                                                          FILED
                                                           AUG 11 2014
                                                       SUSAN M. SPRAUL, CLERK
 1                         NOT FOR PUBLICATION           U.S. BKCY. APP. PANEL
                                                         OF THE NINTH CIRCUIT
 2
 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                        )      BAP Nos.     NV-13-1233-KiTaJu
                                   )                   NV-13-1250-KiTaJu
 6   DESERT CAPITAL REIT, INC.,    )                     (Cross Appeals)
                                   )
 7                  Debtor.        )      Bk. No.      NV-11-16624-LBR
                                   )
 8                                 )
     DAVID M. BAGLEY, Trustee for )
 9   the DCR Liquidating Trust,    )
                                   )
10             Appellant and       )
               Cross-Appellee,     )
11                                 )
     v.                            )      M E M O R A N D U M1
12                                 )
     UNITED STATES OF AMERICA,     )
13                                 )
               Appellee and        )
14             Cross-Appellant.    )
     ______________________________)
15
                    Argued and Submitted on January 24, 2014,
16                             at Las Vegas, Nevada
17                           Filed - August 11, 2014
18                Appeal from the United States Bankruptcy Court
                            for the District of Nevada
19
              Honorable Linda B. Riegle, Bankruptcy Judge, Presiding
20
21   Appearances:     Douglas Scott Draper, Esq. of Heller, Draper,
                      Patrick & Horn, L.L.C. and Kirk D. Homeyer, Esq. of
22                    Gordon Silver argued for appellant/cross-appellee,
                      David M. Bagley; Boris Kukso, Esq. argued for
23                    appellee/cross-appellant, United States of America.
24
     Before:    KIRSCHER, TAYLOR and JURY, Bankruptcy Judges.
25
26
          1
            This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may have
     (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28   Cir. BAP Rule 8013-1.
 1        David M. Bagley, Liquidating Trustee ("Trustee") for the DCR
 2   Liquidating Trust created pursuant to the plan of reorganization
 3   of chapter 112 debtor Desert Capital REIT, Inc. ("Debtor"),
 4   appeals an order granting the countermotion of appellee/cross-
 5   appellant, the Internal Revenue Service ("IRS"), for summary
 6   judgment, which overruled Trustee's objection to the IRS's proof
 7   of claim and allowed the claim in full as a general unsecured
 8   claim.   The IRS cross-appeals an earlier order sustaining
 9   Trustee's objection that no part of the IRS's claim was entitled
10   to priority under § 507(a)(8).    We AFFIRM.
11                 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
12   A.   General information regarding Real Estate Investment Trusts
          ("REITs")
13
14        Before we discuss the facts of these cross-appeals, a brief
15   discussion of REITs is appropriate.     A REIT is an entity, usually
16   a corporation, that owns and operates income-producing real estate
17   such as apartment buildings, shopping centers, offices, hotels and
18   warehouses.    The shares of many REITs are traded on major stock
19   exchanges.
20        A REIT would otherwise be taxable as a C corporation, but by
21   virtue of special provisions set forth in Internal Revenue Code
22   ("IRC") § 856 et seq., a REIT can deduct dividends paid to its
23   shareholders from its corporate taxable income.    Thus, to the
24   extent a REIT distributes all of its taxable income, no
25   corporate-level taxes are due, and a REIT functions like a pass-
26
          2
            Unless specified otherwise, all chapter, code and rule
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The
28   Federal Rules of Civil Procedure are referred to as “Civil Rules.”

                                       -2-
 1   through tax entity.   Taxes are paid by shareholders on dividends
 2   and any capital gains.   Among the many requirements necessary to
 3   qualify as a REIT, a company must distribute at least 90% of its
 4   taxable income to its shareholders annually.
 5        Because a REIT’s activities are limited, a REIT is allowed to
 6   own 100% of the stock in a taxable REIT subsidiary or "TRS."      A
 7   TRS is subject to tax as a regular C corporation.    The TRS can
 8   then provide services to the parent REIT's tenants or own or
 9   operate property which would otherwise disqualify the REIT from
10   its nontaxable status.   REITs and their TRSs, as with other types
11   of commonly controlled entities, are also allowed to allocate
12   certain business expenses between each other.   When a REIT
13   artificially lowers its TRS's taxable income by shifting some of
14   the REIT's expenses to the TRS, the TRS's tax burden is lowered
15   because a lesser share of the subsidiary's income is subject to
16   income tax.
17        Generally, when deductions are improperly shifted between
18   affiliated entities, IRC § 4823 allows the IRS to adjust the
19   allocations made between the parent corporation and its subsidiary
20   to properly reflect their respective income.    These rules are
21   often referred to as the "transfer pricing" rules.   Following the
22   adjustments that eliminate the impact of unreasonable and less
23
24
25
26        3
            IRC § 482 empowers the Secretary to reallocate income,
     deductions, credits or allowances between two or more business
27   organizations that are under common control, if he determines that
     such allocation is necessary "in order to prevent evasion of taxes
28   or clearly to reflect . . . income."

                                     -3-
 1   than arm’s length4 transactions with the parent, the IRS
 2   recalculates the subsidiaries’ tax liability under IRC § 11.     In
 3   other words, the IRS recaptures the corporate tax otherwise lost
 4   at the subsidiary's level.
 5        For REITs, Congress has devised a different statutory scheme
 6   that replaces the ordinary reallocation remedy under IRC § 482.
 7   If the parent REIT improperly shifts deductions to its TRS (or
 8   does other transactions not applicable here), an exaction is
 9   imposed on the parent REIT in the amount of the deduction
10   improperly shifted from the REIT to its TRS.    IRC § 857(b)(7).   In
11   lieu of adjusting the TRS's tax liability, as is done in cases of
12   non-REIT entities, the IRS imposes on the REIT a tax equal to 100%
13   of the redetermined deductions.    IRC § 857(b)(7)(A), (E).5
14
          4
15          The "arm's length standard" is described in Treas. Reg.
     § 1.482-1(b)(1), which provides in part:
16
          In determining the true taxable income of a controlled
17        taxpayer, the standard to be applied in every case is that of
          a taxpayer dealing at arm's length with an uncontrolled
18        taxpayer. A controlled transaction meets the arm's length
          standard if the results of the transaction are consistent
19        with the results that would have been realized if
          uncontrolled taxpayers had engaged in the same transaction
20        under the same circumstances (arm's length result).
21   Accordingly, the amount charged by one related party to another
     for a given service must be the same as if the parties were not
22   related. Treas. Reg. §§ 1.482-2 through 1.482-7 and 1.482-9
     provide specific methods to be used to evaluate whether
23   transactions between or among members of the controlled group
     satisfy the arm's length standard, and if they do not, to
24   determine the arm's length result. See Treas. Reg.
     § 1.482-1(b)(2).
25
          5
              IRC § 857(b)(7)(A) and (E) provide:
26
          (7) Income from redetermined rents, redetermined deductions,
27   and excess interest.
28                                                            continue...

