Amicus Curiae Brief — Raleigh v. Illinois Dept. of Revenue

supreme Court, U.S.

Mar ae veo ! FILED

No. 99.397 | MAR 2-2 2000

In the Supreme Court of the di nited States

THOMAS E. RALEIGH, CHAPTER 7 TRUSTEE

FOR ESTATE OF WILLIAM J. STOECKER, PETITIONER

L.

STATE OF ILLINOIS DEPARTMENT OF REVENUE

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING RESPONDENT

SETH P. WAXMAN

Solicitor General

Counsel of Record

PAULA M. JUNGHANS

Acting Assistant Attorney

General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor

General

KENNETH L. GREENE

STEVEN W. PARKS

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

nee

LT ee Sasa eS

QUESTION PRESENTED

Whether the burden of proof for a tax claim, which

rests upon the taxpayer as a matter of substantive law,

is shifted to the government when that claim is litigated

in the taxpayer’s bankruptcy case.

TABLE OF CONTENTS

Page

Interest of the United States 1

Statement 2

Summary of argument 6

Argument:

The Bankruptcy Code does not alter the substantive

rules that govern the burden of proof for tax

claims 8

Conclusion 24

TABLE OF AUTHORITIES

Cases:

Ahlswede, In re, 516 F.2d 784 (9th Cir.), cert. denied,

423 U.S. 918 (1975) 23

Andover Togs, Inc., In re, 231 B.R. 521 (Bankr. S. D. N. v.

1999) 15

BFP v. Resolution Trust Corp., 511 U.S. 531

(1994) 7,11

Bird v. Carl’s Grocery Co. (In re NWFX, Inc.),

864 F.2d 598 (8th Cir. 1989) 23

Branson v. Department of Revenue, 659 N.E.2d 961

(In. 1995) 10

Bull v. United States, 295 U.S. 247 (1935) 8, 11, 13

Butner v. United States, 440 U.S. 48 (1979) 10, 23

Cities Serv. Oil Co. v. Dunlap, 308 U.S. 208

(1939) 11

City of New York v. Saper, 336 U.S. 828 (1949) — 16, 17, 19

Dewsnup v. Timm, 502 U.S. 410 (1992) 21

Dick v. New York Life Ins. Co., 359 U.S. 437

(1959) 11

Dickinson v. Riley, 86 F.2d 385 (8th Cir. 1936) ............... an

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

(1994) 11

Farris, In re, 194 B. R. 931 (Bankr. E. D. Pa. 1996) 15

Fiori v. Rothensies, 99 F.2d 922 (3d Cir. 1988 20

(ITT)

Cases—Continued: Page

Franchise Taz Board of California v. MacFarlane

(In re MacFarlane), 83 F.3d 1041 (9th Cir. 1996),

cert. denied, 520 U.S.1115 (1997) 3, 5, 11

Grogan v. Garner, 498 U.S. 279 (1991) 10

Helvering v. Taylor, 293 U.S. 507 (1935) 8

Highway Constr. Co. of Ohio, In re, 105 F. 2d 863 (6th

Cir. 1939) 20

Johns-Manville Corp., In re, 57 B.R. 680 (Bankr.

S.D.N.Y. 1986) 19

Landbank Equity Corp., In re, 973 F 2d 265 (4th

Cir. 1992) 5, 22, 23

Lang Body Co., In re, 92 F. 2d 338 (6th Cir. 1937),

cert. denied, 303 U.S. 637 (1938) 20

Lapriano, In re, 909 F. 2d 221 (7th Cir. 1990) . 5,28

Morristown & Erie R.R., In re, 885 F. 2d 98 (3d Cir.

1989) 23

Nicholas v. United States, 384 U.S. 678 (1986). 16, 20

Norwest Bank Worthington v. Ahlers, 485 U.S. 197

(1988) 23

Paschal v. Blieden, 127 F.2d 398 (8th Cir. 1942) ............. 20

Plisco v. United States, 306 F 2d 784 (D.C. Cir.

1962), cert. denied, 371 U.S. 948 (1963) 9

Uneco, Inc., In re, 582 F.2d 1204 (8th Cir. 1976) 20

Unioil, Inc., In re, 962 F. 2d 988 (10th Cir. 1992) 15

United States v. Janis, 428 U.S. 433 (1976) 9

United States v. Noland, 517 U.S. 535 (1996) .......... 8, 28, 24

United States v. Rexach, 482 F. 2d 10 (Ist Cir.),

cert. denied, 414 U.S. 1089 (1973) 8-9

United States v. Sampsell, 224 F 2d 721 (9th Cir.

1955) — 20

United States v. Sutton, 786 F.2d 1305 (Sth Cir.

1986) 23

Vanston Bondholders Protective Comm. v. Green,

329 U.S. 156 (1946) . 10, 11, 23

Welch v. Helvering, 290 U.S. 111 (19383) 8

Cases—Continued: Page

Woehr, In re, 121 B.R. 743 (N.D. Tex. 1990), aff’d,

957 F. 2d 867 (5th Cir. 1992) 15

Yoder Co., In re, 758 F.2d 1114 (6th Cir. 1985) 22

Statutes and rules:

Bankruptcy Code, 11 U.S.C. 101 et seg.

11 U.S.C. 584d) 17

11 U.S.C. 98(a) (1989) — 17

11 U.S.C. 980d) (1989) 17, 18

11 U.S.C. 9800) (1989) 18

11 U.S.C. 362(g) 12

11 U.S.C. 363(0) 12

11 U.S.C. 364(dX(2) 12

11 U.S.C. 502 11

11 U.S.C. 505 11

11 U.S.C. 507(aX8) 14

11 U.S.C. 521(4) 12-13

11 U.S.C. 547(g) 12

11 U.S.C. 701 et seq. (Ch. 7) 2

11 U.S.C. 704(7) 13

11 U.S.C. 1101 et seg. (Ch. 11) 2

11 U.S.C. 1129) 12

Chandler Act of 1988, ch 575, 52 Stat. 840 17

Internal Revenue Service Restructing and Reform Act

of 1998, Pub. L. No. 105-206, Tit. ITI, § 3001(a), 112

Stat. 727 (to be codified) 9

26 U.S.C. 7491 9, 10

26 U.S.C. 7491(a) 9, 10

26 U.S.C. Tag ita) 9

28 U.S.C. 1341 4

28 U.S.C. 2075 22

IIl. Rev. Stat. ch. 120 (Smith-Hurd 1989):

para. 439.3 2

para. 489.10 2

35 Ill. Comp. Stat. Ann. 735/3-7 (West 1999) 3

VI

Rules—Continued: Page

Fed. R. Bankr. P.:

