Reply Brief — Florida Department of Revenue v. General Development Corp.

3 Supreme Court, us.

( PteLkr bp

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No. 95-2069 SEP ¥ 1996

CLERK

IN THE

Supreme Court of the Gnited States

October Term, 1995

STATE OF FLORIDA DEPARTMENT OF REVENUE, and

CONTINENTAL CASUALTY COMPANY,

Petitioners,

v.

GENERAL DEVELOPMENT CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

REPLY TO BRIEF IN OPPOSITION

KENT L. WEISSINGER PAUL M. DODYK

Assistant General Counsel Counsel of Record

FLORIDA DEPARTMENT OF

REVENUE Jeffrey L. Nagel

P.O. Box 6668 CRAVATH, SWAINE & MOORE

Tallahassee, FL 32314 Worldwide Plaza

(904) 921-2151 825 Eighth Avenue

New York, NY 10019-7475

Attorney for Florida (212) 474-1000

Department of Revenue

Attorneys for Continental

Casualty Company

September 9, 1996

§

5

i

TABLE OF CONTENTS

Page

Be a EP EEE hanes cla o's o eo wee il

SPURTE SG so cs oe CO kc ke be heen ye l

I. THE ELEVENTH CIRCUIT REFUSED TO

FOLLOW FEIRING AND KING ............ 2

A. The Eleventh Circuit Adopted Florida

State Law In Defining The Terms

“Assessed” And “Assessable” In The

Federal Bankruptcy Code........... 2

B. The Eleventh Circuit Decision Conflicts

With Supreme Court Precedent ......... 3

C. The Eleventh Circuit Decision Creates

I eT i a ke eia wk as 4

II. THE DECISION BELOW IS IMPORTANT

TO STATE TAXING AUTHORITIES

BECAUSE IT DISRUPTS THE UNIFORM

TREATMENT OF STATE TAXES IN

I Ce ers Saeed ss 7

II. THE TAX WAS CLEARLY ASSESSED “BY

AGREEMENT” WITHIN THE MEANING

OF THE GANBRUPICY CODE ........... 8

6 or eet eM pe as beens o% 9

il

TABLE OF AUTHORITIES

Page(s)

Cases

City of New York v. Feiring, 313 U.S. 283

C198]) cos saa ea 1,3,4

Franchise Tax Bd. v. Bracey (In re Bracey),

TT FSG 294 (Oe GC TS ss here 6, 7

King v. Franchise Tax Bd. of California (In re

King), 961 F.2d 1423 (9th Cir. 1992) ....... passim

Laing v. United States, 423 U.S. 161 (1976) .... 3

Wernimont v. lowa Dept of Rev. (In re

Wernimont), 183 B.R. 181 (Bankr. N.D.

lows 1996) ofa oes eee ees 6, 7

Statutes

26 WGK EGE See eee ae 3

26 USA, $6253 56a eee 3

26 U.S. 6 TASS 8 i ea ee 3

26 USL. © TAGS 6 ei see eee 3

INTRODUCTION

The linchpin of Respondent’s Brief in Opposition is its

argument that the Eleventh Circuit did not resort to Florida

State law for a definition of the terms “assessed” and

“assessable” in the Federal Bankruptcy Code. (Opp. 4).

Respondent is plainly wrong. Even the most cursory

reading of that opinion makes it unmistakably clear that the

Eleventh Circuit drew its definition of these terms from

Florida law: for example, “... only one Florida Statute

provided a definition of the conditions of assessment.” (Pet.

A-7; see also Pet. A-6, A-9, A-11).

Respondent’s Opposition is an extended attempt to

confuse the definition of the terms “assessed” and

“assessable”, as they appear in the Bankruptcy Code, with the

findings concerning “applicable” state law necessary to the

application of that Federal definition to the tax law of a

particular state. The definition of the terms “assessed” and

“assessable” is a matter of Federal law. See King v. Franchise

Tax Bd. of California (In re King), 961 F.2d 1423 (9th Cir.

1992); City of New York v. Feiring, 313 U.S. 283 (1941). In

determining whether the state’s assertion of its tax in a

particular case satisfies the Federal definition of “assessed”’,

the Federal court of course must reference state law. King,

961 F.2d at 1426-27; Feiring, 313 U.S. at 285. Reference to

state law, in applying the Federal definition of “assessment”,

is in nO way inconsistent with the rule that Federal law

defines terms in the Federal bankruptcy laws.

