Amicus Curiae Brief — Raleigh v. Illinois Dept. of Revenue
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Mar D adyro | |
No. 99-387 MAR 23 eG
IN THE .
Supreme Court of the N faion
THOMAS E. RALEIGH, Chapter 7 Trustee
for the Estate of William J. Stoecker,
9 Petitioner,
STATE OF ILLINOIS,
DEPARTMENT OF REVENUE,
Respondent.
On Writ of Certiorari to the
United States Court of Appeals
for the Seventh Circuit
BRIEF OF THE COUNCIL OF STATE GOVERNMENTS,
NATIONAL LEAGUE OF CITIES, NATIONAL
GOVERNORS’ ASSOCIATION, NATIONAL
ASSOCIATION OF COUNTIES, U.S. CONFERENCE
OF MAYORS, INTERNATIONAL MUNICIPAL
LAWYERS ASSOCIATION, AND INTERNATIONAL
CITY/COUNTY MANAGEMENT ASSOCIATION
AS AMICI CURIAE SUPPORTING RESPONDENT
STEVEN H. GOLDBLATT RICHARD RUDA *
APPELLATE LITIGATION Chief Counsel
PROGRAM JAMES I. CROWLEY
GEORGETOWN UNIVERSITY STATE AND LOCAL LEGAL CENTER
LAW CENTER 444 North Capitol Street, N.W.
600 New Jersey Ave., N.W. Suite 345
Washington, D.C. 20001 Washington, D.C. 20001
(202) 662-9555 (202) 434-4850
* Counsel of Record for the
a Amici Curiae
WILSON - Eres Printine Co., Inc. - 789-0096 - WASHINGTON. D.C. 20001
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QUESTION PRESENTED
Whether federal bankruptcy courts are bound by
state law burdens of proof when state tax claims are
litigated in bankruptcy.
(i)
TABLE OF CONTENTS
QUESTION PRESENTED oö
TABLE OF AUTHORM TES
INTEREST OF THE AMICI CURIAE ........................
SUMMARY OF ARGUMENT oo
FEDERAL BANKRUPTCY COURTS ARE
BOUND BY STATE LAW BURDENS OF PROOF
WHEN STATE TAX CLAIMS ARE LITIGATED
14... ———— — —
A. Congress Must Clearly Indicate Its Intention To
e
Regulation Such As Taxation
B. The Code Does Not Intimate, Mush Lene Clensty
Indicate. That Congress Intended To Displace
State Law Purdens Of Proof When State Tax
1. The Bankruptcy Code Is Silent On Burdens
Of Proof In State Tax Disputes And There-
fore Federal 1 Courts Must Apply
State Law ...
2. 3 Dees Mot Diaplace ‘State
Z
C. The Bankruptcy Court’s Equitable Power To
ren
Reallocate Burdens Of Proof
D. Allowing Bankruptey Courts To Reallocate Bur-
dens Of Proof Would Substantially Disrupt
State Tax Administration, Encourage Bank-
ruptcy Filings, And Be Unfair To Innocent
CONCLUSION
iv
13
17
iv
TABLE OF AUTHORITIES
Cases Page
In re 80 Nassau Assocs., 169 B.R. 832 (Bankr.
/ 20
In re Babbin, 164 B. R. 157 (Bankr. D. Colo.
1171Eyb TT oes eC ee a 20
Barrows v. Internal Revenue Service, 231 B. R.
fF Ss ss 24-25
BFP v. Resolution Trust Corp., 511 U.S. 531
— eee See a a passim
In re Bell, 34 F.2d 677 (W.D. Pa. 19299 — 15,17
Bryant v. Swofford Bros. Dry Goods Co., 214 US.
0 9
But ner v. United States, 440 U.S. 48 (1979) passim
In re Canady, 43 A.F.T.R.2d 79-472 (N.D. Ga.
EEE AS NY » 0Ü ] »ù OO ce 14-15, 17
In re Certified Credit Corp., 329 F. Supp. 1402
K ͤ A eae ee 15
Cities Serv. Oil Co. v. Dunlap, 308 U.S. 208
es 7
In re Cobb, 135 B. R. 640 (Bankr. D. Neb. 1992) 25
Cohen v. De La Cruz, 523 U.S. 213 (1999 13, 16
CSX Transp., Inc. v. Easterwood, 507 U.S. 658
ü- A A 5
Dewsnup v. Timm, 502 U.S. 410 (199277 13, 16
Dick v. New York Life Ins. Co., 359 U.S. 437
Ee ay ee a arene ee noe 7
Dows v. Chicago, 78 U.S. 108 (18717 6
Fiori v. Rothensies, 99 F.2d 922 (3d Cir. 1938) 15
Franchise Tax Bd. of California v. Macfarlane,
83 F.3d 1041 (9th Cir. 1996), cert. denied, 520
rr... rer. AC 17, 19
In re Gandolfi & Co., 42 F. Supp. 706 (S.D.N.Y.
RESIS A 15, 17
Garrett v. Moore-McCormack Co., 317 U.S. 289
(1942) 7
In re Georgian Villa, Ine., 10 B. R. 79 (Bankr. ND.
A. ee . nae A eA a 20
In re Glotzer, 42 F. Supp. 712 (S.D.N.Y. 1541) 17
In re Glover-Me Connell Co., 9 F.2d 683 (N. D. Ga.
. —„— 15, 17
*
TABLE OF AUTHORITIES—Continued
Page
Grogan v. Garner, 498 U.S. 279 (1991) 9, 11, 12, 12-13
Helvering v. Taylor, 293 U.S. 507 (19355 7
In re Huckabee Auto Co., 33 B.R. 132 (Bankr.
M.D. Ga. 1981) 20
Kelly v. Robinson, 479 U.S. 36 (1986) —........... 5, 6, 14, 16
In re Lang Body Co., 92 F.2d 338 (6th Cir. 1937),
cert. denied, 303 U.S. 637 (1939 15, 17
In re Lasky, 38 F. Supp. 24 (N.D. Ala. 1941) 15, 17
Lewis v. Manufacturers Nat’l Bank, 364 U.S. 603
ARS 25
Maryland v. Louisiana, 451 U.S. 725 (1981) 1 2, 5, 16
In re Menefee, 40 A. F. T. R. 2d 77-5006 (E. D. Mo.
1977) 15, 17
In re Mid America Co., 31 F. Supp. 601 (S.D. III.
r 15, 17
Midlantic Nat Bank v. New Jersey Dep’t of Envtl.
Prot., 474 U.S. 494 (198 14, 16
In re Mobile Steel Co., 563 F.2d 692 (5th Cir.
111 Ss ee a 20
National Private Truck Council, Inc. v. Oklahoma
Tax Comm’n, 515 U.S. 582 (199595 1, 2,6
Norwest Bank Worthington v. Ahlers, 485 U.S.
i NP eS er ome 4. 18
In re Oxford Assoc., 209 F. Supp. 242 (D. N. J.
% ²˙ ü u dZß Se oe 15, 17
In re Parr, 205 F. Supp. 492 (S. D. Tex. 1962) 15
Paschal v. Blieden, 127 F.2d 398 (8th Cir. 1942) 15,17
Pepper v. Litton, 308 U.S. 295 (193999 20
In re Petersilge, 70 F. Supp. 95 (N. D. Ohio
77 — — 15, 17
In re Raflowitz, 37 F. Supp. 202 (D. Conn.
