Texas Comptroller of Public Accounts v. Trans State Outdoor Advertising Co. , 140 F.3d 618 ( 1998 )

REVISED - MAY 22, 1998
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-20629
In the Matter of TRANS STATE OUTDOOR ADVERTISING CO., INC.
Debtor
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS,
Appellee,
VERSUS
TRANS STATE OUTDOOR ADVERTISING CO., INC.,
Appellant.
Appeal from the United States District Court
For the Southern District of Texas
May 18, 1998
Before REAVLEY, DeMOSS, and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
Trans State Outdoor Advertising Co., Inc. appeals the decision
of the district court reversing the bankruptcy court and finding
that it lacked jurisdiction under 11 U.S.C. § 505(a)(2)(A) to
redetermine the tax liability assessed by the Comptroller. Finding
no error, we affirm the district court.
BACKGROUND
In 1991, the Comptroller performed a sales and use tax audit
on Trans State Outdoor Advertising Co, Inc. (hereinafter “Trans
State”)for the audit period October 1, 1987 through June 30, 1991.
In November 1991, the Comptroller issued an invoice to Trans State
assessing a deficiency due to taxable purchases for which no tax
was paid. In December 1991, Trans State sent a letter to the
Comptroller, requesting a redetermination hearing on the
Comptroller’s sales and use audit assessment. This letter
initiated Administrative Hearing No. 29,369. The Tax Division of
the Comptroller filed its position letter. Trans State responded
asserting that some of the invoices scheduled in the audit were the
result of purchases by companies other than Trans State. Trans
State blamed its former president and accountant for misapplying
Trans State funds by using Trans State’s funds and name for
purchases without authority to do so. The Tax Division responded
that because there was no documentation presented to support the
removal of the invoices at issue from the audit, and because the
invoices were billed in Trans State’s name and paid with Trans
State funds, Trans State was responsible for the sales tax
liability.
The Administrative Law Judge considered all the submissions
and entered his Proposed Comptroller’s Decision on August 14, 1992.
The Administrative Law Judge recommended that the audit stand
without change. Trans State filed written exceptions to the
proposed Decision, to which the Tax Division responded. The
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Administrative Law Judge issued the Comptroller’s Decision on
January 21, 1993, rejecting Trans State’s contention that the tax
liability was the responsibility of another company that had used
Trans State’s funds and name for the invoices at issue, without
authorization. On the same date, the Comptroller issued the Order
of the Comptroller, approving and adopting the decision of the
Administrative Law Judge. The order became final twenty days
thereafter. Trans State did not appeal the order.
On February 24, 1993, Trans State filed a bankruptcy
proceeding under Chapter 11 of the Bankruptcy Code. On August 16,
1993, the Comptroller filed a claim for prepetition sales and use
taxes and interest, in the amount of $41,318.46.
The Chapter 11 plan was confirmed on August 18, 1994. In
October 1994, Trans State filed an objection to the allowance of
the Comptroller’s claim in its bankruptcy. The bankruptcy court
held a hearing and concluded in a letter ruling that it had
jurisdiction to hear the claims objection. At the trial on the
merits, Trans State representatives testified that Trans State had
entered into oral agreements with contractors from which it made
purchases to include all sales taxes in the contractors’ invoices,
and that Trans State did not owe taxes to the state because Trans
State had paid the taxes to the contractors. The auditor from the
Comptroller’s office testified that Trans State had no records to
support its assertion that it had paid the taxes to the sellers
when the purchases were made.
The bankruptcy court issued a second letter ruling in May
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1996, finding that Trans State had requested that its supplier of
materials and services include the sales taxes in its invoice and
that the seller agreed to do so. The bankruptcy court agreed with
the Comptroller that the sales tax was not separately stated on the
seller’s invoices and that there was no written statement that the
stated price included the tax. Despite the absence of such
documentation which is required by the Texas Tax Code, the
bankruptcy court concluded that Trans State, the purchaser, did not
owe any taxes to the Comptroller.
The Comptroller appealed the bankruptcy court’s decision. The
district court reversed, finding that the bankruptcy court did not
have jurisdiction under 11 U.S.C. § 505(a)(2)(A) to redetermine the
tax liability. Because of its ruling on the jurisdictional issue,
the district court did not reach the merits of the Comptroller’s
tax claim. Trans State filed a timely notice of appeal from the
district court’s decision.