Rule 3001(f) 7, 21, 22

Rule 4002 13

Fed. R. Evid.:

Rule 301 8, 22

Rule 1101(a) 22

Tax Ct. R. 142(a) 8

Miscellaneous:

Collier on Bankruptcy (15th ed. rev. 1999):

Vol. 3A (14th ed. 1975) 18

Vol. 6 13

Vol. 9 13

H.R. Rep. No. 595, 95th Cong., Ist Sess. (1978) 14, 21

H.R. Conf. Rep. No. 599, 105th Cong., 2d Sess.

(1998) 9, 10

James Moore, Moores Bankruptcy Manual (19839) ......... 18-19

S. Rep. No. 174, 105th Cong., 2d Sess. (1998) 9, 10, 21

S. Rep. No. 989, 95th Cong., 2d Sess. (1978) 21

S. Rep. No. 1916, 75th Cong., 3d Sess. (1938) 18, 19

21 Charles Alan Wright & Kenneth W. Graham, Federal

Practice and Procedure (1977) 11

In the Supreme Court of the United States

No. 99-387

THOMAS E. RALEIGH, CHAPTER 7 TRUSTEE

FOR ESTATE OF WILLIAM J. STOECKER, PETITIONER

V.

STATE OF ILLINOIS DEPARTMENT OF REVENUE

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING RESPONDENT

INTEREST OF THE UNITED STATES

The Internal Revenue Service files more than

100,000 proofs of claim in bankruptcy cases each year

seeking to recover several billion dollars of taxes. It

has long been the general rule in litigation contesting

tax liabilities that the taxpayer bears the burden of

proof. The question presented in this case is whether

that burden of proof is placed instead on the taxing

authority merely because the tax case is litigated in

bankruptcy court. That question is one of substantial

recurring importance in the administration of the

federal tax laws.

(1)

2

STATEMENT

1. William toecker was the president and sole di-

rector of Chandier Enterprises, Inc., an Illinois corpo-

ration. That corporation purchased an airplane from an

out-of-state seller in 1988. Pet. App. B2. The State of

Illinois imposes a use tax on Illinois residents “upon the

privilege of using in this State tangible personal prop-

erty” whether such property is purchased in Illinois or

elsewhere. Ill. Rev. Stat. ch. 120, J 439.3 (Smith-Hurd

1989). Retailers in Illinois, and foreign retailers with an

adequate nexus to Illinois, are required to collect and

pay over that tax to Illinois. Jbid. Any tax not paid to

a retailer * * * shall be paid to the Department [of

Revenue] directly by any person using such property

within [Illinois].” Jbid. A purchaser whose seller does

not pay the use tax is thus to file a return with the

Department of Revenue and pay the tax. Id. | 439.10.

In this case, however, neither Chandler Enterprises

nor the out-of-state seller of the airplane filed an Illinois

use tax return or paid the Illinois use tax. Pet. App.

B2-B3.

2. In 1989, the creditors of Mr. Stoecker initiated

involuntary bankruptcy proceedings against him under

Chapter 11 of the Bankruptcy Code. The bankruptcy

case was later converted to a liquidation proceeding

under Chapter 7 of the Bankruptcy Code. Pet. App.

C12. While the bankruptcy case was pending, the

Illinois Department of Revenue issued a Notice of Tax

Liability to Chandler Enterprises for the unpaid use

tax on the airplane. The corporation had been invol-

untarily dissolved, however, and thus did not pay the

use tax. Id. at B2-B3.

Under Illinois law, a corporate officer “who has the

control, supervision or responsibility of filing returns

3

and making payment of the amount of any * * * tax

* * * who wilfully fails to file the return or make the

payment * * * shall be personally liable for a penalty

equal to the total amount of tax unpaid by the [cor-

poration].“ 35 Ill. Comp. Stat. Ann. 735/3-7 (West 1999).

Invoking that provision, the Illinois Department of

Revenue issued a Notice of Penalty Liability asserting

that Mr. Stoecker was personally liable for the unpaid

taxes of the corporation. Pet. App. B2-B3, C20-C21.

The State thereafter filed a proof of claim in the amount

of $911,769 in Mr. Stoecker’s bankruptcy case. Id. at

C20 & n.12.

8. The bankruptcy court upheld the trustee’s objec-

tion to the State’s claim. Pet. App. C1-C81. Relying

on Franchise Tax Board of California v. MacFarlane,

83 F.3d 1041, 1045 (9th Cir. 1996), cert. denied, 520 U.S.

1115 (1997), the bankruptcy court concluded that the

State had the burden of proof on its tax claim because

“the ultimate burden of persuasion always remains with

the claimant to prove entitlement to the claim.” Pet.

App. C5. The court held that the Department’s notice

of liability and proof of claim constituted “prima facie

proof as to all elements of [the tax] liability” and that

“(t]he burden then shifted to the Trustee to rebut the

presumption created by” the notice. Id. at C73. The

court stated, however, that the trustee had properly

rebutted that presumption by “showing that the Debtor

was not in control [of the corporation] and thus could

not have voluntarily or willfully failed to pay the tax.”

Ibid. The court held that It he ultimate burden of

proof then shifted back” to the State to show that its

claim should be allowed. Ibid. The court ruled against

the State because it failed to “refute” the debtor’s

evidence “and to ultimately sustain its burden of proof

„ „ ” Id. at C74.

4

4. The district court affirmed. Pet. App. B1-B21.

The court first held that it was barred by 28 U.S.C.