D 15
Security Mortgage Co. v. Powers, 278 US. 149
SRS 9
In re Shackelford, 3 B.R. 42 (Bankr. W.D. Mo.
r 14, 17
In re Standard Milling Co., 324 F. Supp. 386
. 15, 17
Stellwagen v. Clum, 245 U.S. 605 (1919 — 6
vi
TABLE OF AUTHORITIES—Continued
Page
Thinking Machines Corp. v. New Mezico Taxation
& Revenue Dep’t, 211 B.R. 426 (Bankr. D.
Mass. 1997) 22, 23, 25
In re Trustees System Co. of Louisville, 30 F.
ERPS RN 17
In re Uneco, 532 F.2d 1204 (8th Cir. 1976) 15, 17
United Sav. Ass’n v. Timbers of Inwood Forest
Assocs., Ltd., 484 U.S. 365 (1988) 13-14, 14, 15
United States v. Bisceglia, 420 U.S. 141 (1975) 24
United States v. Knoz-Powell-Stockton Co., 83
F.2d 423 (9th Cir. 1936), cert. denied, 299 U.S.
e . 15, 17
United States v. Noland, 517 U.S. 535 (1996) passim
United States v. Reorganized CF & I Fabricators,
RF INCENSE . ae are 21
United States v. Rezach, 482 F.2d 10 (Ist Cir.),
cert. denied, 414 U.S. 1089 (1973) 24
Vanston Bondholders Protective Comm. v. Green,
es GF passim
Welch v. Helvering, 290 U.S. 111 (1933 — 7
Statutes and Rules
Ariz. Rev. Stat. Ann. § 42-1254 (D) (4) (West
Supp. 1999) .............. 7
Colo. Rev. Stat. Ann. § 39-21-105(b) (West 1990) 7
Del. Code. Ann. tit. 30, § 526 (a) (19747 7
Mo. Ann. Stat. § 136.300 (West Supp. 2000) 7
r RE I Nes 18
11 25
JJC — a ae se 10
4 — K 10
ee . h 10
r 10
I 12
111 ian cciihietinttiicisatintsinrniemiemntestathia 21, 22
Bee — 21
11 — AGA SESS Sk SSSR BSS ETS 10
J 111 ccnscscscctninsincittenenteintintiintacditaditasaiees 10
28 U.S.C. § 1341 6
vii
TABLE OF AUTHORITIES—Continued
Page
Fed. R. Bankr. P. 3001 (f 10
Fed. R. Bankr. P. 4003 (e) . — oo
1? 10
Other Authorities
Daniel C. Cohn, Subordinated Claims: Their
Classification and Rating Under Chapter 11 of
the Bankruptcy Code, 56 Am. Bankr. L.J. 293
aan 20
Vern Countryman, The Use of State Law in Bank-
ruptey Cases (Part I), 47 N.Y.U. L. Rev. 404
„— 9
Felix Frankfurter, Some Reflections on the Read -
ing of Statutes, 47 Colum. L. Rev. 527 (1947) 5
Asa S. Herzog & Joel B. Zweibel, The Equitable
Subordination of Claims in Bankruptcy, 15
. EE S| = eee 20
Frances R. Hill, Toward A Theory Of Bankruptcy
Taz: A Statutory Coordination Approach, 50
II 21, 23-24, 24
Steve R. Johnson, The Dangers of Symbolic Leg-
islation: Perceptions and Realities of the New
Burden-of-Proof Rules, 84 Iowa L. Rev. 413
—
—
75
i
=
/ . xx 20
William T. Plumb, The Taz Recommendations of
the Commission on the Bankruptcy Laws-Tazx
Procedures, 88 Harv. L. Rev. 1360 (1975) 23
S. Rep. No. 598, 95th Cong., 2d Sess., reprinted in
III. 5e 11, 22-23
Charles J. Tabb, The Law of Bankruptcy (1997).. 22
*
INTEREST OF THE AMICI CURIAE
Amici, organizations whose members include state,
county, and municipal governments and officials
throughout the United States, have a compelling in-
terest in legal issues that affect state and local gov-
ernments.' Amici regularly file briefs in this Court
in cases that present important questions concerning
the relationship between state and federal law.
The position advanced by Petitioner in this case,
that federal bankruptcy courts are empowered to dis-
regard the extensive body of state law addressing the
burden of proof in tax litigation, see Appendix, would
effect a very substantial displacement of state law in
a core area of state regulatory authority. Petitioner’s
position is unsupported by this Court’s precedents and
is contrary to the Court’s long-held view that Con-
gress and this Court repeatedly have shown an aver-
sion to federal interference with state tax adminis-
tration.” National Private Truck Council, Inc. v.
Oklahoma Tax Comm’n, 515 U.S. 582, 586 (1995).
Amici are also concerned that adoption of Petition-
er’s position will substantially disrupt state and local
government tax administration, encourage bankruptcy
filings, and unfairly impose additional monetary bur-
dens on innocent taxpayers. Amici accordingly file
this brief to assist the Court in its resolution of this
case.
1 Pursuant to Rule 37.3 of the Rules of this Court, the par-
ties have consented to the filing of this brief and their letters
of consent filed with the Clerk. Pursuant to Rule 37.6, amici
state that this brief was not authored in whole or in part by
counsel for a party, and no person other than amici or their
members made a monetary contribution to the preparation or
submission of this brief.
2
SUMMARY OF ARGUMENT
A. When construing federal legislation in an area
historically subject to state authority, this Court
begins with the “basic assumption that Congress did
not intend to displace state law.” Maryland v. Louis-
iana, 451 U.S. 725, 746 (1981). Consequently, in
bankruptcy as in other areas, “[t]o displace tradi-
tional state regulation. . the federal statutory pur-
pose must be ‘clear and manifest.’ Otherwise the
Bankruptcy Code will be construed to adopt, rather
than displace, pre-existing state law.” BFP v. Resolu-
tion Trust Corp., 511 U.S. 531, 544-45 (1994) (cita-
tions omitted). Federalism concerns apply with par-
ticular force when bankruptcy courts adjudicate state
tax disputes. See National Private Truck Council,
Inc. v. Oklahoma Tax Comm’n, 515 U.S. 582 (1995).
It is within this framework that the Court must
evaluate the ruling below. It is a fundamental prin-
ciple of tax law that the burden of proof in tax dis-
putes is ordinarily on the taxpayer. Because the bur-
den of proof is an integral part of a litigant’s sub-
stantive right, the burden of proof is not within the
common law rulemaking authority of the federal
bankruptcy courts. Rather, it is a carefully conceived
aspect of state law in every State. Congress cannot
displace these laws absent a clear statement to that
effect.
B. Nothing in the Bankruptcy Code intimates,
much less clearly states, that bankruptcy courts can
ignore state law burdens of proof when adjudicating
state tax claims. Moreover, Congress has directly
addressed the burden of proof in several other aspects
of bankruptcy litigation. As the court of appeals
noted, “the close attention that the drafters of the
Code paid to issues of burden of proof makes their
3
silence on the burden of proof in tax cases eloquent.”
Pet. App. 11a.
