In re: AFFORDABLE PATIOS & SUNROOMS, Dba Reno Patio and Fireplaces, NV-21-1085-TFL

Affordable Patios & Sunrooms (the Debtor) and related entities operated Mill Street Auto on land held in trust for Reno-Sparks Indian Colony (RSIC); Mill Street Auto owed RSIC sales taxes under RSIC Ordinance 31.
Mill Street Auto failed to file sales tax returns for certain periods; RSIC assessed Estimated Taxes, Estimated Tax Penalties, Late Penalties, and Interest, totaling $112,540.25.
Chapter 7 Trustee Christopher Burke filed suit, obtained substantive-consolidation-type relief by settlement, and objected to RSIC’s claim arguing cap under § 502(b)(6), that RSIC was not a governmental unit, that estimates lacked basis in actual receipts, and that penalties were nonpriority.
Bankruptcy court overruled the objection and allowed RSIC’s claim in full as an unsecured priority tax claim under § 507(a)(8), without detailed findings; Trustee appealed.
On appeal the BAP held RSIC provided sufficient proof for the Estimated Taxes and Interest and the Trustee waived certain arguments, but reversed the bankruptcy court as to priority treatment of the automatic percentage-based Late Penalties and Estimated Tax Penalties.

Issue	Trustee's Argument	RSIC's Argument	Held
Sufficiency of proof for Estimated Taxes	Estimates not tied to historical sales; RSIC should have audited	RSIC submitted tax-manager affidavit; assessments presumptively valid under Ordinance and tax-law principles	RSIC met its burden; Trustee failed to rebut; Estimated Taxes and Interest allowed
Compliance with Ordinance 31 notice procedures	RSIC failed to provide required written notice and appeal rights for estimates	No such challenge was raised below; record insufficient	Issue waived on appeal for failure to raise in bankruptcy court
RSIC status as a "governmental unit" under § 507(a)(8)	RSIC not a governmental unit, so no priority	RSIC is a governmental unit under applicable precedent	Argument waived on appeal; BAP noted Ninth Circuit precedent supports RSIC's status
Priority of tax penalties under § 507(a)(8)(G)	Penalties should not be priority because punitive, not compensatory	Penalties relate to the tax claim and were asserted as part of claim	Penalties are percentage-based and punitive (not tied to RSIC's pecuniary loss); not entitled to priority (reversed as to penalties)

Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035 (9th Cir. 2000) (standard of review and burden-shifting on claim objections)
Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15 (U.S. 2000) (tax disputes commonly place burden of proof on taxpayer)
Neilson v. United States (In re Olshan), 356 F.3d 1078 (9th Cir. 2004) (presumption of correctness for tax assessments; taxpayer must show assessment is arbitrary)
Washington v. Hovan, Inc. (In re Hovan, Inc.), 96 F.3d 1254 (9th Cir. 1996) (percentage-based penalties that do not reference specific costs are punitive, not compensatory)
Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055 (9th Cir. 2004) (Indian colony can qualify as a "governmental unit" under bankruptcy definitions)
Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir. 2010) (clear-error standard for factual findings)