1341 from reviewing tho State’s determination that the

corporation was liable tor the use tax. Pet. App. B13-

B16. That statute deprives the district courts of juris-

diction to enjoin or restrain the assessment or collection

of state taxes when a plain, speedy, and adequate

remedy may be had in the state courts. 28 U.S.C. 1341.

The district court concluded that this statute barred it

from reviewing the validity of the state tax assessment

against the corporation. With respect to the State’s

claim against the debtor in his individual capacity,

however, the court held that the State bore the burden

of proof. Pet. App. B8. The court sustained the con-

clusion of the bankruptcy court that the State failed to

meet that burden by showing that the debtor had

control, supervision, or responsibility for paying the use

tax liability of the corporation. Jd. at B9-B12.

5. The court of appeals reversed. Pet. App. Al-A13..

The court of appeals rejected the conclusion of the

district court that 28 U.S.C. 1341 bars federal courts

from reviewing the tax liability of the corporation in

this bankruptcy case. On the merits, however, the

court of appeals concluded that the state tax had been

lawfully assessed upon the corporation. Pet. App. A7.

Having thus reached the question of the debtor’s

individual liability for that tax, the court of appeals

stated that there was “no proof either that [the debtor]

was responsible for” filing Chandler’s tax returns or

paying Chandler’s taxes “or that he willfully evaded the

payment of the use tax.” Pet. App. A7. The court con-

cluded, however, that “just as under the corresponding

federal law of responsible-officer liability for unpaid

taxes, 26 U.S.C. § 6672 * * * , Illinois shifts the

burden of proof—both production and persuasion—to

5

the officer once a Notice of Penalty Liability is issued,

* * * and the trustee has not carried it.” Pet. App.

A7. The court stated that, while the debtor “may have

satisfied his burden of production by identifying”

another individual as the “corporate financial officer,

* * * he has not satisfied the burden of persuasion.”

Id. at A7-A8. Noting that the proper allocation of the

burden of proof “is critical” to resolution of this case,

the court of appeals held that the debtor was liable for

the tax. Id. at A8.

The court of appeals rejected the trustee’s argument

that “equity” requires the burden of proof for tax

claims to be placed on the government in bankruptcy

cases. Pet. App. A9. The court stated that “(bJank-

ruptcy is not a ‘free-for-all equity balancing act. I bid.

(quoting In re Lapriano, 909 F.2d 221, 223 (7th Cir.

1990)). Instead, “it is now well settled that although the

origins, procedures, and many of the remedies of

bankruptcy are indeed equitable, a bankruptcy judge

has no authority to cut down the entitlements that

creditors seek to enforce in bankruptcy, except * * *

as provided by the Bankruptcy Code itself.” Pet. App.

A9. The court concluded that “[(bjurden of proof is

rightly classified as a part of the creditor’s entitlement”

that “is not shifted in bankruptcy.” Id. at A10.

The court of appeals acknowledged that the decision

of the Ninth Circuit in Franchise Tax Board of Califor-

nia v. MacFarlane, 83 F.3d at 1045, conflicts with the

decision in this case. The court concluded, however,

that the view adopted here and in In re Landbank

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

preferable because (Pet. App. A10):

[i]t is supported by the general pattern of American

tax law, in which “payment precedes defense, and

6

the burden of proof, normally on the claimant, is

shifted to the taxpayer,” Bull v. United States, 295

U.S. 247, 260 (1935), and by the countless cases

which hold that burden of proof is “substantive” for

purposes of the Erie doctrine, e.g., Director v.

Greenwich Collieries, 512 U.S. 267, 271 (1994);

American Dredging Co. v. Miller, 510 U.S. 448, 454

(1994) XR * *

The court of appeals noted that, although Congress

could have provided a different result for tax elaims in

bankruptcy cases, there is no indication that it sought

to do so. The court observed that, while close attention

was paid to issues of burden of proof in several

provisions of the Bankruptcy Code, the Code is silent

on the burden of proof in tax cases. Pet. App. All. The

court noted, moreover, that a rule shifting the burden

of proof to the government on tax claims in bankruptcy

cases would create an undesirable incentive for tax-

payers to declare bankruptcy. Ibid. Concluding that

the burden of proof rests on the taxpayer in this case—

just as it would if the tax claim had been adjudicated

outside of bankruptcy court—the court of appeals held

that “the state has a valid claim * * * and that the

decision of the district court must therefore be re-

versed.” Id. at Al2.

SUMMARY OF ARGUMENT

The proper allocation of the burden of proof is a

substantive rule governed by the law that creates the

underlying claim. The State of Illinois follows the

traditional rule that allocates the burden of proof on tax

claims to the taxpayer. The court of appeals correctly

held that this substantive rule of Illinois law is not

abridged—and that the burden of proof on Illinois tax

7

claims is not placed on the State simply because the

tax claim is litigated in bankruptcy court.

Except when Congress expressly provides other-

wise, the substantive rules that allocate the burden of

proof for a creditor’s claim in non-bankruptcy cases also

govern in bankruptcy proceedings. Nothing in the

Bankruptcy Code expressly shifts the burden of proof

to the taxing authority on tax claims litigated in bank-

ruptcy court. To the contrary, while the Bankruptcy

Code does contain several provisions that, in other

contexts, explicitly address the burden of proof, there is

nothing in the Code that establishes the “clear and

manifest” intent (BFP v. Resolution Trust Corp., 511

U.S. 531, 544 (1994)) required to displace the State’s

substantive rules governing the burden of proof on tax

claims.

The legislative history of the Bankruptcy Code, and

the prior practice under the Bankruptcy Act, also do

not support petitioner’s contention. The case law under

the Bankruptcy Act had reached conflicting results.

Some courts had concluded that the burden of proof

shifts to the taxing authorities in bankruptcy; others

had concluded that the burden was retained by the

debtor. In this context, it cannot plausibly be sug-

gested that congressional silence on the allocation of the

burden of proof was intended to adopt any particular

view.

