Respondents Brief — Raleigh v. Illinois Dept. of Revenue

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No. 99-387 FILED

“WAR 2 tt

fs)

Mar QD olevo o | eta Court, U.S.

In the

Supreme Court of the Ani

THOMAS E. RALEIGH, Chapter 7 Trustee

for the Estate of William J. Stoecker,

Petitioner,

STATE OF ILLINOIS,

DEPARTMENT OF REVENUE,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Seventh Circuit

BRIEF FOR THE RESPONDENT

JAMES E. RYAN

Attorney General of Illinois

JOEL D. BERTOCCHI

Solicitor General of Illinois

A. BENJAMIN GOLDGAR

Counsel of Record

JAMES D. NEWBOLD

Assistant Attorneys General

100 West Randolph Street

12th Floor

Chicago, Illinois 60601

(312) 814-2090

Counsel for Respondent

Printed by Authority of the State of Illinois (P.O. 27347—60—3-23-00)

BEST AVAILABLE COPY Sammi

enn re

. QUESTION PRESENTED

Whether the burden of proof that applies to govern-

ment tax claims in state court—a burden that substan-

tive tax law ordinarily places on the taxpayer to disprove

his liability—is reversed and falls on the government

when the government brings a tax claim in the bank-

ruptcy court.

TABLE OF CONTENTS

PAGE

QUESTION PRESENTED ......ccccccccccccs i

TABLE OF AUTHORITIES ................. iv

STATEMENT OF THE CASE ........cccccccs 1

1. Chandler Enterprises and Stoecker ...... 1

2. Chandler’s Purchase of the Aircraft ...... 2

S. The Tinsio Use TOR oi osccctnsscien 3

4. The Department’s Claim .............. 5

5S. Pressedings BOGW . «csc cteseesieuee 8

SUMMARY OF THE ARGUMENT ........... 10

PX, Pee er eee 12

I. ERSTE 66+ kb vhs ben eee 12

II. THE BURDEN OF PROOF FROM SUB-

STANTIVE TAX LAW APPLIES WHEN

TAX CLAIMS ARE FILED IN BANK-

RUPTCY PROCEEDINGS .......cce0. 13

A. State Law Governs A Creditor’s

Rights In Bankruptcy Unless Some

Federal Interest Dictates Other-

WED oc cet ced iesneas eee 13

B. Burdens Of Proof Are Substantive

Law And One Of A Creditor’s Non-

Bankruptcy Rights ............. 16

C. No Federal Interest Displaces The

State Law Burden Of Proof For

ed dank od ne ab 66 6s ¢

1. The Bankruptcy Code And

Rules Establish No Burdens Of

Proof For The Allowance Of

OO ee

2. The Trustee Identifies No Oth-

er Federal Interest That Dis-

places The Tax Law Burden Of

Ee cee 6 ce wk koe 64

3. Federal Policies Support The

Use Of The State Law Burden

Of Proof In Bankruptcy ......

Ill. THE TRUSTEE’S HISTORICAL AP-

PROACH IS NO SUBSTITUTE FOR THE

ANALYSIS BUTNER REQUIRES ......

A. Past Practice Under The Bank-

ruptcy Act Is An Aid To Construc-

tion, Not A Way Of Filling Gaps In

EY Din. ie ood thee ae ee 6

B. There Was No Accepted Judicial

Practice Under The Act Of Placing

The Burden Of Proof On Tax Cred-

Dt chew e sn Cech hb SO 666 OC 866 ¢

EEE coc evccseccccccesccccces

TABLE OF AUTHORITIES

Cases PAGE(S)

American Dredging Co. v. Miller,

Se Ge SP oe eetecccccncsccée 17-18

Andrew Crispo Gallery, Inc. v. Comm’r,

16 F.3d 1336 (2nd Cir. 1994) .......... 29 n.9

Arkansas v. Farm Credit Servs.,

Sy CE ie ok sad ono os ate 31

Atherton v. F.D.1.C.,

Cae Gas SP GREUD vc ccvecsvenccess< 35, 36

Barnhill v. Johnson,

ee ee one. ca déedneeaue 15, 23

Barrows v. L.R.S.,

231 B.R. 446 (D.N.H. 1906) .............. 28

Begier v. L.R.S.,

SA EEE oc cdecdcscicetacouseee 24

Benedict v. Ratner,

es CED. an. oe 6606 déneeedbens 38

BFP v. Resolution Trust Corp.,

511 U.S. 531 (1994)............ 15, 20, 35, 36

Bryant v. Swofford Bros. Dry Goods Co.,

ee ee ES n4sak cove bbs deeGaees 38

Bull v. United States,

295 U.S. 247 (1935)... ........2200e- 18, 19

Butner v. United States,

ee es EEE Sho ccnacecsciéscoees passim

Central V. Ry. v. White,

i nS, o« .t.egdiunesodusen’ 18

Cities Service Oil Co. v. Dunlap,

er ee Mc éédéeccssesecceceeses 17

Cohen v. De La Cruz,

8 ee ee ee 34

Delaney v. Comm’r, 99 F.3d 20

Dt anos dened eteeese oe bobs 19

Dick v. New York Life Ins. Co.,

4 4 4 —a reer 17

Director v. Greenwich Collieries,

ee can dead eeeeneeeeéses 18

Erie R.R. v. Tompkins,

DPEATETU, cccwedevdscte cuteness 17

Fahs v. Martin, 224 F.2d 387

SE ee yes ee 16

Fair Assessment in Real Estate Ass’n

v. McNary, 454 U.S. 100 (1981) ........... 31

Garrett v. Moore-McCormack Co.,

317 U.S. 239 (1942)......... 12, 17, 18, 19, 20

Grogan v. Garner, 498 U.S. 279 (1991) ..... 15, 20

Helvering v. Taylor, 293 U.S. 507 (1935) ....... 18

In re Anchorage Int'l Inn, Inc.,

718 F.2d 1446 (9th Cir. 1983) ............ 30

In re Bell, 34 F.2d 677 (W.D. Pa. 1929),

modified on other grounds sub nom.

Jarvis v. Heiner, 39 F.2d 361

Cort Me cupdenveessetvebs cates 40 n.11

In re Berkshire Hardware Co.,

39 F. Supp. 663 (D. Mass. 1941) .......... 37

In re Canady, 43 A.F.T.R.2d (RIA)

GIB GL. Ga: BIGED cccccccccccsess 39 n.11

In re Certified Credit Corp.,

329 F. Supp. 1402 (S.D. Ohio 1971) .... 39n.11

In re Cobb, 135 B.R. 640

(Bankr. D. Neb. 1992) ...........522005: 22

In re Ford, 194 B.R. 583

GLE. GEO SEED ccc ccc ccccccteceses 23, 30

In re Fox, 609 F.2d 178 (5th Cir. 1980) .... 39n.11

In re Garfield Bag & Stationery Co.,

42 F. Supp. 708 (S.D.N.Y 1941) ....... 39 n.11

In re Glover-McConnell Co.,

9 F.2d 683 (N.D. Ga. 1925) .......... 40 n.11

In re Highland Superstores, Inc.,

154 F.3d 573 (6th Cir. 1998) ........ 16, 26-27

In re Iowa R.R., 840 F.2d 535

CHU GR, BED ccwccctcccseces 14, 26 n.8, 36

vii

In re Landbank Equity Corp.,

973 F.2d 265 (4th Cir. 1992) ........ 17, 21, 27

In re Lang Body Co., 92 F.2d 338

I GD chduveddus. oben ckds 39 n.11

In re Lapiana, 909 F.2d 221

DMT ous bed 6s eeees Getcebeeki 27

In re Lasky, 38 F. Supp. 24

EN EE 6s doo kun dou al dbeoe 39 n.11

In re Madeline Marie Nursing Homes,

694 F.2d 433 (6th Cir. 1982) ............. 16

In re Menefee, 40 A.F.T.R.2d (RIA)

Se GN GE EOE oc cacetcccveve 39 n.11

In re Mid America Co., 31 F. Supp.

ee a 40 n.11

In re Milwaukee Cheese Wisconsin, Inc.,

112 F.3d 845 (7th Cir. 1997) ............. 26

In re O’Neill, 80-2 U.S. Tax Cas. (CCH)

7 9716 (Bankr. W.D. Va. 1980) ....... 40 n.11

In re Osborn, 4 B.R. 431 (W.D. Mo. 1979) .. 40n.11

In re Oxford Assoc., 209 F. Supp. 242

SE cb ab wWbe ewe d008 39 n.11

In re Petersilge, 70 F. Supp. 95

TD pbc eekscéces esse sk 39 n.11

In re Pisano, 105 B.R. 125 (Bankr.

DR ED So wad dbubeeséuvacace 29 n.9

In re Reeves, 25 A.F.T.R.2d (RIA)

We Ge GD GUE kc Sb 0 6b6s Senne 39 n.11

In re Standard Milling Co.,

324 F. Supp. 386 (N.D. Tex. 1970) ..... 39 n.11

In re Trustees System Co.,

30 F. Supp. 361 (W.D. Ky. 1939) ...... 40 n.11

In re Two Rivers Woodenware,

199 F. 877 (7th Cir. 1912) ........... 37 n.10

In re Ward, 131 F. Supp. 387

Do heck bdesdGuw es oes 37, 39 n.11

In re Uneco, Inc., 532 F.2d 1204

ee es OE 66 8 ecddc esse cchans 39 n.11

Kelly v. Robinson, 479 U.S. 36 (1986) ...... 34, 40

Midlantic Nat'l Bank v. New Jersey

Dep’t of Envtl. Protection,

GF4 UB, GO6 CIB os cc ccc cccvccace 34, 35

N.L.R.B. v. Bildisco & Bildisco,

GES UB GED COE 6 cco sccvcocesccscons 26

National Private Truck Council v. Oklahoma

Tax Comm’n, 515 U.S. 582 (1995) .... 12, 31, 32

New York v. Saper, 336 U.S. 328 (1949) ....... 37

Nicholas v. United States, 384 U.S. 678

+ PPVTTETETUPTTET PTL 37

Nobelman v. American Savings Bank,

608 U.S. 324 (1993)... ...... cee eeees 15, 23

Norwest Bank Worthington v. Ahlers,

ey Ds cheeses ccdésesaseues 26

O’Melveny & Myers v. F.D.1.C.,

Se PED Shvceevobewsecvsedes 35

Palmer v. Hoffman,

ee SOE bo hoc eece sess eeeloees 17

Paschal v. Blieden, 127 F.2d 398

i, Ce ass ud bh es b 00s bee 39 n.11

Patterson v. Shumate, 504 U.S. 753

SE 6 kshan bb 6000 586006466000 000845' 30

Pepper v. Litton, 308 U.S. 295 (1939) ......... 16

Rosewell v. LaSalle Nat'l Bank,

ee ke see ees 32

Security Mortgage Co. v. Powers,

3 f BS | APPT Tere 38

Speiser v. Randall, 357 U.S. 513

CE 6a bbk COC h ECO M ORS ECC ORO RNS CEDOS 17

EEE cc eehRSee OV edb ehesisocevcxerens 20

Thinking Machines Corp. v. New Mexico

Taxation & Revenue Dep’t, 211 B.R.

