Miracle Mile Office Tax Spat Won’t Favor State

     PASADENA, Calif. (CN) – California will not get its way in an old tax dispute tied to reorganizing one of the largest office complexes in Los Angeles, the 9th Circuit ruled.
     Built by developer Jerome Snyder in the late 1980s for $300 million, the 967,000-square-foot Wilshire Courtyard complex is situated in West L.A. on Wilshire Boulevard. OWN (The Oprah Winfrey Network), Fox Animation, E! Entertainment Network, and several other entertainment and media companies lease space in the two-building office complex.
     Though contributing to the revival of the historic Miracle Mile district, the project entered into default after failing to restructure $350 million in secured debt. In July 1997, Snyder and his partners filed for bankruptcy to prevent foreclosure.
     As part of the reorganization, new majority owners took a 99 percent interest in a limited liability company while Snyder and his partners, including nondebtors, took a 1 percent interest.
     After the bankruptcy court confirmed the reorganization in April 1998, $200 million in debt was forgiven. Individual nondebtor partners later filed tax returns reporting cancelation of debt income.
     When the California Franchise Tax Board concluded that the transaction was a disguised sale, however, it classified the reported cancelation of debt as capital gains and asked the individual partners to pay $13 million in unpaid state income taxes.
     The owners asked the bankruptcy court in 2009 to reopen the case and protect it from what it described as the board’s attempt to “collaterally attack” the reorganization plan.
     A bankruptcy judge granted summary judgment for the reorganized Wilshire Courtyard and the nondebtor partners, but a bankruptcy appellate panel reversed.
     In a boost for the complex owners on Tuesday, however, the 9th Circuit found that the bankruptcy court still has authority to decide whether the transaction was a disguised sale, and if taxes are due.
     California argued that it would violate the federal Tax Injunction Act to let the bankruptcy court weigh in since nondebtor partners would get to avoid state taxes.
     But the 9th Circuit found that the bankruptcy court overrides the Tax Injunction Act “where the relief sought was necessary to the enforcement of specific Bankruptcy Code provisions.”
     “The real relief sought in this case involves complexities of tax, partnership, and bankruptcy law, which we do not here decide,” Judge Richard Paez wrote for a three-member panel. “What we do determine is that the bankruptcy court had subject matter jurisdiction to make the determination, as it is sufficiently closely related to the bankruptcy proceeding.”
     Judge Paez was joined by Judge Dorothy Nelson, and U.S. District Judge Suzanne Conlon, sitting by designation from the Northern District of Illinois.

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