Nor does Bankruptcy Rule 3001(f) prescribe a bur-

den of proof on claims in bankruptcy. It provides only

that the proof of claim executed by the claimant is

“prima facie evidence” of the validity and amount of the

claim. Fed. R. Bankr. P. 3001(f). That Rule does not

purport to prescribe the ultimate burden of proof to be

applied when the “prima facie” case established by the

proof of claim is disputed by an objection in bankruptcy

8

court. This Bankruptcy Rule is subject to Rule 301 of

the Rules of Evidence, which specifies that such a

presumption merely imposes a “burden of going for-

ward with evidence” “to rebut or meet the presump-

tion” and “does not shift * * * the burden of proof in

the sense of the risk of nonpersuasion.” Fed. R. Evid.

301.

Petitioner also errs in suggesting that bankruptcy

courts, as courts of equity, may disregard the substan-

tive rules governing burden of proof established under

non-bankruptcy law. Bankruptcy courts may not “con-

tradict [the] statutory or common law” placing the

burden of proof on taxpayers simply by invoking an

“unrestricted power” to achieve “a fairer result”

(United States v. Noland, 517 U.S. 535, 543 (1996)).

ARGUMENT

THE BANKRUPTCY CODE DOES NOT ALTER THE

SUBSTANTIVE RULES THAT GOVERN THE

BURDEN OF PROOF FOR TAX CLAIMS

1. It has long been the settled rule that, except as

Congress provides otherwise, the burden of proof in

litigation involving federal tax liabilities rests on the

taxpayer. As this Court stated in Helvering v. Taylor,

293 U.S. 507, 515 (1935), “[uJnquestionably the burden

of proof is on the taxpayer to show that the commis-

sioner’s determination is invalid.“ Accord Bull v.

United States, 295 U.S. 247, 260 (1935); Welch v.

Helvering, 290 U.S. 111, 115 (1983).’ The rule placing

1 This allocation of the burden of proof historically applied

whether the tax claim was litigated in Tax Court in a deficiency

proceeding (Tax Ct. R. 142(a)), in district court or the Court of

Federal Claims in a refund case (Bull v. United States, 295 U.S. at

260), or in a tax collection action brought by the government in

district court (United States v. Rexach, 482 F.2d 10, 15-18 (Ist

9

the burden of persuasion on the taxpayer was first

developed as a judge-made rule of common law and was

thereafter “repeatedly considered and approved by

Congress.” H.R. Conf. Rep. No. 599, 105th Cong., 2d

Sess. 238 (1998); S. Rep. No. 174, 105th Cong., 2d Sess.

43 (1998)2 The States have also, by either statute or

Cir.), cert. denied, 414 U.S. 1039 (1973); Plisco v. United States,

306 F.2d 784, 786 & n.2 (D.C. Cir. 1962), cert. denied, 371 U.S. 948

(1963)). In United States v. Janis, 428 U.S. 433, 440 (1976), the

Court stated, without deciding, that It Ihe policy behind the pre-

sumption of correctness and the burden of proof * would

appear to be applicable” in tax collection suits and that allocating

the burden to the taxpayer in such suits would accord)

with the burden-of-proof rule which prevails in the usual preas-

sessment proceeding in the United States Tax Court.” .

2 Congress has recently added Section 7491 to the Internal

Revenue Code to provide that, “in any court proceeding,” the

burden of proof on factual iss es relevant to ascertaining the tax-

payer’s federal tax liability will rest with the United States if the

satisfies the following conditions: (i) the taxpayer “intro-

duces credible evidence” on the issue; (ii) the taxpayer has com-

plied with substantiation requirements imposed by the Internal

Revenue Code; (iii) the taxpayer has “maintained all records”

required by the Internal Revenue Code, and “has cooperated with

reasonable requests” for witnesses, information, documents, meet-

ings, and interviews; and, (iv) in the case of a partnership, corpora-

tion or certain trusts, the taxpayer’s net worth does not exceed $7

million, and it has no more than 500 employees. Internal Revenue

Service Restructing and Reform Act of 1998, Pub. L. No. 105-206,

Tit. III, § 3001(a), 112 Stat. 727 (to be codified at 26 U.S.C.

7491(a)). This new provision applies only to court proceedings that

arise in connection with examinations commenced after July 22,

1998, or, in a case in which no examination occurred, to court pro-

ceedings arising in connection with taxable periods beginning, or

events occurring, after July 22, 1998.

The new rules of Section 7491 also apply only to taxes imposed

by Subtitles A (“Income Taxes”) and B (“Estate and Gift Taxes”)

of the Internal Revenue Code. 26 U.S.C. 7491(aX(1). This provision

10

common law, routinely adopted this traditional alloca-

tion of the burden of proof to the taxpayer. See Amici

States Br. Supporting Cert. at 6 n.3. In particular, the

traditional rule has long been followed by the State of

Illinois. Pet. App. A7; Branson v. Department of Reve-

nue, 659 N.E.2d 961, 968 (Ill. 1995).

The court of appeals correctly concluded that the

burden of proof in tax cases is not shifted to the taxing

authority simply because the tax issue arises in the

bankruptcy context. The validity of a creditor’s claim

is governed by substantive state and federal non-

bankruptcy law. Grogan v. Garner, 498 U.S. 279, 283-

284 & n.9 (1991) (non-bankruptcy law governs the stan-

dard of proof that a creditor must satisfy to establish a

valid claim in bankruptcy); Butner v. United States, 440

U.S. 48, 55 (1979); Vanston Bondholders Protective

Comm. v. Green, 329 U.S. 156, 161 (1946). Rules allo-

thus does not alter the traditional rule which places the burden of

proof on the taxpayer in proceedings involving other types of

taxes, such as employment taxes and excise taxes. In order to

shift the burden of proof to the government, the taxpayer bears

the burden of proving that the conditions imposed by 26 U.S.C.

7491 have been satisfied. If the taxpayer fails to sustain that

burden, the ultimate burden of proof remains with the taxpayer.

See S. Rep. No. 174, supra, at 45; H.R. Conf. Rep. No. 599, supra,

at 242.

Even after enactment of Section 7491, the proper allocation of

the burden of proof with respect to federal tax claims in bank-

ruptcy proceedings thus remains of substantial importance to the

United States. It is precisely in instances in which the taxpayer

has not complied with the substantiation rules or has not cooper-

ated with an investigation that the government would incur the

greatest prejudice from bearing the burden of proof on tax claims

in bankruptcy cases. Congress recognized that fact by leaving the

burden of proof on the taxpayer in those situations “in any court

proceeding.” 26 U.S.C. 7491(a).