426 (D. Mass. 1997) ......... 22-23, 27, 28, 31

United Savings Ass’n v. Timbers

of Inwood Forest Assoc., Ltd.,

Se es Eo cb bce eee ws aces bare & 34

United States v. Bisceglia,

6 oe oe os eee ee ee 20

United States v. Generes,

ee Ges SD -«sciew ee ee000 eecae ue 20

United States v. Janis,

ee ED. . 2 ne kod 40 bN ea Owes 18

United States v. Kimbell Foods, Inc.,

ee Sn... Dende ten ebeenuuet 19

United States v. Knox-Powell-Stockton Co.,

83 F.2d 423 (9th Cir. 1936) .......... 39 n.11

United States v. Noland,

ee Ce, I con cabaetéenees 16, 26, 34

United States v. Rexach,

482 F.2d 10 (Ist Cir. 1973) ......... 20, 28-29

United States v. Ron Pair Enters., Inc.,

I i se 34, 35

Vanston Bondholders Protective Committee

v. Green, 329 U.S. 156 (1946) ....... 15-16, 38

Vanston Bondholders Protective Committee

v. Green, 329 U.S. 156 (1946)

(Frankfurter, J., concurring) ........... 13-14

Whitney v. Dresser, 200 U.S. 532 (1906) ....... 38

Statutes and Rules

11 U.S.C. § 93a (repealed) ........ 36-37 n.10, 38

Pe ey En ee 6 nneds Sack .enucseust 22

RP ee ree ere 22

St ED Nn cns edad ee ccdesvbeens 22

I ee eee 15, 21

ee -G-. w cae akcn i dObe bay beens 21

BE WG, BORD on cnc ccccccces 25 n.7, 27

ee Es SEED & 90 600% 6 heb et oo bnneeed 15

Se EE 6.5 bene scicivivicnees 25 n.7

SEE Ado cchabbaussteceenetnan 22

SPE 6S pW G¥dps Oi vkes Senuees 28

ee eee ee 28-29 n.9

Pe Se a ED 6 6 ns'b.n's Civ bose eu eee 28

eo EG TT Te ee eee 22

BD Ws OEE oN Soe pects ecdenwcsees 28

Py PU . 6 Cb dss weneod@ueeciu 19 n.5

xii

Fed. R. Bankr. FP. 301(b) (repealed) ........... 38

Fed. R. Bankr. P. 2004(a), (b) .............4-. 28

PUG. B. GOMED. F. GEOR cs cscccccctesesonss 22

pos. BR. Bamkky. FP. G00Be) 2... ccc ccccccccccs 22

2. FF ECS re 22

Legislative Material

H.R. Rep. No. 95-595, 95th Cong.,

2nd Sess., reprinted in 1978

PERE EE vevtesescncwe 22, 24, 24 n.7

S. Rep. No. 1916, 75th Cong.,

| eer ee eee 36-37

S. Rep. No. 95-989, 95th Cong.,

2nd Sess., reprinted in 1978

Ce EE 6 hates pe aneses 22, 27, 31

Final Report of the National Bankruptcy

Review Commission 3.2.5 (Oct.

20, 1997), reprinted in vol.

G Collier on Bankruptcy app.

pt. 44 (rev. 15th ed. 1999) ....... 21-22, 23 n.6

ce ee ON ca PTE LIE ig APRIL T I IIIT It emt

Other Authorities

3 Collier on Bankruptcy

(James W. Moore, ed., 14th ed. 1977).... 15, 36

3A Collier on Bankruptcy

(James W. Moore, ed.,

bh hiv adeiate ced neeeue 15, 37, 38

6 Collier on Bankruptcy

(Lawrence P. King, ed.,

=f * Se er 29 n.9

15 Collier on Bankruptcy

(Lawrence P. King, ed.,

rev. 15th ed. 1999) ...... 23 n.6, 25 n.7, 28, 31

Vern Countryman, The Use of State Law

in Bankruptcy Cases (Part I),

Ge Teed. Ee, Eee. Ge CRED occ ccécewsces 14

Alfred Hill, The Erie Doctrine

in Bankruptcy, 66 Harv. L. Rev.

Ps .teks 65yens e466 én es Owe ON 13

Frances R. Hill, Toward A Theory of

Bankruptcy Tax: A Statutory

Coordination Approach, 50 Tax

EE Slo cag We Wa eee eke oMies 24

Thomas H. Jackson, Bankruptcy,

Non-Bankrupicy Entitlements,

and the Creditors’ Bargain,

Se ee Ga Ee GHEE bo ec cdsecevcces 24-25

Xiv

Steve R. Johnson, The Dangers of

Symbolic Legislation: Perceptions

and Realities of the New Burden-

of-Proof Rules, 84 Iowa L. Rev.

GE. Sa dWés ees eos 64008 ES 19 n.5

Leo P. Martinez, Tax Collection and

Populist Rhetoric: Shifting the

Burden of Proof in Tax Cases,

39 Hastings L.J. 239, 257 (1988) ........ 18-19

C. Richard McQueen & Jack F. Williams,

Tax Aspects of Bankruptcy Law

and Practice § 7:25 (8rd ed. 1997) ...... 23 n.6

1 Wigmore, Evidence § 5 (Tillers rev. 1983) ..... 17

9 Charles Alan Wright & Arthur

R. Miller, Federal Practice &

Procedure § 2408 (1995) .............4.. 18

STATEMENT OF THE CASE

1. Chandler Enterprises and Stoecker

William J. Stoecker was the president and a director

of Chandler Enterprises, Inc., an Illinois corporation.

(P.A. A-2, C-18).' Chandler’s officers included Lawrence

Pluhar, who also served as an officer of other corpora-

tions involving Swecker. (B.R. vol. 4, J. Prewitt Dep., Ex.

2; B.R. 1992 Tr. at 125, 131). According to Chandler’s

counsel, Pluhar acted “like his [Stoecker’s] chief financial

officer.” (B.R. 1992 Tr. at 125). Other than that single

comment, there is no evidence of the duties Stoecker or

Pluhar performed for Chandler. Nor is there any evi-

dence about the nature of Chandler’s business. The IIli-

nois Secretary of State involuntarily dissolved Chandler

in 1990. (P.A. E-4).

Chandler was one of many companies in a larger

Stoecker business empire. (B.R. vol. 3, 1154A-B, Ex. C).

A federal grand jury eventually indicted Stoecker and

Pluhar for mail, wire and bank fraud in connection with

these companies, alleging that Chandler and several

other companies were mere shells with no substantial

assets, value, income, or business operations. (Jd. at 4).

Stoecker and Pluhar were subsequently convicted. United

States v. William Stoecker, et al., No. 95 CR 118 (N.D. Ill.

' The appendix to the petition for writ of certiorari is cited as

“P.A.” The bankruptcy court record is cited as “B.R.” Because

some items in the bankruptcy court record are not numbered,

references to the record will cite to the volume and to the item

number where possible. The 1992 hearing transcript (cited as

“1992 Tr.”) appears in volume 5.

March 4, 1997). Stoecker’s appeal of his conviction is

pending. United States v. William Stoecker, et al., No.

97-3870 (7th Cir.).’

2. Chandler’s Purchase of the Aircraft

In early 1988, Chandler decided to purchase a corpo-

rate jet and hired an aircraft broker to locate a jet for

sale. (P.A. A-2). The broker found a Dassault Falcon 50

in the possession of an Australian company. (P.A. A-2,

C-15).

Because Chandler was unable to pay the full $12

million purchase price, the broker’s leasing company

financed the sale on an interim basis, entering into an

aircraft lease/purchase agreement with Chandler. (P.A.

A-2). Stoecker signed the agreement as Chandler’s pres-

ident. (P.A. C-51). Chandler paid the leasing company

$2.5 million and took delivery of the aircraft, transferring

it to Illinois. (P.A. A-2). Several months later, Chandler

obtained financing from NEMLC Leasing Corporation

and paid the balance of the purchase price. (P.A. A-2-3,

C-16). Title to the aircraft was transferred to Chandler.

(P.A. A-3).

In connection with the purchase, NEMLC sought a

legal opinion from Chandler about the taxability of the

transaction under Illinois law. (B.R. 1992 Tr. at 125).

Chandler’s counsel wrote a letter to NEMLC opining that

the sale was an “occasional sale” not subject to Illinois

2 The Court can take judicial notice of related litigation. Na-

tional Fire Ins. Co. v. Thompson, 281 U.S. 331, 336 (1930).

use tax. (P.A. C-16-17). Although a copy of the letter was

sent to Pluhar and was also included in the closing book

that Pluhar received (P.A. C-56; B.R. 1992 Tr. at 130-31),

there is no evidence that Stoecker ever saw the letter

(P.A. A-8). No opinion letter was issued to Chandler or to

Stoecker himself. (P.A. C-55; B.R. 1992 Tr. at 136).

Following the closing, Chandler registered the aircraft

with the Federal Aviation Administration at an address

in Oak Forest, Illinois (B.R. 1992 Tr. at 33), but never

registered it with the Illinois Department of Transporta-

tion, as Illinois law required, see Ill. Rev. Stat. ch. 15%,

q 22.42 (1989). (P.A. C-15). No certificate of registration

could have been issued without proof either that Illinois

use tax had been paid or that no tax was due. (P.A. A-12).

