In re Abel

• Decision Date: 03 September 1996
• Docket Number: Civil A. No. 94-7199.
• Parties: In re Paul E. ABEL, Debtor. Paul E. ABEL, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. District Court — Eastern District of Pennsylvania

200 B.R. 816 (1996)

In re Paul E. ABEL, Debtor Paul E. ABEL, Appellant, v. UNITED STATES of America, Appellee.

Civil A. No. 94-7199.

United States District Court, E.D. Pennsylvania.

September 3, 1996.

COPYRIGHT MATERIAL OMITTED

Michael P. Forbes, Norristown, PA, for Paul E. Abel.

Edward Sparkman, Chapter 13 Trustee, Philadelphia, PA, pro se.

Frederic Baker, Assistant U.S. Trustee, Philadelphia, PA, pro se.

MEMORANDUM

DuBOIS, District Judge.

This case is before the Court on an appeal from a January 5, 1994 bankruptcy court order allowing a proof of claim by the Internal Revenue Service ("IRS") against the estate of the Appellant, Paul Abel ("debtor"), for unpaid federal withholding taxes.¹ For the reasons discussed below, the bankruptcy court's order will be reversed.

I. BACKGROUND

This case arises from the failure of Joseph J. Abel & Sons, Inc., a construction company ("the company"), to remit federal payroll withholding taxes for the period ending June 30, 1987 through the period ending September 30, 1988. The debtor was the secretary and fifty percent owner of the company from 1983 until September of 1988, when he resigned after learning of the unpaid taxes.

The debtor's brother, David Abel, was president and also fifty percent owner of the company. The debtor was primarily responsible for overseeing "on-site" work that took place outside of the office, such as supervising construction workers and conducting inspections. The debtor's brother handled the day-to-day business operations of the company.

On May 15, 1992, the debtor filed a voluntary petition for bankruptcy under Chapter 13 of the United States Bankruptcy Code (the "Code"). The IRS filed a proof of claim against the estate claiming that under 26 U.S.C. § 6672, the debtor was liable for $113,825.43 in withholding taxes that the company never paid over to the United States government. In his petition, the debtor requested that the bankruptcy court disallow the IRS' proof of claim.

The bankruptcy court held a hearing on November 29, 1993, at which both the debtor and his brother testified. By order and memorandum dated January 5, 1995, the bankruptcy court allowed the IRS' proof of claim. This appeal followed.

Three issues are before the Court: 1) whether the IRS or the debtor has the burden of proof, 2) whether the debtor was a "responsible party" under 26 U.S.C. § 6672, and if so, 3) whether his failure to pay withholding taxes was "willful" under U.S.C. § 6672.

II. JURISDICTION

This court has jurisdiction over appeals from final judgments, orders, and decrees of the bankruptcy court. 28 U.S.C. § 158. Orders allowing or disallowing proofs of claim in bankruptcy are final. See, e.g., In re Allegheny Int'l, Inc., 954 F.2d 167, 172 (3d Cir.1992); In re Hunt's Pier Associates, 162 B.R. 442, 444 (E.D.Pa.1993), judgment aff'd 31 F.3d 1171 (3d Cir.1994); therefore this Court has jurisdiction over the appeal from the bankruptcy court's order allowing the IRS' proof of claim.

III. BURDEN OF PROOF

The bankruptcy court held that the IRS has the burden of proof. Reviewing this conclusion of law de novo, Quattrone Accountants, Inc. v. I.R.S., 895 F.2d 921, 924 (3d Cir.1990), this Court disagrees.

In bankruptcy proceedings, the claimant, here the IRS, bears the burden of proving a claim filed under Section 502(a) of the Bankruptcy Code. Federal Rule of Bankruptcy Procedure 3001(f) provides that a proof of claim executed and filed in accordance with the Rules of Bankruptcy Procedure "shall constitute prima facie evidence of the validity and amount of the claim." As the Third Circuit has explained:

. . . a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant\'s initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim\'s legal sufficiency. If the objector produces evidence to negate one or more of the sworn facts of the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant.

In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3d Cir.1992) (citations omitted). Although neither Section 502 nor Rule 3001(f) fix the burden of proof, this general rule is longstanding and well-settled. Collier on Bankruptcy, ¶ 502.013 (15th ed. 1991); see, e.g., In re Sumner, 101 F. 224 (E.D.N.Y.1900); In re Gorgeous Blouse Co., Inc., 106 F.Supp. 465 (S.D.N.Y.1952).