11

cating the burden of proof are part of the substantive

law that governs a creditor’s claim. Director v. Green-

wich Collieries, 512 U.S. 267, 271 (1994) (“the assign-

ment of the burden of proof is a rule of substantive

law”); Dick v. New York Life Ins. Co., 359 U.S. 487, 446

(1959); Cities Service Oil Co. v. Dunlap, 308 U.S. 208,

212 (1939). Except when Congress expressly provides

otherwise, the substantive rules that allocate the

burden of proof for a creditor’s claim in non-bankruptcy

cases therefore als govern in bankruptcy proceedings.

See Vanston Bondholders Protective Comm. v. Green,

829 U.S. at 161; 21 C. Wright & K. Graham, Federal

Practice and Procedure § 5122 (1977). See also note 2,

supra. The substantive rule of Illinois law, under which

“the burden of proof, normally on the claimant, is

shifted to the taxpayer” (Bull v. United States, 295 U.S.

at 260), therefore governs in bankruptcy cases in-

volving Illinois tax claims in the absence of a contrary

federal statutory rule.

Petitioner acknowledges (Pet. Br. 7-8, 15) that the

court of appeals correctly concluded (Pet. App. A11)

that nothing in the Bankruptcy Code explicitly shifts

the burden of proof to the taxing authority for tax

claims adjudicated in bankruptcy court. See also Fran-

chise Tax Board of California v. MacFarlane, 83 F.3d

at 1045 (At he bankruptcy code is silent on the alloca-

tion of the ultimate burden of proof” in tax disputes).

Neither Section 502 of the Bankruptcy Code, which

governs the allowance of claims generally, nor Section

505, which authorizes the bankruptcy courts to adjudi-

cate tax disputes, contains any provision addressing or

the burden of proof. See 11 U.S.C. 502, 505.

There is thus nothing in the Bankruptcy Code that es-

tablishes the “clear and manifest” intent (BF v. Reso-

lution Trust Corp., 511 U.S. 581, 544 (1994)) that is re-

12

quired to displace substantive state and federal rules

governing the burden of proof in the adjudication of tax

claims.

As the court of appeals noted in this case (Pet. App.

Al), the Bankruptcy Code does contain several pro-

visions that, in other contexts, explicitly address the

burden of proof. See, e. g., 11 U.S.C. 362(g) (assigning

burden of proof to different parties on different issues

in challenges to automatic stay); 11 U.S.C. 363(0) (as-

signing burden to trustee on issue of adequate protec-

tion of creditors in hearing on use of creditor’s pro-

perty); 11 U.S.C. 364(d)(2) (assigning burden to trustee

on issue of adequate protection in hearing on obtaining

new credit); 11 U.S.C. 547(g) (assigning burden to

trustee seeking to avoid certain allegedly preferential

transfers); 11 U.S.C. 1129(d) (assigning burden to gov-

ernment of proving claim of tax avoidance as principal

purpose of plan). As the court of appeals emphasized,

the careful attention that Congress thus gave to

burden-shifting rules in the Bankruptcy Code makes

the legislative “silence on the burden of proof in tax

cases eloquent.” Pet. App. All.

2. Petitioner errs in suggesting (Pet. Br. 26-27 &

n.10) that the allocation of the burden of proof in

bankruptcy cases should vary depending on whether it

is the taxpayer or a creditor of the taxpayer who dis-

putes the government’s tax claim. The Bankruptcy

Code reflects no intention by Congress to grant to

creditors who contest the validity of a tax claim rights

that are superior to the rights of the tax debtor him-

self“ The identity of the party who contests the tax

3 Unless the court orders otherwise, both bankruptcy trustees

and non-governmental creditors have the right to obtain informa-

tion needed to contest the debtor’s tax liability. See 11 U.S.C.

— — ͥ q — — —

a

13

liability obviously has no bearing on the substantive

question whether the debtor is in fact liable for the tax.

The general rule assigning the burden of proof on tax

claims to the taxpayer stems from the government’s

“imperious need” for taxes, which are “the life-blood of

government.” Bull v. United States, 295 U.S. at 259.

This need for prompt and efficient collection of tax

revenues is not dissipated merely because the taxpayer

has filed for bankruptcy. To the contrary, as the court

of appeals emphasized (Pet. App. All), shifting the

burden of proof to the taxing authority in bankruptcy

proceedings would simply make bankruptcy court a

peculiarly favorable forum in which to dispute tax

claims and thereby create an open invitation for abuse

9 As the court emphasized

(ibid.):

The position for which the trustee contends * * *

would create a new incentive to declare bankruptcy.

We have enough bankruptcies.

The substantive rules of non-bankruptcy law that

place the burden of proof for tax claims on the

have the salutary effect of requiring the taxpayer to

maintain and produce appropriate records. See note 2,

supra. By contrast, the opposite burden of proof rule

for which petitioner contends would create a perverse

681(4) imposing a duty on the debtor to “surrender to the trustee

* * any recorded information, including books, documents,

records, and papers, relating to property of the estate”); 11 U.S.C.

704(7) (requiring the trustee to “furnish such information con-

cerning the estate and the estate’s administration as is requested

by a party in interest”); Fed. R. Bankr. P. 4002 (imposing a duty on

the debtor to “cooperate with the trustee in * * the examina-

tion of proofs of claim”); 6 Collier on Bankruptcy 44 704.0911],

704.11 (15th ed. rev. 1999); 9 id. J 4002. 0502].

14

incentive for debtors to obstruct enforcement of tax

claims simply by leaving their records in disarray.

Neither logic nor the provisions of the Bankruptcy

Code suggest that debtors should benefit at the ex-

pense of the public fisc from a failure to maintain and

produce required tax records. The shifting of the

burden of proof that petitioner proposes for tax claims

litigated in bankruptcy court could yield inappropriate

windfalls for tax protestors or others who seek to avoid

tax debts in bankruptcy.

