                                                        FILED
                                                         APR 07 2015
 1                       NOT FOR PUBLICATION         SUSAN M. SPRAUL, CLERK
                                                       U.S. BKCY. APP. PANEL
                                                       OF THE NINTH CIRCUIT
 2
 3                UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                          OF THE NINTH CIRCUIT
 5   In re:                             ) BAP No. CC-10-1275-SaPaKi
                                        )
 6   WILSHIRE COURTYARD,                ) Bk. No. 97-10771
                                        )
 7                  Debtor,             )
     ___________________________________)
 8                                      )
     CALIFORNIA FRANCHISE TAX BOARD,    )
 9                                      )
                    Appellant           )
10                                      )
     v.                                 ) M E M O R A N D U M1
11                                      )
     WILSHIRE COURTYARD; JEROME H.      )
12   SNYDER GROUP I, LTD.; LEWIS P.     )
     GEYSER REVOCABLE TRUST; GEYSER     )
13   CHILDREN’S TRUST, FBO JENNIFER     )
     GEYSER, LEWIS P. GEYSER, TRUSTEE; )
14   WENDY K. SNYDER; JEROME H. SNYDER; )
     GEYSER CHILDREN’S TRUST, FBO       )
15   DANIEL GEYSER, LEWIS P. GEYSER,    )
     TRUSTEE; RUSSELL & RUTH KUBOVEC,   )
16   DECEASED, KUBOVEC FAMILY TRUST,    )
     RITA FARMER, TRUSTEE; WILLIAM N.   )
17   SNYDER; JOAN SNYDER; GEYSER        )
     CHILDREN’S TRUST, FBO DOUGLAS      )
18   GEISER, LEWIS P. GEYSER, TRUSTEE; )
     LON J. SNYDER; SNYDER CHILDREN’S   )
19   TRUST, FBO WILLIAM N. SNYDER,      )
     LEWIS P. GEYSER, TRUSTEE,          )
20                                      )
                    Appellees.          )
21   ___________________________________)
22                 Argued and Submitted on July 25, 2014
                          at Pasadena, California
23
                           Filed - April 7, 2015
24
               Appeal from the United States Bankruptcy Court
25                 for the Central District of California
26
          1
            This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may have
     (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28   Cir. BAP Rule 8024-1.

                                    -1-
 1                Honorable Samuel Bufford, Bankruptcy Judge and
              Honorable Vincent Zurzolo, Bankruptcy Judge, Presiding2
 2
 3   Appearances:      Lisa W. Chao appeared for Appellant California
                       Franchise Tax Board; Kenneth John Shaffer of Quinn
 4                     Emmanuel Urquhart & Sullivan, LLP appeared for
                       Appellees Wilshire Courtyard, Jerome H. Snyder
 5                     Group I, Ltd., Lewis P. Geyser Revocable Trust,
                       Wendy K. Snyder, Jerome H. Snyder, Geyser
 6                     Children's Trust, FBO Jennifer Geyser, Lewis P.
                       Geyser, Trustee, Geyser Children's Trust, FBO
 7                     Daniel Geyser, Lewis P. Geyser, Trustee, Russell &
                       Ruth Kubovec, Deceased, Kubovec Family Trust, Rita
 8                     Farmer, Trustee, William N. Snyder, Joan Snyder,
                       Geyser Children's Trust, FBO Douglas Geyser, Lewis
 9                     P. Geyser, Trustee, Lon J. Snyder and Snyder
                       Children's Trust, FBO William N. Snyder, Lewis P.
10                     Geyser, Trustee.
11
12   Before: SARGIS,3 PAPPAS, and KIRSCHER, Bankruptcy Judges.
13        The parties to this bankruptcy case, and the appeals arising
14   therefrom, survived the real estate crash of the late 1990s, the
15   Y2K “disaster” with the turning of the Millennium, and the real
16   estate implosion of the 2000s, all while fighting over the effect
17   of the April 1998 confirmation of a chapter 11 plan.     The
18   complexities of the arguments have increased and the reasons for
19   supporting or rejecting the reasoning of the bankruptcy court have
20   grown.     In considering the appeal, this Panel returns to the
21   basics of what was actually decided by the bankruptcy court, the
22   evidence presented, arguments of the parties, and the plain
23   language of the Bankruptcy and Internal Revenue Codes.
24        For the issues presented on appeal, the ruling of the
25
26        2
            Bankruptcy Judges Bufford and Zurzolo each entered orders
     that are implicated in this appeal.
27
          3
            The Honorable Ronald H. Sargis, Bankruptcy Judge for the
28   Eastern District of California, sitting by designation.

                                       -2-
 1   bankruptcy court that the order confirming the chapter 11 plan
 2   determined whether the plan provided for a sale of property is
 3   REVERSED.   Based upon this Panel’s de novo review of the summary
 4   judgment, the decision of the bankruptcy court granting summary
 5   judgment is AFFIRMED.
 6                              APPELLATE HISTORY
 7        This is the second time that the appeal of the bankruptcy
 8   court’s order at issue has been before this Panel.   Previously,
 9   this Panel considered whether proper post-confirmation
10   jurisdiction existed for determination of the underlying issues.
11   Concluding that such post-confirmation jurisdiction did not exist,
12   this Panel reversed and ordered that the matter be remanded with
13   instructions to dismiss.    In re Wilshire Courtyard, 459 B.R. 416,
14   (9th Cir. BAP 2011).
15        The Ninth Circuit Court of Appeals reversed, concluding that
16   post-confirmation jurisdiction existed, and remanded to this Panel
17   for further proceedings.    Wilshire Courtyard v. Cal. Franchise Tax
18   Bd. (In re Wilshire Courtyard), 729 F.3d 1270 (9th Cir. 2013)
19   (“Wilshire I”).
20
                          CHAPTER 11 BANKRUPTCY CASE
21                       AND CONFIRMED CHAPTER 11 PLAN
22        This dispute began when Wilshire Courtyard, a California
23   general partnership, ("Debtor"), filed a chapter 11 bankruptcy
24   case on January 8, 1997 (“Wilshire Bankruptcy Case”).    Debtor
25   developed and owned two commercial complexes on Wilshire Boulevard
26   in Los Angeles containing almost a million square feet of rental
27   office space (the "Property").    The lender holding the debt
28   secured by the first position lien on the Property (“Senior

                                       -3-
 1   Secured Claim”) was Continental Bank, N.A., which secured claim
 2   subsequently came to be held by the successor “Senior Secured
 3   Creditors” in the Wilshire Bankruptcy Case.   Various other
 4   entities held subordinated secured debt.    Early in the Wilshire
 5   Bankruptcy Case, Continental was acquired by Bank of America, N.A.
 6   ("BofA").   BofA served as the loan servicer and trustee for the
 7   Senior Secured Creditors in the Wilshire Bankruptcy Case.
 8   Debtor's total secured debt aggregated almost $350 million.   After
 9   Debtor defaulted on the Senior Secured Claim in July 1996, and a
10   foreclosure sale was scheduled for January 9, 1997, Debtor filed
11   its chapter 11 bankruptcy petition.
12        Appellant California Franchise Tax Board ("CFTB") was listed
13   in the creditor mailing matrix filed by Debtor in the Wilshire
14   Bankruptcy Case.   Though CFTB received notice of the commencement
15   of the case, CFTB did not file a proof of claim, did not assert
16   any other claim, did not oppose the chapter 11 Plan, and did not
17   otherwise investigate or participate in the Wilshire Bankruptcy
18   Case.
19                        Confirmed Chapter 11 Plan
20        The Senior Secured Creditors, Debtor, and the Debtor’s
21   partners (“Partners”) negotiated the terms of a joint, consensual
22   chapter 11 plan of reorganization (“Joint Plan”).   Under the terms
23   of the Joint Plan, the Debtor was restructured from a California
24   general partnership to a Delaware limited liability company —
25   Wilshire Courtyard, LLC (“Wilshire LLC”).   After confirmation,
26   Wilshire LLC continued to own and operate the Property.   Under the
27   terms of the Joint Plan, Wilshire LLC arranged for a new,
28   nonrecourse loan for approximately $100,000,000, secured by a

                                     -4-
 1   first deed of trust on the Property (“New Secured Financing”).
 2        For their part in the reorganization through the Joint Plan,
 3   the Senior Secured Creditors agreed to contribute $23,000,000 to
 4   Wilshire, LLC, and to release the balance of their secured
 5   indebtedness, in part, for receipt of the New Secured Financing
 6   proceeds.   Additionally, the Senior Secured Creditors acquired a
 7   99% ownership interest in the reorganized Wilshire LLC.   For the
 8   Partners, confirmation resulted in their receipt of the remaining
 9   1% interest in Wilshire LLC.    In addition, the Partners also
10   received approximately $3,500,000 in cash, and a $450,000 loan
11   from the Senior Secured Creditors’ entity created to acquire their
12   99% interest in Wilshire LLC.   Other creditors holding the junior
13   secured claim (“Co-Investors”), agreed to accept a $2,500,000
14   payment on their $221,000,000 secured claim, and to forgive the
15   balance of the claim.   Administrative expenses and general
16   unsecured claims totaling around $900,000 were paid in full
17   through the Joint Plan.   These transactions in the Joint Plan by
18   which Wilshire LLC became the successor to the Debtor, the New
19   Secured Financing obtained, claims paid, and the releases granted
20   are referred to as the “Transaction.”
21        Debtor’s Second Amended Disclosure Statement was approved by
22   the bankruptcy court on February 19, 1998.   Notice of the
23   confirmation hearing for the Joint Plan was sent by Debtor to
24   interested parties in the Wilshire Bankruptcy Case on February 12,
25   1998.   However, CFTB was neither served with a copy of the
26   proposed plan nor given notice of the confirmation hearing.
27        After the confirmation hearing, the bankruptcy court entered
28   an Order Confirming the Joint Plan of Reorganization on April 14,