                                       -4-
 1   "Redetermined deductions" are those deductions the IRS has
 2   determined were not reasonably allocated by a REIT to its TRS.
 3   IRC § 857(b)(7)(C).6   However, if a taxpayer successfully
 4   establishes that its transactions are consistent with or
 5   comparable to those of unrelated parties, the transaction can
 6   withstand a challenge under IRC § 482.   See Treas. Reg.
 7   § 1.482-1(b)(1).
 8   B.   Events prior to bankruptcy
 9        Debtor, a Maryland corporation, is a mortgage REIT under IRC
10   § 856 et seq. and wholly owns Desert Capital TRS, Inc. ("DC TRS"),
11   a taxable REIT subsidiary.   Todd Parriott ("Parriott") was the
12   president and CEO of Debtor.   Debtor and DC TRS had no employees
13   and used third parties to provide all services.   Common management
14   services were provided to Debtor and DC TRS by Burton Management
15   Company, Ltd. ("Burton"), a corporation wholly owned by Parriott.
16   At issue in this case is the proper allocation of management fees
17
18
          5
           ...continue
19        (A)Imposition of tax.--There is hereby imposed for each
          taxable year of the real estate investment trust a tax equal
20        to 100 percent of redetermined rents, redetermined
          deductions, and excess interest.
21        . . . .
          (E) Coordination with section 482.--The imposition of tax
22        under subparagraph (A) shall be in lieu of any distribution,
          apportionment, or allocation under section 482.
23
          6
            The actual definition of "redetermined deductions" is
24   provided in IRC § 857(b)(7)(C):
25        Redetermined deductions.--The term "redetermined deductions"
          means deductions (other than redetermined rents) of a taxable
26        REIT subsidiary of a real estate investment trust to the
          extent the amount of such deductions would (but for
27        subparagraph (E)) be decreased on distribution,
          apportionment, or allocation under section 482 to clearly
28        reflect income as between such subsidiary and such trust.

                                       -5-
 1   and other expenses as between Debtor and DC TRS for the tax years
 2   2006, 2007 and 2009.    The expenses at issue are:   (1) base
 3   management fees for 2006 and 2007 paid to Burton; (2) board of
 4   director ("board") fees and expenses for 2006, 2007 and 2009;
 5   (3) incentive compensation for 2006 paid to Burton; and (4) D&O
 6   insurance premiums for the board for 2006 and 2007 (collectively,
 7   the "Management Deductions").
 8        Debtor filed Forms 1120-REIT with the IRS in the tax years
 9   2006, 2007 and 2009, reporting no tax due.    DC TRS filed Forms
10   1120 for the same calendar years, reporting various amounts of
11   corporate income tax.    The 2006 tax returns, prepared by then-
12   accountant Eide Bailly, did not allocate the Management Deductions
13   between Debtor and DC TRS.    In 2008, Debtor, through its new
14   accountant Hancock Askew & Co., LLP ("Hancock"), subsequently
15   filed amended returns for the 2006 tax year, allocating $930,206
16   in Management Deductions from Debtor to DC TRS; DC TRS's amended
17   return increased its Management Deductions by the same $930,206.
18   DC TRS also filed an amended return for tax year 2009.     According
19   to Debtor's and DC TRS's amended returns for tax years 2006 and
20   2007, Debtor allocated 25% of the management fees it paid to
21   Burton/Parriott and 50% of the board expenses to DC TRS.     For
22   2009, Debtor allocated 20% of the board expenses to DC TRS; no
23   management fees were allocated to DC TRS that year.     These
24   allocations reduced DC TRS's tax liability accordingly.     The
25   allocation for 2006 resulted in a tax refund to DC TRS of
26   $316,270.
27        The amended returns prompted an IRS audit.      After the IRS's
28   examination, it determined that while Debtor's board and Parriott,

                                      -6-
 1   through Burton, performed services for both Debtor and DC TRS, a
 2   portion of the Management Deductions claimed by DC TRS belonged to
 3   Debtor and were not deductible by DC TRS.
 4   C.   Events after the bankruptcy filing
 5        An involuntary chapter 11 petition was filed against Debtor
 6   on April 29, 2011, and with Debtor's consent, an order for relief
 7   was entered on June 15, 2011.
 8        On June 7, 2011, the IRS issued to Debtor Notices of Proposed
 9   Adjustments ("NOPAs") for tax years 2006, 2007 and 2009, proposing
10   deficiencies of $622,230, $900,302, and $32,056, respectively,
11   plus accuracy penalties of $124,446 for 2006, $180,060 for 2007,
12   and $6,411 for 2009.
13        On August 26, 2011, the IRS issued to Debtor a Notice of
14   Deficiency ("NOD") for tax years 2006, 2007 and 2009, asserting
15   the deficiencies as described in the NOPAs.    The NOD informed
16   Debtor that it could either agree with the deficiency and allow
17   the IRS to then assess it, thereby avoiding further interest and
18   penalties, or contest the matter before the United States Tax
19   Court once the automatic stay was dissolved.
20        1.   Trustee's objection to the proofs of claim
21        The IRS filed its initial proof of claim, Claim 55-1, on
22   July 6, 2011.   It then filed various amendments:   Claim 55-2,
23   Claim 55-3 and Claim 55-4 (collectively, the "Claim").
24   Claim 55-4, filed in January 2013, asserted an unsecured claim for
25   $2,200,564.36, with $1,885,636.42 being asserted as priority under
26   § 507(a)(8) and penalties of $314,927.94 being asserted as a
27   general unsecured claim.   The Claim sought to recover from Debtor
28   an amount equal to 100% of the amounts the IRS claimed DC TRS

                                     -7-
 1   improperly deducted (the "redetermined deductions") pursuant to
 2   IRC § 857(b)(7)(A).7
 3        Trustee filed an objection to the Claim on March 7, 2012 (the
 4   "Claim Objection").8    He disputed the IRS's methodology used in
 5   reallocating the Management Deductions between Debtor and DC TRS
 6   as not supported by law or fact.    Specifically, Trustee argued:
 7   that Debtor's "profit split methodology" was a permissible
 8   "reasonable method" under IRC § 857(b)(7)(F)9 for allocating
 9   expenses between Debtor and DC TRS; and that the regulations
10   governing expense allocations between affiliated entities
11   generally (i.e., non-REITs) under IRC § 482 did not apply.
12   Nonetheless, argued Trustee, the IRS never determined that
13   Debtor's methodology was not reasonable and yet it proceeded to
14   reallocate the Management Deductions based solely on the relative
15   asset values held by each.    Trustee contended that the applicable
16   test is not whether some other allocation method would be better
17   but, rather, whether Debtor's allocation method was "reasonable."
18        Trustee further disputed the IRS's asserted entitlement to
19   priority, arguing that use of the word "tax" in IRC § 857(b)(7)
20
          7
21          As explained more thoroughly below, Claim 55-4 was filed to
     reflect that assessments had now been imposed against Debtor by
22   the IRS on December 17, 2012.
23        8
              At that time, only Claim 55-1 and Claim 55-2 had been
     filed.
24
          9
              IRC § 857(b)(7)(F) provides:
25
          Regulatory authority.--The Secretary shall prescribe such
26        regulations as may be necessary or appropriate to carry out
          the purposes of this paragraph. Until the Secretary
27        prescribes such regulations, real estate investment trusts
          and their taxable REIT subsidiaries may base their
28        allocations on any reasonable method.

                                       -8-
 1   did not conclusively establish the 100% exaction was a "tax"
 2   entitled to priority.   Instead, argued Trustee, the exaction was
 3   merely a penalty, thereby rendering it only a general unsecured
 4   claim.    Further, the Claim did not fit within any category of
 5   claims entitled to priority under § 507(a)(8)(A)-(G).10
 6        On May 21, 2012, the bankruptcy court entered a scheduling
 7   order bifurcating the issues raised in Trustee's Claim Objection.
 8   Whether any portion of the Claim was entitled to priority would be
 9   decided first; a trial would then be held on whether the IRS
10   improperly redetermined the Management Deductions between Debtor
11   and DC TRS.
12        The IRS thereafter filed a response to the Claim Objection,
13   contending that the exaction worked both to penalize and to
14   collect tax that was otherwise lost due to the improperly
15   allocated Management Deductions.    The IRS conceded that a portion
16   of its Claim — the portion of the exaction that exceeded the
17   additional tax that would have been imposed under IRC § 11 on
18   DC TRS due to redetermined deductions — functioned as a "penalty"
19   and was not entitled to priority.      It further asserted however
20   that to the extent the exaction compensated the government for the
21   tax revenue lost as a result of the deductions improperly claimed
22   by DC TRS, it functioned as a "tax" and was entitled to priority.
23   Put another way, to the extent the Claim was in lieu of the tax
24   that would have been imposed on DC TRS, but for the remedy imposed
25   by IRC § 857(b)(7)(E), it was entitled to priority.     The IRS
26
          10
            Trustee also argued that should the Claim be allowed as an
27   unsecured claim, it was not a "Senior Unsecured Claim" as defined
     in Debtor's Plan. The IRS conceded that, to the extent its Claim
28   was not entitled to priority, it was not a Senior Unsecured Claim.

