In re Premo

Decision Date03 July 1990
Docket NumberBankruptcy No. 87-09410.
Citation116 BR 515
PartiesIn re Michael J. PREMO, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

David L. Powers, Bay City, Mich., for debtor.

Alexandra E. Nicholaides, Asst. U.S. Atty., Washington, D.C., for the I.R.S.

MEMORANDUM OPINION ON DEBTOR'S OBJECTION TO CLAIM OF INTERNAL REVENUE SERVICE

ARTHUR J. SPECTOR, Bankruptcy Judge.

In this case we are called upon to decide whether Michael J. Premo ("Debtor") bears financial responsibility for the unpaid withholding taxes of two companies in which he was the principal equity owner. The Debtor has objected to the proof of claim filed by the Internal Revenue Service ("IRS" or "Government") for withheld but unpaid personal income and social security taxes due from Tri-Cities Computer Mart, Inc. ("Tri-Cities") and Flint Microcomputers, Inc. Besides the Debtor, three witnesses testified at trial, one of whom was called by the IRS. As the question of which party bore the burden of proof was an issue to be decided after trial, each party tried the case as if it bore the burden. The case was well-tried and the issues were extensively briefed. For the reasons which follow, we sustain the Debtor's objection. The following shall constitute our findings of fact and conclusions of law as required by Bankruptcy Rule 7052.

This is a contested matter, Bankruptcy Rule 9014, and is within the bankruptcy jurisdiction of the federal court, 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

FACTS

The Debtor incorporated and began operating Tri-Cities, a retail computer sales company, in 1978. Between 1978 and 1983, the Debtor served as Tri-Cities' secretary/treasurer and, along with his wife, was responsible for the company's bookkeeping and accounting duties. Following the resignation of the company's co-founder, the Debtor became president of Tri-Cities in January, 1983. The company expanded, with gross sales doubling each year from 1978 to 1985. The Debtor, who had no prior training or experience in finance, hired Philip Brzezinski for the newly created position of chief financial officer in April of 1983. As the CFO, Brzezinski assumed responsibility for all accounting aspects of the company, thereby permitting the Debtor to concentrate on sales. In late 1985 or early 1986, Tri-Cities acquired 90% of the stock of Flint Microcomputers. These two companies operated a total of five stores and, by 1987, employed approximately 100 persons.

In early April, 1987, the Debtor received a default notice from its principal financier, Michigan National Bank ("MNB"), which called in Tri-Cities' debt of some $1.5 million. This was when the Debtor first became aware that the companies were experiencing financial difficulties. MNB, whose loan was secured by, among other things, Tri-Cities' accounts, inventory and proceeds thereof, notified the companies' account debtors on approximately April 10, 1987 that payments were to be made directly to the bank. MNB officials came into Tri-Cities' offices on a daily basis and removed all cash on hand. On or about April 21, 1987, the Debtor retained legal counsel and, on counsel's advice, hired Donald Gillings, a CPA, shortly thereafter to assess the financial status of the corporations. Gillings, counsel and the Debtor then met with MNB officials to negotiate terms of a workout. MNB reviewed the corporate financial statements and expressed concern regarding the accuracy of figures relating to accounts receivable. Brzezinski would not cooperate in efforts to prepare more accurate financial statements. On April 28, 1987, Brzezinski resigned. Subsequent reconstruction of the financial reports by outside accountants indicated that the companies incurred a $900,000 loss in 1986 rather than a $100,000 profit, as originally reported. Financial statements for April and May of 1987, prepared after Brzezinski's departure, indicated that, rather than having a net worth of approximately $1 million as reported in prior financial statements, the companies in fact were showing a $3 million deficit. The Debtor first learned of a delinquency in federal withholding tax payments on April 30, 1987, when he and Gillings came across several delinquency notices from the IRS while looking through Brzezinski's desk.

The Debtor's efforts to revive his corporations were shortlived and unsuccessful; on May 19, 1987, Tri-Cities filed for bankruptcy under Chapter 11, followed on May 29, 1987 by Flint Microcomputers. Shortly thereafter, on June 9, 1987, the Debtor personally filed for relief under Chapter 11. The IRS filed a proof of claim alleging that the Debtor was personally liable pursuant to § 6672 of the Internal Revenue Code (IRC) for $242,877.13 in unpaid income and social security taxes owing from Tri-Cities and Flint Microcomputers.1 Section 6672 states in pertinent part:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall . . . be liable to a penalty equal to the amount of the tax evaded, or not collected, or not accounted for and paid over. . . .

