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Bush v. United States

United States Court of Appeals, Seventh Circuit

September 20, 2019

Donald Wayne Bush and Kimberly Ann Bush, Plaintiffs-Appellants,
United States of America, Defendant-Appellee.

          Argued May 22, 2017

          Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. l:15-cv-1318-WTL-DKL - William T. Lawrence, Judge.

          Before Flaum, Easterbrook, and Sykes, Circuit Judges.


         This appeal presents the question whether a bankruptcy court can determine the amount of a debtor's tax obligations, when the debtor is unlikely to pay them. Bankruptcy Judge Carr answered yes and scheduled a trial on the merits, 2015 Bankr. LEXIS 4494 (Bankr. S.D. Ind. July 7, 2015), but a district judge disagreed. 2016 U.S. Dist. LEXIS 106671 (S.D. Ind. Aug. 12, 2016). The interlocutory appeal to the district judge was authorized by 28 U.S.C. §158(a)(3). Because the district judge blocked further proceedings in the bankruptcy court, his decision is final and appealable to us under 28 U.S.C. §1291, for, outside of bankruptcy, tax obligations are stand-alone matters independently appealable. See Bullard v. Blue Hills Bank, 135 S.Ct. 1686, 1692 (2015). See also In re Anderson, 917 F.3d 566 (7th Cir. 2019).

         The dispute began in 2013 when the Internal Revenue Service demanded that Donald and Kimberly Bush pay $107, 000 in taxes, plus $80, 000 in fraud penalties, for tax years 2009, 2010, and 2011. (We round all figures to the nearest thousand.) The Bushes petitioned the Tax Court for review. By the time trial was imminent the parties had stipulated that the Bushes owed $100, 000 in taxes, but penalties remained in dispute: the IRS sought a 75% fraud penalty under 26 U.S.C. §6663(a), while the Bushes proposed a 20% negligence penalty under 26 U.S.C. §6662(a). On the date set for trial, the Bushes filed for bankruptcy, and the automatic stay prevented the Tax Court from proceeding. The bankruptcy court declined to lift the stay. The United States did not appeal but did file a proof of claim seeking taxes and penalties. It also proposed that the tax debt be given priority over the Bushes' other unsecured debts, while the penalty (whatever its ultimate amount) be determined to be nondis-chargeable under 11 U.S.C. §523(a)(7). The Bushes then initiated an adversary proceeding, asking the bankruptcy court to set the penalty at 20% of their unpaid taxes.

         The Bushes pointed the bankruptcy court to 11 U.S.C. §505(a)(1), which reads:

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 assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

         The United States concedes that paragraph (2) does not apply to its dispute with the Bushes. But it argues that §505 as a whole does not grant subject-matter jurisdiction to bankruptcy judges and that only a potential effect on creditors' distributions justifies a decision by a bankruptcy judge about any tax dispute. The Bushes insisted that §505 does supply jurisdiction, a view that the bankruptcy judge accepted and the district judge did not. The parties' briefs in this court continue the debate about the "jurisdictional" nature of §505.

         This is unfortunate, though we grant that other circuits writing about §505 have used a "jurisdictional" characterization. See, e.g., In re Luongo, 259 F.3d 323, 328 (5th Cir. 2001) (calling §505 a "broad grant of jurisdiction"); In re Custom Distribution Services, Inc., 224 F.3d 235, 239-40 (3d Cir. 2000) ("We have consistently interpreted §505(a) as a jurisdictional statute"). But we do not see what §505 has to do with jurisdiction, a word it does not use. Section 505 simply sets out a task for bankruptcy judges. Almost the entirety of the Bankruptcy Code prescribes tasks for bankruptcy judges. For example, §503 tells bankruptcy judges how to determine administrative expenses, and §547 provides for resolution of trustees' preference-recovery actions. Those and other sections in the Code are unrelated to jurisdiction, just as few of the many thousand substantive rules in the United States Code as a whole concern jurisdiction.

         The Supreme Court insists that judges distinguish procedural and substantive rules from jurisdictional ones. See, e.g., Fort Bend v. Davis, 139 S.Ct. 1843 (2019); United States v. Kwai Fun Wong, 135 S.Ct. 1625 (2015); Gonzalez v. Thaler, 565 U.S. 134 (2012). The rule in §505 is on the non-jurisdictional side. The Justices have acknowledged that in earlier years they used the word "jurisdiction" loosely, and our colleagues in other circuits may have been influenced by that old usage when calling §505 "jurisdictional." But the Supreme Court has restricted the category of laws that can be called jurisdictional, and we must follow its current understanding of that term.

         Most genuine jurisdictional rules appear in Title 28, the Judicial Code, and that's true of bankruptcy too. The Bankruptcy Code itself tells us this. Section 105(c) reads: "The ability of any district judge or other officer or employee of a district court to exercise any of the authority or responsibilities conferred upon the court under this title shall be determined by reference to the provisions relating to such judge, officer, or employee set forth in title 28." Bankruptcy judges act as officers of the district courts, see 28 U.S.C. §157(a), so §105(c) means that bankruptcy jurisdiction depends on Title 28. See also Wellness International Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1939 (2015).

         And Title 28 addresses bankruptcy jurisdiction in detail:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive ...

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