                                      -9-
 1   conceded that it had not yet calculated the amount of the exaction
 2   that was in lieu of the under-reported tax by DC TRS, but that it
 3   would do so by the time of trial.   To date, this calculation has
 4   not been provided.
 5        To fit under § 507(a)(8), the IRS proposed three arguments:
 6   (1) the exaction was a tax under § 507(a)(8)(A)(iii) because it
 7   was "on or measured by income" and was "assessable" after the
 8   petition date; (2) the exaction was an "excise tax" under
 9   § 507(a)(8)(E) because it was imposed on a REIT for the
10   performance of an act, namely, improperly allocating deductions to
11   its TRS; and (3), alternatively, even if the exaction was a
12   penalty and not a tax, a portion of it was still entitled to
13   priority under § 507(a)(8)(G) because it was a penalty "in
14   compensation for actual pecuniary loss."
15        In reply, Trustee disputed the IRS's contention that the
16   exaction was a tax based on income.   He further disputed the IRS's
17   contention the exaction was an "excise tax," arguing that equating
18   the exaction here to what the Ninth Circuit has held is the
19   quintessential excise tax — a sales tax — was an extreme stretch.
20   Trustee reasoned that an IRC § 857(b)(7) exaction was more like an
21   exaction under IRC § 4971(a) of a flat 10% tax on pension funding
22   shortages, which were held not to be an excise tax under
23   § 507(a)(8)(E) in United States v. Reorganized CF & I Fabricators
24   of Utah, Inc., 518 U.S. 213, 223 (1996)("CF & I Fabricators").
25   Lastly, Trustee argued that for § 507(a)(8)(G) to apply, the
26   bankruptcy court would first have to conclude the Claim was a tax
27   under § 507(a)(8)(A)-(F), and that it was designed to compensate
28   the government for actual pecuniary loss.

                                    -10-
 1        2.   Priority determination of the Claim
 2        The bankruptcy court held a hearing on the priority portion
 3   of Trustee's Claim Objection on July 24, 2012.    Trustee first
 4   provided the court with a hypothetical, asking it to assume that
 5   each entity had $100 income (for a total of $200), and that a $60
 6   deduction was available.   Regardless of which entity took the $60
 7   deduction, the total income to be taxed would be the same — $140.
 8   For example, if the $60 deduction were given to Debtor, DC TRS
 9   would pay tax on its entire $100, and Debtor would distribute $40
10   to its shareholders, who pay tax individually on that $40.      If DC
11   TRS took the entire $60 deduction, it would pay tax on its $40
12   income and Debtor would distribute $100 to its shareholders, who
13   pay tax on that $100.   However, under IRC § 857, not only is the
14   IRS collecting income tax on the $140, it is also collecting a
15   100% exaction on the deduction that has been disallowed, or,
16   another $60.   Accordingly, argued Trustee, an exaction under IRC
17   § 857(b)(7)(A) constituted a penalty not a tax.   Alternatively,
18   Trustee asked the court to assume Debtor had only $60 income and
19   $60 in deductions, and the IRS then determines that a $40
20   deduction was improperly given to DC TRS.   In that case, Debtor
21   would have no income subject to tax, but under IRC § 857(b)(7)(A)
22   would have to pay a 100% exaction on the $40.    Thus, argued
23   Trustee, the exaction was not a tax based on income.
24        The IRS conceded that two-thirds of the Claim was a penalty
25   and not entitled to priority.   However, it believed that a portion
26   of the Claim, insofar as it recovered the taxes not paid by DC TRS
27   — i.e., the actual pecuniary loss from the uncollected tax — was
28   entitled to priority.   Nonetheless, the IRS admitted that it could

                                     -11-
 1   not articulate how much of the Claim was entitled to priority
 2   because the substance of the Management Deductions had not yet
 3   been addressed.
 4        After hearing further argument from the parties, the
 5   bankruptcy court announced its oral ruling that the Claim was a
 6   penalty for the improperly allocated Management Deductions, and it
 7   was not in compensation for actual pecuniary loss.   Accordingly,
 8   no portion of the Claim was entitled to priority.    A related
 9   priority order was entered on August 27, 2012.
10        A status conference was held in September 2012 to set a trial
11   schedule regarding the merits of the Claim.   Meanwhile, the IRS
12   filed Claim 55-4, asserting that a majority of the Claim (about
13   $1.9 million out of $2.2 million) was entitled to priority,
14   despite the priority order and the IRS's earlier admission that
15   approximately two-thirds of the Claim constituted a penalty not
16   entitled to priority.
17        Because Debtor had neither paid the deficiency nor petitioned
18   the Tax Court within the time prescribed in the NOD, on
19   December 17, 2012, the IRS issued its Certificates of Assessments
20   (Form 4340) against Debtor assessing the taxes and accuracy
21   penalties for 2006, 2007 and 2009 as asserted in the NOD
22   ("Assessments").
23        3.   Trustee's motion for partial summary judgment and the
               IRS's countermotion for summary judgment
24
25        On January 22, 2013, Trustee moved for partial summary
26   judgment on the Claim ("PSJ Motion"), seeking a determination on
27   four legal issues:   (1) that the normal claims objection process
28   would apply at trial, and the IRS had the burden of going forward;

                                     -12-
 1   (2) that IRC § 482 was inapplicable in this case by virtue of
 2   IRC § 857(b)(7)(E); (3) that the standard for determining the
 3   merits of deductions claimed by Debtor is "any reasonable method;"
 4   and (4) that the Plan precluded the IRS from obtaining payment of
 5   any penalties.
 6        Trustee contended that because the Claim involved recovery of
 7   a tax refund, the usual presumption of correctness of an IRS proof
 8   of claim did not apply; therefore, the IRS bore the burden of
 9   proof.   Trustee also asked the bankruptcy court to hold as a
10   matter of law that IRC § 482 was not applicable to the Claim and
11   that Debtor was permitted to allocate deductions on the basis of
12   "any reasonable method" under IRC § 857(b)(7)(F).   Trustee argued
13   that the IRS's "redetermined deductions" were invalid and should
14   be disallowed if Debtor used any reasonable method to determine
15   the proper allocation of deductions between it and DC TRS during
16   the applicable tax years.
17        In response, the IRS filed its countermotion for summary
18   judgment and opposition to Trustee's PSJ Motion ("Counter MSJ"),
19   contending that it was entitled to judgment on the merits of the
20   Claim.   In short, the IRS contended that summary judgment was
21   proper because (1) Debtor had not provided any evidence to rebut
22   the presumption of correctness that attached to its valid proof of
23   claim regarding allocation of the Management Deductions, (2) the
24   IRS had met its burden of establishing the amount of the Claim by
25   producing the NOD and Assessments, and (3) Debtor could not meet
26   its heavy burden of rebutting the documents' validity.
27        As for the interplay between IRC §§ 482 and 857(b)(7), the
28   IRS explained that in order to ensure transactions between a REIT