3. Congress has expressly granted priority to tax

claims in bankruptcy cases. See, eg., 11 U.S.C.

507(a)(8). In doing so, the House Judiciary Committee

explained that la] taxing authority is given preferred

treatment [in bankruptcy] because it is an involuntary

creditor of the debtor. It cannot choose its debtors, nor

can it take security in advance of the time the taxes

become due.” H.R. Rep. No. 595, 95th Cong., Ist Sess.

189-190 (1978). The express legislative determination

to give tax claims priority over the claims of other

creditors in bankruptcy is manifestly inconsistent with

petitioner’s assertion that Congress determined, sub

silentio, to treat tax claims less favorably when liti-

gated in bankruptcy than when litigated outside of

bankruptcy.

Petitioner’s basic premise is that the burden of proof

should be allocated to the government on a tax claim in

bankruptcy court in order to treat the government like

“(e]very other creditor who files a claim in a bank-

ruptcy estate” (Pet. Br. 29). In making that assertion,

however, petitioner fails to confront the fact that the

validity of any creditor’s claiia in bankruptcy court—

whether the creditor is a taxing authority or a non-

governmental entity—is governed by the substantive

rules of non-bankruptcy law. When, as with tax claims,

15

the rules of substantive non-bankruptcy law place the

ultimate burden of proof on the debtor outside of bank-

ruptcy, the debtor or trustee continues to shoulder that

burden of proof in bankruptcy cases.

It is, of course, the ordinary rule that the claimant—

either inside or outside of bankruptcy—bears the

ultimate burden of proof. This is simply an application

of the ordinary rule that a plaintiff generally bears the

burden of proving his claim. But, when the substantive

rule of non-bankruptcy law places the burden of proof

on the defendant rather than the plaintiff, courts have

recognized that the party objecting to the claim in

bankruptcy must then bear the ultimate burden of

proof in the bankruptcy case. As the Amici States have

explained in detail (Amici States Er. Supporting Cert.

at 9-11), the burden of proof is routinely assigned to the

debtor in bankruptcy cases in non-tax contexts in which

applicable non-bankruptcy law assigns that burden to

the party in the debtor’s position. See, e.g., In re

Unioil, Inc., 962 F.2d 988, 994 (10th Cir. 1992) (burden

of proving accord and satisfaction rests on the debtor as

an affirmative defense); In re Woehr, 121 B.R. 743, 746-

747 (N.D. Tex. 1990) (burden of proving debt is usurious

rests on the debtor), aff’d, 957 F.2d 867 (5th Cir. 1992);

In re Andover Togs, Inc., 231 B.R. 521, 530 (Bankr. S. D.

N.Y. 1999) (burden of proving laches); In re Farris, 194

B. R. 933, 936-937 (Bankr. E.D. Pa. 1996) (burden of

proving Truth in Lending Act violation).

Contrary to petitioner’s contention (Pet. Br. 18-20,

27), it is thus not a special dispensation to taxing

authorities to apply the rules established under sub-

stantive non-bankruptcy law in allocating the burden of

proof in bankruptcy cases. Instead, it would be a

distinctive discrimination against taxing authorities to

refuse to apply in bankruptcy cases the burden of proof

16 —

rules established under substantive non-bankruptcy

law which govern the adjudication of such claims out-

side of bankruptcy court. Under our self-reporting

systems of state and federal taxation, taxing authorities

are obviously not in a position comparable to that of

ordinary commercial creditors whose claims typically

are based on transactions they had with the debtor that

would be reflected in the creditors’ own records. The

practical realities of achieving fair resolution of tax

disputes do not change merely because the issue arises

in bankruptcy proceedings.

4. Petitioner asserts (Pet. Br. 10-15, 19-20) that,

prior to the enactment of the Bankruptcy Code of 1978,

the decisions of this Court in City of New York v.

Saper, 336 U.S. 328 (1949), and Nicholas v. United

States, 384 U.S. 678 (1966), had led the “vast majority of

lower courts adjudicating objections to tax claims” (Pet.

Br. 13) to place the ultimate burden of proof on the

taxing authority. Petitioner contends that, if Congress

wished to change this assertedly “established” law, it

would have done so explicitly (Pet. Br. 19). Neither the

decisions of this Court in Saper and Nicholas, nor the

“vast majority” of lower court decisions, however, sup-

port petitioner in this case.

a. In Saper, this Court addressed whether the tax

claim of the City of New York bore interest to the date

the bankruptcy commenced or, instead, to the sub-

sequent date on which the claim was paid. Prior to

1938, a number of courts had held that the claim of a

taxing authority bears interest to the date of payment.

836 U.S. at 333. Congress had generally provided by

statute, however, that interest would be allowed on

bankruptcy claims only to the date the bankruptcy

commenced. Id. at 330. The City nonethe zs asserted

that, by generally disallowing interest after the bank-

17

ruptcy commenced, Congress had not intended to

disturb the preexisting decisions that allowed interest

on tax claims to the date of payment. Ibid. This Court

rejected that contention because the statutory provi-

sion that generally disallowed interest on claims after

commencement of the bankruptcy “contain[ed] no pro-

vision * * * allowing an exception in favor of tax

claims.” Ibid. It was in this specific context that this

Court made the statements on which petitioner seeks to

rely (Pet. Br. 12, 27): (i) that the enactment of amend-

ments to the Bankruptcy Code in the Chandler Act of

1938, ch. 575, 52 Stat. 840, had “assimilated taxes to

other debts for all purposes including the denial of post-

bankruptcy interest” and (ii) that the Bankruptcy Code

“requires governmental claims to be proved in the same

manner and within the same time as other debts

* * *” 336 U.S. at 332.