In contrast, the Eleventh Circuit erroneously held that

Florida State law supplies the definition of “assessment.” (Pet.

A-6, A-7, A-9, and A-11). Because that holding conflicts with

the Court’s holding in Feiring and the analysis of other

Federal courts that have considered the question, it should be

reviewed by this Court and reversed. (Pet. 8-11).

2

I. THE ELEVENTH CIRCUIT REFUSED TO

FOLLOW FEIRING AND KING

A. The Eleventh Circuit Adopted Florida State

Law In Defining The Terms “Assessed” And

“Assessable” In The Federal Bankruptcy

Code.

Despite Respondent’s attempts to confuse, it is

unmistakably clear that the Eleventh Circuit used Florida law

to define the terms “assessed” and “assessable” in the Federal

Bankruptcy Code. After describing the facts, the Eleventh

Circuit states: “Based on the provision’s use of the term

‘applicable law,’ it is apparent that state law should govern

the determination of when a state corporate tax is considered

assessed.” (Pet. A-6). The court goes on: “Accordingly, we

must look to Florida law to determine when GDC’s tax

liability was considered assessed.” (/d.). If these references

contain any ambiguity as to what the court was doing, it

proceeded to say: “. .. only one Florida statute provided a

definition of the conditions of assessment.” (Pet. A-7).

The Eleventh Circuit then proceeded to reject Petitioner’s

argument that “the tax is not assessed until the amount is

finally liquidated and subject to collection” under Federal law

on the grounds that “this is not what the plain meaning of the

Florida statutes suggest.” (Pet. A-9). In applying the wrong

law, the Eleventh Circuit not surprisingly reached the wrong

result. The Eleventh Circuit denied priority to the Florida tax

claim by finding that Florida’s “assessment” occurred some

10 years before the tax became final and collectible. That

result imposes a severe disadvantage uniquely applicable to

the Florida taxing authority.

Respondent’s bold assertion that the concept of assessment

has never been defined in terms which made its incidence

subsequent to judicial proceedings overlooks the Internal

Revenue Code. (Opp. 7-8). Under the Internal Revenue Code,

3

a Federal creditor is prohibited from making an “assessment”

until the decision of the tax court, the circuit court, and this

Court all render a final decision. An “assessment” under the

Code is a bookkeeping notation made when the Secretary

establishes an account against the taxpayer on the tax rolls.

Laing v. United States, 423 U.S. 161, 170 n.13 (1976). The

assessment shall not be made “until the decision of the Tax

court has become final.” 26 U.S.C. § 6213(a) (emphasis

added). Finality occurs after review by the circuit court and

this Court. See 26 U.S.C. §§ 6215, 7483 (notice of appeal),

7485 (stay of assessment).

Furthermore, the concept of finality adopted for the

Federal definition of assessment by the Ninth Circuit in King

entails completion of all proceedings upon which collection

of the tax is dependent, whether judicial or administrative in

nature. Respondent’s argument that an assessment must occur

before judicial review is insupportable. To the contrary, the

concept of assessment is customarily defined in terms which

require the completion of all administrative and judicial

proceedings to determine the validity of a tax claim. To

Petitioner’s knowledge, the only court which has imposed a

definition of assessment that occurs prior to the completion

of all administrative or judicial proceedings necessary to

establish liability is the Eleventh Circuit in this case.

B. The Eleventh Circuit Decision Conflicts With

Supreme Court Precedent.

Respondent’s attempt to reconcile the Eleventh Circuit’s

opinion with this Court’s opinion in Feiring is a transparent

extension of its attempt to confuse the question of what law

applies to define terms in the Federal bankruptcy laws with

the reference to state law entailed in the application of the

Federal definition to a state tax in a particular case. In

4

Feiring, this Court clearly held that terms in the Federal

bankruptcy laws are to be determined by Federal law:

“Whether the present obligation is a ‘tax’ entitled to

priority within the meaning of the [Federal bankruptcy]

statute is a federal question. . .. Hence we look to the

terms and purposes of the Bankruptcy Act as establishing

the criteria upon the basis of which the priority is to be

allowed.” Feiring, 313 U.S. at 285.

