Government
Working Group Proposal #8: Section 505 & the Burden of
Persuasion
Background
Section 505
Congress has, through provisions such as § 505 of the Bankruptcy Code, attempted to
accommodate the goals of the federal bankruptcy system and laws relating to the collection of
taxes. It is uniformly recognized that § 505(a)(1) grants bankruptcy courts the jurisdiction
and plenary authority to hear and determine the amount or legality of
"any" unpaid tax claim, regardless of whether or not the tax and its
concomitant fines and penalties have been previously assessed or contested. [ FN: See 11 U.S.C. §505(a)(1) (1994). Section
505(a)(1) provides: Except as provided in paragraph (2) of this subsection, the court may
determine the amount or legality of any tax, any fine, or penalty relating to a tax, or any addition
to tax, whether or not previously assessed, whether or not paid, and whether or not contested
before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
Id.] The jurisdictional grant contained in § 505(a)(1) is
sufficiently broad enough to include the determination or legality of any type of tax liability
"whether or not paid" or previously adjudicated by a judicial or administrative tribunal
of competent jurisdiction. [ FN: See infra note
8. See generally Perry v. District of Columbia , 314 A.2d 766, 766 (D.C.), cert. denied ,
419 U.S. 836 (1974)(noting that the jurisdictional prerequisite to a judicial review of a tax
assessment under the law of the District of Columbia hinges upon the actual payment of the
disputed tax assessment together with interest and penalties).] Moreover,
courts have construed the statute and its concomitant policy objective to permit the prosecution in
a bankruptcy forum of a de novo appeal from an unpaid paid tax assessment. [ FN: See, e.g. , In re Laptops Etc.
Corp. , 164 B.R. 506 (Bankr. D. Md. 1992)(ruling that the taxing authority ’s sales-tax
assessment, as affirmed by the Department of Revenue postpetition, was an unconstitutional
violation of the Commerce Clause and without force and effect; claims disallowed). By virtue of
§505(a), a bankruptcy court may even determine the validity of a debtor ’s tax
liability, if any, irrespective of whether it had previously granted relief from the automatic stay to
permit the continuation of a tax court proceeding on the same issue. See, e.g. , United
States v. Wilson , 974 F.2d 514, 517 (4th Cir. 1992), cert. denied , 507 U.S. 945 (1993);
In re Swann Gasoline Co. , 46 B.R. 640, 642 (Bankr. E.D. Pa. 1985)(noting that even if
relief from the automatic stay were afforded in order to permit a state court to make
determinations of tax liability, such determinations would not have res judicata or collateral
estoppel effect as to the bankruptcy court ’s own determination of liability under
§505(a)).]
The limitation imposed upon the jurisdiction of the bankruptcy court to determine the
amount or legality of a tax claim and resolve tax disputes is contained in paragraph (a)(2) of
§ 505. Pursuant to § 505(a)(2), a bankruptcy court is not permitted to redetermine
the merits of a tax claim or question of tax liability which has been contested prior to the
commencement of the bankruptcy case in a state, federal or quasi-judicial tribunal. [ FN: See 11 U.S.C. §505(a)(2) (1994). Section
505(a)(2) provides in pertinent part: (2) The court may not so determine-- (A) the amount or
legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before
and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the
commencement of the case under this title . . . . Id.] Section
505(b), by contrast, provides a trustee or debtor-in-possession with the ability to obtain a
determination of any postpetition tax liability which arises during the pendency of the case.
[ FN: Id. §505(b) ( "A trustee
may request a determination of any unpaid tax liability of the estate for any tax incurred during the
administration of the case . . . . ").]
Burden of Persuasion
The Bankruptcy Code is structured to achieve a relatively expeditious resolution with respect
to disputes over the amount, validity and character of claims owed by the bankruptcy estate. A
proof of claim executed and filed in accordance with § 501 of the Bankruptcy Code and
applicable Bankruptcy Rules constitutes prima facie evidence of the amount and validity
of the claim. [ FN: Fed. R. Bankr. P. 3001(f).