                                     -13-
 1   and its TRS are at arm's length, the IRS is authorized to analyze
 2   their claimed deductions under IRC § 482.    If it determines that
 3   deductions taken by the TRS were improper and should be
 4   reallocated to the REIT, IRC § 857(b)(7)(A) imposes a tax equal to
 5   the amount of such reallocated deductions.   Hence, while IRC
 6   § 857(b)(7) dictates that a tax is imposed, the determination
 7   under IRC § 482 fixes the amount.   The IRS, thus, concluded that
 8   the Trustee was incorrect in his assertion that IRC § 482 did not
 9   apply.
10        The IRS agreed that it had the initial burden of proof in tax
11   collection actions.   But, it argued that because the NOD and
12   Assessments carried a presumption of correctness and established a
13   prima facie case that Debtor was liable for the taxes shown,
14   Trustee had to show by a preponderance of the evidence that the
15   deficiency was unreasonable, arbitrary or capricious and then come
16   forward with evidence of the correct allocation for the deductions
17   at issue.   Similarly, it asserted that Trustee's Claim Objection
18   provided no facts or applicable legal authority to show that the
19   IRS's allocation of the Management Deductions was incorrect and
20   that the amount of tax imposed as a result of the disallowed
21   Management Deductions was wrong.    As for the methodology used, the
22   IRS explained that its allocations were based on an agreement
23   Debtor filed with the SEC (the "Burton Agreement"), which stated
24   that management compensation fees paid by Debtor to Parriott were
25   to be based on the value of average invested assets.   Therefore,
26   the IRS allocated the Management Deductions between Debtor and TRS
27   in the same proportion as the value of assets held by each entity
28   respectively.

                                     -14-
 1        Regarding Trustee's "reasonable method" argument, the IRS
 2   agreed that a REIT and its TRS are allowed to base their
 3   allocations on any reasonable method.   However, in this case, the
 4   IRS had already determined that Debtor's allocation was
 5   unreasonable, and that DC TRS was not entitled to some of the
 6   Management Deductions.    It then reallocated the deductions and
 7   issued the NOD and Assessments, so Debtor now had to rebut the
 8   presumption of correctness given to those documents.   The IRS
 9   argued that it was not enough for Trustee to prevail simply by
10   showing that Debtor used "any reasonable method" to allocate the
11   Management Deductions; he had to prove the NOD was wrong.
12        In support of its Counter MSJ, the IRS submitted:    a
13   statement of undisputed facts; a declaration from counsel; copies
14   of the NOPAs, NOD and Assessments; a copy of the Burton Agreement
15   filed with the SEC; copies of 2006 tax returns; and a copy of an
16   internal IRS report dated May 5, 2011, which was generated during
17   the audit investigation in response to Debtor's protest letter.
18        In response, Trustee argued that the IRS had failed to cite
19   any authority in support of its contention that IRC § 482 applied
20   in this case and that its position was contrary to the express
21   language of IRC § 857.    Trustee further argued that the IRS was
22   not entitled to summary judgment because open factual issues
23   remained, such as whether the methodology used by Debtor and
24   DC TRS was reasonable, whether their allocations for the
25   Management Deductions were proper and whether the methodology used
26   by the IRS was correct.   The only facts available at this time
27   were derived from the tax returns, the IRS's internal conclusions
28   about the entities' allocations and the various notices sent to

                                      -15-
 1   Debtor and DC TRS disputing the same and claiming amounts due from
 2   Debtor.   In Trustee's opinion, these facts were not conclusive.
 3   He requested time to conduct discovery to support the positions of
 4   Debtor and DC TRS, which he asserted would undermine the IRS's
 5   Claim.
 6        4.    Ruling on Trustee's PSJ Motion
 7        The bankruptcy court held a hearing on the PSJ Motion on
 8   March 19, 2013.   When the court expressed some confusion about
 9   Trustee's argument respecting the applicability of IRC § 482,
10   counsel for Trustee clarified, stating that Trustee was seeking a
11   ruling that the "reasonable" standard for allocations under IRC
12   § 857(b)(7) applied, as opposed to the "arbitrary and capricious"
13   standard set forth in IRC § 482.   In response, the IRS explained
14   that it had already determined in its audit that Debtor's
15   allocation method was not reasonable, and had this case still been
16   at the disallowance of deduction stage, Trustee could make his
17   "reasonable method" argument.   However, because an NOD had been
18   issued, he now had to show the Claim was arbitrary, capricious and
19   unreasonable.
20        The bankruptcy court denied the PSJ Motion on all issues.
21   Specifically, the court found that this was not an erroneous
22   refund case, that the IRS was held to the "usual standard" of
23   proof and, because the Assessments had been issued, the IRS had
24   met its initial burden of proof on its Claim.   The court also
25   denied Trustee's request for a ruling that IRC § 482 did not apply
26   to the Claim; it did apply.
27        5.    Ruling on the IRS's Counter MSJ
28        Trustee filed a supplemental opposition to the Counter MSJ on

                                     -16-
 1   March 21, 2013.    He disputed certain facts asserted by the IRS in
 2   the NOPAs:   (1) the Burton Agreement was a valid and binding
 3   contract despite the IRS's suggestion to the contrary;
 4   (2) Parriott did not control all aspects of corporate governance
 5   of Debtor and DC TRS, but rather Debtor's board oversaw DC TRS's
 6   assets and reviewed the Burton Agreement on an annual basis;
 7   (3) the IRS had the wrong incorporation date for Debtor; (4) some
 8   of the services rendered by Burton related to invested assets
 9   owned by DC TRS, not Debtor; and (5) the IRS's conclusion that
10   services provided by ARJ11 and Burton were duplicative lacked any
11   factual support.
12        Trustee also argued that the NOD was based on an analysis
13   under IRC § 482, not IRC § 857, which provides two different
14   tests.    Using IRC § 482, the IRS bases its analysis of allocations
15   upon "prevention of tax evasion" or to "clearly reflect income,"
16   as opposed to "any reasonable method."   Therefore, argued Trustee,
17   the IRS used an improper legal standard when issuing the NOD and
18   filing the Claim.   Further, Trustee argued that whether a method
19   is reasonable is purely a question of fact, and the Counter MSJ
20   contained no facts regarding whether Debtor used a reasonable
21   method or if the IRS even looked at any alternative methods.
22   Debtor's report by Ernst & Young from April 2011 showed that other
23   alternatives were provided, but the IRS never showed that these
24   methods were analyzed for reasonableness; it merely employed its
25   own tests.   Trustee disputed the IRS's methodology of allocating
26   Burton's management fee between Debtor and DC TRS based upon the
27
          11
            It is not clear from the record who ARJ is, but we presume
28   it to be another entity involving Parriott.

                                      -17-
 1   amount of capital invested in the assets owned by each entity.
 2   This approach failed to consider that certain DC TRS assets —
 3   Consolidated Mortgage and the Galleria Building — required
 4   significant day-to-day management time and thought, and that some
 5   of Debtor's assets generated no revenue.
 6          Trustee also disputed the IRS's asserted standard for the
 7   burden of proof, contending that even though an IRS proof of claim
 8   is presumed correct, if an assessment is "excessive" or lacked
 9   "minimal factual foundation," the burden of proof shifts to the
10   IRS.   Trustee believed the Assessments were excessive and lacked
11   minimal factual foundation, as shown by the IRS's significant
12   factual errors in the NOPAs.
13          In support of the supplemental opposition, Trustee offered a
14   statement of contested material facts, the 2011 Ernst & Young
15   report and a declaration from counsel, which included copies of
16   various Parriott deposition transcripts, some in relation to
17   Debtor's bankruptcy case and some from other unrelated litigation.
18          In reply, the IRS contended that Trustee's opposition offered
19   no facts or evidence to establish that payments made by Debtor for
20   the management fees and board expenses at issue were properly
21   deductible by DC TRS.   Although Trustee contended that a number of
22   issues of material fact existed, none of them undermined the
23   Assessments or were material to the issue before the bankruptcy
24   court:   whether DC TRS was entitled to the Management Deductions
25   allocated to it.   The IRS performed an audit, issued an NOD and
26   made Assessments against Debtor because Debtor and DC TRS had not
27   established the Management Deductions belonged to DC TRS, which
28   was their burden to establish.   Therefore, no material facts