3. The Illinois Use Tax

The Illinois “sales tax” scheme consists of two taxes: a

retailer’s occupation tax, Ill. Rev. Stat. ch. 120, 4 440-53

(1989), and a use tax, Ill. Rev. Stat. ch. 120, 4 439.1-.22

(1989). The occupation tax is a tax “upon persons en-

gaged in the business of selling personal property” in

Illinois. Ill. Rev. Stat. ch. 120, ¥ 441 (1989). The use tax

is a complementary tax “upon the privilege of using in

this State tangible personal property,” regardless of

whether the property is purchased in Illinois. Ill. Rev.

Stat. ch. 120, ¥ 439.3 (1989).

Unlike the occupation tax, the use tax is imposed on

the purchaser of property. Retailers in Illinois, and for-

eign retailers with an adequate nexus to Illinois, must

collect the tax and remit it to the Department. Ill. Rev.

Stat. ch. 120, | 439.3 (1989). However, any tax “not paid

to a retailer . . . shall be paid to the Department directly

by any person using such property within this State.” Jd.

Purchasers from a retailer who does not pay the tax must

file a return with the Department and pay the tax

themselves. Ill. Rev. Stat. ch. 120, 4 439.10 (1989).

If no return is filed, the Department determines the tax

due and issues a Notice of Tax Liability (“NTL”) to the

taxpayer. Ill. Rev. Stat. ch. 120, 4 444 (1989). The tax-

payer may protest the assessment and request a hearing.

Id. If no protest is filed, however, the NTL becomes a

final assessment. Jd. Decisions of the Department, in-

cluding final assessments, are subject to administra-

tive review in the Illinois courts. Ill. Rev. Stat. ch. 120,

97 444, 451 (1989).

When a corporation fails to pay use tax it owes, respon-

sible officers and employees of the corporation may be

held liable for a penalty equal to the unpaid tax:

Any officer or employee of any corporation subject

to the provisions of this Act who has the control,

supervision or responsibility of filing returns and

making payment of the amount of tax herein

imposed . . . and who wilfully fails to file such

return or make such payment to the Department

or willfully attempts in any other manner to

evade or defeat the tax shall be personally liable

for a penalty equal to the total amount of tax

unpaid by the corporation, including interest and

penalties thereon ... .

Ill. Rev. Stat. ch. 120, 452% (1989).’ If the Department

determines that a penalty should be imposed, the De-

partment issues a notice of penalty liability (“NPL”) to

the officer or employee. Jd. As with an NTL, the officer or

employee subject to an NPL can seek an administrative

hearing and pursue administrative review in the Illinois

courts. Id.

Once the Department has issued an NPL to a corporate

officer or employee, the NPL is deemed “prima facie

correct” and “prima facie evidence of [the] penalty due.”

Ill. Rev. Stat. ch. 120, ¥ 452% (1989). Upon proof of the

NPL, the burden falls on the officer or employee to prove

he is not liable for the penalty assessment. Branson v.

Department of Revenue, 168 Ill. 2d 247, 659 N.E.2d 961

(1995). The burden is not merely a burden of going for-

ward. In Branson, the Illinois Supreme Court held that

the ultimate burden of proof shifts to the taxpayer. The

NPL establishes “a rebuttable presumption” that is re-

butted only if the taxpayer can “adduce sufficient evi-

dence to disprove willful failure to file returns and pay

taxes.” Id. at 262, 659 N.E.2d at 968 (emphasis added).

4. The Department’s Claim

Chandler filed no use tax return with the Department

and paid no use tax on its purchase of the aircraft. (P.A.

* This provision appeared in the Retailer's Occupation Tax Act

and was incorporated into the Use Tax Act. Ill. Rev. Stat. ch.

120, | 439.12 (1989). The provision was later repealed and

recodified as part of the Uniform Penalty and Interest Act. 35

ILCS 735/3-7 (1994).

A-4, B-2). In fact, Chandler never filed Illinois tax re-

turns of any kind and was not registered with the De-

partment in any capacity. (P.A. C-18, D-3). The Depart-

ment knew nothing of Chandler or the aircraft it pur-

chased.

In 1989, Stoecker’s creditors initiated an involuntary

proceeding against him under chapter 11 of the Bank-

ruptcy Code. (P.A. C-12). Thomas E. Raleigh was ap-

pointed trustee. (Jd.). The proceeding was later converted

to a liquidation under chapter 7, and in 1990 Stoecker

was denied a discharge. (Jd.).

In early 1989, the Department was notified about

Stoecker’s bankruptcy. (P.A. C-13). The Department’s

bankruptcy unit researched Stoecker and filed claims

against him in the bankruptcy as the responsible officer

of several corporations. (P.A. C-13-14, D-3, E-3). Because

Chandler was not a registered taxpayer, however, the

Department did not learn about Chandler or link Chan-

dler to Stoecker and the bankruptcy. (P.A. C-14, D-3).

A year later, a Department auditor in a different unit

was reviewing F.A.A. records for unreported aircraft

purchases when he happened on Chandler’s purchase of

the aircraft. (B.R. 1992 Tr. at 14-15, 52). The Department

initiated an audit of the aircraft purchase and sent

several letters to Chandler asking about it. (P.A. C-17,

D-3; B.R. 1992 Tr. at 26-27, and Dep’t Ex. 4). The letters

went unanswered. (P.A. D-3; B.R. 1992 Tr. at 27).

Later in 1990, the Department issued an NTL to

Chandler assessing the unpaid use tax on the purchase.

(P.A. A-4, B-2). Chandler filed no protest (B.R. vol. 2,

1576, ¥ 2), and the assessment became final by operation

_——- -—-

of law, see Ill. Rev. Stat. ch. 120, 444 (1989). There is

no evidence that Chandler sought administrative review

of the assessment in the Illinois courts.

After the NTL was issued, the Department made nu-

merous attempts to collect the tax from Chandler. The

collector tried unsuccessfully to contact Chandler but

determined that Chandler was out of business. (B.R. vol.

2, 1576, ¥ 34; B.R. vol. 6, Towers Dep. at 54). He also

repeatedly tried reaching Stoecker and Pluhar, both in

person and by mail. (P.A. D-3; B.R. 1992 Tr. at 74-76).

Neither responded. (P.A. D-3; B.R. vol. 6, Towers Dep. at

59).

The matter was referred to the Department’s NPL unit

(B.R. 1992 Tr. at 76), which in June 1991 issued an NPL

to Stoecker as a responsible officer of Chandler, assessing

a penalty equal to the unpaid use tax. (P.A. A-4, C-19).

The NPL was sent to Stoecker by certified mail but was

returned unclaimed. (B.R. 1992 Tr. at 92). Stoecker filed

no protest (id. at 93), and the penalty assessment became

final by operation of law, see Ill. Rev. Stat. ch. 120, | 444

(1989). There is no evidence that Stoecker sought admin-

istrative review of the penalty assessment in the Illinois

courts.‘

In September 1991, the NPL unit sent Stoecker a de-

mand for payment of the penalty. (P.A. D-4). In response,

Stoecker’s counsel had several telephone conversations

* The Department also issued an NPL against Pluhar. (B.R.

1992 Tr. at 92-93). Unlike Stoecker, Pluhar protested the NPL,

and after an administrative hearing the Department found he

was not a responsible officer of Chandler. (Jd. at 93).

with the NPL unit. (B.R. 1992 Tr. at 94-96). It was not

until a conversatio: January 1992, however, that he

revealed to the NPL unit that Stoecker was in bank-

ruptcy. (P.A. C-20; B.R. 1992 Tr. at 95-98). On January

21, 1992, the Department filed a proof of claim in the

bankruptcy for the penalty, a claim later amended to

$911,769: $868,351 in unpaid use tax and $43,418 in pre-

petition interest. (P.A. C-20-21).

5. Proceedings Below

The Trustee objected to the Department’s claim (P.A.

C-22, D-4), and in 1996, after extensive litigation, the

bankruptcy court disallowed the claim (P.A. C-1-82),

finding that the Department had not met its burden of

proving Stoecker a responsible officer of Chandler (P.A.

C73-74). The court admitted that the NPL was prima

facie evidence of liability but determined that under

Bankruptcy Rule 3001(f) the Trustee’s only obligation

was to present evidence sufficient to rebut the presump-

tion the NPL raised. (P.A. C-5, C-46, C-73). At that point,

the burden shifted back to the Department, which the

court said bore the “ultimate burden of proof.” (P.A.

C-73). The bankruptcy court concluded that the Depart-

ment failed to meet that burden.

The Department appealed the bankruptcy court’s de-

cision (P.A. B-1), and the district court affirmed. (P.A.

B-1-21). The district court conceded that in non-bank-

ruptcy proceedings “the taxpayer bears the ultimate

burden of proof” but held that in bankruptcy the tax law

burden of proof no longer applied. (P.A. B-7-8). Relying

on In re Macfarlane, 83 F.3d 1041 (9th Cir. 1996), the

court reasoned that “[c]reditors should be treated equally

with respect to the required burden of proof.” (P.A. B-8).

The Department, the court said, should not be able to

benefit from a burden of proof that “arises outside of

bankruptcy law.” (P.A. B-8-9). The district court agreed

with the bankruptcy court that the burden had shifted to

the Department and that the Department had not met its

burden. (P.A. B-9-12).

The Department appealed to the Seventh Circuit, and

the Seventh Circuit reversed, holding that the burden of

proof under tax law applied in bankruptcy proceedings.

(P.A. A-1-13). The court observed that bankruptcy is

simply “a forum in which creditors prove the entitle-

ments that state or federal law confers on them” and in

which “these entitlements are enforced consistently with

the provisions of the Code.” (P.A. A-9). Because burdens

of proof are substantive law, they are “rightly classified

as a part of the creditor's entitlement.” (P.A. A-10). And

although Congress “can alter entitlements in bankruptcy,

and sometimes does so, there is no indication that it

meant to shift the burden of proof from taxpayer to tax

collector.” (P.A. A-11).

The court acknowledged that bankruptcy is an “equita-

ble procedure” (P.A. A-8) but rejected the notion—ap-

parently accepted in Macfarlane—that bankruptcy is a

kind of “equity free-for-all,” one in which judges can

curtail or expand the rights based on “their personal no-

tions of fairness.” (P.A. A-9-10). Bankruptcy courts, the

court declared, have no authority to “cut down the en-

titlements that creditors seek to enforce in bankruptcy

except es provided by the Bankruptcy Code itself.” (P.A.

A-9). The court went on to find that the Trustee bore the

ultimate burden of proof, that he had not carried that

burden, and that the Department’s claim should have

been «llowed. (P.A. A7-8, 12).