See 11 U.S.C. §502(a) (1994) (providing that a claim is "deemed allowed " unless a party
in interest objects). See also Whitney v. Dresser , 200 U.S. 532, 535-36 (1906)(opining that it is
the objection, not the claim, which is heard in a claims contest and that the claim in bankruptcy is
regarded as having a certain standing); 4 Collier on Bankruptcy ¶ 502.02[2][f], at 502-19
(Lawrence P. King et al. eds., 15th ed. revd. 1996)( "Unless the trustee, as objector,
introduces evidence as to the invalidity of the claim or the excessiveness of its amount, the
claimant need offer no further proof on the merits of the claim. ").] Upon
objection to the claim and admission of probative evidence sufficient to rebut the prima
facie validity of the claim, the burden shifts to the claimant who bears the ultimate burden of
persuasion with respect to the amount and validity of its claim. [ FN: The burden of proof in bankruptcy is a shifting
one: [A] claim is prima facie valid if it alleges facts sufficient to support a
legal liability to the claimant; if the objector then produces evidence to refute at least one of the
allegations essential to the claim ’s legal sufficiency, the burden of going forward shifts
back to the claimant to prove the validity of the claim by a preponderance of the evidence. 3
Collier on Bankruptcy ¶ 502.01, at 502-18 n.19 (Lawrence P. King et al. eds.,
15th ed. 1996)(citing In re Allegheny Int ’l Inc. , 954 F.2d 167 (3d Cir. 1992)).
The underlying rationale for imposing the ultimate burden of persuasion upon the claimant in a
dispute with the trustee or debtor- in-possession is that, from a purely procedural standpoint, the
filing of a proof of claim is tantamount to the filing of a complaint in a civil action. See Nortex
Trading Corp. v. Newfield , 311 F.2d 163 (2d Cir. 1962). As such, the claimant in a bankruptcy
proceeding is essentially in the same posture as a plaintiff in a nonbankruptcy proceeding, who is
generally assigned the burden of proving its claim against the defendant. In re Premo , 116
B.R. 515, 518 (Bankr. E.D. Mich. 1990).] In forums other than a
bankruptcy court, however,the burden of persuasion as to the lack of validity of the
sovereign’s tax claim generally falls upon the taxpayer, not the sovereign. [ FN: "[T]he usual procedure for recovery of debts is
reversed in the field of taxation. Payment precedes defense, and the burden of proof, normally on
the claimant, is shifted to the taxpayer. " Bull v. United States , 295 U.S. 247, 260 (1935).
Accord United States v. Janis , 428 U.S. 433, 440 (1976); Helvering v. Taylor , 293 U.S. 507,
515 (1935); Welch v. Helvering , 290 U.S. 111, 115 (1933). See, e.g. , T. Ct. Rule Prac.
& Proc. 142(a); D.C. Code Ann. §47-2010 (1990)(providing for a presumption of
taxability and allocating the burden to the taxpayer to prove that a receipt is not subject to sales
taxation). In proceedings before the Tax Court, the Court of Federal Claims or a district court, it
is incumbent upon the taxpayer, as the party seeking a redetermination of liability, to discharge the
burden of proof by a preponderance of the evidence. Moreover, when an assessment has been
formally made by the taxing authority, it carries with it a presumption of correctness which must
be overcome by the taxpayer. See Psaty v. United States , 442 F.2d 1154 (3d Cir. 1971); United
States v. Molitor , 337 F.2d 917 (9th Cir. 1964).] Consequently, a conflict
often arises which requires the bankruptcy court to determine whether the claim of a taxing
authority is to be treated like all other claims, and accordingly whether the taxing authority must
bear the ultimate burden of persuasion that it has a valid claim, or whether the debtor,
debtor-in-possession, or trustee is required to bear the burden of persuading the bankruptcy court
that the taxing authority does not have a valid claim. [
FN: Elmer Dean Martin III, Burden of Persuasion: The Overlooked Defense to Tax
Claims , 21 Cal. Bankr. J. 117, 117 (1993).] The courts are sharply
divided on the issue and have created a discordant body of law with respect to a fundamental and
recurring issue.
The Courts of Appeals for the Third, Fourth and 7th
Circuits have ruled that the Bankruptcy Code and Rules do not alter burden of proof rules
attendant to tax claims under nonbankruptcy law. [
FN: See, e.g. , United States v. Charlton , 2 F.3d 237, 239 (7th Cir. 1993); IRS v.
Levy ( In re Landbank Equity Corp. ), 973 F.2d 265 (4th Cir. 1992); Resyn Corp. v.