The Feiring Court was equally clear in holding that

reference is made to state law only to determine whether the

facts of the particular case satisfy the Federal definition in

application of the bankruptcy laws:

“The particular demand for which the City now claims

priority of payment as a tax is created and defined by

state enactment. We turn to its provisions and the

decisions of the state courts in interpreting them, not to

learn whether they have denominated the obligation a

‘tax’ but to ascertain whether its incidents are such as to

constitute a tax within the meaning of [the Federal

Bankruptcy Act].” Jd. (emphasis supplied).

The Eleventh Circuit refused to follow Feiring by

adopting a state-law definition of “assessment.” Respondent

attempts to shield the Eleventh Circuit’s decision from review

by confusing the definition of a statutory term with its

application. Petitioners respectfully submit that Respondent’s

Opposition provides no legitimate basis for denying certiorari

and that certiorari should be granted to correct the Eleventh

Circuit’s erroneous refusal to apply Federal law.

C. The Eleventh Circuit Decision Creates Inter-

Circuit Conflict.

Respondent further argues that the decision below creates

no conflict with the Ninth Circuit case of King v. Franchise

Tax Bd. of California (In re King), 961 F.2d 1423 (9th Cir.

1992), relying on its arguments that the Eleventh Circuit

. | —-

5

“differentiated the procedural posture of the two cases” and

“distinguished the statutory delineation of the moment of

assessment in California from that in Florida.” (Opp. 13).

Neither of these arguments address the conflict between

the Ninth and Eleventh Circuits. That conflict arises from the

fact that the Ninth Circuit relied on Federal law in adopting

a definition of assessment generally applicable under the

Federal Bankruptcy Code defined in terms of finality, whereas

the Eleventh Circuit adopted the Florida state definition,

irrespective of finality. Compare King, 961 F.2d at 1427 with

Pet. A-7, A-9.

As for Respondent’s distinctions, the procedural posture

of King was irrelevant to the Ninth Circuit’s definition of an

assessment as “a formal act with significant consequences”

that “cannot occur before it is final.” King, 961 F.2d at 1427.

The procedural posture was relevant only in determining

whether the tax, according to the applicable law, met that

definition. Applying the court’s general definition, the

assessment in King was “final” as of the date the ability of

the taxpayer to appeal lapsed. Jd. Contrary to Respondent’s

argument, the question of what law should be applied to

define the term “assessed” in the Federal Bankruptcy Code

cannot logically depend upon the taxpayer’s conduct in a

particular case.

Similarly, a state’s “delineation” of the “moment of

assessment” is precisely what the King court concluded was

not controlling in determining whether an act of assessment

has occurred. The Court clearly stated: “California’s failure

to label a certain event as the act of assessment does not,

however, control the disposition of our inquiry. We examine

state-created rights so that they can be translated into the

bankruptcy process.” Jd. at 1426. The fact that California

failed to delineate the moment of “assessment” and Florida,

according to the Eleventh Circuit, has done so, is irrelevant.

The point is that neither California nor Florida law can define

6

an act as one of “assessment” under the Federal Bankruptcy

Code, but can only set forth tax collection procedures that a

Federal court must examine to determine whether the tax

meets or fails to meet a uniform Federal definition.

Equally unavailing is Respondent’s reliance on the

decisions in Franchise Tax Bd. v. Bracey (In re Bracey), 77

F.3d 294 (9th Cir. 1996) and Wernimont v. lowa Dept of

Rev. (In re Wernimont), 183 B.R. 181 (Bankr. N.D. lowa

1994). (Opp. 13-14). Both cases support the Petitioners.

Bracey reaffirmed the Ninth Circuit’s decision in King

which defined the term “assessed” not by looking to state law,

but by applying a uniform Federal definition of that term. /d.

at 295.' The Ninth Circuit looked to state law in Bracey only

to determine whether a tax protest had been timely “filed”

because such an appeal would prevent the tax from being

final—i.e. “assessed.” Jd. at 295-96.

Respondent’s reliance on Wernimont is also misplaced.

Wernimont recognized the definition of “assessment”

employed in King—and did not derive its definition of

“assessment” from Iowa law. Jd. at 184. Only after the correct

Federal definition of “assessed” was set forth did the court

“{a]pply[] these definitions to lowa law” to determine whether

an “act of assessment” occurred. Jd.