                                      -18-
 1   existed to create an issue for trial.
 2        As for the IRS's allocation analysis, the IRS conceded that
 3   it based its allocations on the "average invested assets" method
 4   as prescribed in the Burton Agreement, which it did not question
 5   as a legitimate contract.    However, since Trustee's opposition
 6   failed to dispute the IRS's chosen method or the validity of the
 7   Burton Agreement, the IRS contended that he agreed with the
 8   minimal factual foundation for its analysis.   Further, although
 9   Trustee argued that an issue of material fact existed as to
10   whether Debtor's allocation of the Management Deductions was based
11   on "any reasonable method," his opposition offered no evidence
12   about what method was used to allocate them, why that allocation
13   was reasonable given the compensation structure outlined in the
14   Burton Agreement and what documents and facts supported the
15   allocations.
16        Lastly, the IRS disputed Trustee's contention respecting the
17   IRS's application of IRC § 482 to the analysis of redetermined
18   deductions.    In Debtor's case, the IRS had concluded that some of
19   the deductions allocated to DC TRS were not ordinary business
20   expenses, as required by IRC § 162, and so it made an allocation
21   calculation under IRC § 482.   Then, under the authority of IRC
22   § 857(b), it imposed a tax in the amount that would have been
23   allocated under IRC § 482.   No statute or case law implied, as
24   argued by Trustee, that IRC § 857(b)(7)(F), which allows a REIT to
25   use any reasonable method to allocate deductions, limits or
26   changes the requirement that deductions be for ordinary business
27   expenses or that the IRS may not allocate those deductions to
28   properly reflect income.    In fact, argued the IRS, the definition

                                      -19-
 1   of "redetermined deductions" in IRC § 857(b)(7)(C) explicitly
 2   incorporates the standard under IRC § 482.
 3        Trustee filed a second supplemental opposition to the Counter
 4   MSJ on April 4, 2013.   Just one week prior, a deposition was taken
 5   of Michael T. McCarthy ("McCarthy"), the Civil Rule 30(b)(6)
 6   witness for Hancock, the accountancy firm that provided audit and
 7   tax preparer services for Debtor and DC TRS.   Trustee argued that
 8   McCarthy's testimony supported his position that issues of
 9   material fact existed as to whether Debtor used a reasonable
10   method in its allocation of the Management Deductions and whether
11   the IRS was correct in reallocating deductions based solely on
12   invested capital.
13        In its reply to Trustee's second supplemental opposition to
14   the Counter MSJ, the IRS argued that McCarthy's testimony did not
15   create a triable issue, but rather supported the IRS's position
16   that Debtor had no evidence and no documentation to substantiate
17   the allocation of the Management Deductions to DC TRS.   In fact,
18   McCarthy's audit analysis explicitly stated:   that insufficient
19   documentation existed for the allocation; that the previous
20   accountant, Eide Bailly, had informed management that the
21   allocated deductions were not acceptable and lacked documentation;
22   and that the IRS would disallow them, which is why they were not
23   included in the original 2006 tax return.    Further, McCarthy's
24   opinion that the allocations to DC TRS were "reasonable," which
25   the IRS disputed as improper expert testimony, was not sufficient
26   to establish that DC TRS was entitled to the deductions.
27        The bankruptcy court held a hearing on the IRS's Counter MSJ
28   on May 2, 2013.   Counsel for the IRS argued that the facts of this

                                     -20-
 1   case were as follows:    Debtor made payments for management fees
 2   and board expenses; DC TRS wanted the deductions; and no evidence
 3   was offered to establish why 50% of the board expenses and 25% of
 4   the management fees for Burton/Parriott in 2006 and 2007 should go
 5   to DC TRS.   The bankruptcy court then asked counsel for the IRS to
 6   explain at what point in the process would the "reasonable method"
 7   determination under IRC § 857(b)(7) apply or come into play.    The
 8   following colloquy ensued:
 9        MR. KUKSO: But your question I think it goes further.
          Your question is now we're in an exam, and the IRS has
10        these additional tools.   How does that connect to the
          reasonable-method requirement? Well, I think that's the
11        test. Did the REIT use a reasonable method, and it's the
          IRS's prerogative to determine whether it was a
12        reasonable method.
13        THE COURT: So that --
14        MR. KUKSO: What --
15        THE COURT: That stage would come in when you're doing
          your exam --
16
          MR. KUKSO: Right.
17
          THE COURT: – is that what you're saying?
18
          MR. KUKSO: Right.
19
          THE COURT: So the point is at the exam stage they say
20        this wasn't a reasonable method, and they fight the law.
          If they lose that battle there, then you're into the
21        burden of proof when you get a notice of deficiency and
          notice of assessment.
22
          MR. KUKSO: Right. And the burden of proof of entitlement
23        to a deduction.   Is a party entitled to a deduction?
          And, again, that's always on the taxpayer.
24
          THE COURT: Okay. All right.    Thank you.
25
26   Hr'g Tr. (May 2, 2013) 13:8-14:5.
27        After hearing further argument, the bankruptcy court issued
28   its oral ruling in favor of the IRS.    On May 9, 2013, the court

                                      -21-
 1   entered an order granting the Counter MSJ and allowing the IRS's
 2   Claim in full as a general unsecured claim.     These timely
 3   cross-appeals followed.
 4                             II. JURISDICTION
 5        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
 6   and 157(b)(2)(B).   Orders allowing or disallowing proofs of claim
 7   in bankruptcy are final and appealable.    Orsini Santos v. Mender
 8   (In re Orsini Santos), 349 B.R. 762, 768 (1st Cir. BAP 2006).
 9   Therefore, we have jurisdiction under 28 U.S.C. § 158.
10                               III. ISSUES
11   1.   Did the bankruptcy court err in granting the IRS summary
12   judgment and allowing its Claim?
13   2.   Did the bankruptcy court err in determining that no portion
14   of the Claim was entitled to priority?
15                         IV. STANDARDS OF REVIEW
16        We review mixed questions of law and fact de novo.     Wechsler
17   v. Macke Int'l Trade, Inc. (In re Macke Int'l Trade, Inc.),
18   370 B.R. 236, 245 (9th Cir. BAP 2007).    "A mixed question exists
19   when the facts are established, the rule of law is undisputed, and
20   the issue is whether the facts satisfy the legal rule."     Id.
21   Thus, whether a claim is entitled to priority status is a mixed
22   question of law and fact that we review de novo.
23        We also review summary judgment orders de novo.     Tobin v. San
24   Souci Ltd. P’ship (In re Tobin), 258 B.R. 199, 202 (9th Cir. BAP
25   2001).   Viewing the evidence in the light most favorable to the
26   nonmoving party, we must determine "whether there are any genuine
27   issues of material fact and whether the trial court correctly
28   applied the relevant substantive law."    Id.   A fact is material if