Congress’s silence on the burden of proof in tax
disputes is particularly significant given the Court’s
longstanding directive to bankruptcy courts to apply
state law when determining the validity of a state
law claim. Nor is there any federal interest requiring
a different result. Bankruptcy courts should there-
fore apply the burden of proof provided by state law
when adjudicating the validity of state tax claims.
Petitioner’s argument that Congress adopted a pre-
vailing pre-Code judicial construction placing the bur-
den of proof on taxing authorities is unpersuasive for
three reasons. First, there was no pre-Code practice
placing the burden on the taxing authority when tax
claims were litigated in bankruptcy court. Second,
even if there arguably was such a pre-Code practice
on burden of proof, this Court has never suggested
that preemption of state law would be appropriate
absent a clear and manifest indication in the Code.
Inferential preemption of the kind urged by Peti-
tioner would be flatly contrary to core notions of
federalism.
Finally, Petitioner’s pre-Code practice argument
asks the wrong question. What is at issue is not the
burden of proof ultimately applied but the source of
the law that supplies that burden of proof. In many
pre-Code cases involving disputed tax claims courts
placed the burden of proof on the party that would
have carried that burden in the non-bankruptcy set-
ting, thus demonstrating the appropriate respect for
state law.
C. Petitioner’s argument that the bankruptcy
court’s equitable powers enable the court to reallocate
4
the burden of proof on tax claims is meritless.
[Whatever equitable powers remain in the bank-
ruptcy courts must and can only be exercised within
the confines of the Bankruptcy Code.” Norwest Bank
Worthington v. Ahlers, 485 U.S. 197, 206 (1988).
Nothing in the Bankruptcy Code supports allowing
bankruptcy courts to use their equitable powers cate-
gorically to reallocate burdens of proof.
On the contrary, in United States v. Noland, 517
U.S. 535 (1996), this Court held that a bankruptcy
court inappropriately invades the legislative sphere
when it uses its equitable powers categorically to
override the legislatively-created rights of creditors.
Permitting bankruptcy courts to reallocate burdens
of proof to balance the equities between the State and
other creditors, as Petitioner advocates, is irreconcila-
ble with Noland. Moreover, there is no policy in the
Code that all creditors should receive equality of
treatment, as is illustrated by the fact that the claims
of tax creditors are expressly given priority over the
claims of certain other creditors.
D. The consequences of permitting federal bank-
ruptcy courts to shift the burden of proof from the
taxpayer to the taxing entity weigh heavily in favor
of rejecting Petitioner’s position. A categorical fed-
eral rule that placed the burden of proof on the State
in tax claims litigated in bankruptcy court would
substantially disrupt state tax administration, en-
courage bankruptcy filings to avoid taxes, and be
unfair to innocent taxpayers. Bankruptcy courts
should not be permitted to supplant settled state law
and wreak such harmful consequences absent a clear
congressional directive. Because such a directive is
plainly lacking, the judgment of the court of appeals
should be affirmed.
5
ARGUMENT
FEDERAL BANKRUPTCY COURTS ARE BOUND BY
STATE LAW BURDENS OF PROOF WHEN STATE
TAX CLAIMS ARE LITIGATED IN BANKRUPTCY
A. Congress Must Clearly Indicate Its Intention To Dis-
place State Law In Vital Areas Of State Regulation
Such As Taxation
When construing federal legislation in an area his-
torically subject to state authority, this Court begins
with the “basic assumption that Congress did not in-
tend to displace state law.” Maryland v. Louisiana,
451 U.S. 725, 746 (1981). This reluctance to find
preemption in an area of traditional state control is
essential to “avoiding unintended encroachment on
the authority of the States.” CSX Transp., Inc. v.
Easterwood, 507 U.S. 658, 664 (1993). As the Court
recently reaffirmed,
Federal statutes impinging upon important state
interests ‘cannot . . . be construed without regard
to the implications of our dual system of govern-
ment. [W]hen the Federal Government
takes over . local radiations in the vast net-
work of our national economic enterprise and
thereby radically readjusts the balance of state
and national authority, those charged with the
duty of legislating [must be] reasonably explicit.’
BFP v. Resolution Trust Corp., 511 U.S. 531, 544
(1994) (quoting Kelly v. Robinson, 479 U.S. 36, 49-
50, n.11 (1986) (quoting Felix Frankfurter, Some
Reflections on the Reading of Statutes, 47 Colum. L.
Rev. 527, 539-40 (1947))).
These principles are fully applicable in bankruptcy,
as the Court made clear in BFP. “To displace tradi-
tional state regulation . . . the federal statutory pur-
6
pose must be ‘clear and manifest.’ Otherwise the
Bankruptcy Code will be construed to adopt, rather
than to displace, pre-existing state law.” 511 U.S. at
544-45 (citations omitted). “The Bankruptcy Code
can, of course, override [state law] by implication
when the implication is unambiguous. But where the
intent to override is doubtful, our federal system de-
mands deference to long established traditions of
state regulation.” Id. at 546; see also Kelly, 479 U.S.
at 49; Butner v. United States, 440 U.S. 48, 54-55 &
n.9 (1979) (“State laws are... suspended only to
the extent of actual conflict with the system provided
by the Bankruptcy Act of Congress.“); Stellwagen v.
Clum, 245 U.S. 605, 615 (1918) (same).
Federalism concerns apply with particular force
when bankruptey courts adjudicate state tax dis-
putes. Recognizing that [i] t is upon taxation that
the several States chiefly rely to obtain the means to
carry on their respective governments,” this Court
has long held that “it is of the utmost importance to
all of them that the modes adopted to enforce the
taxes levied should be interfered with as little as pos-
sible.” Dows v. Chicago, 78 U.S. 108, 110 (1871).
In National Private Truck Council, Inc. v. Okla-
homa Tax Comm’n, 515 U.S. 582 (1995), the Court
reiterated that “Congress and this Court repeatedly
have shown an aversion to federal interference with
State tax administration.” Jd. at 586. Acknowledg-
ing this “strong background principle against federal
interference with state taxation,” the Court empha-
sized that “principles of federalism and comity gen-
erally counsel that courts should adopt a hands-off
approach with respect to state tax administration.”
Id. at 586, 589; cf. 28 U.S.C. § 1341 (Tax Injunction
Act).
7
It is within this framework that the Court must
evaluate the ruling below. It is a fundamental prin-
ciple of tax law that the burden of proof in tax dis-
putes is usually on the taxpayer. See Appendix; Welch
v. Helvering, 290 U.S. 111, 115 (1933); Helvering v.
Taylor, 293 U.S. 507, 515 (1935) (“[u]nquestion-
ably the burden of proof is on the taxpayer to show
that the [taxing authority’s] determination is in-
valid”).2 The burden of proof is “a part of the very
substance of [the] claim and cannot be considered a
mere incident of a form of procedure.” Garrett v.
Moore-McCormack Co., 317 U.S. 239, 249 (1942)
(statutory right of plaintiff in admiralty case to be
free of burden of proof “inhere[s] in his cause of
action”); see also Dick v. New York Life Ins. Co.,
359 U.S. 437, 446 (1959) (“Under the Erie rule . =
burden of proof [is] substantive”) ; Cities Serv. Oil
Co. v. Dunlap, 308 U.S. 208, 210-12 (1939). Consist-
ent with these principles, the court below rightly ac-
knowledged the “critical importance of burden of
proof to a person’s rights” and noted that burden of
proof is rightly classified as part of [a litigant’s]
entitlement.” Pet. App. 10a. Consequently, as that
court held, the burden of proof in state tax disputes
is not within the rulemaking authority of the federal
bankruptcy courts.
rule is subject to statutory exceptions.