SUMMARY OF ARGUMENT

The burden of proof that applies to tax claims brought

in state court also applies to tax claims brought in

bankruptcy court. Because rights and obligations adju-

dicated in bankruptcy come from state law, state law

determines the rights of creditors in the assets of a

bankruptcy estate. Butner v. United States, 440 U.S. 48,

54-55 (1979). One such state law right is the burden of

proof applicable to a creditor’s claim. Burdens of proof

are substantive law, part of the claim itself. The burden

of proof from tax lew—where proof of a tax assessment

usually shifts the burden to the taxpayer to disprove his

liability—is accordingly the government’s substantive

right as a creditor.

The government does not lose that right when it files

_ tax claims in bankruptcy. Although federal interests may

displace state law in bankruptcy, the Bankruptcy Code

and Rules do not address burdens of proof for claims. Nor

is there a bankruptcy policy of “equality of treatment of

creditors,” as the Trustee asserts, shifting the burden of

proof to the government. Bankruptcy policy contemplates

only equal distribution of assets to similarly situated

creditors. This case is about allowance of claims, not dis-

tribution of assets. In the allowance of claims, moreover,

creditors are treated equally because each is entitled to

assert its state law rights, subject only to the require-

ments of the Code.

Far from identifying a concrete federal interest that

displaces state law, the Trustee’s argument for “equality”

in the allowance of claims is a thinly-disguised invocation

of the bankruptcy courts’ equitable powers. The tax law

burden of proof, he says, is unfair to private creditors

who have no similar right, and bankruptcy courts should

be able to level the playing field. Bankrupt-y courts,

however, can only exercise their equitable powers under

the Code itself. They have no power to adopt uniform

rules that alter the substantive state law rights of cred-

itors out of a sense of “fairness.”

The Trustee’s historical argument for altering the

burden of proof is equally flawed. First, practice under

the former Bankruptcy Act is a tool of statutory construc-

tion, not an automatic gap-filler whenever the Code is

silent. The Trustee has not asked the Court to construe

any provision of the Code. Second, the Trustee has his

history wrong. Although Congress increasingly subjected

the claims of all creditors to the same procedural require-

ments, there was never a movement to alter government

creditors’ substantive state law rights. Nor was there an

established judicial practice under the former Act of

assigning to the government the burden of proof for tax

claims. Bankruptcy history shows only that Congress has

never specified a burden of proof for claims—not under

the Act, and not under the Code.

Altering the burden of proof for tax claims will violate

bankruptcy policy favoring uniform treatment of property

interests between state courts and bankruptcy courts. It

will encourage taxpayers to litigate tax disputes in the

bankruptcy courts rather than the state courts, despite

Cogressional concern that bankruptcy not become a

refuge for tax delinquents. And it will disrupt state tax

collection and necessitate changes in state tax law, con-

trary to the “strong background presumption against

[federal] interference with state taxation.” National Pri-

vate Truck Council v. Oklahoma Tax Comm'n, 515 U.S.

582, 590 (1995). Nothing in federal law or policy compels

these drastic results.

ARGUMENT

I. INTRODUCTION

The burden of proof that ordinarily applies to tax

claims in state court does not shift to the government in

bankruptcy court. The reasons why are not only fun-

damental but well-established. It is a basic premise of

bankruptcy law that state law defines the rights of

creditors in a bankruptcy estate. Butner v. United States,

440 U.S. 48, 54-55 (1979). It is just as basic that burdens

of proof are substantive state law. Garrett v. Moore-

McCormack Co., 317 U.S. 239, 249 (1942). The burden of

proof from state law is therefore a creditor’s substantive

right, a right that applies in the bankruptcy court unless

some overriding federal interest requires a different

result. There is no such federal interest.

The question here is not whether tax creditors like the

Illinois Department of Revenue should be given some

“advantage” (Pet. Br. at i) or “benefit” (id. at 27) in bank-

ruptcy through a particular burden of proof, as the

Trustee asserts. The burden of proof for tax claims orig-

inates outside of bankruptcy, and whatever “advantage”

tax creditors enjoy as a result is their substantive right

under state law. Nor is the question whether creditors

should be accorded “equality of treatment.” (Pet. Br. at

27). Creditors are already treated equally in the allow-

ance of claims because, except where the Code provides

otherwise, all creditors come into bankruptcy with the

same rights they had outside of bankruptcy.

The question in this case is whether tax creditors—

unlike all other creditors—should be stripped of a sub-

stantive non-bankruptcy right and assigned some other,

lesser right, when Congress has not seen fit to do so in

the Code. The answer is no.

Il. THE BURDEN OF PROOF FROM SUBSTANTIVE

TAX LAW APPLIES WHEN TAX CLAIMS ARE

FILED IN BANKRUPTCY PROCEEDINGS.

A. State Law Governs A Creditor’s Rights In

‘Bankruptcy Unless Some Federal Interest

Dictates Otherwise.

The rights of creditors outside of bankruptcy are a

matter of state law, not federal law. They continue to be

a matter of state law in bankruptcy except where a

federal interest displaces them.

The bankruptcy laws provide a forum and procedures

to address the rights of creditors. Vanston Bondholders

Protective Committee v. Green, 329 U.S. 156, 171 (1946)

(Frankfurter, J., concurring); Alfred Hill, The Erie Doc-

trine in Bankruptcy, 66 Harv. L. Rev. 1013, 1020 (1953).

Unless the Code provides otherwise, however, the bank-

ruptcy laws do not create rights. “Parties are in a bank-

ruptcy court with their rights and duties already estab-

lished, except insofar as they subsequently arise during

the course of bankruptcy administration or as part of its

conduct.” Vanston, 329 U.S. at 169 (Frankfurter, J., con-

curring); see also Butner, 440 U.S. at 54; Vern Country-

man, The Use of State Law in Bankruptcy Cases (Part 1),

47 N.Y.U. L. Rev. 407, 412 (1972) (bankruptcy “deals

with an existing condition” and does not establish

claims).

Because “[p]roperty interests are created and defined

by state law,” state law, not bankruptcy law, determines

the interests of creditors in a bankruptcy estate. Butner,

440 U.S. at 54-55. Declaring “the basic federal rule” in

bankruptcy to be “that state law governs,” id. at 57, the

Court observed in Butner that Congress has not rede-

fined the rights of creditors in the bankruptcy laws but

has “generally left the determination of property rights

in the assets of a bankrupt’s estate to state law,” id. at

54-55. “Unless some federal interest requires a different

result,” the Court continued, “there is no reason why

such interests should be analyzed differently simply be-

cause an interested party is in a bankruptcy proceeding.”

Id.; see also In re Iowa R.R., 840 F.2d 535, 536-37, 539

(7th Cir. 1988) (“state law is the usual source of creditors’

rights in bankruptcy cases,” and “the bankruptcy court

must implement rather than alter them”).

Although Butner was decided under the former Bank-

ruptcy Act, the Court has adhered to this fundamental

view of bankruptcy under the Code. Citing Butner, the

Court has repeatedly said that the rights of creditors in

the assets of a bankruptcy estate are determined by state

law “(ijn the absence of a controlling federal rule,” No-

belman v. American Savings Bank, 508 U.S. 324, 329

(1993), or “any controlling federal law,” Barnhill v. John-

son, 503 U.S. 393, 398 (1992); see also Grogan v. Garner,

498 U.S. 279, 283 (1991). Unless a federal purpose to

displace state law is “‘clear and manifest,’” the Court

declared recently, “the Bankruptcy Code will be con-

strued to adopt, rather than displace, pre-existing state

law.” BFP v. Resolution Trust Corp., 511 U.S. 531, 544-45

(1994) (quoting English v. General Elec. Co., 496 U.S. 72,

79 (1990)).

The Trustee, however, disputes the application of state

law in this case. Citing Vanston Bondholders Protective

Committee v. Green, 329 U.S. 156 (1946), he argues that

“the allowance” of a claim under section 502 of the Code

is “a question of federal law to which federal burdens of

persuasion should apply.” (Pet. Br. at 24).

The Trustee misinterprets Vanston. The statements in

the opinion suggesting that the “allowance” of claims is

a federal matter were made more than 40 years before

the Code was enacted, and they must be taken in histori-

cal context. Under the Bankruptcy Act, “allowance” and

“proof” of claims were distinct concepts. 3A Collier on

Bankruptcy | 63.05 at 1775-76 (James W. Moore, ed.,

14th ed. 1975). Even claims found to exist and deemed

proved might still be “disallowed” in whole or in part on

an equitable basis. 3 Collier on Bankruptcy | 57.14 at

228-33 (James W. Moore, ed., 14th ed. 1977). The equiva-

lent of this pre-Code power is what the Code today terms

“equitable subordination.” See 11 U.S.C. § 510(c\1);

United States v. Noland, 517 U.S. 535, 538 (1996); In re

Madeline Marie Nursing Homes, 694 F.2d 433, 437 (6th

Cir. 1982).

The courts of appeals have accordingly interpreted the

broad language in Vanston and in Pepper v. Litton, 308

U.S. 295 (1939), to “establish a rule only for the distribu-

tion of assets.” Fahs v. Martin, 224 F.2d 387, 394 (5th

Cir. 1955). Vanston has “‘never been applied . . . to oust

state law in the original determination of the existence

and amount of liability.’” In re Highland Superstores,

Inc., 154 F.3d 573, 578 (6th Cir. 1998) (quoting In re

Madeline Marie Nursing Homes, 694 F.2d at 437). In-

deed, Vanston itself explicitly states that “[wJhat claims

of creditors are valid and subsisting obligations . . . is to

be determined by reference to state law.” Vanston, 329

U.S. at 161.

This case concerns the validity of a claim, not the dis-

tribution of a bankruptcy estate’s assets. The validity of

a claim is a state law issue, and the rights that gov-

ernment tax creditors assert in bankruptcy proceedings

depend on state law. Vanston, 329 U.S. at 161; see also

Butner, 440 U.S. at 55.

B. Burdens Of Proof Are Substantive Law And

One Of A Creditor’s Non-Bankruptcy Rights.

State law for this purpose includes the burden of proof

that applies to a creditor’s claim. Burdens of proof are

substantive law. The burden of proof under tax law is

therefore the government’s substantive right.