Neither of these isolated quotations from the decision

in Saper has relevance to the present case. Indeed,

petitioner has significantly misinterpreted the quoted

text. When the Court referred to governmental claims

being “proved in the same manner and within the same

time as other debts” (336 U.S. at 382), the Court was

not describing the method of proving a claim on the

merits. Under the terminology employed under the

Bankruptcy Act, prior to enactment of the Bankruptcy

Code of 1978, a debt was “proved” in the sense de-

scribed in Saper by the submission of a timely “proof of

claims * * * under oath, in writing and signed by a

creditor. ” 11 U.S.C. 93(a) (1939). Under Section 580d)

of the Bankruptcy Act, as amended in 1938, Je llaims

which have been duly proved” in this sense were to “be

allowed * * * unless objection to their allowance shall

be made by parties in interest * * 11 U.S.C. 980d)

(1989). Thus, under the Bankruptcy Act terminology,

18

even when a claim was “proved” by the filing of a

timely, verified “proof of claim,” it was to be “allowed”

upon objection only if the court thereafter determined

that it was a valid and enforceable claim on the merits.

See J. Moore, Moore’s Bankruptcy Manual § 57, at 148

& n.1 (1939); 3A Collier on Bankruptcy | 68.05 (14th

ed. 1975). The ultimate burden of persuasion was

simply not relevant to whether a claim was “proved”

under the terminology employed in the Bankruptcy

Act. The burden of persuasion became relevant only in

determining whether a “proved” claim, to which objec-

tion had been made by a party in interest, would be

“allowed” on the merits.‘ See 11 U.S. C. 980d) (1989); J.

‘ Petitioner plainly errs in relying (Pet Br. 11) on the portion of

the legislative history of the Chandler Act which states that

governmental claims would “be subjected to the same require-

ments as other claims” under that Act. S. Rep. No. 1916, 75th

Cong., 3d Sess. 5 (1938). In the Chandler Act, Congress for the

first time required governmental claims to be filed and “proved” in

the same manner as other claims. See 11 U.S.C. 93(n)

(1939); J. Moore, supra, at 148 & n.1. The claims of the United

States had formerly not been subject to the same time limits and

“proof of claim” requirements imposed on other creditors. Ibid.

(“{p}rovision in respect to government claims was added to avoid

decisions which had held that the time limit [on submitting claims]

was not binding upon the sovereign”). The language that peti-

tioner quotes from the 1938 Senate report simply describes the

newly adopted requirement that there be a timely “proof of claim”

for government claims. The Senate Report generally agreed with

the House proposal that, with respect to the requirement that

“claims must actually be filed within the bar time,” “governmental

claims should be subject to the same requirements as other

claims.” S. Rep. No. 1916, supra, at 5. The Report went on to

state, however, that this time “limitation should be tempered by

la] provision for extension, for the reason that it is sometimes

difficult for the Government to prepare and present its claims

within a fixed time.” Ibid. By thus subjecting governments to the

19

Moore, supra, at 147. See also In re Johns-Manville

Corp., 57 B. R. 680, 686-687 (Bankr. S. D. N.Y. 1986).

In proper context, the quoted passages from Saper

simply represent a straightforward application of the

settled rule that, when Congress expressly and compre-

hensively addresses a particular subject, exceptions to

the legislative rule are not lightly to be implied. 336

U.S. at 330. In the present case, unlike in Saper, it is

undisputed that Congress has not expressly provided a

general rule detailing the burden of proof for tax claims

or other types of claims in bankruptcy. See Pet. Br. 19

(acknowledging “Congress’ silence on the applicable

burden of persuasion in claim objection proceedings”).

Instead, each claimant comes to bankruptcy court with

rights to be determined under substantive non-bank-

ruptcy law. One of the substantive rights that governs

the tax claim of the State of Illinois is the right to have

the ultimate burden of proof placed on the party

objecting to the claim. See page 11, supra. Since Con-

gress has not provided a different rule, that substantive

rule of state law governs the determination of the

State’s claim in bankruptcy court. See ibid.

b. The decision of this Court in the Nicholas case is

similarly inapposite. In Nicholas, the Court again

addressed the right of a taxing authority to receive in-

terest on its claim in a bankruptcy case. In the circum-

stances of that case, the Court held that interest on

taxes incurred after the commencement of a reor-

ganization but before the conversion of that proceeding

to a liquidation was not an administrative expense of

requirement of a timely “proof of claim,” Congress did not purport,

even by implication, to address the proper allocation of the burden

of proof for determining whether a claim is ultimately to be

“allowed” against the estate.

20

the bankruptcy estate. It was in this context that the

Court made the statement in a footnote quoted by

petitioner (Pet. Br. 12) that Saper “reflected an assimi-

lation of tax debts to the status of other debts in

bankruptcy.” 384 U.S. at 682 n. 10. The fact that inter-

est on tax debts was treated like interest on “other

debts in bankruptcy” has no bearing on the question

presented in this case.

e. Petitioner errs in asserting that, prior to the

enactment of the Bankruptcy Code of 1978, “the vast

majority of lower courts” (Pet. Br. 13) held that the

taxing authority bears the burden of proof in establish-

ing its claim. In the first place, none of the cases

referred to by petitioner (Pet. Br. 13-15) suggests that

either Saper or Nicholas is relevant to this issue.

Moreover, petitioner cites only one decision of a court of

appeals as support for its position. United States v.

Sampsell, 224 F.2d 721 (9th Cir. 1955). By contrast,

two other courts of appeals had held under the Bank-

ruptcy Act that the burden of proof rests on the party

who objects to the tax claim. In re Uneco, Inc., 532

F.2d 1204, 1207 (8th Cir. 1976); Paschal v. Blieden, 127

F.2d 398, 401-402 (8th Cir. 1942); In re Lang Body Co.,

92 F. 2d 338, 341 (6th Cir. 1937), cert. denied sub nom.

Hipp v. Boyle, 303 U.S. 637 (1938).

5 Petitioner erroneously cites (Pet. Br. 14) Fiori v. Rothensies,

99 F. 2d 922 (3d Cir. 1988), and Dickinson v. Riley, 86 F.2d 385 (8th

Cir. 1936), in this context. Neither of those cases addresses the

proper allocation of the ultimate burden of proof. Petitioner also

errs in citing (Pet. Br. 15) In re Highway Construction Co. of Ohio,

105 F. 2d 863 (6th Cir. 1989), which ruled against the government

claim simply because it had been rebutted by the debtor and the

government had failed “to introduce evidence to establish its

claim.” Id. at 866.

