California tax agency successfully challenges three-year limitation on priority claims in massive solar fraud bankruptcy
A Nevada bankruptcy judge has reversed a prior ruling that would have limited California's tax priority claims in the DC Solar bankruptcy case, a decision that could significantly delay distributions from the $90 million estate to creditors who have already waited six years for recovery.
In a September 23, 2025 memorandum decision, the court granted the California Department of Tax and Fee Administration's motion to reconsider the priority status of its approximately $35.4 million tax claim in the Chapter 7 case of Double Jump, Inc. and related DC Solar entities in the U.S. Bankruptcy Court for the District of Nevada (Lead Case No. 19-50102-gs).
The court's revised ruling allows CDTFA's entire priority claim to proceed under 11 U.S.C. § 507(a)(8)(A)(iii) as a tax "not assessed but assessable" after the bankruptcy filing, rather than being limited to the three years prior to the February 3, 2019 petition date under the previously applied subsections § 507(a)(8)(A)(i) or (E)(i).
"Upon reconsideration of its prior order, the court agrees with CDTFA that, to the extent that it has a priority tax claim it is not limited to the three years prior to the bankruptcy filing," the court wrote in the 19-page decision.
Background of the Tax Dispute
The dispute centers on California sales tax allegedly owed on mobile solar generators sold by DC Solar Solutions, Inc. CDTFA issued a deficiency determination after the debtor failed to report any sales tax on its California sales. The underlying tax dispute remains ongoing before the California Office of Tax Appeals, and the deficiency determination has not become final.
The Chapter 7 trustee had sought to determine the maximum amount of CDTFA's priority claim to evaluate whether an interim distribution to other creditors was feasible while reserving funds for the priority debt. With roughly $90 million in net estate assets available, creditors have been waiting approximately six years for any distribution since the bankruptcy filing.
In the court's original September 30, 2024 memorandum decision, it ruled that CDTFA's priority claims were "limited to taxes assessed during the three years prior to the petition date." This determination was based on the parties' arguments, which focused on whether the claims fell under § 507(a)(8)(A)(i) or § 507(a)(8)(E)(i), both of which contain three-year limitations.
CDTFA's Challenge and Legal Arguments
CDTFA did not immediately appeal the court's September 2024 decision. Instead, in an October 21, 2024 notice, it first asserted that its priority claim should be calculated under § 507(a)(8)(A)(iii), which contains no three-year limitation period. However, CDTFA waited until March 10, 2025—over five months after the original decision—to formally file its motion challenging the court's ruling.
The trustee and opposing creditors, including East West Bank, East West Bancorp, and ADHI-Solar, LLC, argued that the court's order was final and that CDTFA's motion was an inappropriate request for reconsideration filed well outside any applicable deadlines.
In supplemental briefing, CDTFA revealed that its representative, Janine Aceves, had sent an email in January 2024 stating that CDTFA was treating its sales tax claims as priority under § 507(a)(8)(A)(iii) because the liability was "assessable but not yet assessed (liability not yet final)."
Court's Legal Analysis
The court determined that its prior order was interlocutory rather than final, allowing revision under Federal Rule of Civil Procedure 54(b). It found that the "applicable proceeding" was the final determination of CDTFA's claim, including any priority component, which had not been finally resolved.
Analyzing the competing priority provisions, the court relied heavily on Ninth Circuit precedent, particularly the 2011 decision in Ilko v. California State Board of Equalization. That case held that California sales tax is both an excise tax and a tax on gross receipts, with § 507(a)(8)(A) prevailing when both categories apply.
"Under binding Ninth Circuit precedent in Ilko, § 507(a)(8)(E) does not provide a 'safe harbor' when § 507(a)(8)(A) also applies," the court noted.
Critically, the court found that because CDTFA's deficiency determination remains pending before the California Office of Tax Appeals and has not become "final," the tax claim is properly characterized as "not assessed, but assessable" as of the petition date. Under Ninth Circuit precedent, "a tax deficiency is 'assessed' for purposes of rendering the assessment nondischargeable not when the notice of the assessment is filed, but when the assessment becomes 'final.'"
Impact on Estate Administration
The ruling significantly complicates the trustee's efforts to make distributions to creditors. Under the court's original ruling limiting CDTFA's priority to a three-year period, the trustee could have calculated a maximum reserve amount and potentially made interim distributions to other creditors.
Now, with CDTFA's entire $35.4 million priority claim potentially valid without time limitations, the trustee must reserve a much larger portion of the estate's $90 million in assets, substantially reducing or eliminating potential distributions to general unsecured creditors.
The decision highlights the ongoing complexities in the DC Solar bankruptcy case, which stems from what federal prosecutors called one of the largest investment fraud schemes in recent history. The solar company collected billions in investments before collapsing amid allegations of massive fraud by its principals.
Ongoing Proceedings
While the court has now determined the applicable priority provision for CDTFA's claim, the underlying amount of the tax liability remains disputed before the California Office of Tax Appeals. The court noted that "if the trustee prevails there would be no tax owed."
The court also abstained from making a final determination of CDTFA's tax claim amount, acknowledging the ongoing state proceedings. This means the priority determination, while significant for estate administration purposes, remains subject to the ultimate resolution of the underlying tax dispute.
The case demonstrates the complex interplay between federal bankruptcy law and state tax collection, particularly in large bankruptcy cases where priority determinations can significantly impact creditor recoveries and estate distributions.
This article was prepared using Stretto Conductor, our new AI-powered assistant that's here to help. Stretto Conductor was able to create this summary of a 19 page court filing in less than a minute. Always review the underlying docket filings for accurate information. The information and responses generated by Stretto Conductor may contain errors or inaccuracies and should not be relied upon as a substitute for professional or legal advice.