The burden of proof peculiar to tax law is not just a

procedural nicety. The Court has long held that burdens

of proof are substantive law. See, e.g., American Dredging

Co. v. Miller, 510 U.S. 443, 454 (1994); Dick v. New York

Life Ins. Co., 359 U.S. 437, 446 (1959); Palmer v. Hoff-

man, 318 U.S. 109, 117 (1943); Cities Service Oil Co. v.

Dunlap, 308 U.S. 208, 212 (1939); see also In re Land-

bank Equity Corp., 973 F.2d 265, 270 (4th Cir. 1992); 1

Wigmore, Evidence § 5 at 358 (Tillers rev. 1983) (“bur-

dens of proof and those evidentiary rules thought to

affect burdens proof” are “most often treated as substan-

tive”). A party’s burden of proof “inhere(s] in his cause of

action.” Garrett, 317 U.S. at 249. It “is part of the very

substance of his claim and cannot be considered a mere

incident of procedure.” Id.; see also Cities Service, 308

US. at 212 (stating that the burden of proof relates to a

“substantial right,” one on which a party “may confi-

dently rely”).

In his brief, the Trustee offers no serious argument

that burdens of proof are not substantive law. Instead, he

attacks the proposition indirectly, asserting that “bank-

ruptcy courts are not bound under Erie R.R. v. Tompkins,

304 U.S. 64 (1938)” and so implying that burdens of proof

are only substantive when Erie is involved. (Pet. Br. at

22).

The Trustee is mistaken. Although burdens of proof are

substantive for purposes of Erie, they are not, as the

Trustee suggests, substantive because of Erie. Burdens

of proof are substantive law because so often they turn

out to be critical: “In all kinds of litigation it is plain that

where the burden of proof lies may be decisive of the

outcome.” Speiser v. Randall, 357 U.S. 513, 525 (1958);

see also American Dredging, 510 U.S. at 454 (burdens of

proof “bear upon the substantive right to recover”). The

critical nature of the burden of proof is what makes it

“part of the very substance” of a party's claim. Garrett,

317 U.S. at 249; see also 9 Charles Alan Wright & Arthur

R. Miller, Federal Practice & Procedure § 2408 at 555

(1995) (burdens are a “matter of substance” because they

are “associated closely with substantive rights”).

The Court has never confined its view that burdens of

proof are substantive to cases involving Erie questions,

making burdens of proof substantive for Erie purposes

but procedural for others. In Garrett, for example, the

Court held that because burdens of proof are substantive

law, the burden of proof on a federal claim applies when

the claim is brought in state court. Garrett, 317 U.S. at

249; see also Central V. Ry. v. White, 238 U.S. 507, 511-

12 (1915) (same). Recently, the Court again declared—

without any sort of Erie qualification—that “the assign-

ment of the burden of proof is a rule of substantive law.”

Director v. Greenwich Collieries, 512 U.S. 267, 271

(1994).

As the Seventh Circuit correctly noted, “the general

pattern of American tax law” is to place the burden on

the taxpayer to disprove his liability. (P.A. A-10). “(Tyhe

usual procedure for the recovery of debts is reversed in

the field of taxation. Payment precedes defense, and the

burden of proof, normally on the claimant, is shifted to

the taxpayer.” Bull v. United States, 295 U.S. 247, 260

(1935); see also United States v. Janis, 428 U.S. 433, 441

(1976) (calling this “the usual rule with respect to the

burden of proof in tax cases”); Helvering v. Taylor, 293

U.S. 507, 515 (1935). Both federal tax law, see Leo P.

Martinez, Tax Collection and Populist Rhetoric: Shifti

the Burden of Proof in Tax Cases, 39 Hastings L.J. 239,

257 (1988), and state tax law, see Amicus Br. of State of

New Mexico, et al., in Support of Cert. Pet. at 6 and n.3,

typically allocate the burden of proof to the taxpayer.*

More than other burdens of proof, the tax law burden

of proof “inheres” in the governmert’s tax claim because

of the claim’s nature and its importance. Garrett, 317

U.S. at 249; see Delaney v. Comm’r, 99 F.3d 20, 23 (1st

Cir. 1996) (tax law burden of proof is “more deeply rooted

than the conventional regimen that places the burden of

proof on the moving party”). The burden of proof directly

advances the government’s vital interest in securing

revenue essential for government operations. Taxes are

“the life-blood of government, and their prompt and cer-

tain availability an imperious need.” Bull, 295 U.S. at

259; see also United States v. Kimbell Foods, Inc., 440

U.S. 715, 734 (1979). As a consequence, the government

must resort to “more drastic means of collection” than

other creditors, including a burden-shifting scheme under

which the taxpayer must prove the government’s assess-

ment wrong. Bull, 295 U.S. at 259-60.

5 The Internal Revenue Service Restructuring and Reform Act

of 1998, Pub. L. No. 105-206, altered federal tax law to place

the burden of proof on the Internal Revenue Service. See 26

U.S.C. § 7491(a). That section, however, requires that several

tes be met before the burden shifts from the taxpayer

to the LR.S. Id. Because of these prerequisites, the extent to

which section 7491(a) has any practical impact has been ques-

tioned. See Steve R. Johnson, The Dangers of Symbolic Legis-

lation: Perceptions and Realities of the New Burden-of-Proof

Rules, 84 Iowa L. Rev. 413 (1999).

The tax law burden of proof also stems from a recogni-

tion that state and federal tax systems depend on vol-

untary compliance by taxpayers rather than government

enforcement. See United States v. Bisceglia, 420 U.S. 141,

144 (1975); United States v. Generes, 405 U.S. 93, 104

(1972). Under state and federal law, taxpayers are ob-

ligated to perform their own assessment and “disclose

honestly all information relevant to tax liability.” Bis-

ceglia, 420 U.S. at 144. This obligation includes main-

taining records that will enable taxpayers to make that

disclosure. See Spies v. United States, 317 U.S. 492, 495

(1943) (a self-assessment system functions only when

taxpayers “keep and render true accounts”). Taxpayers

bear the burden of proof because they are more likely

than the government to have information about their

liabilities. United States v. Rexach, 482 F.2d 10, 16 (1st

Cir. 1973).

The burden of proof under tax law, in short, is no “mere

incident of procedure,” Garrett, 317 U.S. at 249, but is an

integral part of tax law, as much the government’s right

as the right to levy the tax itself. The state law burden of

proof therefore applies in bankruptcy unless the Trustee

shows “some federal interest” in displacing state law in

tax cases, Butner, 440 U.S. at 55, an interest “clear and

manifest” from federal law, BFP, 511 U.S. at 544; ef.

Grogan, 498 U.S. at 283 (standard of proof governing

“(t]he validity of a creditor’s claim,” as opposed to its dis-

chargeability, is “determined by rules of state law”).

C. No Federal Interest Displaces The State Law

Burden Of Proof For Tax Claims.

The Trustee has shown no such federal interest. The

Bankruptcy Code and the Rules of Bankruptcy Procedure

say nothing about burdens of proof in claims objection

proceedings, and, despite what the Trustee claims, there

is no general bankruptcy policy of “equality of treatment

of creditors” (Pet. Br. at 27), particularly none concerning

allowance of claims. Far from displacing state law, fed-

eral bankruptcy policy and federal policy toward state

tax administration weigh heavily in favor of employing

the state law burden of proof.

1. The Bankruptcy Code And Rules Establish

No Burdens Of Proof For The Allowance Of

Claims. |

Although the obvious source of a “federal interest”

displacing state law would be federal bankruptcy law

itself, bankruptcy law does not provide one. Nothing in

the Bankruptcy Code sets burdens of proof for any

claims, let alone alters the state law burden of proof for

tax claims. Section 502 of the Code provides for the proof

and allowance of claims, 11 U.S.C. § 502, and section

505(a) allows the bankruptcy courts to “determine the

amount or legality of any tax,” 11 U.S.C. § 505(a).

Neither provision, however, addresses burdens of proof.

Nor does any other section of the Code. See Landbank,

973 F.2d at 270-71; Final Report of the National Bank-

ruptcy Review Commission 3.2.5 (Oct. 20, 1997), re-

printed in vol. G Collier on Bankruptcy app. pt. 44 at 44-

810 (Lawrence P. King, ed., rev. 15th ed. 1999) (“Final

Report”). The Trustee admits as much in his brief. (Pet.

Br. at 8, 15, 17).

This omission was intentional. Elsewhere in the Code,

Congress explicitly addressed burdens of proof. See 11

U.S.C. § 362(g) (relief from automatic stay); 11 U.S.C.

§ 363(0) (adequate protection); 11 U.S.C. § 364(d)(2)

(adequate protection); 11 U.S.C. § 547(g) (avotdability of

preferential transfer); 11 U.S.C. § 1129(d) (cenfirmation

of plan for purpose of avoiding taxes). Although Congress

could have established a burden of proof for claims, as

well, it did not do so, and the Senate and House Reports

explain the omission: “The burden of proof on the issue

of allowance is left to the Rules of Bankruptcy Proce-

dure.” S. Rep. No. 95-989, 95th Cong., 2nd Sess. 62, re-

printed in 1978 U.S.C.C.A.N. 5787, £848; H.R. Rep. No.

95-595, 95th Cong., 2nd Sess. 352, reprinted in 1978

U.S.C.C.A.N. 5973, 6308.

But the Bankruptcy Rules assign no burdens of proof

for claims either, something the Trustee also admits.

(Pet. Br. at 8). Like the Code, the Rules set certain

burdens of proof. See Fed. R. Bankr. P. 4003(c) (objection

to exemption); Fed. R. Bankr. P. 4005 (objection to dis-

charge). For claims, though, Rule 3001(f) states only that

a proof of claim is “prima facie evidence of the validity

and amount of the claim.” Fed. R. Bankr. P. 3001(f). The

Rule “does not, in a technical sense, allocate [the] burden

of proof” but “simply establishes that a proof of claim

constitutes evidence.” In re Cobb, 135 B.R. 640, 641

(Bankr. D. Neb. 1992); see also Thinking Machines Corp.

v. New Mexico Taxation & Revenue Dep't, 211 B.R. 426,

428, 430 n.5 (D. Mass. 1997); In re Ford, 194 B.R. 583,

589 (S.D. Ohio 1995). If Congress considers that a

deficiency, it has never sought to remedy it in the Code.°

With the Bankruptcy Code and Rules silent on the

matter, there is no “controlling federal law,” Barnhill,

503 U.S. at 398, or “controlling federal rule,” Nobelman,

508 U.S. at 329, that displaces the state law burden of

proof.