— — — a —

21

The suggestion of petitioner (Pet. Br. 15-16, citing

Dewsnup v. Timm, 502 U.S. 410, 419 (1992)) that Con-

gress should be understood to have adopted “pre-Code

practice” thus lacks any force in this case. No con-

clusion about legislative intent can be drawn from this

conflicting precedent.

5. Petitioner incorrectly relies on the legislative

history of the Bankruptcy Code of 1978. As petitioner

notes (Pet. Br. 17), the House and Senate reports on

that Act both state that a proof of claim constitutes

“prima facie evidence of the claim” and that, in the

absence of an objection by a party in interest, the claim

is to be “allowed.” H.R. Rep. No. 595, supra, at 352; S.

Rep. No. 989, 95th Cong., 2d Sess. 62 (1978). The

legislative reports further state that “[tJhe burden of

proof on the issue of allowance is left to the Rules of

Bankruptcy Procedure.” bid. Congress thus mani-

festly declined itself to adopt a general provision ad-

dressing the “burden of proof on allowance” in bank-

ruptcy cases.

Petitioner incorrectly contends (Pet. Br. 17) that this

Court adopted such a burden of proof rule by issuing

Rule 3001(f) of the Bankruptcy Rules. That Rule

specifies that (Fed. R. Bankr. P. 3001(f)):

A proof of claim executed and filed in accordance

with these rules shall constitute prima facie evi-

dence of the validity and amount of the claim.

That Rule, by its very terms, does no more than adopt

the accepted proposition reflected in the legislative

history that a properly filed proof of claim is “prima

facie evidence” of the claim. Nothing in that Rule

purports to establish an overriding, ultimate burden of

proof rule to apply when the “prima facie” case is

disputed by an objection in bankruptcy court. As the

22

Fourth Circuit explained in In re Landbank Equity

Corp, 973 F.2d at 269, the “prima facie evidence” rule

stated in Bankruptcy Rule 3001(f) is simply a pro-

cedural mechanism for facilitating administration of the

bankruptcy estate. It places the burden of coming

forward with some evidence to dispute the claim on the

party who contests it; it does not address the question

of who bears the ultimate burden of persuasion once the

“prima facie” case has been placed at issue by the

objecting party. Ibid. Accord In re Yoder Co., 758

F.2d 1114, 1119-1120 (6th Cir. 1985).

In this regard, Bankruptcy Rule 3001(f) parallels

(and is subject to) Rule 301 of the Federal Rules of

Evidence.’ That rule of evidence, which applies to all

cases in bankruptcy court, specifies that “a preswmp-

tion imposes on the party against whom it is directed

the burden of going forward with evidence to rebut or

meet the presumption, but does not shift to such party

the burden of proof in the sense of the risk of non-

persuasion, which remains throughout * * * upon the

party on whom it was originally cast.” Fed. R. Evid.

301 (emphasis added).

6. Petitioner also errs in suggesting (Pet. Br. 26, 29)

that, because bankruptcy courts originated as courts of

equity, they may disregard the substantive rules gov-

erning burden of proof established under non-bank-

ruptcy law. As the court of appeals stated in this case

Moreover, because the allocation of the ultimate burden of

proof is a part of the substantive rights of the claimant (see page

10, supra), the Bankruptcy Court rules could not lawfully “abridge,

enlarge, or modify [that] substantive right.” 28 U.S.C. 2075.

7 The Federal Rules of Evidence are expressly applicable to all

proceedings conducted in bankruptcy court. See Fed. R. Evid.

1101(a). a

23

(Pet. App. 9a, quoting In re Lapriano, 909 F.2d 221, 224

(7th Cir. 1990)), “[bJankruptcy is not a ‘free-for-all

equity balancing act.’” The equitable powers of a bank-

ruptcy court “must and can only be exercised within the

confines of the Bankruptcy Code.” Norwest Bank Wor-

thington v. Ahlers, 485 U.S. 197, 206 (1988). As this

Court stated in Butner v. United States, 440 U.S. 48, 56

(1979), “undefined considerations of equity provide no

basis” for departing from substantive rules establishing

a claimant’s rights under non-bankruptcy law. Absent

some “overruling federal law,” the bankruptcy court

may not alter the substantive rights of creditors estab-

lished under non-bankruptcy law. Vanston Bond-

holders Protective Comm. v. Green, 329 U.S. at 161.

See also United States v. Sutton, 786 F.2d 1305, 1308

(5th Cir. 1986); In re Morristown & Erie R. R., 885 F.2d

98, 100 (8d Cir. 1989); Bird v. Carl’s Grocery Co. (In re

NWFX, Inc.), 864 F.2d 593, 595 (8th Cir. 1989). As this

Court stated in United States v. Noland, 517 U.S. 535,

543 (1996) (quoting In re Ahlswede, 516 F.2d 784, 787

(9th Cir.), cert. denied, 423 U.S. 913 (1975)), “the [eq-

uity] chancellor never did, and does not now, exercise

unrestricted power to contradict statutory or common

law when he feels a fairer result may be obtained by

application of a different rule.” The Fourth Circuit

correctly concluded in In re Landbank Equity Corp.,

973 F.2d at 271, that the fact that a bankruptcy court is

a court of equity “does not confer on the court unlimited

authority to ignore plain statutory requirements and to

alter the substantive rights of the parties.”

Placing the burden of proof on the taxing authority in

bankruptcy cases would improperly disregard the sub-

stantive rights established under state and federal law.

Congress did not itself mean] to shift the burden of

proof from taxpayer to tax collector” in bankruptcy

24

cases. Pet. App. All. Bankruptcy courts may not

“contradict [the] statutory or common law” placing the

burden of proof on taxpayers by invoking an “unre-

stricted power” to achieve what the court may consider

to be “a fairer result” (United States v. Noland, 517

U.S. at 543). The court of appeals correctly held that

the ultimate burden of proof for tax claims rests on the

taxpayer as a matter of substantive law—regardless

whether that claim is adjudicated inside, or outside, of

bankruptcy.

CONCLUSION

The judgment of the court of appeals should be

affirmed.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

PAULA M. JUNGHANS

Acting Assistant Attorney

General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor

MARCH 2000