United States , 851 F.2d 660 (3d Cir. 1988). "[U]pon review of the code and its legislative
history, we find nothing which suggests that this dispute between a taxpayer and the IRS should
be decided in a manner any different from that in which the case would be determined outside the
bankruptcy context. " Levy , 973 F.2d at 270- 71.] Accordingly, those
courts have placed the burden on the debtor-taxpayer ina claims contest. [ FN: See supra note 10.] The
Courts of Appeals for the Fifth, Sixth, Ninth and 10th
Circuits have reached the opposite conclusion, finding that the government should be treated the
same as every other creditor in the claims objection process. [ FN: See, e.g. , Franchise Tax Bd. v.
MacFarlane ( In re MacFarlane ), 83 F.3d 1041 (9th Cir. 1996), cert. filed , (Aug. 12,
1996); Placid Oil Co. v. IRS ( In re Placid Oil Co. ), 988 F.2d 554 (5th Cir.), reh
’g denied , 4 F.3d 992 (5th Cir. 1993); In re Fullmer , 962 F.2d 1463 (10th Cir.
1992); In re Fidelity Holding Co. , 837 F.2d 696 (5th Cir. 1988); Industrial Comm
’r v. Highway Constr. Co. ( In re Highway Constr. Co. , 105 F.2d 863 (6th Cir.
1939)(pre-Code case).] The confusion in the area can perhaps be best
illustrated by the fact that the Court of Appeals for the 8th
Circuit has weighed in on both sides of the issue. [
FN: Compare Gran v. IRS ( In re Gran ), 964 F.2d 822 (8th Cir. 1992); Paschal
v. Blieden , 127 F.2d 398 (8th Cir. 1942)(pre-Code case)(imposing the burden on the
government) with In re UNECO Inc. , 532 F.2d 1204 (8th Cir. 1976)(pre-Code
case)(imposing the burden on the debtor- taxpayer).] Lower courts are
equally divided. [ FN: Compare In re
Wilhelm , 173 B.R. 398, 401-02 (Bankr. E.D. Wis. 1994); In re Premo , 116 B.R. 515,
524 (Bankr. E.D. Mich. 1990)(refusing to recognize an exception to the rule allocating the burden
of ultimate persuasion upon the creditor for tax authorities in the context of a hearing on an
objection to a claim); In re Federated Dep ’t Stores Inc. , 135 B.R. 950, 958
(Bankr. S.D. Ohio 1992), aff ’d , 171 B.R. 603 (S.D. Ohio 1994) with Abel v. United
States ( In re Abel ), 200 B.R. 816, 819 (E.D. Pa. 1996); In re Thinking Machs.
Corp. , 1996 WL 708364 *4 (Bankr. D. Mass. 1996)(concluding that rule that Bankruptcy Rule
3001(f) places the ultimate burden of proof and persuasion upon the government, improperly
permits a tax litigant to shift the burden of proof by merely filing bankruptcy); In re Ford ,
194 B.R. 583, 588-89 (S.D. Ohio 1995); Cobb v. United States ( In re Cobb ), 135 B.R.
640, 641 (Bankr. D. Neb. 1992)(concluding that Bankruptcy Rule 3001(f) does not allocate the
burden of proof but simply establishes that a proof claim constitutes evidence: "The Rule, in effect
creates a presumption which must be overcome by debtor. Once the presumption is overcome . .
., the proof of claim no longer constitutes evidence--the bubble is burst. The burden of proof is to
then be allocated by applicable non-bankruptcy law. ").]
Proposal
The Bankruptcy Code should be amended to clarify that the burden of proof rules and
concomitant presumptions which would be applicable under nonbankruptcy law are
equally applicable to bankruptcy court determinations under § 505.
Reasons for the Change
The allocation of the burden of persuasion in many tax controversies is often determinative.
Absent an indentifiable federal interest which compels a different result, there is no sound reason
why the efficacy of tax claims should be analyzed differently because of the advent of bankruptcy.