2. The Trustee Identifies No Other Federal

Interest That Displaces The Tax Law Bur-

den Of Proof.

Unable to come up with any “federal rule” or “law,” the

Trustee contends that giving tax creditors the “benefit”

of a burden of proof that other creditors do not enjoy is

contrary to bankruptcy’s “fundamental goal” of “equality

of treatment of creditors.” (Pet. Br. at 27). This is es-

pecially so, he says, given that tax claims already receive

priority in distribution. (Jd.).

® In 1997, the National Bankruptcy Review Commission in fact

recommended that Congress amend the Bankruptcy Code “to

clarify” that the tax law burden of proof is “equally applicable

in bankruptcy court proceedings to determine tax liabilities

under 11 U.S.C. §§ 502 and 505.” Final Report, supra, at 44-

806. The Commission’s recommendation was consistent with

the views of commentators who have advocated applying the

non-bankruptcy burden in bankruptcy cases. See, e.g., 15

Collier on Bankruptcy 14 TX5.03(5), TX5.04[6) (Lawrence P.

King, ed., rev. 15th ed. 1999); C. Richard McQueen & Jack F.

Williams, Tax Aspects of Bankruptcy Law and Practice § 7:25

The Trustee is wrong for two reasons. First, he grossly

overstates the extent to which the bankruptcy laws are

designed to achieve “equal treatment.” Bankruptcy does

not serve as the great leveler, and no bankruptcy princi-

ple calls for formal equality among creditors in all things.

See Frances R. Hill, Toward A Theory of Bankruptcy Tax:

A Statutory Coordination Approach, 50 Tax Law. 103,

162 (1996) (“[I}t is far from clear that formal equality is

a principle of fairness in disputes among creditors”).

The policy to which the Trustee refers is one of “equality

of distribution among all creditcrs.” H.R. Rep. No.

95-595, supra, at 186, reprinted in 1978 U.S.C.C.A.N.

5973, 6147 (emphasis added); see also Landbank, 973

F.2d at 270. Once claims are allowed, in other words,

“creditors of equal priority should receive pro rata shares

of the debtor’s property.” Begier v. I.R.S., 496 U.S. 53, 58

(1990).

As the Department has observed, however, this case

does not concern what assets should be distributed to

creditors with allowed claims. It concerns whether the

Department’s claim should have been allowed in the first

place. In suggesting that a policy of “equality” underlies

the process governing the allowance of claims, the

Trustee confuses two different stages of a bankruptcy

proceeding.’ See Thomas H. Jackson, Bankruptcy, Non-

’ Even the policy with respect to distribution is not one of

perfect equality. It is a “general policy” subject to exceptions,

including “the grant of priority to certain claims” and “the

subordination of certain claims.” H.R. Rep. No. 95-595, supra,

at 186, reprinted in 1978 U.S.C.C.A.N. 5973, 6147. At the dis-

(continued...)

Bankruptcy Entitlements, and the Creditors’ Bargain, 91

Yale L.J. 857, 859 (1982) (the assertion that “equality”

is an overriding bankruptcy policy does not deal, “even

roughly, with the plain fact that all bankruptcy laws to

date accord substantial respect to non-bankruptcy en-

titlements”).

Second, in the allowance of claims all creditors—pri-

vate creditors and the government—are treated equally

under the Code in an important sense. Except where

Congress has expressly chosen to change substantive

rights, all parties come into bankruptcy with the same

rights and entitlements they had outside of bankruptcy.

See Butner, 440 U.S. at 54-55, 57. All creditors are

treated identically because the position they held is nei-

ther improved nor worsened, and the strength of their |

claims is neither increased nor decreased. In asking the

Court to disturb the state law rights of government

creditors by adopting a less favorable burden of proof for

tax claims, the Trustee is not seeking equal treatment for

non-governmental creditors. He wants better treatment.

7 (...continued)

tribution stage, the government has historically enjoyed a

favored status and continues to do so under the Code: tax

claims are priority claims, 11 U.S.C. § 507(aX8), and are non-

dischargeable, 11 U.S.C. § 523(a\1). The “egalitarian appeal”

of the Trustee’s argument “overlooks the frequent disparate

treatment of the government as tax-creditor found in the

Bankruptcy Code regarding such matters as the priority and

dischargeability of claims.” 15 Collier on Bankruptcy, supra,

q TX5.03(5) at TX5-25.

The Seventh Circuit rightly saw the Trustee’s appeal to

“equality of treatment” for what it is: an argument for

the intervention of equity in the allowance of claims.

(P.A. A-9-10). No such equitable authority exists. Al-

though the Trustee in his brief continues to play up the

equitable powers of bankruptcy courts (Pet. Br. at 28 and

n.11), the Bankruptcy Code “does not authorize free-

wheeling consideration of every conceivable equity.”

N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 527 (1984).

Rather, the equitable powers of bankruptcy courts can

only be exercised under the Code itself. Norwest Bank

Worthington v. Ahlers, 485 U.S. 197, 206 (1988).

No Code provision authorizes bankruptcy courts to

discount or even discard the state law rights of an entire

class of creditors on equitable grounds, allowing the

claims of some creditors and not others because some

creditors are perceived to be “most worthy.” In re Mil-

waukee Cheese Wisconsin, Inc., 112 F.3d 845, 848 (7th

Cir. 1997). “Undefined considerations of equity,” the

Court declared in Butner, do not entitle bankruptcy

courts to fashion “uniform federal rule[s]” that rob cred-

itors of their rights under state law.* Butner, 440 U.S. at

56; see also Noland, 517 U.S. at 540-41; In re Highland

* In contending that tax creditors should be deprived of state

law rights when other creditors are accorded theirs, the Trustee

is in fact advocating, not equity, but inequity. See Butner, 440

U.S. at 56 (conferring new rights on some creditors and ne-

gating the rights of others “when bankruptcy intervenes” is an

“inequity”); Jowa R.R., 840 F.2d at 536 (equity “the

consistent application of legal rules,” and “[wJhen o i t

gets treatment that is denied to others, they have treated

inequitably”) (internal quotation omitted).

Superstores, 154 F.3d at 578-79; In re Lapiana, 909 F.2d

221, 224 (7th Cir. 1990) (“bankruptcy judges are not em-

powered to dissolve rights in the name of equity”).

As for the advantages tax creditors have over other

creditors, those are advantages the law gives them. The

“benefit” tax creditors reap from their burden of proof

(Pet. Br. at 27) is one state law confers. Tax claims re-

ceive priority in bankruptcy because Congress said so in

the Code. 11 U.S.C. § 507(aX8). In drafting the Code,

Congress specifically sought to balance the competing

interests of debtors, private creditors and tax creditors.

See S. Rep. No. 95-989, supra, at 14, reprinted in 1978

U.S.C.C.A.N. 5787, 5800; Landbank, 973 F.2d at 270.

Congress knew how to address taxes and burdens of

proof, and Congress could have displaced the state law

burden of proof for tax claims in the Code. It chose not to.

Bankruptcy courts may not second-guess that choice,

disfavoring tax creditors on the ground that “Congress

has given them too much.” Thinking Machines, 211 B.R.

at 431 n.7 (internal quotation omitted).

The Trustee also mistakenly suggests that the “policy

reasons” for placing the burden of proof on the taxpayer

would not be “disserved” by reversing the burden of proof

in bankruptcy. He asserts that trustees and private

creditors “often” have no better understanding of the

debtor’s affairs and no more access to information than

the government. (Pet. Br. at 27 n.10).

In most cases, though, trustees and creditors do have

information about the debtor. Private creditors, who

often insist on financial information as a condition of

doing business, are in fact more likely to have infor-

mation than the government, which deals with the debtor

on a non-consensual basis. The Code and Rules also give

trustees and creditors committees the means to acquire

information, authorizing them to investigate the debtor’s

finances, see 11 U.S.C. § 704(4); 11 U.S.C. § 1103(c)(2); 11

U.S.C. § 1302(b)(1), and to “examine any entity” concern-

ing “the liabilities and financial condition of the debtor,”

Fed. R. Bankr. P. 2004(a), (b). See also 15 Collier «n

Bankruptcy, supra, 4 TX5.03[5] at TX5-25 n.57 (noting

that arguments of the kind the Trustee makes for shift-

ing the burden of proof to the government “overlook the

trustee’s rights to the relevant books and records”).

Moreover, access to information is not the only “policy

reason” underlying the tax law burden of proof. Tax law

also assigns the burden of proof to taxpayers to provide

an incentive to meet their record-keeping obligations in

a tax system based on voluntary compliance and self-as-

sessment. Rexach, 482 F.2d at 16. Removing the burden

of proof from taxpayers would destroy that incentive.

Barrows v. I.R.S., 231 B.R. 446, 452 (D.N.H. 1998);

Thinking Machines, 211 B.R. at 431. The risks from a

scarcity of information would fall on the government, not

the taxpayer, and a taxpayer who kept few or no tax rec-

ords would be rewarded by escaping liability.’ Rexach,

® It is no answer to argue that under 11 U.S.C. § 727(aX3) a

debtor who fails to keep records may be denied a discharge.

(Pet. Br. at 27 n.10). Records sufficient for bankruptcy pro-

ceedings will not necessarily be records sufficient for taxing

authorities to prove their claims. Nor are the Code’s record-

keeping requirements as strict as the requirements of tax law.

(continued...)

482 F.2d at 17 (placing the burden on the government

would undermine record-keeping requirements, making

the government’s case “more difficult if not impossible to .

establish”).

These considerations, however, go to choices about

policy—whether assigning the burden of proof to the

government in bankruptcy would be a more sensible

practice. That is not the question here. Congress enacted

the Code, and suggestions about the best way to operate

the bankruptcy system should be addressed to Congress

rather than the Court. See Kawaauhau v. Geiger, 523

U.S. 57, 64 (1998) (bankruptcy policy is for Congress, not

the Court, to decide). The only question in this case is

whether any clear and manifest federal interest requires

bankruptcy courts faced with tax claims to alter the bur-

den of proof applicable to those claims under state law.

See Butner, 440 U.S. at 55.

The Trustee has proposed no such federal interest. It is

not enough to say that other creditors do not have the

same rights as tax creditors, when the rights of all

® (...continued)

Under section 727(aX3), a credible excuse for the loss of records

will often ensure a discharge, see, e.g., In re Pisano, 105 B.R.