                                      -5-
 1   1998 (“Confirmation Order”).    CFTB acknowledges that it received
 2   the "Notice of Order Confirming Chapter 11 Plan" from the Clerk of
 3   the bankruptcy court.   The Notice stated in relevant part that,
 4   "Notice is hereby given of the entry of an order of this Court
 5   confirming a Plan of Reorganization.   A copy of the order and the
 6   plan itself are contained in the Court file located at the address
 7   listed herein."   This Confirmation Order is the epicenter from
 8   which the present dispute emanates.
 9        The Joint Plan having been confirmed, the Wilshire Bankruptcy
10   Case was closed on October 22, 1998.   Wilshire LLC contends, and
11   CFTB has not effectively disputed, that the confirmed plan was
12   implemented and consummated.    The restructure of the Debtor was
13   accomplished, the Transaction was implemented and the Joint Plan
14   was completed, and Wilshire LLC became the successor to the
15   Debtor.
16        After confirmation and consummation of the Joint Plan, the
17   Partners reported approximately $208,000,000 in aggregate
18   cancellation of debt income ("CODI") on their individual 1998
19   California state tax returns.   On November 15, 2002, CFTB sent
20   Wilshire LLC and the Partners an "Audit Issue Presentation Sheet"
21   ("AIPS").   The AIPS informed them that CFTB challenged the
22   Partners' characterization of the tax consequences of the
23   Transaction affected by the confirmed Joint Plan as CODI.     Rather
24   than $208,000,000 in CODI, CFTB argued that the Partners should
25   have reported approximately $231,000,000 in capital gain income
26   arising from the Transaction.   CFTB contends that the treatment of
27   the Senior Secured Creditors’ Claim and the Co-Investors’ Claim
28   and interests under the Joint Plan constituted a disguised sale of

                                      -6-
 1   the Property.    Based on the AIPS, CFTB issued notices of proposed
 2   assessments to the Partners on June 15, 2004, totaling
 3   approximately $13,000,000 in unpaid income taxes.
 4        The Partners disputed CFTB's assertion that the Transaction
 5   resulted in income to the Debtor and the Partners.    Over the next
 6   five years, CFTB and the Partners engaged in several California
 7   state administrative hearings relating to this dispute.
 8               Enforcement of Joint Plan and Confirmation Order
 9        On May 27, 2009, the dispute shifted from the state
10   administrative proceedings back to the bankruptcy court.
11   Wilshire LLC filed an ex parte motion to reopen the Wilshire
12   Bankruptcy Case.    Wilshire LLC argued that through the AIPS and
13   the continuing administrative hearings, CFTB was attempting to
14   collaterally attack the Confirmation Order and Joint Plan by
15   recharacterizing the terms of the Joint Plan as effecting a
16   disguised sale of the Property.    Wilshire LLC asserted that the
17   Joint Plan provided for Wilshire LLC, as the reorganized Debtor,
18   to retain ownership of the Property and did not provide for a sale
19   of the Property.    The bankruptcy court granted the motion and
20   entered an order reopening the Wilshire Bankruptcy Case on June 4,
21   2009.
22        Wilshire LLC then filed a motion for an Order to Show Cause
23   Re Contempt ("OSC") on June 23, 2009.4    The bankruptcy court
24   issued the OSC on August 12, 2009, directing CFTB to appear before
25
26           4
            Ex. 4, p. 24. (All references to the Record are from the
     Exhibits presented by Appellant CFTB, Exhibits 1 - 34, identified
27   by Exhibit (“Ex.”) number and the page number at which the
     referenced document or specific text may be located in the
28   Record.)

                                       -7-
 1   the bankruptcy court to show why it should not be held in contempt
 2   for collaterally attacking, and by refusing to act in accordance
 3   with, the Joint Plan and Confirmation Order.5
 4        CFTB responded to the OSC on August 27, 2009, arguing that
 5   Wilshire LLC had not given CFTB adequate notice of the terms of
 6   the Joint Plan prior to confirmation, of the time for objecting to
 7   the plan, or of the confirmation hearing.6     Therefore, CFTB
 8   asserted it was not bound by the Joint Plan and Confirmation
 9   Order.    Further, CFTB asserted that Wilshire LLC lacked standing
10   to prosecute the OSC motion and issuance of a contempt order by
11   the bankruptcy court against CFTB would be fundamentally unfair
12   because the state tax consequences of the plan terms were never
13   considered by the bankruptcy court.      CFTB also argued that the
14   bankruptcy court lacked the authority to determine such taxes.       If
15   the court decided the court had authority to determine and
16   Wilshire LLC had standing to prosecute the motion, Wilshire LLC
17   was guilty of laches.      CFTB asserted that laches bars the
18   determination because Wilshire LLC delayed raising these issues in
19   the Wilshire Bankruptcy Case during the six-year period after
20   confirmation that the CFTB was prosecuting the issue in the state
21   administrative proceedings.
22        Wilshire LLC replied on September 9, 2009, arguing that:
23   (1) CFTB had received adequate notice of the filing of the
24   Wilshire Bankruptcy Case and proceedings and entry of the
25   Confirmation Order; and (2) Wilshire LLC had both prudential and
26
27        5
              Ex. 22; p. 697.
28        6
              Ex. 6; p. 33.

                                        -8-
 1   constitutional standing to seek enforcement of the Confirmation
 2   Order.    Additionally, Wilshire LLC argued that CFTB could not
 3   prove an affirmative defense of laches.7
 4        The bankruptcy court held an initial hearing on the OSC on
 5   September 15, 2009.      Wilshire LLC and CFTB appeared by counsel;
 6   however, the Partners were not represented at the hearing.     Only
 7   Wilshire LLC had sought the issuance of the OSC.8     After hearing
 8   arguments of counsel, the bankruptcy court directed the parties to
 9   submit further briefing whether a contempt motion was proper under
10   the circumstances of this case, and suggested that the Partners
11   should be joined as parties to the proceedings.
12        After a continued status conference, on March 12, 2010,
13   acting under authority of Rule 7019,9 made applicable in contested
14   matters by Rule 9014(c), the bankruptcy court ordered the joinder
15   of the Partners in the proceedings.      None of the Partners objected
16   to the joinder order.
17                        Motion for Summary Judgment
                       or Summary Adjudication of Issues
18
19        Eleven months after the OSC was filed, Wilshire LLC and the
20   Partners filed a joint Motion for Summary Judgment or Summary
21   Adjudication of Issues on May 3, 2010 (“Motion for Summary
22
23
          7
              Ex. 7; p. 50.
24
          8
            Ex. 4, p. 24; Notice of and Motion for Issuance of Order to
25   Show Cause.
26        9
            All Rule references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001–9037, and all Civil Rule references are to
27   the Federal Rules of Civil Procedure 1–86. Rule 7019 makes Fed.
     R. Civ. P. 19 for joinder of parties applicable in bankruptcy
28   adversary proceedings.

                                        -9-
 1   Judgment or Summary Adjudication”).     In the motion, they repeated
 2   Wilshire LLC's earlier contentions concerning CFTB's receipt of
 3   adequate notice in the Wilshire Bankruptcy Case, that CFTB's
 4   characterization of the Transaction as a disguised sale amounted
 5   to a collateral attack on the Joint Plan, and that the
 6   Confirmation Order should be enforced under applicable provisions
 7   of the Bankruptcy Code.
 8        CFTB filed an opposition to the Motion for Summary Judgment
 9   or Summary Adjudication on June 9, 2010, generally countering
10   these arguments.   In addition to its earlier arguments, CFTB also
11   argued that the bankruptcy court lacked subject matter
12   jurisdiction to decide the motion and that, if it had
13   jurisdiction, the bankruptcy court should abstain from considering
14   the tax issues.    Further, CTFB argued that if the bankruptcy court
15   was inclined to resolve the tax issues and determine whether the
16   Transaction did indeed result in CODI rather than capital gain,
17   CFTB requested a six-month continuance to undertake discovery on
18   that issue.
19        Wilshire LLC and the Partners responded to CFTB's opposition
20   on June 16, 2010, generally repeating and supporting their earlier
21   arguments.
22        The bankruptcy court conducted a hearing on both the OSC and
23   summary judgment motion on June 22, 2010, at which all the parties
24   were represented by counsel.   The bankruptcy court rejected CFTB's
25   request to submit additional briefing, and denied its request for
26   additional time to conduct discovery.    On July 15, 2010, the
27   bankruptcy court issued an Order for Summary Adjudication of
28

                                      -10-
 1   Issues and Continued Hearing (“Summary Adjudication Order”).10    In
 2   the Summary Adjudication Order the court made the following
 3   pertinent findings and conclusions:
 4   1.   That jurisdiction existed under 28 U.S.C. §§ 1334(b) and
          1346(a), and 11 U.S.C. §§ 346(a) and 346(j) to interpret the
 5        terms of the Joint Plan and Confirmation Order.
 6   2.   Finding “V” (page 6 line 17) of Confirmation Order11 states,
          “The Joint Plan and all agreements, settlements, transactions
 7        and transfer contemplated thereby do not provide for, and
          when consummated will not constitute, the liquidation of all
 8        or substantially all of the property of the Debtor's Estate
          under Bankruptcy Code section 1141(d)(3)(A); . . .”
 9
     3.   The bankruptcy court further concluded that “[b]ecause the
10        [Joint] Plan did not implement a sale or exchange, the
          release or forgiveness under the [Joint] Plan did not create
11        capital gain income reportable by the [Debtor].”
12        The Summary Adjudication Order further provided that within
13   ten days of the entry of that Order, CFTB must vacate the
14   assessments which are based on the Joint Plan effectuating a
15   disguised sale or that the Transaction was a sale or exchange.
16   CFTB was further ordered to cease and desist from taking further
17   action in contempt of the Confirmation Order.   The bankruptcy
18   court ordered that it would conduct a further hearing concerning
19   the impact, if any, of Stackhouse v. United States, 441 F.2d 465
20   (5th Cir. 1971), to consider whether there could be a different
21   tax result for the Partners than for the Debtor (the
22   partnership).12
23
24
          10
25             Ex. 31, p. 1078.
26        11
               Ex. 22, p. 702
27        12
            Summary Adjudication Order, Ex. 31, p. 1080; and Hearing
     Transcript (“Hrg. Tr.”) of June 22, 2010 hearing, Ex. 32,
28   pp. 1124: 16-23, 1125: 1-15.