Pig ny» 2 Ann. 8 39-21-1056 (b) (West 1990)
(taxpayer does not carry burden of proof on issue of whether
he is guilty of fraud with intent to evade tax) ; Del. Code nen
tit. 30, 8 526 (a) (1974) (same); Ariz. Rev. Stat. Ann. : ‘
1254(D) (4) (West Supp. 1999) (placing burden of proo the
taxing authority in specified situations); Mo. Ann. —
§ 136.300 (West Supp. 2000) (“The director of revenue —
have the burden of proof with respect to any factual ue
relevant to ascertaining the liability of a taxpayer” in speci-
fied circumstances) .
In this regard, the Court should also consider the
disruptive consequences of reversing the judgment
below. The longstanding rule placing the burdea of
proof on the taxpayer is a carefully conceived aspect
of federal, state, and local tax law. It is based or the
taxpayer’s superior access to the relevant evidence.
A rule requiring the taxing authority to bear the
burden of proof when asserting a claim against a
debtor in bankruptcy proceedings would preempt at
least some aspect of tax law in every State, hus
undermining carefully considered legislative and judi-
cial determinations. See Appendix.’ State legislatares
have broad authority over taxation and can exercise
it to alter the burden of proof in circumstances in
which they conclude it is warranted. Thus, a ate-
gorical rule shifting the burden to the taxing au-
thority in all bankruptcy proceedings would disturb
the carefully considered schemes of the States which
balance the competing interests of the taxpayer and
the taxing authority.
B. The Code Does Not Intimate, Much Less Clear'y Indi-
cate, That Congress Intended To Displace Kate Law
Burdens Of Proof When State Tax Clains Are Liti-
gated In Bankruptcy
1. The Bankruptcy Code Is Silent On Burdens Of
Proof In State Tax Disputes And Therefore Fed-
eral Bankruptcy Courts Must Apply State Law
This Court has consistently held that the validity of
a claim in bankruptcy court “is a question which,
in the absence of overruling federal law, is to be deter-
mined by reference w state law.” Vanston Bond-
holders Protective Comm. v. Green, 329 U.S. 156,
3 The Appendix identifies at least one law in each State that
places the burcen of proof on the taxpayer.
9
161 (1946) ; see also Butner, 440 U.S. at 55; Grogan
v. Garner, 498 U.S. 279, 283 (1991) (“The validity
of a creditor’s claim is determined by rules of state
law.”).* In Butner, the Court held that because Con-
gress had not formulated a rule “defining the mort-
gagee’s interest in the rents and profits earned by
property in a bankrupt estate,” 440 U.S. at 54, such
interest must be determined by reference to state
law. Noting that “[p]roperty interests are created
and defined by state law,” the Court ruled that “[u]n-
less some federal interest requires a different result,
there is no reason why such interests should be an-
alyzed differently simply because an interested party
is involved in a bankruptcy proceeding.” Id. at 55.°
Nothing in the Bankruptcy Code or the Federal
Rules of Bankruptcy Procedure intimates, much less
clearly states, that bankruptcy courts may ignore
state law burdens of proof when adjudicating state
4 See also Bryant v. Swofford Bros. Dry Goods Co., 214 U.S.
279, 290-91 (1909) (“in bankruptcy the construction and
validity of such a contract must be determined by the local
laws of the state”); Security Mortgage Co. v. Powers, 278
U.S. 149, 158 (1928) (validity of a lien is determined by state
law).
5 As Professor Countryman observed with respect to the
predecessor to the Bankruptcy Code,
[T]he bankruptcy process deals with an existing condi-
tion . . . [a]nd the Bankruptcy Act does not provide a
body of law, to be applied retroactively, in the establish-
ment of claims. Hence the existence and amount of a
bankrupt’s liabilities, though determined by the bank-
ruptcy court in allowing or disallowing claims, will in-
evitably be determined by non-bankruptcy, usually state,
law.
Vern Countryman, The Use of State Law in Bankruptcy
Cases (Part I), 47 N.Y.U. L. Rev. 404, 412 (1972).
10
tax claims. The Code establishes that a claim or in-
terest properly filed under section 501 will be allowed
unless a party in interest objects. See 11 U.S.C.
§ 502(a) (1994). The Rules further provide that
a proof of claim properly filed “shall constitute prima
facie evidence of the validity and amount of the
claim.” See Fed. R. Bankr. P. 3001(f). Neither of
these provisions speaks to the method by which the
validity of a claim should be determined when dis-
puted by a party in interest.
Moreover, Congress has directly addressed the bur-
den of proof in several aspects of bankruptcy litiga-
tion. See, e.g., 11 U.S.C. § 362(g) (assigning burden
of proof in challenges to automatic stay); 11 U.S.C.
§ 363(0) (assigning trustee burden of proof on ade-
quate protection issue in hearings on use of prop-
erty) ; 11 U.S.C. § 364 (d) (2) (assigning trustee bur-
den of proof on adequate protection issue in hearing
on obtaining credit); 11 U.S.C. §547(g) (assigning
burden with respect to avoidability of certain alleg-
edly preferential transfers); 11 U.S.C. 5 1129 (d)
(assigning to government burden of proving claim
of tax avoidance as principal purpose of plan).* As
the court of appeals noted, “the close attention that
the drafters of the Code paid to issues of burden of
proof makes their silence on the burden of proof in
tax cases eloquent.” Pet. App. lla (citations omitted).
Congress’s silence on the burden of proof in this
context is particularly significant given the Court’s
longstanding directive to bankruptcy courts to apply
state law when determining the validity of a state
6 See also Fed. R. Bankr. P. 4003(c) (party objecting to
exemption bears burden); Fed. R. Bankr. P. 4005 (burden
assigned to party objecting to discharge).
11
law claim, see Vanston, 329 U.S. at 161, a signifi-
cance reinforced by the Code’s legislative history.’
Nor is there any federal interest requiring a different
result. See infra p. 22. Bankruptcy courts should
therefore apply the burden of proof provided by state
law when adjudicating the validity of state tax claims.
Petitioner argues that cases like Vanston and
Grogan establish that state law burdens of proof
should govern the validity of the creditor’s claim out-
side of bankruptcy, but that federal law burdens of
proof should govern the allowance of claims under
section 502. See Pet. Br. 23-24. Petitioner is incor-
rect. Vanston and Grogan hold that state law governs
the validity of a claim in bankruptcy court, but that
federal law governs the disallowance or the discharge
of claims in bankruptcy. See Vanston, 329 U.S. at
161-63; Grogan, 498 U.S. at 283-84. Thus, in Van-
ston this Court explained:
What claims of creditors are valid and subsisting
obligations against the bankrupt at the time a
petition in bankruptcy is filed is a question which,
in the absence of overruling federal law, is to be
determined by reference to state law. . In de-
termining what claims are allowable and how a
debtor’s assets shall be distributed, a bankruptcy
court does not apply the law of the state where
it sits.... [B]ankruptcy courts must administer
and enforce the Bankruptcy Act as interpreted
7 The legislative history of the Code demonstrates that Con-
7
|
12
by this Court in accordance with authority
granted by Congress to determine how and what
claims shall be allowed under equitable principles.