In tax litigation under § 6672 the taxpayer, here the debtor, generally has the burden of proof. Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir.1971); see also Anastasato v. Commissioner of Internal Revenue, 794 F.2d 884, 886-887 (3d Cir.1986). Once the IRS has introduced a certified tax assessment, the taxpayer has both the burden of going forward with the evidence, and the burden of persuasion. Id. at 1160; see also Brounstein v. United States, 979 F.2d 952, 954 (3d Cir.1992). This burden of proof is not set by the tax code, but is instead based on a number of important policy considerations. Id.

In this case, the IRS filed a proof of claim against the debtor in bankruptcy proceedings seeking to recover unpaid withholding taxes. The Court is thus presented with a conflict between the burden of proof usually applied in bankruptcy cases and that usually applied in tax assessment cases. If the bankruptcy rule applies and the debtor rebuts the prima facie validity of the claim, the burden of persuasion is on the IRS; if the tax rule applies, the debtor must show he is not liable under § 6672 by a preponderance of the evidence.

This general question — which ultimate burden of proof to use when the tax and bankruptcy rules conflict — has split the Courts of Appeals. The Third, Fourth and Seventh Circuits have concluded that the taxpayer has the burden of proof. Resyn Corp. v. United States, 851 F.2d 660 (3d Cir.1988); In re Landbank Equity Corp., 973 F.2d 265, 268-272 (4th Cir.1992); U.S. v. Charlton, 2 F.3d 237, 239-240 (7th Cir.1993). The Fifth, Eighth, Tenth and Ninth Circuits have reached the opposite conclusion and held that in bankruptcy cases the government bears the ultimate burden of proof. In re Macfarlane, 83 F.3d 1041, 1045 (9th Cir.1996); Matter of Placid Oil Company, 988 F.2d 554, 557 (5th Cir.1993); In re Fidelity Holding Co., 837 F.2d 696, 698 (5th Cir.1988); In re Brown, 82 F.3d 801, 805 (8th Cir.1996); In re Fullmer, 962 F.2d 1463, 1466 (10th Cir.1992).

In Resyn the Third Circuit held that the taxpayer had the burden of proof in a case that arose in bankruptcy. The court explained:

The burden of proving that the assessment is arbitrary and excessive rests on the taxpayer; if the taxpayer cannot prove that the assessment was arbitrary, it retains the burden of overcoming the presumption in favor of the government that the assessment was not erroneous. However, once the taxpayer has sustained its burden of proving that the assessment is arbitrary and excessive, i.e., that it lacks a rational foundation in fact and is based upon unsupported assertions, the ultimate burden of proving that the assessment is indeed correct is placed on the government.

Resyn Corp. v. United States, 851 F.2d 660 (3d Cir.1988).

Resyn involved a proof of claim by the IRS for corporate income tax deficiencies that resulted from the debtor's fraudulent diversion of income. Id. at 661-662. The records that would have shown the amount of the diverted income and the tax owed "had disappeared without explanation." Id. at 662. The IRS computed the income from what records were available, and the debtor protested that the results were arbitrary and excessive. Id. at 663. The Third Circuit applied the standard normally used in tax deficiency cases and held that the taxpayer had the burden of proving that the assessment was arbitrary and excessive. Id. The opinion does not discuss the burden of proof generally applied in bankruptcy, nor does it hold that the ultimate burden is always on the taxpayer in tax cases that arise in bankruptcy.

The bankruptcy court in this case distinguished Resyn on the grounds that Resyn was a tax deficiency case, not a claim against a debtor under § 6672 for failure to turn over federal payroll withholding taxes. After noting that Resyn did not hold that the burden of proof is always on the taxpayer in bankruptcy cases, and considering the policy reasons at work in the tax and bankruptcy contexts, the bankruptcy court held that the burden should be placed on the IRS when it files a proof of claim in bankruptcy based on § 6672. See generally, In re Compass Marine Corp., 146 B.R. 138, 147 (Bktcy.E.D.Pa.1992); In re Fidelity America Financial Corp., 1990 WL 299418, *4 (Bankr. E.D.Pa.1990); but see In re Green, 89 B.R. 466, 474 (Bankr.E.D.Pa.1988).

The bankruptcy court reasoned that Resyn, in which the amount of a tax assessment was at issue, did not apply in this case, where responsibility for the tax, but not the amount, is at issue. The court looked at two policy reasons behind allocating the burden of proof to the taxpayer — encouraging recordkeeping and putting the burden on the party with the best access to "correct facts and figures" — and concluded that although they made sense in Resyn, they did not apply with the same force in this § 6672 case. On those issues the opinion states that in litigation under § 6672 liability depends on factors which are "primarily resolved by testimonial records," not simply access to records. The bankruptcy court also noted that a "responsible person" under § 6672 may have no obligations relating to bookkeeping whatsoever, see...