125, 127 (Bankr. S.D. Fla. 1989) (debtor’s unrebutted testimony

that moving company lost carton of records deemed sufficient),

whereas the loss of records is rarely a defense to tax liability,

see Andrew Crispo Gallery, Inc. v. Comm’r, 16 F.3d 1336, 1343

(2nd Cir. 1994). Some debtors (consumer debtors, for example)

are not even expected to have much in the way of records and

generally are not denied a discharge under section 727(aX3).

See 6 Collier on Bankruptcy { 727.03[3)[g] at 727-36 (Lawrence

P. King, ed., rev. 15th ed. 1999).

creditors are a matter of state law. Butner, 440 U.S. at

54. No bankruptcy policy is thwarted simply because

state law gives one creditor greater rights than another.

In re Anchorage Int'l Inn, Inc,, 718 F.2d 1446, 1451 (9th

Cir. 1983).

3. Federal Policies Support The Use Of The

State Law Burden Of Proof In Bankruptcy.

Not only has the Trustee identified no federal interest

supporting the result the advocates, but several federal

policies militate against altering the burden of proof

when a taxpayer files bankruptcy.

First, shifting the burden of proof contravenes bank-

ruptcy’s neutral] stance toward non-bankruptcy rights

and the “uniform treatment of property interests” it

ensures. Butner, 440 U.S. at 44; see also Patterson v.

Shumate, 504 U.S. 753, 764 (1992) (stating that “treat-

ment of pension benefits” should not “vary based on the

beneficiary’s bankruptcy status”). For the most part,

bankruptcy neither confers new rights nor takes away

old ones. If the burden of proof changes when taxpayers

file bankruptcy, however, taxing authorities will be de-

nied one of their non-bankruptcy rights. Taxpayers,

meanwhile, will obtain a right they do not have when

their tax liabilities are decided in state court. No party

should receive “‘a windfall merely by reason of the hap-

penstance of bankruptcy.’” Butner, 440 U.S. at 55 (quot-

ing Lewis v. Manufacturers Nat'l Bank, 364 U.S. 603, 609

(1961)). Nor should the rights of parties in tax disputes

turn on whether the disputes are litigated in bankruptcy

court or state court. Ford, 194 B.R. at 589-90.

Second, the bankruptcy laws are meant to discourage

taxpayers from forum-shopping and from using bank-

ruptcy “as a means of improperly avoiding their tax

debts.” S. Rep. No. 95-989, supra, at 14, reprinted in 1978

U.S.C.C.A.N. 5787, 5800. Congress specifically intended

“to make tax considerations as nearly neutral as possible

with regard to whether a taxpayer should file a case

under chapter 11.” 15 Collier on Bankruptcy, supra,

4 TX5.04(6] at TX 5-46; see Butner, 440 U.S. at 55

(uniform treatment of property interests serves to “dis-

courage forum shopping”). If taxpayers can shift the

burden of proof to the government merely by filing bank-

ruptcy, however, bankruptcy proceedings will provide

taxpayers with their best chance of avoiding tax liabili-

ties. Taxpayers will quickly learn that they are better off

defending tax claims in bankruptcy court than in state

court, giving them an incentive to file bankruptcy and

“funnel[ling]) people with tax problems into the bank-

ruptcy courts.” Thinking Machines, 211 B.R. at 431.

Third, shifting the burden of proof to the government

in bankruptcy would be contrary to fundamental princi-

ples of federalism. The power to tax is not only an aspect

of state sovereignty but “is basic to the power of the State

to exist.” Arkansas v. Farm Credit Servs., 520 U.S. 821,

826 (1997). Because of the importance of tax laws to the

states, Fair Assessment in Real Estate Ass'n v. McNary,

454 U.S. 100, 108 (1981), Congress and the Court “re-

peatedly have shown an aversion to federal interference

with state tax administration.” National Private Truck

Council v. Oklahoma Tax Comm'n, 515 U.S. 582, 586

(1995). They have recognized that federal intervention in

state tax matters risks throwing state tax administration

“into disarray,” allowing taxpayers to escape the re-

quirements of state law. Rosewell v. LaSalle Nat'l Bank,

450 U.S. 503, 527 (1981) (quoting Perez v. Ledesma, 401

U.S. 82, 128 (1971) (Brennan, J., concurring in part and

dissenting in part)).

If the burden falls on the government to prove tax lia-

bility, state tax administration could be disrupted, and

states could find it necessary to rework their tax laws.

Because taxpayers will be able to contest their tax lia-

bilities in a forum where they are relieved of the obliga-

tion to produce evidence, potential tax delinquents will

no longer have much reason to maintain records. To com-

pensate, states could well be forced to impose greater

reporting requirements on all taxpayers, burdening them

and intruding more deeply into their lives. Rather than

chance revenue shortfalls, states may have to create new

and expensive mechanisms for the sole purpose of fer-

reting out information that taxpayers previously had to

supply themselves or risk tax liability if they did not. In

that event, the states’ costs of collection will increase;

their net tax revenues will decrease.

Given the “strong background presumption against in-

terference with state taxation,” National Private Truck

Council, 515 U.S. at 590, the policy of treating property

interests in and out of bankruptcy uniformly, and the

Congressional concern that bankruptcy not become a

haven for tax delinquents, Congress could not have

meant for tax claims to be determined in bankruptcy

using a burden of proof different from the burden of proof

in state court.

Ill, THE TRUSTEE’S HISTORICAL APPROACH IS

NO SUBSTITUTE FOR THE ANALYSIS BUTNER

REQUIRES.

In his brief, the Trustee spends little time proposing a

federal interest that warrants displacing the state law

burden of proof. Although Butner describes the applicable

analysis, the Trustee barely mentions the case. (See Pet.

Br. at 26). Rather than confront Butner and make the

showing that decision requires, the Trustee tries to side-

step the issue, embarking on a lengthy excursion into

bankruptcy history designed to preempt Butner alto-

gether. (Pet. Br. at 9-20).

The problem with the Trustee’s historical argument—

an argument he has never made before in this litiga-

tion—is that both its premises are false. The history of

the bankruptcy laws provides no basis for inserting

burdens of proof to fill gaps in the Code. And even if past

practice could be used this way, the Trustee’s version of

bankruptcy history is incorrect.

A. Past Practice Under The Bankruptcy Act Is An

Aid To Construction, Not A Way Of Filling Gaps

In The Code.

Federal common law under the Bankruptcy Act does

not mechanically supplement the Code in all matters

where the Code is silent, as the Trustee seems to believe.

It is simply an aid to construction when Code provisions

are unclear. Because no Code section addresses burdens

of proof for claims, there is no Code section to be con-

strued here. The history of bankruptcy practice is beside

the point.

Although the Court has often examined practices under

the Act in cases arising under the Code, it has done so

only in the course of considering what existing Code

provisions mean. See, e.g., Cohen v. De La Cruz, 523 U.S.

213, 221-22 (1998) (noting that history of fraud exception

under the Act “reinforces our reading of § 523(a'2A)”);

Noland, 517 U.S. at 539 (considering past equitable sub-

ordination practice in interpreting section 510(c)); United

Savings Ass’n v. Timbers of Inwood Forest Assoc., Ltd.,

484 U.S. 365, 373 (1988) (considering former practice

where legislative history indicated section 506(b) “merely

codified pre-Code bankruptcy law”); Kelly v. Robinson,

479 U.S. 36, 44, 47, 50 (1986) (considering “the language

of §§ 101 and 523 in light of the history of bankruptcy

court deference to criminal judgments” because that his-

tory “informs our understanding of the language of the

Code”); Midlantic Nat'l Bank v. New Jersey Dep’t of

Envtl. Protection, 474 U.S. 494, 501 (1986) (reviewing

history of abandonment power as an aid to interpreting

section 554).

Past bankruptcy practice, in other words, has served as

a tool of statutory interpretation. United States v. Ron

Pair Enters., Inc., 489 U.S. 235, 244-45 (1989) (explaining

that in Kelly and Midlantic, for example, the Court

“looked to pre-Code practice for interpretive assistance”

where statutory language, “at least to some degree, was

open to interpretation”). When Code provisions are am-

biguous or unclear, Congress is assumed to have been

aware of accepted practices under the Act and to have

drafted the Code with them in mind. Kelly, 479 U.S. at

47; Midlantic, 474 U.S. at 501. This is no more than an

application of “the normal rule of statutory construction”

that “if Congress intends for legislation to change the

interpretation of a judicially created concept, it makes

that intent specific.” Midlantic, 474 U.S. at 501. |

The Court has not said, however, that it will automati-

cally import “established practice” under the Act to fill

every gap in the Code when no question of statutory

meaning is at stake. See Ron Pair, 489 U.S. at 244 (in

determining that Congress intends no departure from

pre-Code practice, the Court has not simply relied “on a

pale presumption to that effect”). To the contrary, the

Court has made clear that it will not “adopt a court-made

rule to supplement federal statutory regulation that is

comprehensive and detailed.” O’Melveny & Myers v.

F.D.L.C., 512 U.S. 79, 85 (1994); see also Atherton v.

F.D.1.C., 519 U.S. 213, 218-19 (1997). Instead, “matters

left unaddressed in such a scheme are presumably left

subject to the disposition provided by state law.” O’Mel-

veny, 512 U.S. at 85.

Federal common law may displace state law to fill gaps

in a federal statutory scheme, but it does so only in

instances when there is “‘a significant conflict between

some federal policy or interest and the use of state

law.’” Atherton, 519 U.S. at 218 (quoting O’Melveny, 512

U.S. at 87). Those instances are “‘few and restricted.’”

O’Melveny, 512 U.S. at 87 (quoting Wheeldin v. Wheeler,

373 U.S. 647, 651 (1963)). Where the Bankruptcy Code is

concerned, the Court has said, the statutory scheme will

generally be construed “to adopt, rather than displace,

_ ‘pre-existing state law.” BFP, 511 U.S. at 545.

The Trustee has not identified a Code provision he

wants the Court to construe. He admits there is none.

(Pet. Br. at 7-8, 15). Without such a provision, O'Melveny,

Atherton and BFP demand a conflict with “some federal

policy or interest” before state law can be discarded—

bringing the analysis back to Butner. See Iowa R.R., 840

F.2d at 540. What past practices were under the Bank-

ruptcy Act is irrelevant.