329 U.S. at 161-63 (emphasis added) (citations omit-
ted). The Court thus described two distinct processes
to be followed by bankruptcy courts: courts should
determine the validity of the creditor’s claim under
state law, and then determine whether the claim must
nevertheless be disallowed pursuant to other provi-
sions specified by Congress in the Bankruptcy Act.
Indeed, the Court in Vanston went on to “assum[e]
arguendo, that the obligation for interest on interest
is valid under the law of New York, Kentucky, and
the other states having some interest in the indenture
transaction” before addressing “whether allowance of
the claim would be compatible with the policy of the
Bankruptcy Act.” 329 U.S. at 162.
The Bankruptcy Code of 1978 likewise embodies
the two distinct processes described in Vanston. Sec-
tion 502 provides that when a trustee objects to a
proof of claim filed by a creditor, a bankruptcy court
“shall determine the amount of such claim in lawful
currency of the United States as of the date of the
filing of the petition, and shall allow such claim in
such amount, except to the extent that” such claim
is inconsistent with the eight specific bases for dis-
allowing claims enumerated by Congress. See 11
U.S.C. § 502(b) (1994). Moreover, contrary to Peti-
tioner’s assertion, Grogan only confirms that under
the Bankruptcy Code oi 1978, as was the case pre-
Code, the “validity of a creditor’s claim [in bank-
ruptey court] is determined by rules of state law.”
498 U.S. at 283 (citing Vanston, 329 U.S. at 161).*
The Court’s ruling in Grogan that “the issue of non-
dischargeability has been a matter of federal law governed by
13
Thus, bankruptcy courts should apply state law, in-
cluding state law burdens of proof, when determining
the validity of state tax claims.
2. Pre Code Practice Does Not Displace State Law
Burdens Of Proof
Petitioner argues that, when enacting the Bank-
ruptey Code, Congress adopted a “prevailing judicial
construction” of the Bankruptcy Act that placed the
burden of persuasion on taxing authorities. See Pet.
Br. 15-20. Petitioner’s argument based on pre-Code
practice is unpersuasive for three reasons.
First, Petitioner has failed to establish a prevail-
ing pre-Code practice placing the burden of proof on
the taxing authority. This Court has found a pre-
vailing pre-Code practice to exist when there is in
fact a consensus among all, or nearly all, the courts
addressing a given point. See, e.g., Cohen v. De La
Cruz, 523 U.S. 213, 221 (1998). In Cohen, this Court
relied on a pre-Code practice established by provisions
in the Bankruptcy Act of 1898 and this Court’s prece-
dent interpreting that Act. Id. The Court noted no
contrary authority on the issue.“
terms of the Bankruptcy Code,” 498 U.S. at 284, does not
indicate, as Petitioner suggests, that federal burdens of proof
should apply in this case. See Pet. Br. 24. Rather, the Court
in Grogan simpiy reiterated that the validity of a claim
should be governed by state law, but other bankruptcy in-
quiries, such as the discharge of a claim, should be governed
by federal bankruptcy law. See 498 U.S. at 283-84.
9 See also Dewsnup v. Timm, 502 U.S. 410, 418 & n.4, 419
(1992) (pre-Code practice established by provision of Bank-
ruptcy Act and this Court’s precedent; no contrary authority
noted); United Sav. Ass’n v. Timbers of Inwood Forest
Assocs., Ltd., 484 U.S. 365, 373 (1988) (preCode practice
14
In contrast, this Court has refused to find that a
pre-Code practice exis- vhere the proffered practice
is supported only by di ided authority. See United
Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd.,
484 U.S. 365, 380-82 (1988). There, the Court
pointed to seven bankruptcy court cases and the com-
ments of a leading bankruptcy commentator as au-
thority which contradicted the proffered pre-Code
practice before concluding that “[t]he at best divided
authority under Chapter 11 removes all cause for
wonder that the alleged departure from it should not
have been commented upon in the legislative history.”
Id. at 381-82.
Likewise, in the present case Petitioner has failed
to establish a pre-Code practice placing the burden
of proof on the taxing authority when tax claims
are adjudicated in bankruptcy court. Petitioner him-
self acknowledges that five courts had placed the bur-
den on the taxpayer rather than the taxing authority
before the enactment of the Bankruptcy Code, and
two courts required the objecting party to rebut the
presumptive validity of tax claims by clear and con-
vineing evidence. See Pet. Br. 15 n.5. Moreover, a
review of the relevant case law demonstrates many
more pre-Code cases placing the burden of proof on
the taxpayer / debtor. ! Finally, it is unclear whether
established by plain text of statute and this Court’s prece-
dent; no contrary authority noted); Midlantic Nat’l Bank v.
New Jersey Dep’t of Envtl'l Prot., 474 U.S. 494, 500-01
(1986) (pre-Code practice established by relevant circuit and
bankruptcy cases; no contrary authority noted); Kelly, 479
U.S. at 44-46 (pre-Code practice established by this Court’s
precedent, court of appeals cases and leading commentator ;
one court of appeals case noted as contrary authority).
10 See, e.g., In re Shackelford, 3 B.R. 42, 44 (Bankr. W.D.
Mo. 1980); In re Canady, 43 A.F.T.R.2d 79-472, 473 (N.D.
15
each of the cases Petitioner cites (Br. 14-15) support
the existence of a pre-Code practice placing the bur-
den of proof on the taxing authority." Thus, Peti-
tioner establishes “at best, divided authority” as to
which party bears the burden of proof when the
validity of a tax claim is adjudicated in bankruptcy
court. United Savings Association, 484 U.S. at 382.
Second, even if there arguably was such a pre-Code
practice on burden of proof, this Court has never sug-
gested that preemption of state law would be appro-
priate absent a clear and manifest indication in the
Code. Inferential preemption of the kind urged by
Ge. 1978) ; In re Menefee, 40 A.F.T.R.2d 77-5006, 5013 & n.19
(E.D. Mo. 1977); In re Uneco, 532 F.2d 1204, 1207 (8th Cir.
1976) ; In re Certified Credit Corp., 329 F. Supp. 1402, 1403-
04 (S.D. Ohio 1971) ; In re Standard Milling Co., 324 F. Supp.
386, 390 (N.D. Tex. 1970) ; In re Parr, 205 F. Supp. 492, 498
(S.D. Tex. 1962) ; In re Oxford Assoc., 209 F. Supp. 242, 243-
44 (D.N.J. 1962); In re Petersilge, 70 F. Supp. 95, 96-97
(N. D. Ohio 1946) ; Paschal v. Blieden, 127 F.2d 398, 401-02
(8th Cir. 1942); In re Raflowitz, 37 F. Supp. 202, 207 (D.
Conn. 1941); In re Lasky, 38 F. Supp. 24, 30 (N.D. Ala.
1941) ; In re Gandolfi & Co., 42 F. Supp. 706, 707 (S.D.N.Y.
1940); In re Mid America Co., 31 F. Supp. 601, 607 (S.D.