                                    -11-
 1                   Second Hearing on Motion for Summary Judgment
                          and August 31, 2010 Written Decision
 2
          The bankruptcy court held a second hearing on July 20, 2010,
 3
     on the Motion for Summary Judgment or Summary Adjudication.       Early
 4
     in the hearing, the court noted that the Summary Adjudication
 5
     Order interpreting Finding “V” was effective only as to Wilshire
 6
     LLC, but only tentative as to the individual Partners based on the
 7
     court having ordered further briefing and argument on the
 8
     “Stackhouse issue.”       After hearing the arguments of the parties,
 9
     the bankruptcy court announced it would grant summary judgment in
10
     favor of both Wilshire LLC and the Partners.       Among the statements
11
     made by the bankruptcy court at the hearing were that:
12
     (a) “Section 1141 provides that all creditors are bound by the
13
     plan.        This includes [CFTB];” (b) “In this case the plan’s results
14
     also apply to the Debtor’s partners,. . .;” and (c) “so [CFTB’s]
15
     actions are in contempt of the confirmation order and [CFTB] is
16
     ordered to cease and desist.”13
17
          On August 31, 2010, the bankruptcy court issued a written
18
     Decision entitled “Opinion on the Summary Judgment Motion”
19
     (“August 31 Decision”).14       No further order was issued after the
20
     July 20, 2010 continued hearing.       In the August 31 Decision the
21
     bankruptcy court made the following determinations:
22
     1.   “[B]ecause [CFTB] received both the case commencement notice
23        and a notice of entry of the confirmation order, the notice
          provided to [CFTB] was constitutionally adequate and did not
24        deny [CFTB] its due process rights.” Ex. 38, p. 1486.
25
26           13
            Ex. 37; Hr'g Tr., p. 1479:1-3; 8-9; 18-19 (July 20, 2010
     Continued Hearing on Motion for Summary Judgment or Summary
27   Adjudication).
28           14
                  Ex. 38, p. 1483.

                                          -12-
 1
     2.   “[T]he interests of the Partners are wholly derivative from
 2        the status of the Property in the partnership.” Id.,
          p. 1483.
 3
     3.   “The confirmation order specifically provided that the plan
 4        and transactions thereunder ‘do not provide for, and when
          consummated will not constitute, the liquidation of all or
 5        substantially all of the property of the Debtor's estate.’”
          Id., p. 1484
 6
     4.   “Because the [CFTB] is bound by the chapter 11 plan, . . .,
 7        the action now taken by [CFTB] [to recharacterize the
          Transaction as a disguised sale] in contravention of the plan
 8        is an impermissible collateral attack on confirmation order.”
          Id., p. 1487.
 9
     5.   “[CFTB’s] attempt to recharacterize the [Transaction] as a
10        disguised sale would nullify the effect of the [1980
          Bankruptcy Tax Act which overturned Stackhouse] and would
11        ignore the interplay between § 346 and relevant IRC
          Provisions [IRC § 108(a)(1)] allowing debtor to exclude CODI
12        from its realizable income.” Id., p. 1488
13   6.   [W]hen there is a cancellation of indebtedness at the
          partnership level . . . , there is no realized taxable
14        income, even at the partner level, when a partnership does
          not realize CODI.” Id.
15
16              October 4, 2010 Order Granting Summary Judgment
17        On October 4, 2010, the bankruptcy court entered a final
18   "Order Granting Summary Judgment" (“Summary Judgment Order”).15
19   This final order was consistent with the August 31 Decision, with
20   the court making some additional findings and conclusions, which
21   are paraphrased as follows:
22   1.   The court summarily adjudicates and interprets Finding “V” of
          the Confirmation Order to establish that the transaction
23        implemented under the Joint Plan is not a sale or exchange
          for any purpose.
24
     2.   The court summarily adjudicates and interprets Finding X of
25        the Confirmation Order and the Joint Plan Article VI.A.2 to
          establish that the transfers and transactions implemented
26        under the Joint Plan are not a sale of partnership interests
          by the existing Partners.
27
28        15
               Ex. 39, p. 1491.

                                      -13-
 1
     3.   The court summarily adjudicates and interprets Finding “X” of
 2        the Confirmation Order to establish that the transfers and
          transactions contained in Joint Plan Article VI.A., and
 3        specifically Article VI.A.2., to be a capital contribution to
          Wilshire LLC in return for receiving the LLC interests.
 4
     4.   The court summarily adjudicates and interprets Finding “Y” of
 5        the Confirmation Order and Joint Plan Article VII.A and C to
          establish that the junior secured claim in the approximate
 6        amount of $221 Million is released and discharged for payment
          of $2.5 Million as provided in Joint Plan Article V.C-2.
 7
     5.   The court summarily adjudicates and interprets Bankruptcy
 8        Code § 346 (as it existed in 1997) as applying to the State
          of California so that income is not realized by (1) the
 9        bankruptcy estate, (2) debtor, or (3) successor to debtor by
          reason of forgiveness or discharge of indebtedness under
10        Title 11.
11   6.   The excluded discharge of indebtedness is income subject to
          passthrough pursuant to IRC Section 702(a) resulting in a
12        basis increase under IRC Section 705.
13   7.   The CFTB Assessments (Ex. 14, pp. 223-257) of taxes on the
          Partners constitute an impermissible collateral attack on the
14        Confirmation Order and Joint Plan based on the requirement on
          a government unit to raise the tax avoidance issue either at
15        or before the confirmation hearing, or in the event of fraud
          within 180 days thereafter as provided in 11 U.S.C.
16        §§ 1129(d) and 1144.
17   8.   CFTB is ordered to vacate the Assessments within ten days of
          the entry of this Order Granting Summary Judgment.
18
          THE SUMMARY ADJUDICATION ORDER, SUMMARY JUDGMENT ORDER,
19           AND THE AUGUST 31 DECISION ARE PROPERLY ON APPEAL
20        On July 26, 2010, CFTB filed a Notice of Appeal (“First
21   Notice of Appeal”) in connection with the Motion for Summary
22   Judgment or Summary Adjudication.16   The First Notice of Appeal
23   states that CFTB appeals to the Bankruptcy Appellate Panel from:
24   (1) the Summary Adjudication Order (filed July 15, 2010), (2) the
25   “July 20, 2010 Decision,” and (3) “any judgment, order or decree
26   related to such decision, which has not, as yet, been issued.”
27
28        16
               Ex. 33, p. 1128.

                                    -14-
 1        On October 13, 2010, CFTB filed a second Notice of Appeal in
 2   connection with the Motion for Summary Judgment or Adjudication
 3   (“Second Notice of Appeal”).17    The second Notice states that CFTB
 4   appeals to the Bankruptcy Appellate Panel from: (1) the July 15,
 5   2010 Order for Summary Adjudication and Continuing Hearing,
 6   (2) the July 20, 2010 oral decision of the bankruptcy court and
 7   any judgment, order or decree related to that oral decision, which
 8   has not, as yet been issued, (3) the August 31 Decision, and
 9   (4) the Order Granting Summary Judgment.
10        CFTB argues that the bankruptcy court lacked jurisdiction to
11   issue the Summary Judgement Order on October 4, 2010, because CFTB
12   filed a Notice of Appeal of the Summary Adjudication Order on
13   July 25, 2010.    CFTB contends that the Summary Judgment Order
14   filed on October 4, 2010, altered and expanded the Summary
15   Adjudication Order previously filed on July 15, 2010, which was
16   the subject of the July 25, 2010 Notice of Appeal.    In support of
17   this contention, CFTB cites Rains v. Flinn (In re Rains), 428 F.3d
18   893, 904 (9th Cir. 2005) for the basic legal principle that, once
19   a notice of appeal is filed, the bankruptcy court may not finally
20   adjudicate substantial rights directly involved in the appeal.
21   CFTB concludes that the August 31 Decision is the judgment or
22   order from which it has appealed, and the October 4, 2010 Order
23   altered that judgment or order.    CFTB’s arguments miss the mark on
24   several points.
25        First, subject to exceptions not applicable here, an appeal
26   may be taken as a matter of right only from a final judgment or
27
28        17
               Ex. 40, p. 1496.

                                       -15-
 1   order.       28 U.S.C. § 158(a)(1).   The final judgment or order
 2   requirement is intended to preclude piecemeal litigation, conserve
 3   judicial energy, and eliminate delays caused by interlocutory
 4   appeals.       Catlin v. United States, 324 U.S. 229, 233-34 (1945).
 5   “In the ordinary course a ‘final decision’ is one that ends the
 6   litigation on the merits and leaves nothing for the court to do
 7   but execute the judgment.”       Ray Haluch Gravel Co. v. Cent. Pension
 8   Fund of the Int’l Union of Operating Eng’rs & Participating
 9   Emp’rs, 134 S. Ct. 773, 779 (2014)(quoting Catlin, 324 U.S. at
10   233).
11        It is clear from the history of hearings and orders in the
12   Wilshire Bankruptcy Case beginning with the Summary Adjudication
13   Order, through the hearings and oral statements from the
14   bankruptcy court at the July 20, 2010 hearing, the issuance of the
15   August 31 Decision, and ultimately the Summary Judgment Order, the
16   final order from which an appeal could be taken as a matter of
17   right was not issued by the court until October 4, 2010.       The CFTB
18   incorrectly seeks to treat the August 31 Decision, the Summary
19   Adjudication Order, and the statements of the court at the two
20   hearings as the “final orders” for purposes of appeal – all of
21   which predated the issuance of the actual final order, the
22   October 4, 2010 Summary Judgment Order.18
23        In substance, CFTB complains that the bankruptcy court
24   conducted multiple proceedings and afforded the parties several
25
26           18
            CFTB’s First Notice of Appeal foretells that a final order
     is to come, stating that CFTB is appealing from not only the
27   Summary Adjudication Order and Decision, but from any other order
     or decree relating to the motion “which has not, as yet, been
28   issued.” Ex. 33, p. 1128.