                                     -22-
 1   it may affect the outcome of litigation.     Anderson v. Liberty
 2   Lobby, Inc., 477 U.S. 242, 248 (1986).      We may affirm an order
 3   granting summary judgment on any ground supported by the record.
 4   Simo v. Union of Needletrades, Indus. & Textile Emps., 322 F.3d
 5   602, 610 (9th Cir. 2003).
 6                               V. DISCUSSION
 7   A.   The bankruptcy court did not err when it granted the IRS's
          Counter MSJ and allowed its Claim.
 8
          1.     Section 502 and Rule 3001
 9
10        A timely filed proof of claim "constitutes prima facie
11   evidence of the validity and amount of the claim," Rule 3001(f),
12   and will be allowed unless a party in interest objects.     § 502(a).
13   Garner v. Shier (In re Garner), 246 B.R. 617, 620-21 (9th Cir. BAP
14   2000).    "Upon objection, the proof of claim provides some evidence
15   as to its validity and amount and is strong enough to carry over a
16   mere formal objection without more."    Lundell v. Anchor Constr.
17   Specialists, Inc. (In re Lundell), 223 F.3d 1035, 1039 (9th Cir.
18   2000).
19        To defeat a claim, the objector must come forward with
20   evidence that tends to rebut the claim by probative force equal to
21   that of the creditor’s proof of claim.      Id.; Ashford v. Consol.
22   Pioneer Mortg. (In re Consol. Pioneer Mortg.), 178 B.R. 222, 226
23   (9th Cir. BAP 1995), aff'd, 91 F.3d 151 (9th Cir. 1996). "'If the
24   objector produces sufficient evidence to negate one or more of the
25   sworn facts in the proof of claim, the burden reverts to the
26   claimant to prove the validity of the claim by a preponderance of
27   the evidence.'"    In re Consol. Pioneer Mortg., 178 B.R. at 226
28   (quoting In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d

                                      -23-
 1   Cir. 1992)).    Ultimately, the burden of persuasion rests with the
 2   claimant.    Lundell, 223 F.3d at 1039.
 3        The underlying rationale for this general rule is that a
 4   claimant in bankruptcy is in the same posture as a civil plaintiff
 5   in a nonbankruptcy case, who generally is assigned the burden of
 6   proving its claim against the defendant under nonbankruptcy law.
 7   See In re KDI Corp., 2 B.R. 503, 504 (Bankr. S.D. Ohio 1980);
 8   4 COLLIER ON BANKRUPTCY ¶ 502.02[3][f] (Alan N. Resnick & Henry J.
 9   Sommer eds., 16th ed. 2012).    In this case, however, the
10   applicable nonbankruptcy law is federal tax law, which generally
11   places the burden of persuasion upon the taxpayer to show that he
12   or she is not liable for the amount.      Trustee disputes the burden
13   of proof applied by the bankruptcy court.
14        2.     Analysis
15        "A bankruptcy court adjudicating a tax claim by the IRS must
16   apply the burden-of-proof rubric normally applied under tax law."
17   Neilson v. United States (In re Olshan), 356 F.3d 1078, 1084 (9th
18   Cir. 2004)(citing Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15,
19   20-21 (2000)).    "'In an action to collect taxes, the government
20   bears the initial burden of proof.'"      Id. (quoting Palmer v.
21   United States, 116 F.3d 1309, 1312 (9th Cir. 1997)(citing United
22   States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983))).        This
23   burden is automatically satisfied, however, by the production of
24   "deficiency determinations and assessments for unpaid taxes" by
25   the IRS, which are presumed correct "so long as they are supported
26   by a minimal factual foundation."    Id. (quoting Palmer, 116 F.3d
27   at 1312.    If such assessments have been issued and presented to
28   the court, the burden shifts to the taxpayer to show, by a

                                      -24-
 1   preponderance of the evidence, "that a [deficiency] determination
 2   is arbitrary, excessive or without foundation."   Id. (citing
 3   Palmer, 116 F.3d at 1312); Helvering v. Taylor, 293 U.S. 507, 515-
 4   16 (1935)).   Only if the taxpayer can meet this burden must the
 5   IRS produce additional proof to show that its determination was
 6   correct.   Id. (citing Keogh v. Comm'r, 713 F.2d 496, 501 (9th Cir.
 7   1983)).    The taxpayer also carries the burden of establishing
 8   entitlement to a tax deduction.    Norgaard v. Comm'r, 939 F.2d 874,
 9   877 (9th Cir. 1991).
10        At the summary judgment stage, the IRS, as the moving party,
11   satisfies its evidentiary burden once deficiency determinations
12   and assessments are produced.   See Palmer, 116 F.3d at 1312.     The
13   presentation of a Certificate of Assessments and Payments, also
14   known as Form 4340, for each tax year in question is sufficient.
15   Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992).     If
16   the taxpayer fails to rebut the presumption that these documents
17   are correct, the IRS is entitled to judgment as a matter of law.
18   See Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1983).      "In
19   reviewing the Commissioner's allocation of income under [IRC]
20   § 482, we focus on the reasonableness of the result, not the
21   details of the examining agent's methodology."    E.I. Du Pont de
22   Nemours & Co. v. United States, 608 F.2d 445, 454 (Ct. Cl.
23   1979)(citing Eli Lilly & Co. v. United States, 372 F.2d 990, 997
24   (Ct. Cl. 1967); Young & Rubicam, Inc. v. United States, 410 F.2d
25   1233, 1245 (Ct. Cl. 1969)).
26        Trustee argues that the bankruptcy court erred in giving the
27   NOD and Assessments the presumption of correctness and shifting
28   the burden to him to establish that the IRS's determinations were

                                       -25-
 1   arbitrary or capricious.    Trustee contends that IRC § 857(b)(7)(F)
 2   employs a "much lower" standard for allocating deductions between
 3   a REIT and its TRS; it allows them to use "any reasonable method,"
 4   as opposed to the traditional standard in IRC § 482, which allows
 5   the IRS to essentially reject the allocation method used by a
 6   non-REIT, pick its own method, and reallocate deductions
 7   accordingly to prevent the "avoidance of tax" and "clearly reflect
 8   income."   Trustee argues that as long as Debtor used a reasonable
 9   method to allocate the Management Deductions, then the IRS was not
10   entitled to any presumption that no other reasonable method
11   existed, or to reject Debtor's method.   We disagree.
12        To be sure, IRC § 857(b)(7)(F) allows a REIT and its TRS to
13   base their allocations on any reasonable method.   Further, the
14   IRS's exclusive remedy for improperly allocated deductions between
15   a REIT and its TRS is to impose on the REIT an exaction equal to
16   100% of the redetermined deductions, rather than reallocate the
17   deductions and adjust the income of the TRS.   IRC § 857(b)(7)(E).
18   However, no authority suggests, and Trustee has pointed to none,
19   that IRC §§ 482 and 857(b)(7) are mutually exclusive or that a
20   different or "much lower" standard applies when the IRS is
21   analyzing whether a transaction between a REIT and its TRS, as
22   opposed to other types of commonly controlled entities, was at
23   arm's length.   Although REITs have been given special benefits
24   under the Tax Code, its allocation methodology must still satisfy
25   the arm's length requirement of IRC § 482.   Therefore, regardless
26   of what method Debtor used, even if a reasonable one, it still had
27   to comply with IRC § 482.   See David Lee, Transfer Pricing Audits
28   and Taxable REIT Subsidiaries: Considerations and Cautions, 7

                                      -26-
 1   (July 11, 2011), www.us.kpmg.com /microsite/taxnewsflash/2011/...
 2   /071111-trs-audit.pdf (last visited Aug. 9, 2014)("Transfer
 3   Pricing Audits").
 4        We see no compelling reason to apply a different burden of
 5   proof in tax collection actions involving REITs under IRC § 857 as
 6   opposed to any other types of tax collection actions.      Further, as
 7   the IRS explained at the hearing on the Counter MSJ, during the
 8   IRS's examination of Debtor, it was determined that the allocation
 9   for the Management Deductions did not meet the principles outlined
10   in IRC § 482.   In other words, Debtor's allocation method was
11   found to be not reasonable.   Debtor protested this issue prior to
12   bankruptcy and apparently lost.    Subsequently, the IRS issued the
13   NOD and Assessments for tax years 2006, 2007 and 2009, which were
14   presented to the bankruptcy court.       These documents were entitled
15   to the presumption of correctness, as long as they were supported
16   by a minimal factual foundation.    Therefore, once the bankruptcy
17   court found that the NOD and Assessments were supported by a
18   minimal factual foundation, it did not err in shifting the burden
19   to Trustee to show that they were arbitrary, excessive or without
20   foundation.
21        Trustee disputes the bankruptcy court's findings that the IRS
22   had shown a minimal factual foundation for the NOD and
23   Assessments, thereby entitling the documents to the presumption of
24   correctness, and that he failed to rebut that presumption.      Again,
25   we disagree.    In making a determination of whether a transaction
26   between a REIT and its TRS was at arm's length, the IRS has broad
27   discretion to select the "best method" for measurement of an arm’s
28   length result from the many listed in Treas. Reg. § 1.482.