III. 1989) ; In re Lang Body Co., 92 F.2d 338, 341 (6th Cir.
1987), cert. denied, 303 U.S. 637 (1938); United States v.
Knoz-Powell-Stockton Co., 83 F.2d 423, 425 (9th Cir. 1936),
cert. denied, 299 U.S. 573 (1936) ; In re Bell, 34 F. 2d 677, 680
(W.D. Pa. 1929); In re Glover-McConnell Co., 9 F.2d 683,
686 (N.D. Ga. 1925).
11 See, e.g., Fiori v. Rothensies, 99 F.2d 922, 922 (3d Cir.
1938) (per curiam) (discussing prima facie value of taxing
authority’s claim, but failing to reach the issue of burden of
proof).
12 Indeed, in the leading cases in which both a pre-Code
practice and issues of federalism were at stake, the Court
16
Petitioner would be flatly contrary to core notions
of federalism that require Congress to clearly indi-
cate its intention to displace state law. As the Court
held in BF”, only a congressional intention that is
“clear and manifest,” 511 U.S. at 544, suffices to dis-
place state law in the bankruptcy context. As amici
have noted, it is a fundamental principle of state tax
law that, with the exception of certain specifically
delineated situations, the burden of proof in tax dis-
putes falls upon the taxpayer. See Appendix. If this
Court is to begin with the “basic assumption that
Congress did not intend to displace state law,” Mary-
land v. Louisiana, 451 U.S. at 746, it should find a
congressional intent to adopt a pre-Code practice
which displaces state substantive law only in the
clearest and most compelling circumstances, which
are not present here.
Finally, Petitioner’s proffered pre-Code analysis
should be rejected because it asks the wrong ques-
tion. At issue here is not so much the burden of proof
to be applied as the source of the law that determines
how the burden is allocated. Thus, in terms of pre-
Code practice, the more appropriate inquiry is
whether pre-Code cases applied specific bankruptcy
law burdens of proof or the burdens that applied
under relevant non-bankruptcy law. A review of case
law involving disputed tax claims indicates that
many courts placed the burden of proof on the party
which would otherwise have carried that burden under
preserved state law. See, e.g., Cohen, 523 U.S. at 221, 223
(pre-Code practice respected State’s interest in enforcement
of state law judgment against debtor) ; Dewsnup, 502 U.S.
at 417-19 (pre-Code practice preserved the result otherwise
obtained under state law); see also Midlantic, 474 U.S. at
500; Kelly, 479 U.S. at 53.
SE — . —ä.—
17
non-bankruptcy law, thereby demonstrating an ap-
propriate respect for state law.
For all of these reasons, this Court should decline
to find an intent of Congress to adopt a pre-Code
practice placing the burden of proof on the taxing
authority in state tax disputes.
C. The Bankruptcy Court’s Equitable Power To Reorder
Claims Does Not Empower It To Reallocate Burdens
Of Proof
Petitioner contends that the baakruptcy court’s
equitable powers should be used to reallocate the bur-
den of proving the validity of a tax claim in order
to promote the policy of equality among creditors.
See Pet. Br. 26-29; see also Franchise Tax Bd. of Cali-
fornia v. Macfarlane, 83 F.3d 1041, 1045 (9th Cir.
1996) (shifting burden to taxing authority in order
to “balance the equities,” on grounds that taxing
authority should not receive “double benefit,” because -
tax claims also receive statutory priority over
claims of other creditors), cert. denied, 520 U.S.
1115 (1997). This argument is without merit. The
13 See, e.g., In re Shackelford, 3 B.R. at 44 (citing non-
bankruptcy law, or cases relying on nonbankruptcy law, when
stating burden of proof); accord In re Canady, 43 A.F.T.R.2d
at 473; In re Menefee, 40 A.F.T.R.2d at 5013 & n.19; In re
Uneco, 582 F.2d at 1207; In re Standard Milling Co., 324
F. Supp. at 390; In re Oxford Assoc., 209 F. Supp. at 243-44;
In re Petersilge, 70 F. Supp. at 96-97; Paschal v. Blieden, 127
F.2d at 401-02; In re Lasky, 38 F. Supp. at 30; In re Glotzer,
42 F. Supp. 712, 713 (S.D.N.Y. 1941) ; In re Trustees System
Co. of Louisville, 30 F. Supp. 361, 363 (1939); In re Candolfi
E Cog42 F. Supp. at 707; In re Mid America Co., 31 F. Supp.
at ; In re Lang Body Co., 92 F.2d at 341; United States
v. Kæ-Powell- Stockton Co., 83 F.2d at 424-25; In re Bell,
34 Fd at 680; In re Glover-McConnell Co., 9 F.2d at 686.
18
equitable powers of the bankruptcy court to reorder
claims cannot be used to override the state law that
determines the validity of a claim. In “balancing the
equities,” bankruptcy courts must also consider this
Court’s directive that, absent a contravening state-
ment from Congress, creditors are entitled to the
same substantive rights in bankruptcy court that
they possess outside of bankruptcy. The goal of bank-
ruptcy courts should be to ensure that the validity of
a creditor’s claim does not depend upon whether the
claim is asserted in bankruptcy court or some other
forum. This goal, rather than some undefined desire
for equality among creditors, controls this case.
Bankruptcy courts are courts of equity. See 11
U.S.C. §105(a). This Court has repeatedly held,
however, that “whatever equitable powers remain in
the bankruptcy courts must and can only be exercised
within the confines of the Bankruptcy Code.” Nor-
west Bank Worthington v. Ahlers, 485 U.S. 197, 206
(1988); see also United States v. Noland, 517 U.S.
535, 539 (1996) (“although [the bankruptcy court]
is a court of equity, it is not free to adjust the legally
valid claim of an innocent party who asserts the
claim in good faith merely because the court perceives
that the result is inequitable”); Butner, 440 U.S.
at 56 (“undefined considerations of equity provide
no basis for adoption of a uniform federal [bank-
ruptey] rule”).
The Bankruptcy Code does not state that bank-
ruptcy courts may use their equitable powers cate-
gorically to shift the burden of proof in tax disputes.
Petitioner nevertheless contends that - bankruptcy
courts are entitled to disregard state substantive law
when determining the validity of a claim, if doing so
19
will promote “equality” among creditors. Pet. Br.
27; see also Macfarlane, 83 F.3d at 1045. Indeed,
Petitioner asserts that [iln order to balance the
equities between taxing authorities and other credi-
tors, taxing authorities should shoulder the same
burden of persuasion as other creditors to establish
their claims.” Pet. Br. 29. ,
Petitioner’s argument is without merit. In Noland,
this Court held that a bankruptcy court inappropri-
ately invades the legislative function when it uses its
equitable powers categorically to override the legisla-
tively-created rights of creditors. 517 U.S. at 540-41.
The Noland Court reasoned that the equitable powers
of a bankruptcy court do not justify categorical sub-
ordination of claims where such subordination was
at odds with Congress’ articulated scheme of priori-
ties. Jd. The Court stated that bankruptcy courts
could not categorically subordinate the claims of
creditors—in this case the Internal Revenue Service
—in derogation of Congress’s ordering of priorities
because doing so would contravene the reasoned pol-.
icy judgment of the legislature. See id. at 543.