Indeed, "[i]n resolving disputed claims against the bankruptcy estate, it is important to
understand that theBankruptcy Code, in most instances, while providing a forum and procedures
for an expedient dispute resolution, does not endeavor to supplant the substantive law under
which the claim against the estate . . . arose." [
FN: Internal Rev. Serv. v. Levy ( In re Landbank Equity Corp. ), 973 F.2d 265,
270 (4th Cir. 1992)(citing Report of the Commission on the Bankruptcy Laws of the United
States , H.R. Doc. No. 137, 93d Cong., 1st Sess. Pt. I 68-71, 76-78 (1973)). The United States
Supreme Court has found that "presumptions (and their effects and burden of proof are
‘substantive, ’ " not procedural. See Dick v. New York Life Ins. Co. , 359 U.S. 437, 446
(1959).] To the contrary, it is axiomatic bankruptcy law that the
validity of a creditor’s claim is determined by the rules of nonbankruptcy law.
[ FN: See Grogan v. Garner , 498 U.S. 279,
283-84 & n.9 (1991). The United States Supreme Court has opined that it is imperative to
distinguish between the standard of proof that a creditor must satisfy in order to establish a valid
claim against the bankrupt estate and the standard that a creditor who has established a valid claim
must still satisfy in order to avoid dischargeability. The validity of a creditor ’s claim is
determined by rules of state law [defined] expansively . . . to refer to all
nonbankruptcy law that creates substantive claims. . . . [H]owever, the issue of nondischageability
has been a matter of federal law governed by the terms of the Bankruptcy Code. Id.
(footnote inserted & citations omitted).]
There is no statutory provision or expression in the legislative history evidencing an intent by
Congress that firmly-rooted precepts of tax law should be displaced by a special legal requirement
that is only applied in the context of a bankruptcy proceeding. No principled policy objective is
furthered by recognizing a distinction for purposes of claims allowance between bankrupt and
nonbankrupt taxpayers. The signal under an alternative view is relatively clear: When a taxpayer
seeks relief under the bankruptcy laws, it may be able to garner a distinct and frequently more
advantageous treatment of its tax liability. The uniform treatment of tax claims through an
adherence to nonbankruptcy law burdens and presumptions serves to reduce uncertainty,
discourages forum shopping and prevents a party from receiving a windfall or result not otherwise
obtainable merely because of the happenstance of bankruptcy.
The position that the government as a tax creditor occupies in a claims contest is
fundamentally different than other creditors in a normal debtor-creditor relationship. Unlike most
creditors, the taxing authority does not have the opportunity to independently maintain adequate
records of transactions giving rise to liability. Indeed, federal, state and local taxing authorities are
complete strangers to the transactions giving rise to the tax liability in virtually every case. It is
generally the debtor, debtor-in-possession or trustee who has access to all of the relevant records,
information and knowledge required to substantiate or contest the validity of a tax claim. As such,
"[t]he common law rule placing the burden on the party with access to the facts seems
particularly applicable in a self-assessment system which provides for the taxpayer to make the
initialdetermination of liability" and bolsters the record-keeping requirement the Internal
Revenue Code imposes upon taxpayers. [ FN: 15 Collier on Bankruptcy ¶ TX5.03[5], at
TX5-24 (Lawrence P. King et al. eds., 15th ed. revd. 1996).]
Competing Considerations
Although there is general egalitarian appeal to the premise adopted by those courts that alter
nonbankruptcy law rules in a claims contest and reason that the policies underlying the bankruptcy
laws compel equal treatment among creditors. This position, however, overlooks or ignores the
frequent disparate and favorable treatment that Congress has accorded taxing authorities in the
Bankruptcy Code and the unique nature of their claims. [ FN: See, e.g. , 11 U.S.C.
§§507(a)(8), 523(a)(1) (1994). In a broad sense, the goals of rehabilitating debtors
and giving equal treatment to private voluntary creditors must be balanced with the interests of
governmental tax authorities who, if unpaid taxes exist, are also creditors in the proceeding. Since
tax authorities are creditors of practically every taxpayer, another important element is that tax
collection rules for bankruptcy cases have a direct impact on the integrity of Federal, State and
local tax systems. These tax systems, generally based on voluntary assessment, work to the extent
that the majority of taxpayers think they are fair. This presumption of fairness is an asset which
should be protected and not jeapardized by permitting taxpayers to use bankruptcy as a means of
improperly avoiding ther tax debts. To the extent that debtors in a bankruptcy are freed from
paying their tax liabilities, the burden of making up the revenues thus lost must be shifted to other
taxpayers. S. Rep. No. 989, 95th Cong., 2d Sess. 13-14 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5799- 5800.]
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