                                           -16-
 1   opportunities to consider interim rulings and further brief
 2   specific issues.   Beginning with the bankruptcy court’s July 20,
 3   2010 oral statements, and continuing through the August 31
 4   Decision and the final Summary Judgment Order on October 4, 2010,
 5   the final legal conclusions made by the bankruptcy court evolved
 6   as the judge considered the evidence and arguments.    Once the
 7   Summary Judgment Order was entered, the universe of the bankruptcy
 8   court’s findings of fact and conclusions of law was fixed and the
 9   final, appealable order issued.    The bankruptcy court did not
10   issue such a final order, but continued the hearing on the
11   “Stackhouse Issue” to determine whether the tax assessments could
12   be made against the Partners.
13
                        The Summary Adjudication Order
14                         Cannot Be a Final Order
15        Further, the Summary Adjudication Order did not purport to be
16   a final determination of the Contested Matter, but only a “summary
17   adjudication.”   The term “summary adjudication” is not a federal
18   procedural term, but one under California state law.    “Summary
19   adjudication” is a procedure by which the state court judge may
20   determine some of the claims or issues, but does not conclude the
21   action before the court.   The final judgment is, and must be,
22   subsequently issued.19
23        In federal court the analogous rule is found in Civil
24   Rule 56(a), as incorporated by Rule 7056, providing for partial
25   summary judgment on a claim or defense.   As noted in MOORE’S FEDERAL
26
27        19
            See 6 Witkin, Cal. Proc. 5th, §§ 267 - 277, Proceedings
     Without Trial, for general discussion of the state law principle
28   of summary adjudication.

                                       -17-
 1   PRACTICE, CIVIL § 56.122 (Matthew Bender 3d Ed.), “Of course, the
 2   reference to ‘judgment’ in the term ‘partial summary judgment’ is
 3   a misnomer.   Any ruling that disposes of less than all issues and
 4   fewer than all parties in an action is not a judgment within the
 5   meaning of Rule 54.”   A partial summary judgment order is “not an
 6   inherently final order.”   Mueller v. Auker, 576 F.3d 979, 1002
 7   (9th Cir. 2009); SEIU, Local 102 v. Cnty. of San Diego, 60 F.3d
 8   1346, 1350 (9th Cir. 1994).
 9        Further, CFTB’s assertion that the Summary Adjudication Order
10   is a “final order” does little to avoid piecemeal litigation, and
11   actually has the effect of creating piecemeal, fragmented,
12   potentially inconsistent litigation between the CFTB and Wilshire
13   LLC on the one hand, appealing the Summary Adjudication Order, and
14   then CFTB and Partners in appealing the Summary Judgment Order.
15        The Summary Judgment Order is the final order from which CTFB
16   could appeal.   The bankruptcy court properly exercised
17   jurisdiction over the Motion for Summary Judgment or Summary
18   Adjudication through and including the issuance of the Summary
19   Judgment Order.   CFTB timely appealed the final order.
20                            STANDARDS OF REVIEW
21        The bankruptcy court’s decision to grant or deny a summary
22   judgment is reviewed de novo by the appellate court.    Botosan v.
23   Paul McNally Realty, 216 F.3d 827, 830 (9th Cir. 2000).    The same
24   standards used by the bankruptcy court under Civil Rule 56, as
25   made applicable by Rules 7056 and 9014, apply upon appellate
26   review.   Meade v. Cedarapids, Inc., 164 F.3d 1218, 1221 (9th Cir.
27   1999).    Facts determined for summary judgment proceedings are not
28   entitled to the clearly erroneous standard of appellate review.

                                      -18-
 1   Audrey, Inc. v. Casey (In re Audre, Inc.), 216 B.R. 19, 25 (9th
 2   Cir. BAP 1997); Gertsch v. Johnson & Johnson, Finance Co.
 3   (In re Gertsch), 237 B.R. 160, 165 (9th Cir. BAP 1999).    Summary
 4   judgment is not proper if material factual issues exist for trial.
 5   Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995).
 6        An appellate court may base its ruling on any ground
 7   supported by the record.    Danning v. Miller (In re Bullion Reserve
 8   of N. Am.), 922 F.2d 544. 546 (9th Cir. 1991); Gilbert v. Ben-
 9   Asher, 900 F.2d 1407, 1410 (9th Cir. 1990), cert. denied, 498 U.S.
10   865 (1990).
11                  STANDING, CONSTITUTIONALLY SUFFICIENT
                   NOTICE, BINDING ORDER CONFIRMING PLAN,
12             AND NO DETERMINATION OF NATURE OF TRANSACTION
13        CFTB first asserts that Wilshire LLC, as successor to the
14   reorganized Debtor, does not meet the minimum Constitutional
15   standing requirements for a party with an actual case or
16   controversy to be adjudicated by the federal courts.   U.S. CONST.
17   art 3, sec. 2.   A determination of standing is subject to de novo
18   review on appeal.   La Asociacion de Trabajadores de Lake Forest v.
19   City of Lake Forest, 624 F.3d 1083, 1087(9th Cir. 2010).
20        Federal courts are not forums for hypothetical claims or
21   litigation by persons who do not have rights which are the subject
22   of the federal court proceeding (with limited exceptions to this
23   rule, such as class action and other special representative
24   proceedings authorized by Congress).    Ne. Fla. Chapter of the
25   Associated Gen. Contractors of Am. v. City of Jacksonville, Fla.,
26   508 U.S. 656, 663 (1993).   Standing must be determined to exist
27   before the court can proceed with a case.   Sacks v. Office of
28   Foreign Assets Control, 466 F.3d 764, 771 (9th Cir. 2006).

                                      -19-
 1          A person must have a legally protected interest, for which
 2   there is a direct stake in the outcome, to have standing in
 3   federal court.   This fundamental requirement arises under the
 4   Constitution.    Arizonans for Official English v. Ariz., 520 U.S.
 5   43, 64 (1997).   The Supreme Court provided a detailed explanation
 6   of the Constitutional case or controversy requirement in
 7   Northeastern Florida Chapter of the Associated General Contractors
 8   of America v. City of Jacksonville, Florida, supra 508 U.S. at
 9   663.   In that decision, the court explained that a party seeking
10   to invoke federal court jurisdiction must demonstrate: (1) injury
11   in fact, not merely conjectural or hypothetical injury; (2) a
12   causal relationship between the injury and the challenged conduct;
13   and (3) the prospect of obtaining relief from the injury as a
14   result of a favorable ruling is not too speculative.   Id.
15          CFTB asserts that Wilshire LLC lacks standing because the
16   taxes at issue are to be paid by the Partners, not the Debtor,
17   citing Culver, LLC v. Chiu (In re Chiu), 266 B.R. 743, 748 (9th
18   Cir. BAP 2001), aff’d, 304 F.3d 905 (9th Cir. 2002).   Wilshire LLC
19   counters, arguing that as the entity in which the tax event is
20   determined, and then passed through to the Partners, it has
21   standing to determine the taxes arising from the operation of its
22   business, citing Sprint Communications Co., L.P. v. APCC Servs.,
23   Inc., 554 U.S. 269, 287 (2008).
24          The tax liabilities or benefits of the Partners are wholly
25   derivative of the tax consequences of the Transaction created by
26   and for Debtor through the Joint Plan.   Determination of taxable
27   income for a partnership is done in the same manner as for an
28   individual, with that income or loss then passed through from the

                                       -20-
 1   partnership to the partners.   United States v. Basye, 410 U.S.
 2   441, 448 (1973); 26 U.S.C. §§ 703, 701.   The partnership is
 3   regarded as an independently recognizable entity apart from the
 4   aggregate of its partners.   Only once its income is ascertained
 5   and reported, then the existence of the partnership may be
 6   disregarded and then each partner is attributed a tax attribute
 7   for a portion of the total, treating the partnership as merely a
 8   conduit through which the partnership’s income has passed.     Id.20
 9   For partnerships, the California Revenue and Taxation Code
10   incorporates the provisions of Subchapter K of Chapter 1 of
11   Subtitle A of the Internal Revenue Code (26 U.S.C. §§ 701-776).
12   Cal. Rev. & Tax Code § 17851 (with specific statutory exceptions
13   not applicable to the issue before the court).
14        Wilshire LLC, as the successor to Debtor, is the “person”
15   whose transaction is the subject of the controversy to determine
16   whether income was generated for tax purposes for the partnership.
17   After the taxation income determination from the Transaction is
18   made for the partnership (Debtor), then the partnership serves as
19   the conduit through which the income (or loss) is passed through
20
21        20
            Footnote 8 in United States v. Basye, 410 U.S. at 448,
     quotes the legislative history, echoing the Solicitor General’s
22   remarks that it is odd to be debating the issue of income being
     determined at the partnership and that being then passed through
23   to the partners. “The legislative history indicates, and the
     commentators agree, that partnerships are entities for purposes of
24   calculating and filing informational returns but that they are
     conduits through which the taxpaying obligation passes to the
25   individual partners in accord with their distributive shares. See,
     e. g., H. R. Rep. No. 1337, 83d Cong., 2d Sess., 65-66 (1954);
26   S. Rep. No. 1622, 83d Cong., 2d Sess., 89-90 (1954); 6 J. Mertens,
     Law of Federal Income Taxation § 35.01 (1968); S. Surrey &
27   W. Warren, Federal Income Taxation 1115-1116 (1960); Jackson,
     Johnson, Surrey, Tenen & Warren, The Internal Revenue Code of
28   1954: Partnerships, 54 Col. L. Rev. 1183 (1954).”

                                     -21-
 1   to the Partners.    Wilshire LLC, the successor which emerged from
 2   the confirmed Joint Plan, has standing to litigate the Joint Plan
 3   issues concerning the nature of the Transaction.    Once such
 4   determination is made, then Wilshire LLC can properly report such
 5   income or losses (or correct previously reported information) to
 6   the Partners for inclusion on their tax returns.
 7        The bankruptcy court’s determination that Wilshire LLC has
 8   standing to prosecute the Order to Show Cause and obtain a
 9   determination of the Transaction is correct and is affirmed.
10
               CFTB Was Provided Constitutionally Sufficient Notice
11                        Of The Wilshire Bankruptcy Case
12        This Panel having determined that Wilshire LLC has standing,
13   next considers CFTB’s assertion that it is not bound by the
14   provisions of the Confirmation Order.    This argument operates on
15   two levels: first, whether CFTB was bound by the reorganization of
16   the Debtor and Transaction provided for in the Joint Plan and the
17   Confirmation Order; and second, whether specific findings made in
18   the Confirmation Order bind Wilshire LLC, the Partners, and CFTB
19   concerning the nature of the Transaction (whether it was a sale or
20   a non-sale reorganization of the Debtor with debt forgiveness
21   under the Bankruptcy Code).    CFTB conflates these two separate
22   issues.
23        In the Summary Adjudication Order, the bankruptcy court
24   determined that Finding “V” of the Confirmation order establishes
25   that the Transaction was not a sale or exchange for any purpose.21
26   The bankruptcy court subsequently issued the August 31 Decision
27
28        21
               Ex. 31; Summary Adjudication Order, p. 1078.