Despite Noland’s admonition that “bankruptcy
courts may not take it upon themselves to make
categorical determination[s] under the guise of
[equity],” 517 U.S. at 543, Petitioner advocates a
rule that would require bankruptcy courts to do pre-
cisely that. Permitting bankruptcy courts to reallo-
cate burdens of proof in order to “balance the equi-
ties ‘between the [State] and other creditors’ ” or to
avoid “ ‘granting the [State] a double benefit,’”
Macfarlane, 83 F.3d at 1045 (citations omitted), is
irreconcilable with Noland. Indeed, the rule that
Petitioner seeks—that the burden of proof is always
on the taxing entity in bankruptcy—is a blanket rule
20
of the very sort struck down by the Court in Noland
as “inappropriately categorical in nature.” 517 U.S.
at 543.* Petitioner’s request must be denied because
this Court has already made clear that equitable
powers do not authorize a bankruptcy court to “ex-
ercise unrestricted power to contradict statutory or
14 Petitioner’s suggestion that the equitable powers of the
Court may be used to shift the burden of proof because the
“ ‘balance of equities between creditor and creditors’ is at
work when a bankruptcy court is called upon to adjudicate
an objection to the allowance of a priority tax claim,” Pet. Br.
29, is without merit. As discussed abcve, this case involves
the burden of proof to be applied when determining the
validity of the claim under state law, not the allowance of the
claim under federal law. Moreover, it is questionable whether
a bankruptcy court may use its equitable powers to disallow
a claim when, as here, the creditor has engaged in no mis-
conduct or fraud. See, e.g., In re Mobile Steel Co., 563 F.2d
692, 699 (5th Cir. 1977) (“[E]quitable considerations can
justify only the subordination of claims, not their disallow-
ance.”); In re 80 Nassau Assoc., 169 B. R. 832, 837 & n.4
(Bankr. S. D. N. v. 1994); In re Babbin, 164 B. R. 157, 160
(Bankr. D. Colo. 1994); In re Georgia Villa, Inc., 10 B. R. 79,
85 (Bankr. N. D. Ga. 1981); In re Huckabee Auto Co., 33 B. R.
132, 139-40 (Bankr. M.D. Ga. 1981) ; see also 4 Lawrence P.
King, Collier on Bankruptcy J 510.02 (15th ed. 1999) (“There
are in addition, situations in which the claim of a creditor is
enforceable at law and should be allowed, but where the
creditor’s misconduct requires an equitable remedy. In such
a case, the valid claim will not be disallowed but will be sub-
ordinated, or postponed in rank, until the claims of other
creditors have been satisfied.”) (citing Asa S. Herzog & Joel
B. Zweibel, The Equitable Subordination of Claims in Bank-
ruptcy, 15 Vand. L. Rev. 83, 86 (1961) and Daniel C. Cohn,
Subordinated Claims: Their Classification and Rating Under
Chapter 11 of the Bankruptcy Code, 56 Am. Bankr. L.J.
298 (1982)); cf. Pepper v. Litton, 308 U.S. 295, 312 (1989)
(acknowledging equitable powers of disatlowance or sub-
ordination when creditor breached fiduciary duty).
21
common law when [the court] feels a fairer result
may be obtained by application of a different rule.”
Id. at 543; accord United States v. Reorganized CF
& I Fabricators, 518 U.S. 213, 229 (1996) (“caie-
gorical reordering of priorities that takes place at
the legislative level of consideration is beyond the
scope of judicial authority to order equitable subordi-
nation under § 510(c)”).
Petitioner also contends that the Code’s “funda-
mental goal of equality of treatment of creditors is
put at risk if one class of creditors—and indeed, a
class of creditors whose claims are often granted
priority status—is given the benefit of a favorable
presumption that is unavailable to other creditors.”
Pet. Br. 27. There is, however, no policy in the Code
that all creditors should receive “equality of treat-
ment” in bankruptcy proceedings. On the contrary,
the Code expressly grants favorable treatment to tax
creditors in other instances. See, e.g., 11 U.S.C.
§ 507 (a) (8) (priority of distribution); 11 U.S.C.
§ 523 (a) (1) (nondischargeability of tax liability).
The decision to grant certain priorities to tax eredi-
tors is a reasoned congressional judgment reflecting
the fact that taxing authorities are non-consensual
15 Taxing authorities have a fundamentally different rela-
tionship with debtors than do most private creditors because
they are public agencies and nonconsensual creditors. Most
private creditors achieve through contract greater access to
information with which to monitor the financial activities of
their debtors than the government obtains on tax returns.
See Frances R. Hill, Toward A Theory Of Bankruptcy Taz:
A Statutory Coordination Approach, 50 Tax Law. 103, 107,
149 (1996). Moreover, private creditors can adjust the terms
of credit to reflect risk. Consequently, Congress had valid
reasons for providing taxing authorities with certain prefer-
ences in the bankruptcy context.
22
creditors. A bankruptcy court should not be permitted
to undermine that judgment.”
In short, a bankruptcy court cannot invoke its
powers of equity to “create equitable impediments
for a certain class of creditors based on the notion
that Congress has given [those creditors] too much.”
Thinking Machines Corp. v. New Mexico Taxation &
Revenue Dep’t, 211 B.R. 426, 431 n.7 (Bankr. D.
Mass. 1997) (citation omitted). Rather, as this
Court recognized in Butner, 440 U.S. at 56, unless
Congress has mandated otherwise, “undefined con-
siderations of equity provide no basis for adoption
of a uniform federal rule” in bankruptcy that con-
travenes generally applicable state law rules.
D. Allowing Bankruptcy Courts To Reallocate Bur-
dens of Proof Would Substantially Disrupt State
Tax Administration, Encourage Bankruptcy Filings,
And Be Unfair To Innocent Taxpayers
The adverse consequences of permitting federal
bankruptcy courts to shift the burden of proof from
the taxpayer to the taxing entity also weigh heavily
in favor of affirming the judgment of the court of
appeals. These consequences are distinctly at odds
with the concerns expressed in the legislative history
of the Bankruptcy Code.
Since tax authorities are creditors of practically
every taxpayer, . . . tax collection rules for bank-
16 As one commentator has observed, “It is scarcely a sur-
prise to note that the government’s claim for unpaid prepeti-
tion taxes may be afforded priority status in bankruptcy dis-
tribution. Indeed, perhaps the surprise is that the priority
for taxes is as low as it is; taxes rank eighth in the priority
line.” Charles J. Tabb, The Law of Bankruptcy 520 (1997)
(citing 11 U.S.C. § 507(a) (8)).
23
ruptcy cases have a direct impact on the integ-
rity of the Federal, State, and local tax systems.
These tax systems, generally based on voluntary
assessment, work[] to the extent that the major-
ity of taxpayers think they are fair. This pre-
sumption of fairness is an asset which should be
protected and not be jeopardized by permitting
taxpayers to use bankruptcy as a means of im-
properly avoiding their tax debts. To the extent
that debtors in a bankruptcy are freed from
paying their tax liabilities, the burden of mak-
ing up the revenues thus lost must be shifted to
other taxpayers.