ANALYSIS
The bankruptcy court held that it had jurisdiction to
determine the tax liability of Trans State. A bankruptcy court’s
conclusions of law are reviewed de novo. In re Herby’s Foods,
Inc., 2 F.3d 128, 130 (5th Cir. 1993).
A bankruptcy court’s power to determine tax liability is set
forth in 11 U.S.C. § 505(a) which provides in pertinent part:
§ 505. Determination of tax liability
(a)(1) 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
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assessed, whether or not paid, and whether or not
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction.
(2) The court may not so determine--
(A) the amount or legality of a tax, fine, penalty,
or addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction before
the commencement of the case under this title . . . .
11 U.S.C. § 505(a)(emphasis added). Although § 505(a)(1) gives the
bankruptcy court power to decide the amount or legality of most
taxes, this grant of authority is limited by § 505(a)(2)(A). The
key to resolving the jurisdictional issue is hinged upon the
determination of whether the Comptroller’s administrative hearing
process was an adjudication “by a judicial or administrative
tribunal of competent jurisdiction” prior to the filing of the
bankruptcy petition. If it was such an adjudication, the
bankruptcy court did not have jurisdiction to redetermine Trans
State’s tax liability under § 505(a)(2)(A).
The Texas Administrative Code sets out the rules governing
taxpayers’ disputes over the amount of taxes assessed by the
Comptroller. 34 Tex. Admin. Code § 1.1 et seq. Section 1.3
provides that contested cases are within the jurisdiction of
administrative law judges. The taxpayer may request a hearing, and
if the taxpayer makes such a request, the administrative law judge
is authorized to conduct a hearing, examine witnesses, rule on
evidence, and propose decisions to the Comptroller of Public
Accounts. 34 Tex. Admin. Code § 1.7.
The conduct of the hearing is governed by § 1.21 of the
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Administrative Code. The rules of evidence promulgated by the
Texas Supreme Court apply. Any party may request the assigned
administrative law judge to subpoena witnesses or require document
production, or the judge may do so independently. The witnesses
testify under oath, and all contested cases heard by an
administrative law judge are recorded. 34 Tex. Admin. Code § 1.21.
The assigned administrative law judge prepares a proposed
decision to which the parties may file exceptions. Before the
proposed decision is given effect, it must be approved by the
Comptroller. 34 Tex. Admin. Code § 1.28. A motion for rehearing
may be filed within twenty days; otherwise, the Comptroller’s
decision becomes final. The taxpayer may appeal this decision by
filing suit in state district court if the taxpayer has first paid
the tax under protest. Tex. Tax Code Ann. § 112.052 (Vernon Supp.
1998). The trial of the issues is de novo. Tex. Tax Code Ann. §
112.054.
Trans State argues that the Comptroller’s decision does not
amount to an adjudication under § 505(a)(2)(A) and, thus according
to Trans State, the bankruptcy court had jurisdiction to determine
its sales tax liability. Trans State maintains that the
Comptroller’s decision was nothing more than an assessment and
could hardly be considered an adjudication by a judicial or
administrative tribunal. Trans State emphasizes that the
administrative judge merely provided the Comptroller with proposed
findings and conclusions and a recommendation; the Comptroller was
not bound by the administrative judge’s decision. According to
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Trans State, the Comptroller is an interested party, and is no more
an administrative or judicial tribunal than is the Internal Revenue
Service.
Trans State cites only one case in support, In re Washington
Manufacturing Co., 120 B.R. 918 (Bankr. M.D. Tenn. 1990). In that
case, real property had been assessed by the County Board of
Equalization in 1985 pursuant to a debtor’s prepetition request.
The debtor failed to timely appeal the County Board’s decision in
1985, and the bankruptcy court concluded that it was without
authority to determine the amount of the debtor’s tax liability
pursuant to § 505(a)(2)(A) for the 1985 year. The bankruptcy court
adopted the commonly accepted rule that it was authorized “to
determine the amount of the debtors’ tax liability unless that
liability was finally determined via both a contest before and an
adjudication by a judicial or administrative tribunal prior to
commencement of the debtors’ bankruptcy case.” Id. at 919.
