the district court dismisses for lack of jurisdiction under Section 1334, the debtor is likely to appeal, once again arguing that Section 505(a) confers jurisdiction. Given that Judge Easterbrook has already twice ruled that Section 505(a) is not jurisdictional, the Seventh Circuit presumably will uphold dismissal for lack of jurisdiction.

At that juncture, the debtor will be in a position to file a petition for certiorari asking the Supreme Court to resolve a circuit split and decide whether Section 505(a) is jurisdictional.

Recall that the Supreme Court decided one year ago in a unanimous opinion that Section 363(m) is not jurisdictional. Rather, it’s a limitation on the remedy available to an appellate court on an appeal from an order approving a sale. See MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288 (April 19, 2023). To read ABI’s report, click here.