                                       -22-
 1   which concluded that notice of filing of the Wilshire Bankruptcy
 2   Case and the subsequent notice that the Confirmation Order had
 3   been entered provided constitutionally sufficient notice that
 4   CFTB’s rights and interests were determined through confirmation
 5   of the Joint Plan.
 6        The touchstone for a question of whether sufficient notice
 7   was provided for Constitutional Due Process purposes for a
 8   determination of a person’s rights or interest in property is
 9   Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950).
10   Such constitutionally sufficient notice must be “[r]easonably
11   calculated, under all the circumstances, to apprise interested
12   parties of the pendency of the action and afford them an
13   opportunity to present their objections.”   Id. at 314.   In the
14   context of bankruptcy proceedings, the issue of Due Process was
15   recently addressed by the Supreme Court in United Student Aid
16   Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).   Having received
17   notice of the plan and its contents prior to the bankruptcy court
18   confirming the chapter 13 plan, the Supreme Court found that such
19   notice satisfied United Student Aid Funds, Inc.’s Due Process
20   rights.   Id. at 272.   As restated in Tulsa Professional Collection
21   Services, Inc. v. Pope, 485 U.S. 478, 484 (1988), notice is
22   constitutionally sufficient when it is reasonably calculated,
23   under all the circumstances, to apprise interested parties of the
24   pendency of the action and afford them an opportunity to present
25   their objections.
26        Here, CFTB received notice of both the Wilshire Bankruptcy
27   Case and the Confirmation Order.   Had it chosen to act, such as
28   requesting special notice, CFTB could have monitored the Wilshire

                                      -23-
 1   Bankruptcy Case.   CFTB cannot now complain that it was not invited
 2   by the Debtor to assert whatever rights or objections CFTB might
 3   possibly have to the Joint Plan which was moving toward
 4   confirmation.
 5        The bankruptcy court’s determination that CFTB received
 6   sufficient notice of the Wilshire Bankruptcy Case and the
 7   proceedings which led to the Confirmation Order is affirmed.    The
 8   terms of the Joint Plan and Confirmation Order bind Wilshire LLC,
 9   the Partners, and CFTB to the Joint Plan.
10
                Findings in the Confirmation Order Stating the
11            Nature of the Transaction Are Not Binding on CFTB
12        As the Panel reads Wilshire LLC’s and the Partners’ briefs,
13   they contend that the Confirmation Order not only confirms the
14   Joint Plan, but “binds” CFTB to a determination stated in the
15   Confirmation Order that, for purposes of tax treatment, the
16   Transaction is not a sale of the partnership assets or interests.
17   This argument overstates the effect of the Confirmation Order.
18        For this proposition, Wilshire LLC and the Partners direct
19   the Panel to the progeny of Lawrence Tractor Co. v. Gregory
20   (In re Gregory), 705 F.2d 1118, 1123 (9th Cir. 1983).   In Gregory
21   the Ninth Circuit Court of Appeals affirmed the lower courts,
22   concluding that notice of a chapter 13 bankruptcy case was
23   sufficient notice to the creditor that confirmation of the plan
24   could lead to the discharge of its debt.    The notice of the
25   bankruptcy case put the creditor on inquiry notice that its claim
26   could be affected, including discharged as provided by the
27   Bankruptcy Code, which required the creditor to investigate the
28   case.   If the creditor had so acted, it would have seen that

                                     -24-
 1   debtor was seeking to confirm a chapter 13 plan which provided a
 2   0% percent dividend for the creditor’s claim and a discharge of
 3   that debt upon completion of the Chapter 13 plan.
 4        In 2009, the Ninth Circuit again addressed this issue in Joye
 5   v. Franchise Tax Board (In re Joye), 578 F.3d 1070 (9th Cir.
 6   2009).    In Joye, the CFTB (same party as in this appeal) received
 7   notice of the Joye bankruptcy case having been filed and that
 8   September 3, 2001, was the claims bar date set for governmental
 9   claims.    The CTFB, with knowledge of the Joye bankruptcy case, did
10   not file a proof of claim until October 15, 2001.    In Joye, the
11   court concluded that while having notice of the bankruptcy case,
12   the CFTB “[i]gnored the Joyes’ bankruptcy proceeding ‘at its
13   peril.’”   Id. at 1080.
14        In the present case, Wilshire LLC does not contend that the
15   proposed Chapter 11 plan or the bankruptcy court file provided
16   notice that confirmation of the Joint Plan would constitute a
17   determination that the Transaction was not a sale.   Nor is it
18   asserted that notice was provided that confirmation of the Joint
19   Plan would determine the tax consequences flowing from the
20   Transaction.   Rather, Wilshire LLC only argues that by virtue of
21   adding language stating such a “determination” to the order
22   subsequently signed by the bankruptcy judge, that language now
23   binds CFTB.
24        A review of the Second Amended Disclosure Statement,
25   Section III, Part H, titled “Tax Consequences of Joint Plan,”
26   imparts the following information with respect to the tax
27   consequences of confirmation: “CREDITORS AND INTEREST HOLDERS
28   CONCERNED WITH HOW THE JOINT PLAN MAY AFFECT THEIR TAX LIABILITY

                                      -25-
 1   SHOULD CONSULT WITH THEIR OWN ACCOUNTANTS, ATTORNEYS, AND/OR
 2   ADVISORS.”22     It continues to state, “The Proponent CANNOT and DOES
 3   NOT represent that the tax consequences contained below are the
 4   only tax consequences of the Joint Plan because the Tax Code
 5   embodies many complicated rules that make it difficult to state
 6   completely and accurately all of the tax implications of any
 7   action.”23     This Section H of the Second Amended Disclosure
 8   Statement restates several times that no representation concerning
 9   the actual tax consequences of confirmation and performance of the
10   plan would be made by Debtor.
11        For the Partners, the Second Amended Disclosure Statement
12   states that there will be a discharge of indebtedness and Partners
13   will recognize cancellation of indebtedness income (“CODI”).     The
14   Second Amended Disclosure Statement continues, stating that the
15   Partners may elect to treat the CODI as provided in § 108 of the
16   Internal Revenue Code.     Such § 108 treatment may allow the CODI to
17   be excluded from income or Partners may elect to offset it against
18   operating losses.24     The Joint Plan does not contain any provision
19   either characterizing the Transaction or the tax effects of the
20   Transaction.25
21        The Joint Plan and the Confirmation Order do not constitute
22   the final determination of the Transaction for tax purposes.     Such
23   determination was properly the subject of the subsequent post-
24
          22
25             Id., p. 496:20-22.
          23
26             Id., p. 496:25-27, 497:1-2.
27        24
               Id., p. 498:3-13.
28        25
               Ex. 12; Second Amended Disclosure Statement, pp. 515-561.

                                       -26-
 1   confirmation judicial proceedings in the bankruptcy court which
 2   are the subject of this appeal.    The bankruptcy court properly
 3   considered CFTB’s contentions, rejecting Wilshire LLC’s contention
 4   that the Joint Plan and Confirmation Order is a final order
 5   previously determining that issue between Wilshire LLC and CFTB.
 6
                 THE BANKRUPTCY COURT CORRECTLY DETERMINED
 7                  THAT THE TRANSACTION WAS NOT A SALE
 8        The Ninth Circuit Court of Appeals remanded this appeal to
 9   the Bankruptcy Appellate Panel to make a merits determination of
10   whether the bankruptcy court gave “due consideration to the
11   ‘economic realities’ of the transaction as structured through the
12   [Joint] Plan and Confirmation Order.”      These “economic realities”
13   are a consideration of whether there are “tax independent
14   considerations” for the transaction and that the economic
15   substance of the transaction “is not shaped solely by tax-
16   avoidance features that have meaningless labels attached . . . .”
17   Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978).       So
18   long as there are significant and genuine non-tax attributes to
19   the transaction, the form of the transaction adopted by the
20   parties governs for tax purposes.    Id.   See also Sollberger v.
21   Commissioner, 691 F.3d 1119, 1124, n.6 (9th Cir. 2012) (The court
22   conducts a flexible, case-by-case analysis of whether the burdens
23   and benefits of ownership have been transferred.     There are not
24   hard and fast rules of thumb which can be used for such a
25   determination, and no single factor is controlling.     The
26   transaction must be viewed in light of realism and practicality.)
27        The bankruptcy court determined the Transaction eleven months
28   after the Order to Show Cause was issued.     The bankruptcy court

                                       -27-
 1   issued three documents stating the findings and conclusions upon
 2   which the Summary Judgment Order is based.      For the flexible,
 3   case-by-case analysis of whether “tax independent considerations”
 4   exist and the economic substance of the Transaction, this Panel,
 5   through its de novo review, considers the evidence presented and
 6   the findings of fact and conclusions of law to be drawn therefrom.
 7
                           First Hearing on Motion for
 8                  Summary Judgment or Summary Adjudication
 9        The hearing on the Motion for Summary Judgment or Summary
10   Adjudication was conducted on June 22, 2010.      In its Opposition26
11   and at the June 22, 2010 hearing27 CFTB did not argue that tax
12   independent considerations did not exist or that the economic
13   realities of the Transaction demonstrated that they were only tax
14   driven.    Rather, CFTB’s arguments focused on why the bankruptcy
15   court did not have jurisdiction (which jurisdiction the Ninth
16   Circuit established does exist in Wilshire I) and why 11 U.S.C.
17   § 346(j) did not apply to the Transaction under the confirmed
18   Joint Plan.    CFTB stated at the hearing, “We’re not challenging,
19   your Honor, the aspects of the plan.”28      Rather, CFTB asserted that
20   the court does not have jurisdiction to determine the issue if
21   11 U.S.C. § 346 applied, and the application of the Internal
22   Revenue Code to treat the Transaction as a sale of partnership
23
24
25
          26
            Ex. 24; Opposition to Motion for Summary Judgment or
26   Adjudication, p. 875.
27        27
               Ex. 32; Transcript, p. 1085.
28        28
               Ex. 32; Transcript, p. 1114:8-9.