Nothing in either Bracey or Wernimont lends support to

the Eleventh Circuit’s practice of borrowing definitions of

assessment from the laws of the various states to define the

| Bracey also demonstrates that the procedural posture of the case

has nothing to do with the meaning given by the Ninth Circuit to the term

“assessed.” (Opp. 13 n.2). In Bracey, the taxpayer did appeal the

assessment by filing a formal protest. The King rule and Federal law apply |

whether the taxpayer appeals or not. The taxpayer’s timely protest in ;

Bracey meant that the “assessment” by the State of California was not yet

“final” under the King criteria. Bracey, 77 F.3d at 296. This is precisely

the situation here.

7

term “assessment” as it appears in the Federal Bankruptcy

Code. To the contrary, both cases rely on King and adopt a

uniform Federal definition of “assessment,” making it clear

that King, Bracey and Wernimont all follow Federal law.

Ii. THE DECISION BELOW IS IMPORTANT TO

STATE TAXING AUTHORITIES BECAUSE IT

DISRUPTS THE UNIFORM TREATMENT OF

STATE TAXES IN BANKRUPTCY

Respondent suggests that because “‘a taxpayer had the

obligation either to pay in full the amount of tax in dispute

or to post a bond that guarantees payment”, Florida has little

interest in the outcome of this dispute.” (Opp. 15). The

argument misses the point. At issue here is whether the

Federal Bankruptcy Code should discriminate between

identical claims arising under the laws of different states

based on the way in which each state defines the term

“assessed.” The Eleventh Circuit’s decision disrupts the

uniform application of the Federal Bankruptcy Code by

rejecting the necessity of a uniform Federal definition of the

term “assessed”. The Eleventh Circuit’s decision also

frustrates the intent of the Bankruptcy Code by denying

priority to DOR’s claim even though the DOR was unable to

collect from GDC prior to GDC’s bankruptcy because its

claim had not been finalized.

2 The fact that GDC bonded its liability in this case is immaterial.

Unless the Eleventh Circuit’s decision is reversed, the Court may rest

assured that the Circuit’s accelerated definition of assessment will afford

taxpayers ample opportunity to delay payment beyond “assessment”

without bonding. Bonding is required in the Federal system when a

taxpayer appeals a decision from the Tax Court to the Court of Appeals,

but assessment does not occur until final disposition of the matter by the

circuit court and this Court. See supra p.3.

8

Ill. THE TAX WAS CLEARLY ASSESSED “BY

AGREEMENT” WITHIN THE MEANING OF

THE BANKRUPTCY CODE

Respondent claims that the parties’ agreement to GDC’s

liability for tax and the amount of that liability did not

constitute an assessment by agreement despite the fact that the

parties’ agreement rendered the tax claim final because the

parties reserved their positions as to the priority in bankruptcy

of these tax claims.*

If King correctly defined the term “assessment” in terms

of finality, the parties’ agreement to GDC’s tax liability

would necessarily constitute an assessment by agreement. To

permit private parties to defeat characterization of their

agreements as “assessments by agreement” by imposing

conditions that relate to the priority of a tax claim in

bankruptcy would allow parties to define terms under the

Federal Bankruptcy laws. The Eleventh Circuit delegated the

definition of terms in the Federal Bankruptcy laws to an

agreement between the parties. Petitioners urge this Court to

grant certiorari to correct this unprecedented deviation from

the applicability of Federal law to determine the meaning of

a Federal statute.

3 Respondent and the Eleventh Circuit also argue that the parties’

agreement cannot be an assessment by agreement because it constitutes

a settlement of litigation. That position is obviously untenable. There is

no authority or logic for the exclusion of “settlements” from assessments

by “agreement” as an abstract matter. In this context, where the parties’

agreement renders a state tax claim final, the tax is “assessed by

agreement.”

a

CONCLUSION

| The petition for a writ of certiorari should be granted.

KENT L. WEISSINGER

Assistant General Counsel

FLORIDA DEPARTMENT OF

REVENUE

P.O. Box 6668

Tallahassee, FL 32314

(904) 921-2151

Attorney for Florida

Department of Revenue

September 9, 1996

Respectfully submitted,

PAUL M. DODYK

Counsel of Record

Jeffrey L. Nagel

CRAVATH, SWAINE &

MOORE

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019-7475

(212) 474-1000

Attorneys for Continental

Casualty Company