Brown, In re, 95-3173
| Decision Date | 09 July 1996 |
| Docket Number | No. 95-3173,95-3173 |
| Parties | -2045, 97-2 USTC P 50,559, 44 Fed. R. Evid. Serv. 471 In re Walter Steven BROWN; Diane Kay Brown, Debtors. Walter Steven BROWN; Diane Kay Brown, Appellants, v. INTERNAL REVENUE SERVICE, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Appeal from the United States District Court for the Southern District of Iowa; Honorable Harold Vietor, Judge.
Marlyn S. Jensen, Osceola, AR, for Appellants.
David E. Carmack, Justice Dept., Washington, DC, argued (Gary R. Allen, Randolph L. Hutter, on the brief), for Appellee.
Before McMILLIAN, FAGG and BURNS, * District Judge.
Debtors Walter Steven Brown and Diane Kay Brown appeal from a final order entered in the District Court 1 for the Southern District of Iowa affirming the bankruptcy court's 2 dismissal of their Chapter 12 case pursuant to 11 U.S.C. § 1208(c)(9). In re Brown, 169 B.R. 59 (S.D.Iowa 1995), aff'g Bankr. No. 93-00070-C-J (Bankr.S.D.Iowa Feb. 16, 1995). For reversal, the debtors argue the bankruptcy court erred in (1) holding that certain presumptions were insufficient to rebut the IRS's proof of claim, (2) excluding the debtors' answers to interrogatories, certain documents produced in response to a discovery request and debtor The debtors are farmers. At some point before the events at issue in the present case, they had filed a voluntary petition in bankruptcy under Chapter 12. One of their major creditors was the Farmers Home Administration (FmHA). According to the debtors, their Chapter 12 petition precipitated an investigation by the Office of the Inspector General of them and their relatives, including scheduled examinations at distant locations. The debtors asserted that they voluntarily dismissed their Chapter 12 petition in order to spare their relatives from having to undergo these examinations. According to the debtors, the Office of the Inspector General continued the investigation and referred the matter to the United States Attorney for presentation to a federal grand jury, which did not indict the debtors.
Walter Steven Brown's affidavit, and (3) dismissing their Chapter 12 case. For the reasons discussed below, we affirm the order of the district court.
In January 1993 the debtors filed a second Chapter 12 petition. This petition is at issue in the present case. The debtors had $97,946 in assets but $639,305.07 in liabilities. Their major creditor was the FmHA. According to the debtors, the Office of the Inspector General had turned over the information obtained during the course of its investigation to the Internal Revenue Service (IRS). The IRS investigated the debtors' tax liabilities. In April 1993 the IRS filed an objection to the confirmation of the debtors' proposed plan. In May 1993 the IRS filed a proof of claim for $604,251.89 for federal income taxes, interest and penalties (for tax years 1987-1992). The debtors' proposed plan did not provide for payment of these tax liabilities.
The debtors had filed a federal income tax return only for 1987. On June 4, 1993, the bankruptcy court ordered the debtors to file their delinquent tax returns within 7 days and to file either an objection to the IRS proof of claim or an adversary proceeding within 3 weeks.
On June 23, 1993, the debtors filed an objection to the IRS proof of claim. The debtors stated that they had filed their tax returns as ordered and that the tax returns showed that they did not owe any federal income taxes at that time. The government filed an objection and argued that its proof of claim was entitled to a presumption of validity and that the debtors had "the burden of presenting evidence to rebut the prima facie evidence of the validity and amount of the claim." The government also filed a motion to dismiss the debtors' case because the debtors reported annual employment income of less than $20,000 in 1991 and 1992 and the IRS and the FmHA had each filed a proof of claim for more than $600,000. The government argued that the debtors' "financial history did not reflect a farming operation from which a plan of reorganization could feasibly be developed" and that the debtors would probably not change the type of farming they did in order to produce more income.
In September 1993 the government filed a memorandum in support of its objection and attached the declaration of the IRS agent assigned to the debtors' case. In this declaration the IRS agent stated that he investigated the debtors' income tax liabilities for 1987-1991 for the purpose of preparing the IRS proof of claim. The IRS agent reviewed the debtors' income tax returns and many of the invoices for goods purchased by various customers of 3-S Farming, 3-S, Inc., and M & B Farms, three Iowa corporations operated by the debtor Walter Steven Brown. He also analyzed the endorsements on the checks used to pay for the goods purchased by customers of these corporations. The IRS agent discovered that "large amounts" of money had been paid to these corporations for various agricultural commodities. He also discovered that these corporations had never filed federal corporate tax returns and that many of the checks used to pay for the commodities sold by these corporations had been endorsed by the debtor Walter Steven Brown. In addition, the IRS agent discovered that the debtors did not maintain any known bank accounts in their own names and that they attempted to deal in cash as often as possible. He concluded that income which had nominally been paid to the corporations should be attributed to the debtors personally and that this income had not been reported on the debtors' tax returns. The IRS On September 16, 1993, the bankruptcy court held a hearing on the debtors' objection to the IRS proof of claim. The debtors did not testify or appear in person. The IRS agent testified at the hearing and explained how he had calculated the debtors' unreported income and that he had obtained the checks, receipts and other documents from the FmHA. The bankruptcy court refused to allow counsel for the debtors to ask the IRS agent whether he knew how the FmHA had obtained the documents (the debtors alleged the FmHA had obtained the documents in violation of federal privacy laws and the fourth amendment) because the only issue was the validity of the claim. The IRS agent also testified that articles of incorporation had been filed for the three corporations but that he did not know who controlled the corporations. He also testified that two of the corporations, 3-S, Inc., and 3-S Farming, had never filed federal corporate income tax returns and that the third corporation, M & B Farms, had filed tax returns for 1987 and 1990-1992, but that none of the income attributed to the debtors for the years at issue had been reported by M & B Farms.
agent attached his work sheets to his declaration.
The debtors' tax preparer testified that she had prepared the debtors' 1987-1992 tax returns on the basis of information provided by the debtors but that she had not seen most of the documents that the IRS agent had used to calculate the debtors' income. According to the tax preparer, the debtors by 1992 had no farm income other than agriculture programs and had what she described as "negative income." The tax preparer also testified that she had prepared corporate tax returns for the three corporations in the past on the basis of information provided by the debtors.
The debtors then sought to admit into evidence their answers to interrogatories, certain documents produced in response to a discovery request and an affidavit of the debtor Walter Steven Brown. The bankruptcy court refused to admit these items because they were hearsay.
The government filed a motion for judgment as a matter of law on the ground that the debtors had failed to carry their burden of proof. The debtors opposed the motion on the basis of the presumptions in favor of the separateness of the corporations and the validity of their tax returns. The bankruptcy court concluded that the debtors had failed to carry the ultimate burden of proof that the IRS proof of claim was erroneous and dismissed the debtors' case. On appeal the district court reversed and remanded because the bankruptcy court erroneously placed the ultimate burden of proof on the debtors. The district court decided that the debtors only had to present sufficient evidence to rebut the prima facie validity of the IRS proof of claim.
On remand the debtors relied on the existing bankruptcy court record, including the presumption in favor of "corporate separateness." The bankruptcy court placed the ultimate burden of proof (the burden of persuasion) on the IRS, concluded that the debtors had...
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