                                       -27-
 1   Transfer Pricing Audits at 7.    Courts have given the IRS broad
 2   leeway in the application of IRC § 482.     See Foster v. Comm'r,
 3   756 F.2d 1430, 1432 (9th Cir. 1985)(Commissioner has broad
 4   discretion under IRC § 482, and appellate court will not overturn
 5   his decision unless the taxpayer shows it to be unreasonable,
 6   arbitrary or capricious); E.I. Du Pont de Nemours & Co., 608 F.2d
 7   at 455; Nw. Nat'l Bank v. United States, 556 F.2d 889, 891 (8th
 8   Cir. 1977).    The best method is not required to be the same as or
 9   similar to the methods used by the taxpayer.      Transfer Pricing
10   Audits at 7.
11        Here, the IRS reallocated some of the Management Deductions
12   based on the method prescribed in the Burton Agreement — the value
13   of average invested assets.   For certain others, it accepted the
14   allocations as proposed by Debtor.      As such, we have difficulty
15   finding that the IRS's methodology was not reasonable when it
16   adopted a method of allocation that the Debtor either agreed to as
17   appropriate or actually utilized.    Plus, we also note that our
18   focus here is the reasonableness of the result, not the details of
19   the examining agent's methodology.      E.I. Du Pont de Nemours & Co.,
20   608 F.2d at 454.   Thus, the NOPAs, which provided the factual
21   basis for the IRS's reallocation of the Management Deductions,
22   established a minimal factual foundation for the NOD and
23   Assessments, and Trustee therefore had to show that they were
24   arbitrary, excessive or without foundation.
25        Trustee's rebuttal evidence consisted primarily of misplaced
26   argument that the IRS had failed to establish that the method used
27   by the IRS was reasonable.    He offered no evidence as to what
28   method Debtor used to allocate the Management Deductions, why that

                                      -28-
 1   method was reasonable or how that method was actually used to
 2   produce the allocations claimed.    Even Debtor's former accountant,
 3   Eide Bailly, had informed management that the allocated deductions
 4   were not acceptable, lacked documentation, and that the IRS would
 5   not accept them, which is why they were not included in the
 6   original 2006 tax returns.    McCarthy's testimony that Debtor's
 7   method was "reasonable," even presuming it was admissible, did not
 8   sufficiently rebut the presumption and show that the NOD and
 9   Assessments were arbitrary, excessive or without foundation.      Most
10   importantly, Trustee offered no evidence to show how much of the
11   Management Deductions could be properly deductible by TRS as
12   opposed to Debtor, and this deductibility was ultimately his
13   burden to show.    Norgaard, 939 F.2d at 877.
14        Accordingly, because Trustee did not rebut the presumption
15   that the NOD and Assessments were correct and show that any
16   genuine issues of material fact existed for trial, the IRS was
17   entitled to judgment that its Claim would be allowed as a general
18   unsecured claim.   See Hansen, 7 F.3d at 138.12   Therefore, we
19   discern no error by the bankruptcy court.
20   B.   The bankruptcy court did not err when it determined that no
          portion of the IRS's Claim was entitled to priority.
21
22        The Claim at issue here is based on an exaction imposed
23   against Debtor under IRC § 857(b)(7)(A) and equal to 100% of the
24
          12
             We disagree with Trustee's contention that the IRS's Claim
25   was in reality an erroneous refund suit, thereby putting the
     burden on the IRS to show that it was entitled to the money. As
26   the IRS explained, an erroneous refund suit is a special type of
     suit authorized under IRC § 7405 to recover a refund issued to a
27   taxpayer in error. The IRS had not brought such a suit and
     represented that it could not do so because no tax refund was
28   issued to Debtor; it was issued to non-debtor DC TRS.

                                      -29-
 1   Management Deductions that the IRS determined were improperly
 2   allocated to DC TRS for tax years 2006, 2007 and 2009 — the
 3   redetermined deductions.    The IRS concedes that a portion of the
 4   exaction functions as a penalty (punishing tax-avoiding maneuvers)
 5   and is not entitled to priority.    However, it argues that a
 6   portion of it functions as a "tax" to the extent it recaptures tax
 7   revenue lost from DC TRS (or is a penalty in compensation for
 8   actual pecuniary loss in the amount of such tax lost from DC TRS),
 9   and to that extent is entitled to priority.    Put another way, to
10   the extent IRC § 857(b)(7)(A) imposes liability on a parent REIT
11   that is in lieu of the additional corporate income tax that would
12   have been imposed on its TRS but for IRC § 857(b)(7)(E), the
13   exaction functions as a tax on the parent REIT.    The IRS contends
14   that this "tax" portion of the exaction is entitled to priority as
15   an income tax under § 507(a)(8)(A)(iii) or an excise tax under
16   § 507(a)(8)(E)(ii).13   Alternatively, if the entire exaction
17   functions as a penalty, the IRS contends that the portion of it
18   which compensates the government for the actual pecuniary loss
19
          13
               Section 507(a)(8)(A) & (E) provide in relevant part:
20
          Eighth, allowed unsecured claims of governmental units, only
21        to the extent that such claims are for—
22        (A) a tax on or measured by income or gross receipts for a
          taxable year ending on or before the date of the filing of
23        the petition —
                (iii) other than a tax of a kind specified in section
24              523 (a)(1)(B) or 523 (a)(1)(C) of this title, not
                assessed before, but assessable, under applicable law or
25              by agreement, after, the commencement of the case.
          . . .
26
          (E) an excise tax on—
27             (ii) if a return is not required, a transaction
               occurring during the three years immediately preceding
28             the date of the filing of the petition.

                                      -30-
 1   resulting from improperly allocated deductions is entitled to
 2   priority under § 507(a)(8)(G).14
 3        Trustee disputes the IRS's position and argues that recovery
 4   of lost tax revenue is not a component of recovery under IRC
 5   § 857(b)(7)(A).    Rather, the recovery is measured by the total
 6   amount of improper deductions and is not the difference between
 7   the tax paid by the TRS and the tax that the TRS should have paid
 8   had the deductions not been taken.      It is assessed against the
 9   parent REIT equal to the deductions that the IRS contends were
10   improperly allocated to the TRS.    In short, Trustee contends the
11   bankruptcy court was correct in holding that the exaction is a
12   penalty.
13        1.     Priority tax claims under § 507(a)(8)
14        Regardless of the specific subpart asserted by the IRS, all
15   of § 507(a)(8) requires the debt at issue to be either a tax debt
16   or a penalty related to a tax debt and in compensation for actual
17   pecuniary loss before it will qualify for priority treatment under
18   this subsection.    In re Towler, 493 B.R. 239, 242 (Bankr. D. Colo.
19   2013).    Non-pecuniary loss penalties are not entitled to priority
20   but may be allowed only as general unsecured claims.     Therefore,
21   in order to determine whether a certain portion of the IRS's Claim
22   is entitled to priority, we must decide whether the exaction under
23   IRC § 857(b)(7) is a non-pecuniary loss penalty or a tax.
24        The government exacts many types of payments from its
25   citizens.    "An 'exaction' is the 'action of demanding and
26
27        14
            Section 507(a)(8)(G) provides for priority treatment of "a
     penalty related to a claim of a kind specified in this paragraph
28   and in compensation for actual pecuniary loss."

