BURDEN OF PROOF

(COMMISSION TRACK NUMBER 211)

Present Law

The general bankruptcy rule is that a purported creditor adjudicating a claim against a debtor has the burden of proof with respect to the matters encompassed by the claim. Although the debtor may have some burden of going forward in initially contesting a claim and placing the issue before the court, (fn. 34) the burden of persuasion is on the party seeking to enforce the claim (fn. 35).

Whether this allocation of the burden of proof applies to tax cases is in dispute. Although the taxpayer generally has the burden of proof outside of the bankruptcy court in any litigation with the Internal Revenue Service (fn. 36) at least three circuits of the United States Court of Appeals have held that the general bankruptcy rule applies in the bankruptcy court, (fn. 37) and a governmental taxing authority asserting the claim has the burden of proof. Three circuits apply the general tax rule and place the burden of proof on the taxpayer (fn. 38). The rule in one circuit that seems to have addressed the issue is unclear (fn. 39).

Proposals Before the Commission

Commission Track Number 211. The Government Working Group proposes to conform the bankruptcy rule to the tax rule outside of bankruptcy. See Government Working Group Proposal number 8; see also Santa Fe Discussion Issues, p. 25, Item IVD; Justice Proposal p. 85; IRS Proposal, p. 1.

Task Force Position

The Task Force generally agrees with the proposal that the burden of proof in the Bankruptcy Court should not differ from the burden of proof in other forums. However, there may sometimes be competing considerations in bankruptcy cases and the bankruptcy judge should be given limited authority to place the burden of proof on the Government in cases where the interests of justice would be served.

Reasons for Position

In its submission to the Commission, the Department of Justice argues in part that allocating the burden of proof to the taxpayer "is appropriate because the taxpayer has or should have information underlying entries on the tax return including information relating to the income and deductions . . . . A taxing authority would be at a serious disadvantage if all of a taxpayer's unsubstantiated deductions had to be allowed, absent proof that such deductions were inappropriate . . . . Except in the rarest of circumstances, the Government is a stranger to the transactions that are the subject of a tax dispute . . . ." (fn. 40).

The Task Force is persuaded by the arguments made by the Department of Justice. A taxing authority generally does not have at its disposal records that would enable it to contest a taxpayer position, and a taxpayer is under a legal obligation to maintain records to substantiate the items on its income tax return. Placing the burden of proof on the Government in a tax dispute in the Bankruptcy Court allows a taxpayer to go into bankruptcy to obtain an advantage that tax laws would not afford. This is bad public policy, regardless of our general view that there are places where the strictures of the tax law must give way in order to accommodate the objectives of the bankruptcy law. For these very reasons, however, the Task Force believes that there may be times at which an exception is warranted. The most obvious situation is the case in which a trustee has been appointed, particularly in the case of an individual chapter 7 case. Here, the parties may be faced with an uncooperative debtor. Placing the burden of proof on the trustee may give the Government a windfall vis-a vis other creditors (fn. 41). By simply disallowing deductions, for example, and putting the trustee to proof which the trustee may nothave, the Government may end up collecting a tax which is not owed, and depriving unsecured creditors of money to which they may be entitled. While placement of the burden of proof in some such cases may deprive the fisc of revenue, a balancing of interests seems required. Since all of these cases may be fact driven, it would be impossible to set forth hard and fast rules. The Task Force believes that such an appropriate balancing can be achieved if the statute is drafted so as to place the burden of proof on the debtor in the ordinary case, subject to generally applicable nonbankruptcy exceptions. The bankruptcy judge would have the power to vary the rule in the interests of justice. Appropriate legislative history should set forth that it is expected that the bankruptcy judge would use such authority only in cases where the assumption underlying the general rule, i.e., disparity in factual information between the debtor and the Government, is not present. The Task Force believes that such a resolution would lead to a proper result in every case.

Other Institutional Positions

The Association of the Bar of the City of New York believes that taxing authorities should be subject to the same rules as other creditors. A focus group of the American College of Bankruptcy believes the burden of proof should generally be on the taxpayer.

****************************FOOTNOTES******************************

fn. 34: In re Allegheny Int'l, Inc. 954 F.2d 167 (3d Cir. 1992); In re Fullmer, 962 F.2d 1463 (10th Cir. 1992). See cases collected at Lawyers Edition, Bankruptcy Service, Section 6B20 (1996).

fn. 35: See also Henderson & Goldring, Failing & Failed Businesses, Section 1013.4 (Little Brown 1996).

fn. 36: See, e.g., Tax Court Rule 142(a), "The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court; and except that, in respect of any newmatter, increaes in deficiency, and affirmative defenses, pleaded in the answer, it shall be upon respondent." The most significant statutory exception is for fraud, which the Service must prove by clear and convincing evidence. I.R.C. Section 7454.

fn. 37: Franchise Tax Board v. Macfarlane, 83 F.3d 1041 (9th Cir. 1996); In re Placid Oil Co., 988 F.2d 554 (5th Cir. 1993); In re Fullmer, 962 F2d 1463 (10th Cir. 1992).

fn. 38: In re Landmark Equity Corp., 973 F.2d 265 (4th Cir. 1992); Resyn Corp. v. United States, 851 F.2d 660 (3d Cir. 1988); United States v. Charlton, 2.F.3d 237 (7th Cir. 1993).

fn. 39: See in re Gran, 964 F.2d 822 (8th Cir. 1992) and In re Unecco, Inc., 532 F.2d 1204 (8th Cir. 1976).

fn. 40: Justice Proposal at p. 87 (September 1996).

fn. 41: See letter from Hon. Arthur J. Spector to the Reporter for the Commission dated February 6, 1997. Judge Spector believes that the debtor should bear the burden if a successful outcome would inure to his benefit, but the government should bear the burden if other creditors are the real parties in interest.

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Last updated July 5, 1997