                                      -28-
 1   interests by the Partners.29    At the conclusion of the June 22,
 2   2010 hearing the bankruptcy court did not state any findings of
 3   fact or conclusions of law on the record.
 4                 Request for Continuance Was Properly Denied
 5        As part of its Opposition, CFTB requested a six-month
 6   continuance so that it could conduct discovery on the issue of
 7   whether the Transaction resulted in cancellation of indebtedness.30
 8   The scope of the requested discovery is set forth in Paragraph 22
 9   of the Declaration of Robert Babcock (“Babcock Declaration”) filed
10   in opposition to the Motion for Summary Judgment or Summary
11   Adjudication.31   The scope of the discovery described relates to
12   the underlying substance of the Transaction, with discovery to be
13   conducted of the Debtor, creditors, Partners, and Wilshire LLC.
14        CFTB also filed an Ex Parte Motion for Continuance if the
15   bankruptcy court did not discharge the Order to Show Cause based
16   on CFTB’s legal arguments.     CFTB requested the continuance to
17   allow an additional six months to conduct discovery.32
18        The continuance for CFTB to undertake such discovery was not
19   granted by the court.    The bankruptcy court’s denial of the
20   request for further discovery before ruling on the motion for
21   summary judgment is reviewed for abuse of discretion.       Chance v.
22   Pac-Telerac, Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2011).      The
23
24
          29
               Ex. 32; Transcript, p. 1114: 1-4, 18-22.
25
          30
               Ex. 24; Opposition, p. 1:19-21, 2:1-14.
26
          31
               Ex. 34; Babcock Declaration, p. 1138.
27
          32
               Ex. 19; Conditional Ex Parte Motion to Continue Hearing,
28   p. 316.

                                       -29-
 1   burden is on the party seeking further discovery to show that it
 2   diligently pursued its previous discovery opportunities and that
 3   evidence it seeks exists.    Id., citing Nidds v. Schindler Elevator
 4   Corp., 113 F.3d 912 920 (9th Cir. 1996), and Conkle v. Jeong,
 5   73 F.3d 909, 914 (9th Cir. 1995).
 6        In the Opposition, CFTB theorized that the Transaction
 7   resulted in capital gain, and therefore there was no cancellation
 8   of indebtedness income which could have been excluded pursuant to
 9   Internal Revenue Code (“IRC”) § 108 (26 U.S.C. § 108) and
10   11 U.S.C. § 346(j) would not be applicable.     CFTB argued that the
11   Transaction consisted of a sale of 99% of the properties of Debtor
12   for $3,500,000 and cancellation of $284,570,000 of indebtedness.33
13   CFTB treated the Transaction as in substance being a sale by the
14   Partners of 99% of their partnership interests to the Senior
15   Secured Creditors who acquired such 99% interest in the Debtor to
16   be their 99% interest in Wilshire LLC.      CTFB further contended
17   that the Transaction violated IRC § 701 (which provides that a
18   partnership shall not be subject to the income tax imposed), and
19   that by applying the step-transaction doctrine CFTB can treat the
20   Transaction as one by which Debtor sold a 99% interest in the
21   properties or that the Partners sold 99% of their interests in the
22   Debtor.    Evidence was not presented to support these arguments.
23        As Wilshire LLC and the Partners argue, the briefing and
24   hearing schedule on the Motion for Summary Judgment or Summary
25   Adjudication was set pursuant to a stipulation between CFTB and
26
27
28        33
               Ex. 24; Opposition, p. 916:1-9.

                                      -30-
 1   Wilshire LLC (“Scheduling Stipulation”).34   As part of the
 2   Stipulation, dated April 22, 2010, CFTB, Wilshire LLC, and the
 3   Partners agreed and stipulated to several matters.    First, the
 4   bankruptcy court had issued an order joining all of the Partners
 5   into this Contested Matter.    Second, no objection to the joinder
 6   by any of the Partners was filed and the Partners were parties to
 7   this Contested Matter.    CFTB, Wilshire LLC, and the Partners then
 8   stipulated that the hearing on the Motion for Summary Judgment or
 9   Summary Adjudication occur on June 22, 2010.     Further, the Motion
10   for Summary Judgment or Adjudication would be filed by May 3,
11   2010, Opposition filed by June 7, 2010, and Replies filed by
12   June 15, 2010.
13        In denying the request for a continuance to undertake
14   discovery, the bankruptcy court noted that no discovery had been
15   attempted by CFTB during the one year that this Contested Matter
16   had been pending.    CFTB argued that the issues relating to
17   11 U.S.C. § 346(j) had not been raised until the filing of the
18   Motion for Summary Judgment or Summary Adjudication.    The
19   bankruptcy court noted that the issue of whether 11 U.S.C. § 346
20   applied had been fully briefed by the parties.
21        The bankruptcy court further noted that in its September 8,
22   2009 Reply to CFTB’s Response to the Order to Show Cause,
23   Wilshire LLC asserted that the grounds for contempt included the
24   assertion that CFTB’s conduct constituting a collateral attack on
25   the Confirmation Order and Joint Plan in violation of 11 U.S.C.
26
27
28        34
               Ex. 13; Joint Status Report, p. 166.

                                      -31-
 1   § 346(j).35    The Reply expressly quoted the language of 11 U.S.C.
 2   § 346(j)(1) stating that no income is realized from the
 3   forgiveness or discharge of indebtedness in a case under
 4   Title 11.36    There was no “surprise” that 11 U.S.C. § 346 was a
 5   basis for the relief requested (contempt for a collateral attack
 6   on the Confirmation Order and Joint Plan) from September 8, 2009
 7   forward, and the record shows that CFTB was aware that 11 U.S.C.
 8   § 346 was at issue when it entered into the Scheduling
 9   Stipulation.
10        No adequate basis is shown for reversing the bankruptcy
11   court’s denial of the Ex Parte Motion for Continuance.     No basis
12   is shown for granting relief to CFTB from the stipulation setting
13   the schedule for filing and hearing cross-summary judgment
14   motions.    Neither in its brief nor at oral argument on this appeal
15   has CFTB provided any explanation of how it was prevented from
16   conducting discovery during that one-year period after the motion
17   for the OSC was filed.      Denial of the request for a continuance is
18   affirmed.
19
                       Bankruptcy Court Determination That
20                        The Transaction Was Not A Sale
21        In the Summary Adjudication Order the bankruptcy court
22   determined that: (1) Finding “V” of the Confirmation Order
23   establishes “[T]hat the transaction implemented under the Plan is
24   not a sale or exchange;” and (2) that since the transaction was
25
26
          35
            Ex. 7; Wilshire LLC’s Reply to Opposition to CFTB Response
27   to Order to Show Cause, pp. 67:1 - 68:17.
28        36
               Id.; p. 67:3-6.

                                        -32-
 1   not a sale or exchange, “[t]he release or forgiveness of
 2   indebtedness under the Plan did not create capital gain income
 3   reportable by [Debtor].”37      The court then continued the hearing
 4   for further briefing and oral argument on the Stackhouse issue.
 5        The bankruptcy court conducted a further hearing and issued
 6   the August 31 Decision.38      It first determined that the Joint Plan
 7   “does not effect a sale of the partners’ interest in the
 8   partnership property.”       The bankruptcy court further stated,
 9   consistent with the Summary Adjudication Order, that the Joint
10   Plan restructured the Debtor from a general partnership into a
11   limited liability company (Wilshire LLC), with Wilshire LLC, the
12   restructured Debtor, continuing to own the Properties.      The
13   bankruptcy court repeated the prior finding and determination
14   pursuant to Finding “V” of the Confirmation Order.
15        The bankruptcy court, in connection with the substance of the
16   Transaction, made the determination that CFTB’s interpretation of
17   the tax laws and the Transaction “would nullify the effect of the
18   [Bankruptcy Tax Act of 1980] at the partner level in a
19   [cancellation of indebtedness] scenario and would ignore the
20   interplay between § 346 and relevant IRC provisions allowing the
21   debtor to exclude [cancellation of indebtedness income] from its
22   realizable income.”    The bankruptcy court concluded that the
23   Bankruptcy Tax Act of 1980 overruled Stackhouse v. United States,
24   441 F.2d 465 (5th Cir. 1971), which had previously interpreted the
25   IRC to allow for income to be determined in one manner for a
26
27        37
               Ex. 31; p. 1079.
28        38
               Ex. 38; p. 1483.

