In re Sharon Steel Corp.

WARREN W. BENTZ, Bankruptcy Judge

Franklin E. Agnew, III, Chapter 11 Trustee for Sharon Steel Corporation ("Debtor") filed the within "Application" ("Motion") seeking to have this court decide a tax issue involving the identity of the component members of the Unitary Group which includes the Debtor, for California Franchise Tax purposes. The Franchise Tax Board of the State of California ("Board") has entered a special appearance for the sole purpose of contesting this court's jurisdiction. The Board asserts that it has not waived sovereign immunity under the Eleventh Amendment to the Constitution of the United States as it has not made an assessment nor filed a claim against the Debtor.

Whether this court has jurisdiction to determine the Debtor's right to file a consolidated tax return with its subsidiary in the State of California.

The Board relies on 11 U.S.C. § 106 and Hoffman v. Connecticut Department of Income Maintenance, 109 S.Ct. 2818 (1989) for the proposition that the Board has not waived sovereign immunity and, therefore, asserts that we lack jurisdiction.

§ 505 of the Bankruptcy Code, 11 U.S.C. § 505, gives this court jurisdiction to "determine the amount or legality of any 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," unless the amount or legality of the tax was "contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the [bankruptcyl case."

The Debtor's right to file a consolidated state tax return with its subsidiary clearly falls within § 505 as that decision involves a determination of the amount or legality of a tax.

11 U.S.C. § 106 provides for a limited waiver of sovereign immunity in bankruptcy cases. § 106(c) codifies In re Gwilliam, 519 F.2d 407 (9th Cir. 1975) and In re Dolard, 519 F.2d 282 (9th Cir. 1975), permitting the Bankruptcy Court to determine the amount and dischargeability of tax liabilities owing by the Debtor prior to or during a bankruptcy case whether or not the governmental unit to which such taxes are owed files a proof of claim. See 124 Cong. Rec. 32394 (1978) (statement of Rep. Edwards); id., at 33993 (statement of Sen. DeConcini).

In Hoffman, the Supreme Court determined that § 106(c) did not authorize monetary recovery from the states in a preference action. The Hoffman Court establishes, however, that a bankruptcy court can determine the amount or legality of any tax:

The language of § 106(c)(2) is more indicative of declaratory and injunctive relief than of monetary recovery. The clause echoes the wording of sections of the Code such as § 505, which provides that "the court may determine the amount or legality of any tax," 11 U.S.C. § 505(a)(1), a determination of an issue that obviously should bind the governmental unit but that does not require a monetary recovery from a State.

In a similar fact situation involving the Board, the Bankruptcy Court for the Central District of California assumed jurisdiction under 11 U.S.C. § 505 to determine the component members of the unitary group. In re Newedge, No. LA 87-01467, slip op. (Bankr. C.D. Cal. June 12, 1989), aff'd., No. 89-4653-R, slip op. (C.D. Cal. January 31, 1990).

Accordingly, we find that the Bankruptcy Court has jurisdiction over this matter. An appropriate order will be entered.