However, the bankruptcy court did conclude that it had authority to
determine the debtor’s 1988 tax liability because the City and
County’s reassessment of the 1988 tax liability was not made prior
to commencement of the bankruptcy case.
Washington Manufacturing appears to support the Comptroller’s
position, not that of Trans State. What is emphasized in
Washington Manufacturing is that timing is of utmost importance.
If the tax liability is determined by the state prepetition through
an adjudicative system, the bankruptcy court is without
jurisdiction to redetermine the tax liability.
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In the case sub judice, the district court concluded that the
proceeding before the administrative judge was quasi-judicial, and
therefore amounted to an adjudication by an “administrative or
judicial tribunal” under § 505(a)(2)(A) of the Bankruptcy Code.
The district court reasoned that the proceeding was adversarial
before a tribunal of competent jurisdiction. We agree. Trans
State was afforded the opportunity to subpoena and call witnesses
to testify at a contested hearing wherein the rules of evidence
would be applied. Trans State also had the opportunity to appeal
the Comptroller’s decision in state district court for de novo
review once paying the tax under protest. See Tex. Tax Code Ann.
§ 112.052 (Vernon Supp. 1998); Tex. Tax Code Ann. § 112.054.
Moreover, Trans State could have filed for bankruptcy before the
decision of the Comptroller became final and had his tax liability
determined by the bankruptcy court. See 11 U.S.C. § 505(a)(1).
Other courts facing similar circumstances have held that the
bankruptcy court was without jurisdiction to determine tax
liability once the matter had been adjudicated by a quasi-judicial
tribunal. See United States v. Utah Construction & Mining Co., 384
U.S. 394 (1966)(holding that an administrative board’s
determinations were final and conclusive, having provided the
parties with a full and fair opportunity to litigate with respect
to all claims as to which the board had jurisdiction and an
opportunity to seek court review of any adverse findings); Arkansas
Corp. Commission v. Thompson, 313 U.S. 132 (1941)(holding that
Arkansas Corporation Commission’s determination of tax liability
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which was not appealed in state court became a final decision and
could not be relitigated in bankruptcy court as the Commission had
full power to summon witnesses and hear evidence and state statute
provided the right to appeal in state court); City Vending of
Muskogee v. Oklahoma Tax Commission, 898 F.2d 122 (10th Cir.),
cert. denied, 498 U.S. 823 (1990)(holding that the bankruptcy court
lacked jurisdiction to determine whether sale of cigarettes to
Indian tribes was exempt from the state cigarette tax under the
Commerce Clause because Oklahoma Tax Commission determined it
lacked authority to hear constitutional claims, and taxpayer failed
to appeal this determination to the Oklahoma Supreme Court); City
of Amarillo v. Eakens, 399 F.2d 541 (5th Cir. 1968), cert. denied,
393 U.S. 1051 (1969)(referee was precluded from redetermining the
property valuation for tax purposes because it previously had been
adjudicated before the Potter County Board of Equalization and
taxpayer failed to seek judicial review); In re El Tropicano, Inc.
128 B.R. 153 (Bankr. W.D. Tex. 1991) (holding that Bexar County
Appraisal District was an administrative or judicial tribunal of
competent jurisdiction as the taxpayer had the opportunity to
appear, offer evidence, and appeal the Appraisal District’s
decision; thus the bankruptcy court did not have jurisdiction over
tax liability redetermination under § 505(a)(2)(A)).
The district court further emphasized that the purpose behind
section 505 of the bankruptcy code is to protect the estate from
the potential loss incurred because of a debtor’s failure, due
either to financial inability or mere indifference, to contest
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potentially incorrect assessments. In this case the purposes
underlying section 505 would not be served by allowing Trans State
to relitigate in a federal forum. See In re Northwest Beverage,
Inc., 46 B.R. 631, 635 (Bankr. N.D. Ill. 1985).
For the reasons assigned by the district court, we agree that
the bankruptcy court was without jurisdiction to redetermine the
tax liability of Trans State under § 505(a)(2)(A). Accordingly,
the judgment of the district court reversing the bankruptcy court
is AFFIRMED.
AFFIRMED.
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