26 U.S.C. § 6672(a).

The Debtor does not deny that his companies failed to pay withholding taxes for the time periods in question, but he does deny that he was personally responsible for collecting and paying these taxes. The Debtor also denies that he "willfully" failed to pay the trust fund taxes. Each party claims that the other bears the burden of proof in this case, and that issue will be addressed first.

BURDEN OF PROOF

Pursuant to § 502(a) of the Bankruptcy Code and Bankruptcy Rule 3001(f), a properly executed proof of claim constitutes prima facie evidence of its correctness. It is a well-settled principle of bankruptcy law that a party objecting to the claim "carries the burden of going forward to meet, overcome, or at least equalize, what operates in favor of the creditor by the force of section 502(a) and the Rule." 3 Collier on Bankruptcy, ¶ 502.013 (15th ed.1989). The "burden of ultimate persuasion," however, "is always on the claimant." Id. The underlying rationale for this rule is that a claimant in a bankruptcy proceeding is in the same posture as a civil plaintiff in a non-bankruptcy proceeding, who generally is assigned the burden of proving its claim against the defendant under non-bankruptcy law. See In re Lewis, 80 B.R. 39, 40 (Bankr.E.D.Pa.1987); In re KDI Corp., 2 B.R. 503, 504 (Bankr.S.D. Ohio 1980); 3 Collier on Bankruptcy, supra. The problem in this case, however, is that the applicable non-bankruptcy law is tax law, which places the burden of persuasion upon the taxpayer to show that he is not liable for the amount sought by the government. It is this apparent conflict which presents a problem in this case.

As previously stated, the taxpayer generally bears the burden of proof in non-bankruptcy litigation concerning the correctness of taxes assessed by the IRS. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935); Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); United States v. Rexach, 482 F.2d 10 (1st Cir. 1973), cert. denied 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973). Similarly, a person from whom the IRS seeks to recover a penalty under 26 U.S.C. § 6672 must prove that he is not liable for payment of the assessed penalty.2 Calderone v. United States, 799 F.2d 254 (6th Cir.1986); Sinder v. United States, 655 F.2d 729 (6th Cir.1981); Psaty v. United States, 442 F.2d 1154 (3d Cir.1971). This general rule of procedure appears to be derived primarily from case law; no statute or regulation categorically assigns the burden of proof to the taxpayer in litigating disputes with the IRS.3

In this case, the IRS never assessed the Debtor for the unpaid taxes, presumably because it had not completed its investigation of the taxpaying companies when the Debtor's bankruptcy was filed. The Government vehemently argued that its failure to assess is of no importance. Because the Debtor has taken no position on this issue, we have no occasion to decide the question.4

Many cases hold that the IRS bears the burden of proving its tax claim in bankruptcy without regard to whether the tax in question was assessed pre-petition. The earliest case located in which the burden of proof was assigned to the IRS under such circumstances is In re Gorgeous Blouse Co., Inc., 106 F.Supp. 465 (S.D.N.Y.1952), where the court stated:

There is no doubt that the burden of establishing the claim rests upon the Government. The filing of a sworn proof of claim is sufficient to establish a prima facie case. It "compels the objector to go forward and produce evidence enough to rebut the claimant\'s prima facie case. Once this is achieved, it is for the claimant to prove his claim, not for the objector to disprove it." These principles are applicable to tax claims asserted by the Government.

Id. at 465 (citations omitted).

Gorgeous Blouse cited Collier on Bankruptcy as authority for the proposition that the bankruptcy rule assigning the burden of proof to the claimant applies with equal force when the claimant is a taxing authority.5 The 14th edition of Collier states that "as in the case of other types of claims, a filed proof of a tax claim in proper form establishes a prima facie case for the allowance of the claim citation omitted. The burden of proof is on the claimant, but the burden of going forward and introducing evidence to rebut the prima facie case is on the objecting party citing In re Bradley, 16 F.2d 301 (S.D.N.Y.1926)." 3A Collier on Bankruptcy, ¶ 64.409 (14th ed.1988) (emphasis added).6

The authority cited in Collier is not persuasive,7 and Gorgeous Blouse offers no rationale to justify its holding. Nevertheless, many cases decided subsequent to ...

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