The Wilshire Courtyard is a 1-million square foot office complex in Los Angeles’s “Miracle Mile” district. The complex’s mortgage debt was acquired through bankruptcy by a consortium led by McCarthy Cook, Blackstone Real Estate Advisors, and Merrill Lynch. California’s Franchise Tax Board (FTB), the state income tax agency, felt that this was a disguised “deemed sale,” and that the owners owed capital gains tax on the transaction. The FTB said that the federal Tax Injunction Act prevented the bankruptcy court from intervening in this; the owners said that bankruptcy trumps this. Originally, the bankruptcy court agreed with the owners. However, a bankruptcy appellate panel reversed. The Ninth Circuit Court of Appeals ruled on this earlier this week.
As noted in the summary of the opinion:
Holding that the character of the core transaction of the debtor’s bankruptcy was an issue that the bankruptcy court had jurisdiction to decide, the panel remanded the case to the BAP to determine in the first instance whether the bankruptcy court’s answer to this question gave due consideration to the “economic realities” of the transaction as structured under the plan and confirmation order.
This does not mean that the owners will win. Rather, it means that the dispute will be argued in bankruptcy court rather than in front of the FTB. As the Court noted,
The real relief sought in this case involves complexities of tax, partnership, and bankruptcy law, which we do not here decide…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.
Because everything is tied together, the matter is properly in front of the bankruptcy court. That’s a far friendlier venue for the owners than the FTB.