                                         -33-
 1   partnership and then in a different manner by the IRS for the
 2   individual partners.
 3        The August 31 Decision concludes with the bankruptcy court
 4   expressly stating that the Transaction: (1) resulted in discharge
 5   of indebtedness; (2) was not a disguised sale; and (3) did not
 6   result in a capital gain.
 7        The court then issued the Summary Judgment Order on
 8   October 4, 2009, which includes the following determinations by
 9   the court concerning the Transaction.   First, the court
10   interpreted and adjudicated Finding “X” of the Confirmation Order
11   to establish that the Transaction was not a sale of the
12   partnership interests.   Second, that there was a capital
13   contribution by the Senior Secured Creditors for their interest in
14   the restructured Debtor, Wilshire LLC, as part of the Transaction.
15   Third, that Finding “Y” of the Confirmation Order established that
16   the $221,000,000 claim secured by the second deed of trust was
17   released and discharged solely in exchange for the payment of
18   $2,500,000 as provided in the Joint Plan.
19
         Upon De Novo Review, The Evidence Presented Supports the
20           Determination That The Transaction Was Not a Sale
21        The CFTB complains that the bankruptcy court did not, and
22   could not, have really considered the “economic realities” of the
23   transaction because it was not presented with evidence of the
24   transaction by CFTB.   As discussed above, this Panel, upon
25   completing its de novo review, concurs with the decision of the
26   bankruptcy court in denying CFTB’s request for a continuance to
27   begin discovery on the eve of the stipulated hearing on the Motion
28   for Summary Judgment or Summary Adjudication.   CFTB was aware

                                     -34-
 1   since September 2009 that the 11 U.S.C. § 346 discharge or
 2   forgiveness of indebtedness was at the core of Wilshire LLC’s
 3   contention that CFTB was engaging in an impermissible collateral
 4   attack of the confirmed Joint Plan and Confirmation Order.    CFTB’s
 5   strategy decision to not present any additional evidence does not
 6   mean that the bankruptcy court did not have evidence from which it
 7   made its decision, and this Panel can conduct its de novo review.
 8        The federal judicial process is not a GIGO (garbage in,
 9   garbage out) system.   Irrespective of the sufficiency of the legal
10   briefs, a federal judge has the responsibility to make his or her
11   decision based on the correct law.     United Student Aid Funds, Inc.
12   v. Espinosa, 559 U.S. at 277.   However, the federal judge is
13   dependant on the parties to present the competent, credible
14   evidence from which the judge is to make the required findings of
15   fact.   In making the requisite findings of fact and making the
16   conclusions of law therefrom, the judge should not go outside the
17   record unless the facts are matters of common knowledge or capable
18   of certain verification (Fed. R. Evid. 201, Judicial Notice).
19   Clicks Billards, Inc. v. Sixshooters, Inc., 251 F.3d 1252, 1267
20   (9th Cir. 2001).   A party cannot complain that it would have
21   conducted discovery or presented other evidence if it had known in
22   advance the findings of fact and conclusions of law which the
23   court was going to draw from the discovery and other evidence
24   presented at the hearing or trial.
25        For the bankruptcy court, the evidence of the Transaction
26   provided by Wilshire LLC, the Partners, and CFTB consists
27   substantially of the Disclosure Statement and Joint Plan.    The
28   bankruptcy court concluded that the Transaction was not a sale or

                                     -35-
 1   exchange, but a restructure by which the Debtor partnership was
 2   reorganized into Wilshire LLC, a limited liability company.     While
 3   CFTB theorizes whether, if evidence existed and were produced, a
 4   court at sometime in the future might determine that the
 5   Transaction is not as stated in the Joint Plan, no such evidence
 6   was presented by CFTB to the bankruptcy court.
 7        In conducting the de novo review, this Panel concurs that
 8   (1) there is not any conflicting evidence of any material fact and
 9   (2) there are no genuine issues of material fact – only a dispute
10   as to the legal conclusions drawn from the undisputed evidence.
11   From the evidence presented, the bankruptcy court did not err in
12   concluding that the Joint Plan and Transaction constituted a
13   reorganization of the Debtor into Wilshire LLC, and such
14   reorganization was not a sale, transfer, or a disguised
15   foreclosure or deed in lieu of foreclosure.    The Disclosure
16   Statement describes a very complex business transaction by which
17   the Senior Secured Creditors acquire a 99% interest in Wilshire,
18   LLC, the successor reorganized Debtor that emerges from bankruptcy
19   through the Joint Plan.   For the Partners, 99% of their interests
20   in the Debtor are lost, with them having only a 1% interest in
21   Wilshire LLC, the reorganized successor to Debtor.
22        The Joint Plan and Disclosure Statement identify the
23   following assets and claims to be addressed.   As of the Second
24   Amended Disclosure Statement, the assets of the Debtor and
25   bankruptcy estate are listed to have a value of $164,645,000,
26   which are subject to the Senior Secured Creditors’ lien
27   ($173,570,000 claim) and the Co-Investors’ Junior lien
28

                                     -36-
 1   ($221,000,000 claim).39   Under the Debtor’s liquidation analysis,
 2   this exhausts any value in the assets, or as may be more commonly
 3   stated, all creditors and interest holders, other than the Senior
 4   Secured Creditors (on at least a portion of their secured claim),
 5   are “out of the money.”   The Liquidation Analysis identifies an
 6   additional $850,000 to $900,000 in general unsecured claims which
 7   would also “be out of the money” in a Chapter 7 liquidation.
 8        The Disclosure Statement also informs creditors that a
 9   settlement was reached and approved by the Court among the Debtor,
10   acting as the then debtor in possession,40 Senior Secured
11   Creditors, and California Federal Bank.   The settlement resolved a
12   lease dispute with California Federal Bank and provided for a new
13   lease of the Property for the Joint Plan.   Under the settlement,
14   California Federal Bank also agreed to pay the Estate $27,825,000,
15   assign its existing leases and subleases to the Estate, enter into
16   a new five year lease, dismiss the pending adversary proceeding,
17   and execute mutual releases.
18        The Joint Plan provides for Wilshire LLC to obtain New
19   Secured Financing of $95,000,000 to $100,000,000 to be paid to the
20   Senior Secured Creditors.   The difference between the $123,000,000
21   portion of the Senior Secured Claim and the payment from the New
22   Secured Financing would constitute the Senior Secured Creditors’
23   capital contribution to acquire the 99% interest in Wilshire LLC.
24
25        39
            Ex. 21; Disclosure Statement, p. 509 Liquidation Analysis,
     and pp. 491-492, Article III, D, Class B and C-2 (Senior Secured
26   Claim), and Class C-2 (Co-Investor Secured Claim).
27        40
            The debtor in possession serves as the fiduciary of the
     bankruptcy estate in the place of, and exercising many of the
28   powers of, a Chapter 11 trustee. 11 U.S.C. § 1107.

                                     -37-
 1   The $40,570,000 balance of the Senior Secured Creditors’ Claim was
 2   to be paid $40.57, with the remainder of the Senior Secured claim
 3   discharged and the parties executing releases.
 4        For the Co-Investors’ Claim in the amount of $221,000,000,
 5   they were to be paid $2,500,000, with the balance of the
 6   obligation being discharged and the parties executing releases.41
 7        Under the Joint Plan the creditors holding $850,000 to
 8   $900,000 in general unsecured claims were paid in full.
 9        The Disclosure Statement provides information about the pre-
10   and post-petition operation of the Property by the Debtor and the
11   Bankruptcy Estate.    This included a discussion of the dispute with
12   California Federal Bank and commencing the Wilshire Bankruptcy
13   Case to prevent the Senior Secured Creditors from proceeding with
14   a foreclosure sale.   It further discussed the active prosecution
15   of the case by the Debtor and the Secured Creditors, including an
16   attempt to have a bankruptcy trustee appointed.    The final
17   approved disclosure statement was forged from drafts advanced by
18   the Debtor and objections asserted by the U.S. Trustee, Secured
19   Creditors, and California Federal Bank.   During the Wilshire
20   Bankruptcy Case the creditors who chose to be active conducted
21   discovery, investigated the operation of the Debtor’s business,
22   evaluated competing claims, and participated in advancing a
23   chapter 11 plan.   By early October 1997, Debtor, Secured
24   Creditors, and Co-Investors entered into a Memorandum of
25   Understanding which was the foundation for the Joint Plan.
26   Ultimately, the parties in the Wilshire Bankruptcy Case structured
27
          41
            Ex. 21; Disclosure Statement 491-492.     Ex. 21; Plan Art.
28   VII A. and C., pp. 545, 546.

                                      -38-
 1   the Joint Plan and moved forward to implement the Transaction
 2   through confirmation of the Joint Plan.42
 3        The uncontested evidence presented shows that this was not
 4   only a highly complex real estate partnership bankruptcy case, but
 5   one in which the various parties (Debtor, competing creditors with
 6   secured claims, third-party lessee – all natural enemies) acted in
 7   their own economic self-interests.      This is not a case in which
 8   the only active parties were the debtor and insider creditors
 9   constructing a reorganization based on personal tax issues, not
10   business economic realities.
11        The evidence presented shows that the Joint Plan was created
12   by the Debtor, BofA, Senior Secured Creditors, Co-Investors
13   holding the Junior Secured claim, California Federal Bank, and
14   creditors holding general unsecured claims based on the economic
15   realities of the assets and claims, not as a tax avoidance plan.
16   This is a case where the Debtor had limited assets and extensive
17   debts which far outstripped the assets.     The creditors and Debtor
18   fashioned a plan which made the economic results for creditors,
19   even those holding general unsecured claims, dramatically better.
20   To the extent that the Partners considered the tax consequences of
21   the Transaction, such consideration did not drive the economic
22   realities decision of the creditors in supporting the Joint Plan.43
23
24
          42
               Ex. 21: Disclosure Statement, pp. 483-487.
25
          43
            It should not be forgotten that in the chapter 11 process
26   the creditors not only vote to accept or reject a plan, but
     creditors are not dependent on a “take it or leave it” plan put
27   forward by the debtor. Creditors may advance their own chapter 11
     plan to compete in the bankruptcy marketplace for creditor votes.
28   11 U.S.C. §§ 1121(c), 1129(a)(7) and (b).