B. There Was No Accepted Judicial Practice Under

The Act Of Placing The Burden Of Proof On Tax

Creditors.

Even if past bankruptcy practices were relevant here,

the Trustee has his history wrong. The trend in bank-

ruptcy legislation over the last century was to subject the

government as creditor to the same procedures in bank-

ruptcy as other creditors, not to disrupt the government’s

substantive rights. The courts, meanwhile, had no estab-

lished practice in bankruptcy cases of placing the burden

of proof on the government in tax claims.

Changes in the bankruptcy laws since the 1898 Act was

enacted do not show a Congressional desire to alter the

non-bankruptcy rights of government creditors. It is true

that taxes were not treated as claims under the original

version of the Act but were obligations the trustee had to

seek out and pay unless the bankruptcy court issued a

bar order. See 3 Collier on Bankruptcy, suj: , {57.30 at

433. It is true, as well, that the Chandler Act brought

government claims, tax and otherwise, under the Act, re-

quiring that they be filed and proved in the same manner

as other claims.” Jd. at 433-44; see S. Rep. No. 1916, 75th

° “Proving” a claim under section 57a of the Act (and later

under former Bankruptcy Rule 301(a)) had nothing to do with

(continued...)

Cong., 3rd Sess. 2, 5 (1938); In re Berkshire Hardware

Co., 39 F. Supp. 663, 667 (D. Mass. 1941).

But these were procedural requirements. The purpose

of the Chandler Act was to subject government claims to

“substantially the same formalities and time limitations

as other provable debts.” 3A Collier on Bankruptcy,

supra, { 63.26 at 1900. In matters of bankruptcy proce-

dure, the Chandler Act ensured that a government tax

claimant was “in no better position than any other claim-

ant,” In re Ward, 131 F. Supp. 387, 395 (D. Colo. 1955),

and in this respect tax claims were indeed to be treated

“no differently from other claims.” (Pet. Br. at 11). Thus,

in New York v. Saper, 336 U.S. 328, 337 (1949), which

the Trustee cites, the Court held that government cred-

itors had no more right to post-petition interest—a

matter of bankruptcy law—than any other creditor. Jd.

at 337; see also Nicholas v. United States, 384 U.S. 678,

683 (1966) (disallowing post-petition interest on post-

petition tax liabilities).

Nothing in the Bankruptcy Act or in the Chandler Act,

however, purported to alter the substantive, non-bank-

ruptcy rights of tax creditors—the rights on which their

claims in bankruptcy were based. It was instead well

established under the Act that state law, not bankruptcy

burdens or standards of proof. It meant supplying a statement

setting forth the claim, listing any payments made on it, and

declaring that the debtor owed the balance. See 11 U.S.C. § 93a

(repealed); Jn re Two Rivers Woodenware, 199 F. 877, 881 (7th

Cir. 1912) (stating that “[sJection 57a shows how a claim is to

be ‘proved.’”).

law, governed the substantive rights of creditors. As the

Court observed: “[wJhat claims of creditors are valid and

subsisting obligations against the bankrupt at the time

a petition in bankruptcy is filed, in the absence of over-

ruling federal law, is to be determined by reference to

state law.” Vanston, 329 U.S. at 161.

This rule, reiterated in Butner more than 50 years

later, was consistently applied under the Act. See, e.g.,

Security Mortgage Co. v. Powers, 278 U.S. 149, 153 (1928)

(validity of attorney’s lien in bankruptcy “must be de-

termined by Georgia law”); Benedict v. Ratner, 268 U.S.

353, 359 (1925) (rights of claimant in bankruptcy de-

pended “primarily upon the law of New York”); Bryant v.

Swofford Bros. Dry Goods Co., 214 U.S. 279, 291 (1909)

(“in bankruptcy the construction and validity” of a con-

tract “must be determined by the local laws of the

State”); see also 3A Collier on Bankruptcy, supra, { 63.07

at 1806-07 (noting that “(t]his principle has always been

recognized” under the Act).

Nor did the Act address burdczs of proof for claims—

something the Trustee concedes—let alone the burden of

proof for tax claims. (Pet. Br. at 12). Whitney v. Dresser,

200 U.S. 532 (1906), established no burden of proof. The

Court held only that a proof of claim was “prima facie

evidence of its allegations in case it is objected to,”

adding that this was “not a question of the burden of

proof in a technical sense—a burden which does not

change whatever the state of the evidence—but simply

whether the sworn proof is evidence at all.” Jd. at 534-35.

Section 57a of the Bankruptcy Act, 11 U.S.C. § 93a

(repealed), and later former Bankruptcy Rule 301(b), only

codified this decision.

Against this backdrop, the majority of lower federal

court decisions considering tax claims in bankruptcy in

fact employed the burden of proof from state or federal

substantive tax law.'’ That, not the application of some

" See, e.g., In re Fox, 609 F.2d 178, 181 (5th Cir. 1980) (debtor

had burden of proving right to state sales tax deductions); Jn re

Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976) (trustee had

burden of proving bad debt deduction); Paschal v. Blieden, 127

F.2d 398, 401 (8th Cir. 1942) (trustee had burden of proof to

show assessment incorrect); United States v. Knox-Powell-

Stockton Co., 83 F.2d 423, 425 (9th Cir. 1936) (trustee had bur-

den of proving monies received were not income); Jn re Lang

Body Co., 92 F.2d 338, 341 (6th Cir. 1937) (trustee had burden

of proving taxes were arbitrary and had to meet non-bank-

ruptcy standard of proof); In re Canady, 43 A.F.T.R.2d (RIA)

472 (N.D. Ga. 1978) (non-bankruptcy burden of proof applied to

objection to tax claim); Jn re Menefee, 40 A.F.T.R.2d (RIA) 5006

(E.D. Mo. 1977) (debtor had burden of proof on I.R.S. counter-

claim); In re Certified Credit Corp., 329 F. Supp. 1402, 1403

(S.D. Ohio 1971) (trustee had burden of proving right to de-

ductions); Jn re Standard Milling Co., 324 F. Supp. 386, 390

(N.D. Tex. 1970) (trustee had burden of proving property tax

valuation was excessive under state law); In re Reeves, 25

A.F.T.R.2d (RIA) 761 (D. Colo. 1970) (trustee had burden of

proof in dispute over I.R.S. assessment); Jn re Oxford Assoc.,

209 F. Supp. 242, 244-45 (D.N.J. 1962) (trustee had burden of

proof in tax dispute); Jn re Ward, 131 F. Supp. 387, 390 (D.

Colo. 1955) (trustee bore burden of proof on objection to tax

claim); Jn re Petersilge, 70 F. Supp. 95, 96-97 (N.D. Ohio 1946)

(trustee had burden of proving objection to state sales tax

assessment); Jn re Garfield Bag & Stationery Co., 42 F. Supp.

708, 711 (S.D.N.Y 1941) (trustee had burden to prove deduc-

tions under municipal tax ordinance); Jn re Lasky, 38 F. Supp.

24, 30(N.D. Ala. 1941) (trustee had burden of proving objection

(continued...)

universal “bankruptcy” burden of proof, appears to have

been the established practice. At worst, taking all of the

cases the parties have cited, the courts had no consistent

practice. But there was certainly no practice of the kind

the Trustee claims, one “so widely accepted” as to justify

the conclusion that displacing state law burdens was the

norm. Kelly, 479 U.S. at 46.

In the wake of all this, Congress addressed the burden

of proof question in 1978 the same way it had in 1898. It

said nothing. As the Department has discussed, and as

the Trustee admits, the Bankruptcy Code and Rules

contain no burdens of proof for claims.

The Trustee’s historical dissertation, then, amounts to

little more than this. The Bankruptcy Act created no

burden of proof for tax claims, and neither did any of the

amendments to the Act. Between 1898 and 1978, federal

" (...continued)

to property tax assessments); Jn re Trustees System Co., 30

F. Supp. 361, 363 (W.D. Ky. 1939) (debtor had burden of proof

in contesting federal income taxes); In re Mid America Co., 31

F. Supp. 601, 607 (S.D. Ill. 1939) (trustee had burden under

state law of proving debtor’s exemption from state employment

taxes); In re Bell, 34 F.2d 677, 680 (W.D. Pa. 1929) (trustee had

burden of proving right to federal tax deduction), modified on

other grounds sub nom. Jarvis v. Heiner, 39 F.2d 361 (3rd Cir.

1930); In re Glover-McConnell Co., 9 F.2d 683, 686 (N.D. Ga.

1925) (debtor bore burden of proving entitlement to tax ex-

emption); Jn re O'Neill, 80-2 U.S. Tax Cas. (CCH) ¥ 9716

(Bankr. W.D. Va. 1980) (debtor and trustee had burden of proof

in dispute over tax penalty); Jn re Osborn, 4 B.R. 431, 435

(W.D. Mo. 1979) (debtor had burden of disproving liability for

federal responsible officer penalty).

courts—to the extent they had a consistent practice at

all—employed the burden of proof from substantive tax

law in deciding the validity of tax claims. When the Code

came into being in 1978, it contained no burden of proof

for tax claims, and it still contains none. Neither do the

Rules. That is not much of a basis for believing that

Congress expects the Court to fashion a special, federal

common law burden of proof for tax cases.

The Trustee’s historical argument is a clever attempt,

not only to avoid Butner, but to make it appear that the

Department wants special treatment, a dispensation

from long-standing rules of bankruptcy=Not so. The long-

standing bankruptcy rule is that state law governs the

rights of creditors, public and private, except where a

federal interest demands otherwise. Butner, 440 U.S. at

54-55. In seeking to jettison the state law burden of proof

that ordinarily applies to tax claims, the Trustee is the

one asking for a special dispensation. To get it, though,

the Trustee had to show a clear federal interest compel-

ling that result. Jd. He has not made that showing.

CONCLUSION

The decision of the United States Court of Appeals for

the Seventh Circuit should be affirmed.

Respectfully submitted,

JAMES E. RYAN

Attorney General of Illinois

JOEL D. BERTOCCHI

Solicitor General of Illinois

A. BENJAMIN GOLDGAR

Counsel of Record

JAMES D. NEWBOLD

Assistant Attorneys General

100 West Randolph Street

12th Floor

Chicago, Illinois 60601

(312) 814-2090

Counsel for Respondent

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