                                      -31-
 1   enforcing payment (of fees, taxes, penalties, etc.).'"     In re
 2   Towler, 493 B.R. at 242 (quoting the Oxford English Dictionary
 3   Online, OED.com, http://www.oed.com/view/Entry/65523?redirected
 4   From=exaction (last visited Aug. 9, 2014)).     Some exactions, such
 5   as a fine for a speeding ticket, clearly are not taxes or a
 6   penalty related to a tax.   Id.    Whether an obligation is a tax
 7   within the meaning of the Bankruptcy Code is determined by federal
 8   law.   City of N.Y. v. Feiring, 313 U.S. 283, 285 (1941).
 9          2.   Analysis
10          The term "tax," found in IRC § 857(b)(7)(A) & (E) is not
11   defined in the Bankruptcy Code.     Examining the statutory text in
12   this case is equally unhelpful.     Nonetheless, statutory labels do
13   not control whether a specific exaction constitutes a tax or
14   penalty for the purposes of fixing priorities under § 507(a)(8).
15   Instead, courts are instructed to employ a "functional analysis"
16   to ascertain the "actual effects" of the exaction.     CF & I
17   Fabricators, 518 U.S. at 221.     As part of this functional
18   analysis, the Supreme Court particularly distinguished a "tax" and
19   a penalty related to a tax from a "penalty" that is unrelated to a
20   tax.   "[A] tax is an enforced contribution to provide for the
21   support of government; a penalty . . . is an exaction imposed by
22   statute as punishment for an unlawful act."     Id. at 224 (quoting
23   United States v. La Franca, 282 U.S. 568, 572 (1931)).     The
24   Supreme Court recently reaffirmed its approach to distinguishing
25   taxes from penalties in Nat'l Fed'n of Indep. Bus. v. Sebelius,
26   132 S.Ct. 2566, 2596-97 (2012).
27          Based on Feiring and its progeny, the Ninth Circuit in Cnty.
28   Sanitation Dist. No. 2 v. Lorber Indus. of Cal., Inc.

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 1   (In re Lorber), 675 F.2d 1062, 1066 (9th Cir. 1982), outlined four
 2   elements necessary for determining whether an exaction is a tax:
 3   (1) an involuntary pecuniary burden, regardless of name, laid upon
 4   individuals or property; (2) imposed by, or under authority of the
 5   legislature; (3) for public purposes, including the purposes of
 6   defraying expenses of government or undertakings authorized by it;
 7   and (4) under the police or taxing power of the state.    Most
 8   government exactions satisfy the second and fourth elements, which
 9   appears to be the case here.   Element one is likely met as well.
10   However, the third element of "public purpose" is not so clear.
11        We could not locate, and the parties have not cited, any case
12   or other authority determining whether the exaction imposed in
13   IRC § 857(b)(7)(A) is a penalty or a tax for purposes of priority
14   under § 507(a)(8).    However, in applying the CF & I Fabricators
15   standard to IRC § 857(b)(7)(A), we are persuaded that the
16   provision is a non-pecuniary loss penalty and not a tax for
17   purposes of bankruptcy priority.
18        In CF & I Fabricators, the debtor steel company failed to
19   make a required annual contribution of $12.4 million to an
20   employee pension plan under ERISA, and the IRS imposed an exaction
21   pursuant to IRC § 4971(a), which imposes on the employer a payment
22   equal to 10% (i.e., $1.24 million here) on any "accumulated
23   funding deficiency" of certain pension plans.    518 U.S. at 216-17.
24   If the employer fails to correct the deficiency before the earlier
25   of a notice of deficiency or assessment, the employer is also
26   obligated to pay an additional "tax" of 100% of the accumulated
27   funding deficiency.   IRC § 4971(b).    In applying a functional
28   analysis to determine whether the exaction at issue was a tax or

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 1   penalty, the Supreme Court held that the exaction's "patently
 2   punitive function" rendered it a non-tax related penalty rather
 3   than an excise tax, as claimed by the IRS, and was a general
 4   unsecured claim.   Id. at 225-26.
 5        Other comparable penalty versus tax cases are those involving
 6   IRC § 72(t), which imposes a 10% exaction on the premature
 7   withdrawal of pension plan funds.   The Tenth Circuit in United
 8   States v. Dumler (In re Cassidy), 983 F.2d 161, 164-65 (10th Cir.
 9   1992), held that the exaction was a flat rate penalty designed to
10   be punitive in nature, and not one for actual pecuniary loss,
11   because it bore no relationship to the direct financial loss of
12   the government.    Accord In re Crespedes, 393 B.R. 403, 409 (Bankr.
13   E.D. N.C. 2008)(holding same); In re Mounier, 232 B.R. 186, 192-93
14   (Bankr. S.D. Cal. 1998)(10% penalty for early pension withdrawal
15   does not satisfy "public purpose" test of Lorber since the
16   purported tax did not support the government but was meant to
17   prevent retirement plans from being treated as savings accounts by
18   individuals).
19        Here, the IRS's own documents establish that the portion of
20   the exaction it contends is entitled to priority is not a "tax"
21   designed to recover the alleged lost tax revenue from DC TRS.     The
22   NOPAs set forth the IRS's calculations for the reallocation of the
23   Management Deductions.   If one subtracts Column 2 (the Allowed
24   Allocation to DC TRS) from Column 1 (the Original Amount Allocated
25   to DC TRS), that yields the figure set forth in Column 4 — the
26   100% exaction imposed against Debtor under IRC § 857(b)(7)(A).
27   Adding all of the numbers in Column 4 for the three tax years at
28   issue results in a sum of $1,554,588, which is the principal

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 1   amount the IRS asserts is entitled to priority in its Claim.    The
 2   remainder portion it asserts is entitled to priority is the
 3   interest on this principal up to the petition date, some $331,000.
 4   This number is not a recalculation of income taxes due by DC TRS;
 5   it is a straight application of the 100% penalty imposed against
 6   Debtor for the improperly allocated Management Deductions.
 7   Nothing whatsoever about this amount correlates to what DC TRS
 8   would have paid in corporate income tax but for the in-lieu remedy
 9   against Debtor under IRC § 857(b)(7)(E).    Thus, an exaction under
10   IRC § 857(b)(7)(A) is not a tax intended to support the government
11   but, rather, functions as a penalty against a parent REIT for its
12   improperly allocated deductions to its TRS.
13        Because we conclude that the 100% exaction imposed under IRC
14   § 857(b)(7)(A) is a non-pecuniary loss penalty, we reject the
15   IRS's alternative argument that its Claim is entitled to priority
16   under § 507(a)(8)(G).   For that provision to even apply, the
17   exaction at issue would have to relate to a "tax" under
18   § 507(a)(8)(A)-(F), which is does not.   See Ohio Bureau of
19   Workers' Comp. v. Yoder (In re Suburban Motor Freight, Inc.),
20   36 F.3d 484, 489 (6th Cir. 1994)(applying former § 507(a)(7)(G)
21   and holding that to qualify for priority, the financial exaction
22   must (1) relate to a tax, (2) be penal in nature, and (3) be
23   compensatory for actual pecuniary loss rather than punitive).
24   Accordingly, we conclude that the bankruptcy court did not err
25   when it sustained Trustee's objection and denied priority status
26   to the IRS's Claim.
27                              VI. CONCLUSION
28        For the foregoing reasons, we AFFIRM.

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