Opinion ID: 602380
Heading Depth: 1
Heading Rank: 2

Heading: standard of review

Text: Courts of appeal set aside a bankruptcy court's factual findings when such findings are clearly erroneous; however, courts of appeal apply a de novo review to a bankruptcy court's legal conclusions. In the Matter of Luce, 960 F.2d 1277, 1280 (5th Cir.1992); In the Matter of Nicholas, 956 F.2d 110, 111 (5th Cir.1992). In deciding whether a lower court erred in determining that a party failed to satisfy its burden of proof, a reviewing court applies the clearly erroneous standard. Bartmess v. Federal Crop Ins. Corp, 845 F.2d 1258, 1261 (5th Cir.1988); McDaniel v. Temple Indep. School Dist., 770 F.2d 1340, 1346-47 (5th Cir.1985); Tulia Feedlot, Inc. v. United States, 513 F.2d 800, 806-07 (5th Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 362, 46 L.Ed.2d 281 (1975). A reviewing court may set aside a lower court's finding when the reviewing court has a  'firm and definite conviction that a mistake has been committed.'  McDaniel, 770 F.2d at 1347 (quoting Oil, Chemical and Atomic Workers Int'l Union v. Ethyl Corp., 703 F.2d 933, 935 (5th Cir.1983)); Bartmess, 845 F.2d at 1261; Tulia Feedlot, 513 F.2d at 806-07. Placid's Evidence as to its Professional Fees and Expenses Placid provided the Bankruptcy Court with different kinds of evidence as to the bankruptcy-related and nonbankruptcy fees and expenses it paid its lawyers and accountants. The Bankruptcy Court had the fee applications themselves, with detailed descriptions of the nature of the services performed and the corresponding fee amounts. Placid took the fees and expenses of its primary outside law firm, two other law firms, and two accounting firms, and allocated those into three categories: substantive bankruptcy-related fees and expenses; procedural bankruptcy-related fees and expenses; and claims, operations, etc., which encompassed ordinary business transactions and ongoing business operations. Placid admits that it cannot establish the precise amounts of all the nonbankruptcy professional fees and expenses it sought to deduct. However, many of the professional billings are broken down by specific matters, such as the defense of cases in which Placid had been sued. As to these matters, there appears to be little question as to the amounts or the nature of the underlying transaction or event. Other professional billings for fees and expenses are not broken down into specific items. Placid's allocations estimated the amounts of fees and expenses attributable to these matters. Placid also provided supporting evidence as to the amounts and as to the nature of the underlying transactions in the fee applications that the Bankruptcy Court had already considered and approved. This court holds that Placid did provide enough information to meet its burden and shift the final burden of disallowing the claimed deductions to the IRS. The Bankruptcy Court should have considered the evidence as to the existence and amounts of the professional fees and expenses at issue. The evidence was sufficient to meet the IRS' prima facie case of nondeductibility and shift back to the IRS the burden of proving that the nonbankruptcy fees and expenses be disallowed. In particular, the three-part chart broke down the professional fees and expenses into categories that are capable of being allocated among currently deductible expenses, amortizable capital expenses, and expenses that must be allocated to basis.  See, e.g., Record Vol. 2, Exs. 2-5, pp. 50-57. The Supreme Court recently reiterated that the  'decisive distinctions' between current expenses and capital expenditures are 'those of degree and not of kind'  and that each case must be decided according to its specific facts. Indopco, Inc. v. Commissioner of Internal Revenue, --- U.S. ----, ----, 112 S.Ct. 1039, 1044, 117 L.Ed.2d 226 (1992). In deciding whether a particular fee or expense should be considered deductible, the Bankruptcy Court should consider a mix of factors, including (1) the nature of the fee or expense; (2) the relationship between the fee or expense and the reorganization; (3) the person or entity who incurred the expense; (4) the form and structure of the particular transaction; (5) whether the transaction was actually consummated; and (6) the ability of the taxpayer to identify with reasonable exactitude the functional steps of the reorganization to which the fees and expenses relate. Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders, p 5.06, 5-34 (5th ed. 1987); see, e.g., Woodward v. Commissioner of Internal Revenue, 397 U.S. 572, 575-79, 90 S.Ct. 1302, 1305-07, 25 L.Ed.2d 577 (1970) (examining nature of the claim and relationship of the expenses to the transaction); United States v. Hilton Hotels Corporation, 397 U.S. 580, 583-85, 90 S.Ct. 1307, 1309-10, 25 L.Ed.2d 585 (1970). The Bankruptcy Court concluded that all Placid's professional fees and expenses incurred during bankruptcy were to be capitalized to an intangible asset, without the benefit of amortization. The Bankruptcy Court reached this conclusion in part by finding that certain fees and expenses were capital expenses, but then ruling that these expenses could not be segregated from nondeductible fees and expenses. On remand, the Bankruptcy Court should not bind itself by a sweeping characterization that Placid's bankruptcy proceedings were in substance a reorganization, with the result that all Placid's bankruptcy-related fees and expenses must be capitalized to an intangible asset without amortization. I.R.C. § 368. On remand, the Bankruptcy Court should analyze all the fees and expenses to identify them as: 1) currently deductible; 2) amortizable over the period of the useful life of the underlying transaction or event; and 3) allocated to nonamortizable intangible assets. See The Denver & Rio Grande Western Railroad Co. v. Commissioner of Internal Revenue, 32 T.C. 43, 51-52 (1959), aff'd, 279 F.2d 368 (10th Cir.1960); see also, Woodward, 397 U.S. at 575-79, 90 S.Ct. at 1304-07; Hilton Hotels, 397 U.S. at 583-85, 90 S.Ct. at 1308-09; Great Western Power Co. of California v. Commissioner of Internal Revenue, 297 U.S. 543, 546-47, 56 S.Ct. 576, 577, 80 L.Ed. 853 (1936). For example, professional fees and expenses that are related to restructuring a specific debt and therefore conferred a specific long-term benefit are to be capitalized with an amortization period equivalent to the useful life of that underlying transaction. Included in the Bankruptcy Court's task on remand is to distinguish between professional fees and expenses for initiating and administering the bankruptcy proceedings, as opposed to those fees and expenses that are directly related to a particular asset or debt transaction. Given the evidence Placid presented to the Bankruptcy Court, this court is left with the firm conviction that the Bankruptcy Court erred in holding that Placid did not sustain its burden to rebut the IRS's prima facie case. Because it was error to hold that Placid did not sustain its burden, this court REVERSES and REMANDS. On remand, the Bankruptcy Court is ordered to reexamine the record to segregate among currently deductible, amortizable, and nonamortizable professional fees and expenses for the 1986 and 1987 tax returns. If necessary, the Bankruptcy Court should allow the parties an opportunity to supplement the record to provide a more detailed categorization of fees and expenses, as outlined above. REVERSED AND REMANDED.