# Respondents Brief — Raleigh v. Illinois Dept. of Revenue

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Respondents Brief
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 15

## Text

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,
v.

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

i
. 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.

ii

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

iv

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

Vv
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

vi

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

ix

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

1

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.

2

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).

3

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.

4

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 ... .

5

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).

6

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

_——- -—-

7

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).

8

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.

10

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

11

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

12

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

13

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-

14

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

15

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);

16

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

17

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

18

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.

19

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”).

21

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,

ee

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

24

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...)

25

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.

26

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).

27

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-

28

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...)

29

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).

30

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.

31

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

32

“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.

34

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”

35

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,

36

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...)

37

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

© (...continued)

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.’”).

38

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.

39

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...)

40

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).

41

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.

42

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0333%3A06. Public record. Not legal advice.