In re Thinking Machines Corp., Bankruptcy No. 94-15405-WCH.
| Decision Date | 29 October 1996 |
| Docket Number | Bankruptcy No. 94-15405-WCH. |
| Citation | 203 BR 1 |
| Parties | In re THINKING MACHINES CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Charles R. Dougherty, Hill & Barlow, Boston, MA, for Debtor.
Donald F. Harris, Special Assistant Attorney General, Santa Fe, NM, for New Mexico Taxation and Revenue Department.
DECISION REGARDING OBJECTION TO PROOF OF CLAIM OF NEW MEXICO TAXATION AND REVENUE DEPARTMENT
The Debtor is a Massachusetts corporation engaged in the manufacture and sale of computers. It sold computer products and services under contracts with Sandia National Laboratories ("Sandia"), the Defense Advanced Research Projects Agency ("DARPA") and the Los Alamos National Laboratory ("LANL") which are all located in New Mexico (collectively the "Buyers"). Between 1988 and 1991, the Debtor billed Sandia, DARPA and LANL a total of $3,014,603 pursuant to these contracts which are referred to as Maintenance Agreements (the "Agreement").
The operative portion of the Agreement provides as follows:
In May of 1992, the New Mexico Taxation and Revenue Department (the "Department") commenced an audit of the Debtor for the period from January 1, 1988 through March 31, 1992. Based upon the above-quoted language and the invoices which referred to services rendered, the auditor concluded that the Agreement constituted the sale of a service and assessed the Debtor for tax, penalty and interest on a tax base of $3,259,291.
The Debtor protested the assessment. The Debtor asserted that the tax base was $405,000 because this was the only amount of revenue attributable to the services rendered under the Agreement. The remaining amounts which the Debtor charged the Buyers under the Agreement were for the sale of tangible personal property.
The Department disputed the Debtor's characterization of the Agreement and asked the Debtor to produce documentation to support its contention that the Agreement principally involved the sale of tangible personal property and hence was exempted by tax certificates issued by the Department as discussed below.
On August 17, 1994, the Debtor filed for relief under Chapter 11 of the United States Bankruptcy Code. On September 21, 1994, the Department filed a proof of claim for the amount of the assessment. The Debtor objected to the claim on the grounds that the Debtor held certificates that exempted the Debtor from payment of New Mexico's state gross receipts taxes for "the value of transactions involving the sale of tangible personal property . . ." and that the Department had failed to state the basis of its claim.
A proof of claim is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). It constitutes prima facie evidence of the validity and amount of the claim. Fed. R.Bankr.P. 3001(f).
Courts routinely hold that if a party objecting to a proof of claim meets or overcomes the presumption of Rule 3001(f), the ultimate burden rests upon the claimant to establish the claim by a preponderance of the evidence. In re Premo, 116 B.R. 515, 518 (Bankr.E.D.Mich.1990). This is intended to place the claimant in the same position it would have been had the claimant been a plaintiff in a civil action.
The application of this rule is problematic when the claimant is a taxing authority. Unlike an ordinary plaintiff in a civil action, the burden of proof in a contest involving a tax assessment rests with the taxpayer. United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 290-91, 79 L.Ed. 623 (1935); United States v. Rexach, 482 F.2d 10, 17 (1st Cir.1973), cert. denied 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973). This rule is supported by "the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the Code." Rexach, 482 F.2d at 16. Psaty v. United States, 442 F.2d 1154, 1160 (3rd Cir.1971). In Rexach, Judge Coffin further stated that if the burden were placed on the government in an action to collect assessed taxes it 482 F.2d at 17.
In the bankruptcy claim context, however, a majority of courts place the burden of proof on taxing authorities. Franchise Tax Board, of California. v. MacFarlane (In re MacFarlane), 83 F.3d 1041 (9th Cir.1996); Placid Oil Co. v. I.R.S. (In re Placid Oil Co.), 988 F.2d 554 (5th Cir.1993); California State Board of Equalization v. Official Unsecured Creditors Committee (In re Fidelity Holding Co., Ltd.), 837 F.2d 696 (5th Cir.1988); Gran v. I.R.S. (In re Gran), 964 F.2d 822 (8th Cir. 1992); In re Premo, supra; and In re Dakota Industries, Inc., 131 B.R. 437 (Bankr. D.S.D.1991).
In contrast, other courts hold that the burden of proof in bankruptcy cases remains on the taxpayer. United States v. Charlton, 2 F.3d 237 (7th Cir.1993); Internal Revenue Service v. Levy (In re Landbank Equity Corp.), 973 F.2d 265 (4th Cir.1992); Resyn Corp. v. United States, 851 F.2d 660 (3rd Cir.1988) and Cobb v. United States (In re Cobb), 135 B.R. 640 (Bankr.D.Neb.1992).
I find the cases adopting the majority rule unpersuasive. Gran and Placid Oil relied solely on Fidelity for their holdings. Fidelity relied, in turn, on a case from this district and one from New York for the proposition that the government and litigants should be subject to the same burden of proof. In re WHET, Inc., 33 B.R. 424, 437 (Bankr. D.Mass.1983) and In re Avien, Inc., 390 F.Supp. 1335 (E.D.N.Y.1975), aff'd, 532 F.2d 273 (2d Cir.1976).
In WHET, Judge Lavien addressed whether the procedure implemented by the court for addressing claims objections was proper. While he did state that the burden of proof is always on the claimant, the issue was neither discussed nor was it a necessary part of the decision. Significantly, he ruled otherwise in a later proceeding. See In re Mason, 118 B.R. 170 (Bankr.D.Mass.1990) ().1 Similarly, Avien relied on an oft cited case, In re Gorgeous Blouse Co., 106 F.Supp. 465 (S.D.N.Y.1952). I agree with Judge Spector's conclusion in Premo that Gorgeous Blouse "offers no rationale to justify its holding." Premo, 116 B.R. at 524.
In MacFarlane, the Ninth Circuit found the logic of Fidelity compelling. 83 F.3d at 1041. It held that it would be inequitable to provide a taxing authority with both a priority claim and relief from the burden of proof rules applied to other claimants. In re Dakota Industries concluded that the plain language of § 502(a) and Rule 3001(f) requires the court to place the ultimate burden on the claimant.
In re Premo offers a detailed discussion of the issue and stated that it found the case law unpersuasive. Judge Spector applied the factors to which the First Circuit referred in Rexach when discussing the reasons for the general rule in tax litigation, 116 B.R. at 522, but held that these considerations did not warrant placing the burden on the debtor in bankruptcy. In ruling that the burden should be placed on the taxing authority, he held that "a few cases have made valid arguments as to why tax claims should not be treated differently from other kinds of claims against the debtor." 116 B.R. at 524. Moreover, he stated that placing the burden on the taxing authority would be "justifiable in part as a means of promoting uniformity, if only within the Sixth Circuit." Id.
I do not find the Fidelity line of cases persuasive. They relied on cases which did not discuss the issue or offer grounds for their conclusions. Dakota Industries rested on statutory language which does not exist. While Premo did offer a thorough discussion of the issues involved, in the end it relied upon a few cases which made "valid arguments" and the need to have uniformity within the Sixth Circuit as...
To continue reading
Request your trial