                                      -39-
 1        There was no conflicting evidence presented to the court,
 2   only arguments about the legal conclusions to be drawn from the
 3   evidence.    The bankruptcy court did not err in concluding that the
 4   Joint Plan was based on the economic realities of the Transaction,
 5   that the Transaction was not a sale, and that the Transaction was
 6   not shaped by tax-avoidance features or purpose.
 7        The bankruptcy court’s determination that the Transaction was
 8   a restructure of the Debtor and not a sale is affirmed.
 9                THE FORGIVENESS OF DEBT THROUGH THE JOINT PLAN
                 DOES NOT RESULT IN REPORTABLE INCOME FOR FEDERAL
10                       AND STATE TAXES FOR THE PARTNERS
11        Having concluded that the Joint Plan and Transaction were not
12   a disguised sale or other than the reorganization and restructure
13   of the Debtor as stated in the Joint Plan, the bankruptcy court
14   further determined that the discharge or forgiveness of debt
15   through that Joint Plan was not income to the partnership.
16        It has long been recognized that providing deductions or
17   exclusions for income arising from cancellation or discharge of
18   indebtedness through a bankruptcy case was a necessary and
19   integral part of the bankruptcy laws.    Claridge Apartments Co. v.
20   Commm’r, 323 U.S. 141, 149 (1944)(discussing the Chandler Act
21   provisions to encourage the freer use of bankruptcy reorganization
22   and avoid otherwise unnecessary or premature liquidations).
23        The term “gross income,” from which a tax calculation begins,
24   is defined in IRC § 61.    This non-exclusive list “means all income
25   from whatever source derived.”    Some statutory examples
26   [identified by numbering used in the statute] are (1) compensation
27   for services, (2) gross income from business, (3) gains from
28   dealings in property, (8) alimony, and (12) income from discharge

                                       -40-
 1   of indebtedness.    In 2925 Briarpark, Ltd. v. Comm’r, 163 F.3d 313
 2   (5th Cir. 1993), the Fifth Circuit Court of Appeals reviewed a
 3   decision of the United States Tax Court concerning a sale of
 4   property by a partnership.    In Briarpark, the partnership sold
 5   property subject to $24,562,763 in liens for $10,936,532.      As part
 6   of the sale, the creditor released Briarpark and the guarantor
 7   (who was insolvent) of approximately $14,000,000 of liability in
 8   excess of the sales proceeds paid to the creditor.    On its tax
 9   return, Briarpark reported $14,468,154 of cancellation of
10   indebtedness income relating to the sale.
11        The Fifth Circuit noted that gross income pursuant to IRC
12   § 61 comes in many forms, with two of the examples being “gains
13   derived in dealing in property” (IRC § 61(a)(3)) and “income from
14   discharge of indebtedness” (IRC § 61(a)(12)).    Because the
15   practical effect of the Briarpark transaction was to sell the
16   property to a buyer, then the purchase price paid and the debt
17   forgiveness were determined by the Tax Court (the trial court) to
18   be part of a single transaction for income defined as “from a sale
19   or exchange” of property.    In closing, the Fifth Circuit
20   emphasized that it is for the trial court, upon consideration of
21   the entire transaction, to determine the factual category (dealing
22   in property or cancellation of indebtedness) of the income for
23   taxation purposes.44
24        The Transaction which occurred in this case is the
25   reorganization of Debtor into Wilshire LLC.    The bankruptcy court
26   determined that the reorganization was not a sale or transfer of
27
28        44
               Id. at 318.

                                      -41-
 1   property.    As part of the reorganization, the former interests of
 2   the Partners were cancelled and a creditor obtained a 99% interest
 3   in Wilshire LLC for a portion of its secured claim.   The
 4   confirmation of the Joint Plan included forgiveness of the
 5   indebtedness, as part of a complex restructuring of the Debtor and
 6   creditors’ rights and interest.
 7        After considering the evidence presented, the bankruptcy
 8   court determined that the forgiveness of debt through the Joint
 9   Plan constituted cancellation of debt income, not capital gain.45
10   Upon de novo review, this Panel makes the same determination.    The
11   Transaction and restructuring of the complex rights and interests
12   of the bankruptcy estate, Senior Secured Creditors, Co-Investors,
13   creditors holding general unsecured claims, and Partners,
14   resolving lease disputes, and creating the new successor
15   Wilshire LLC, is consistent with the forgiveness of debt, not with
16   a sale of the Property.
17        Merely because the restructuring of the Debtor, the emergence
18   of the successor entity, the forgiveness of indebtedness, the New
19   Refinance Loan, and issuance of the interests in the reorganized
20   debtor all occur in one document, the Chapter 11 Plan, that does
21   not mean that it is just one big sale transaction.    In every
22   bankruptcy case, the confirmation of the Chapter 11 plan fixes the
23   rights and interests, provides for the forgiveness of
24   indebtedness, and binds the parties (11 U.S.C. § 1141) in one fell
25   swoop.
26        The Joint Plan provides for the forgiveness of indebtedness
27
28        45
               Ex. 40; August 31 Decision, p. 1507.

                                       -42-
 1   as one of multiple plan provisions.    Some creditors forgave
 2   substantial amounts for the payment of a modest amount (recovering
 3   “only” $2,500,000 on a $212,000,000 claim, rather than getting
 4   nothing), while the Senior Secured Creditors forgave indebtedness
 5   and contributed $23,000,000 to the reorganized Debtor.   As part of
 6   this complex Transaction, the Senior Secured Creditors acquired
 7   99% of the interest in Wilshire LLC.
 8        As noted by the Ninth Circuit Court of Appeals in Wilshire I,
 9   bankruptcy plans are often dependent on the cancellation of
10   indebtedness relief in bankruptcy to facilitate a reorganization.
11   A reorganization produces better economic results for all and
12   preserves a business operation, rather than merely shutting
13   everything down and liquidating the pieces.   Such a reorganization
14   often, as in the Wilshire Bankruptcy Case, is a complex reordering
15   of rights and interests, forgiving debt, incurring new
16   obligations, making capital contributions, and deferring payment.
17   This is much more complex than - “sell the property and pay the
18   money.”
19        The evidence presented to the bankruptcy court, for which
20   there were no material facts in dispute, supports the
21   determination that the Transaction resulted in the forgiveness of
22   debt and “cancellation of debt income,” not “gains from dealings
23   in property.”
24             The Bankruptcy Code And Internal Revenue Code
           Provide For No Realization of Income From Forgiveness
25                  Of Indebtedness In A Bankruptcy Case
26        To facilitate reorganizations under the Bankruptcy Code
27   rather than forcing liquidations of business and financial
28   enterprises, Congress has provided for special tax treatment when

                                    -43-
 1   indebtedness is discharged or forgiven through a bankruptcy case.
 2   In this appeal, the provisions of 11 U.S.C. § 346(a) and (j) as
 3   they existed in 1998 are at issue.
 4           § 346. Special tax provisions
 5           (a) Except to the extent otherwise provided in this
          section, subsections (b), (c), (d), (e), (g), (h), (i),
 6        and (j) of this section apply notwithstanding any State
          or local law imposing a tax, but subject to the Internal
 7        Revenue Code of 1986.
          . . .
 8
             (j)(1) Except as otherwise provided in this
 9        subsection, income is not realized by the estate, the
          debtor, or a successor to the debtor by reason of
10        forgiveness or discharge of indebtedness in a case under
          this title. . . .
11
12        In addition to § 346, the Internal Revenue Code itself has a
13   specific section addressing income generated from the discharge of
14   indebtedness.    In pertinent part, IRC § 108 provides:
15        § 108.    Income from discharge of indebtedness
16        (a) Exclusion from gross income.
17            (1) In general. Gross income does not include any
          amount which (but for this subsection) would be
18        includible in gross income by reason of the discharge
          (in whole or in part) of indebtedness of the taxpayer
19        if–
20              (A) the discharge occurs in a title 11 case, . . .
21           (2) Coordination of exclusions.
22              (A) Title 11 exclusion takes precedence.
          Subparagraphs (B), (C), and (D) of paragraph (1) shall
23        not apply to a discharge which occurs in a title 11
          case. . . .
24
25        The Debtor that was reorganized into Wilshire LLC was a
26   partnership.    While the tax liabilities and attributes for a
27   partnership are passed through to the partners, the income or loss
28   (tax attributes) are first determined at the partnership, and then

                                      -44-
 1   those attributes are passed through to the partners.
 2        The plain language of 11 U.S.C. § 346(j) states, “income is
 3   not realized by the estate, the debtor, or a successor to the
 4   debtor by reason of forgiveness or discharge of indebtedness in a
 5   case under [Title 11].”   IRC § 108 confirms that if a discharge of
 6   indebtedness occurs in a case under Title 11, then that basis for
 7   such discharge shall control over all others.   By Confirmation of
 8   the Joint Plan in the Wilshire Bankruptcy Case, Debtor was
 9   forgiven debt of $40,570,000 of the Secured Creditors’ Claim and
10   $218,500,000 of the Co-Investor’s Claim.46
11        No income is realized by either the bankruptcy estate or
12   Debtor for such forgiveness of indebtedness.    Properly applying
13   the provisions of 11 U.S.C. § 346(j) and IRC 108(a), the Debtor,
14   bankruptcy estate, and Wilshire LLC did not obtain income from the
15   forgiveness of debt.   There being no income for the Debtor, there
16   is no income to pass through to the Partners by virtue of the
17   forgiveness of indebtedness in the Wilshire Bankruptcy Case under
18   Title 11.   It may well be that there are other adjustments of tax
19   attributes (IRC § 108(b)) or partnership basis (IRC § 705), but
20   the determination of whether there is income or loss is computed
21   at the partnership, not the individual partners.47
22        The determination by the bankruptcy court that discharge or
23
24
          46
            Ex. 21; Disclosure Statement Classes C-1 and C-2, p. 492.
25   Ex. 21; Joint Plan Classes C-1 and C-2, p. 537, and Article VII
     Discharge and Release, pp. 545-546.
26
          47
            IRC § 704 provides that a partner’s share of income, gain,
27   loss, deductions, or creditors (once determined for the
     partnership) are distributed among the partners pursuant to the
28   partnership agreement.

                                     -45-
 1   forgiveness of indebtedness exclusion from income applies to the
 2   Debtor and results in there not being income from discharge of
 3   indebtedness for the Partners is affirmed.
 4                               CONCLUSION
 5        We REVERSE the bankruptcy court’s determination that the
 6   Confirmation Order itself was a determination whether the
 7   Transaction was a sale or not a sale of property.
 8        We AFFIRM, upon de novo review, the bankruptcy court’s entry
 9   of summary judgment in favor of Wilshire LLC and the Partners.    In
10   so affirming, this Panel determines: (1) Wilshire LLC has standing
11   to file and prosecute the OSC; (2) CFTB received sufficient notice
12   for the Confirmation Order to be binding on CFTB; (3) the proper
13   appeal is taken from the Summary Judgment Order filed on
14   October 4, 2010; (4) the Transaction, based upon the economic
15   realities of the Transaction, was not motivated by tax avoidance;
16   (5) the Transaction was not a sale, but provided for the
17   forgiveness of debt owed by the Debtor; (6) the forgiveness of
18   debt through the Joint Plan was subject to the provisions of 11
19   U.S.C. § 346 (in effect as of the confirmation of the Joint Plan)
20   and 26 U.S.C. § 108; (7) the tax consequences of the Transaction
21   are determined at the Debtor, the partnership, and such tax
22   consequences are then passed through to the Partners; and (8) the
23   forgiveness of debt did not result in income realized by the
24   Debtor or passed through to the Partners.
25
26
27
28

                                    -46-
