## Facts

- Nelson Bunker Hunt and Caroline Lewis Hunt filed separate Chapter 11 petitions in September 1988.
- Before bankruptcy, the IRS issued a statutory notice of deficiency for the Hunts’ 1982 joint federal income tax return, asserting approximately $154.9 million in deficiency plus approximately $122.1 million in interest.
- The Hunts timely petitioned the U.S. Tax Court in May 1988 to contest the full 1982 deficiency; the case was in active pretrial posture with a trial expected in early 1989.
- The Chapter 11 filings triggered the automatic stay, halting further Tax Court proceedings on the 1982 dispute.
- The debtors moved for a bankruptcy-court determination of tax liability under 11 U.S.C. § 505, including the 1982 liability.
- The United States (IRS) moved to modify the automatic stay so the Tax Court could determine the 1982 liability.
- The IRS anticipated filing a proof of claim exceeding $600 million based on multiple tax controversies across several years.
- The 1982 dispute involved alleged income in excess of $380 million tied to transactions the IRS characterized as lacking valid business purpose; the Hunts asserted the transactions involved a valid partnership and disputed valuations.
- The parties agreed to lift the stay for several other tax matters, leaving only the proper forum for resolving the 1982 dispute for decision.

## Issues

1. Whether the bankruptcy court should exercise discretionary jurisdiction under 11 U.S.C. § 505(a)(1) to determine the debtors’ 1982 federal income tax liability, or instead modify the automatic stay to permit the pending Tax Court case to proceed.

## Decision

- The court held it had jurisdiction under § 505(a)(1) to determine the 1982 tax liability because the merits had not been previously adjudicated in a contested proceeding.
- The court declined, as a matter of discretion, to determine the 1982 liability in bankruptcy.
- The court granted the United States’ motion to modify the automatic stay to allow the 1982 Tax Court case to go forward.

## Legal Principles

- 11 U.S.C. § 505(a)(1) authorizes (but does not require) a bankruptcy court to determine a debtor’s tax liability when the liability has not already been adjudicated in a contested proceeding by a court of competent jurisdiction.
- A central purpose of § 505 is protecting creditors from being bound by tax outcomes the debtor failed to contest; that rationale is reduced when the debtor is actively litigating the tax dispute in another competent forum.
- In deciding whether to exercise § 505 jurisdiction, relevant considerations include judicial economy, the status of related nonbankruptcy proceedings, the comparative expertise of the Tax Court on federal tax matters, and the risk of inconsistent judgments (including “whipsaw” concerns) from parallel litigation in multiple courts.
- When a Tax Court proceeding is already pending and substantially underway, and related disputes are being litigated there, a bankruptcy court may appropriately defer by modifying the automatic stay to permit Tax Court adjudication.

## Conclusion

The bankruptcy court chose not to decide the Hunts’ 1982 income tax liability under § 505, finding that efficiency, Tax Court competence, and avoidance of duplicative or inconsistent litigation favored allowing the already-pending Tax Court case to proceed after modification of the automatic stay.


In re Hunt, 95 B.R. 442 (Bankr. N.D. Tex. 1989)