S. Rep. No. 598 at 14, reprinted in 1978 U.S.C.C.A.N.
at 5800. The Senate Report expressed particular con-
cern that “the tax collector . . should not lose taxes
which he has not had reasonable time to collect or
which the law has restrained him from collecting.”
Id.
“Claims for taxes figure prominently in nearly all
bankruptcy proceedings.” William T. Plumb, The
Tax Recommendations of the Commission on the
Bankruptcy Laus Tam Procedures, 88 Harv. L. Rev.
1360, 1363 (1975). The allocation of the burden of
proof frequently has a substantial impact on state reve-
nue collection because the determination of which
party bears the burden of proof in tax cases will
often be “critical” to the ultimate outcome of the
dispute, as it is in this case. See Pet. App. 8a. If the
State is unable to collect taxes from debtors because
of the reallocation of the burden of proof, it will nec-
essarily pass on its losses to the general public in the
form of higher taxes. See Thinking Machines, 211
B. R. at 431 n.8 (citing Hill, 50 Tax Law. at 112).
Consequently, “other present and future taxpayers
24
[will be] left to provide the revenue required for
governmental operations,” Hill, 50 Tax Law. at 107,
potentially creating “concerns about the fairness of
the distribution of the burden of funding the govern-
ment.” Steve R. Johnson, The Dangers of Symbolic
Legislation: Perceptions and Realities of the New
Burden-of-Proof Rules, 84 Iowa L. Rev. 413, 451-52
(1999).
Requiring bankruptcy courts to adjust the burden
of proof for tax claims would be particularly disrup-
tive because both federal and state tax systems rely
upon voluntary compliance and self-reporting by citi-
zens." See United States v. Bisceglia, 420 U.S. 141,
145 (1975). The taxpayer, rather than the govern-
ment, is the party most likely to possess relevant evi-
dence regarding potential tax liability and is thus
best able to carry the burden of proof in the event of
any contest as to that liability. See United States v.
Rexach, 482 F.2d 10, 16 (Ist Cir.), cert. denied,
414 U.S. 1039 (1973). A taxing authority is a non-
consensual creditor who “has no discretion in choos-
ing those from whom it must collect taxes” and “no
ability to monitor debtors and could gain no benefit
from doing so.” Hill, 50 Tax Law. at 149.
Indeed, both the court below and other courts have
recognized that permitting bankruptcy courts to shift
the burden of proof in tax disputes would “create a
new incentive to declare bankruptcy.” Pet. App. 11a.
17 Indeed, the current allocation of the burden of proof is
in harmony with rules requiring taxpayers adequately to
document their financial affairs. See United States v. Rexach,
482 F.2d 10, 16 (ist Cir.), cert. denied, 414 U.S. 1089 (1973).
18 See also Barrows v. Internal Revenue Serv., 281 B.R. 446,
452 (Bankr. D.N.H. 1998) (stating that “if the burden of
25
A taxpayer disputing a substantial tax liability would
have a strong incentive to file a bankruptcy petition
ir no other ressen than to chtein s foverable. forum
tigate the issue. Perhaps even more significantly,
a rule shifting the burden of proof to the State in
tax disputes (and thus decreasing the State’s chances
of recovering back taxes from the estate) would cre-
ate an incentive for non-governmental creditors to
initiate involuntary bankruptcy proceedings under
11 U.S.C. § 303.
*
Alternatively, reallocating the burden of proof
would undermine the fairness of the tax system by
providing taxpayers with a windfall merely by
reason of the happenstance of bankruptcy.” Lewis v.
Manufacturers Nat'l Bank, 364 U.S. 603, 609
(1961). Such a change in the law would “funnel
people with tax problems into the bankruptcy courts,
and thus undermine the enforcement of state tax
law.” Thinking Machines, 211 B.R. at 431.
A bankruptcy court is not “untethered to any obli-
gation to preserve the coherence of substantive [leg-
islative] judgments.” Noland, 517 U.S. at 542. Con-
sequently, these courts should not be permitted to
proof was allocated differently between the bankruptcy forum
and other forums, there would be a great incentive for tax-
payers to forum shop. Simp’y by filing for bankruptcy, the
taxpayer could shift the povential responsibility for estab-
lishing the validity and amount vel nom of a tax claim to the
taxing authority.”) ; Thinking Machines, 211 B.R. at 431-32
(“in the view of this Court, a rule shifting the burden of
proof to the taxing authority in bankruptcy proceedings
would render the bankruptcy forum more favorable to taxpay-
ers than the non-bankruptcy forum”); Jn re Cobb, 135 B. R.
640, 641 (Bankr. D. Neb. 1992) (“to rule [in favor of the tax-
payer] would permit a tax litigant to shift the burden of proof
to the [taxing authority] by filing bankruptcy’’).
26
supplant well-established state law in an area of
fundamental importance to state sovereignty absent
a clear congressional mandate to do so. Because Con-
gress has not sanctioned such wholesale abrogation
of state law, Petitioner’s position should be rejected.
CONCLUSION
The judgment of the court of appeals should be
affirmed.
—Respeetfully submitted,
STEVEN H. GOLDBLATT RICHARD RUDA *
APPELLATE LITIGATION Chief Counsel
PROGRAM JAMEs I. CROWLEY
GEORGETOWN UNIVERSITY STATE AND LOCAL LEGAL CENTER
LAW CENTER 444 North Capitol Street, N.W.
600 New Jersey Ave., N.W. Suite 345
Washington, D.C. 20001 Washington, D.C. 20001
(202) 662-9555 (202) 4344850
* Counsel of Record for the
March 23, 2000 Amici Curiae
APPENDIX
la
APPENDIX
SELECTED STATE LAW GOVERNING
BURDEN OF PROOF IN TAX DISPUTES
Alabama: Ala. Code § 40-2A-7 (b) (5) (e) (1993) (“On
appeal to the circuit court or to the administrative
law division, the final assessment [of the taxing au-
thority] shall be prima facie correct, and the burden
of proof shall be on the taxpayer to prove the assess-
ment is incorrect.”’).
Alaska: Cool Homes v. Fairbanks North Star Bor-
ough, 860 P.2d 1248, 1262-63 (1998) (Alaska 1993)
(per curiam) (“Alaska law provides that the tax-
payer bears the burden of proof before a Board of
Equalization. The only grounds for adjustment of
the assessment are proof of unequal, excessive, im-
proper or under valuation based on the facts that are
stated in a valid, written appeal or proven at the
appeal hearing.’ AS 29.45.210(b). The Borough
Code contains similar language. FNSB 3.24.012(C)
(2).”); Alaska Stat. § 43.05.455 (e) (1998) (in
formal hearings before the Office of Tax Appeals, the
“taxpayer bears the burden of proof on questions of
fact by a preponderance of the evidence unless a dif-
ferent standard of proof has been set by law for a
particular question.“).
Arizona: Graham County v. Graham County Elec.
Coop. Inc., 512 P.2d 11, 12 (Ariz. 1973) (“A tax-
payer in challenging an assessment in the superior
court has the burden of proof.“); Ariz. Rev. Stat.
Ann. § 42-1254(D)(4) (West Supp. 1999) (placing
burden of proof on taxing authority in certain limited
situations expressly provided for by statute).
Arkansas: IBM Credit Corp. v. Pulaski County, 873
S.W.2d 161, 162 (Ark. 1994) (“[t]he burden of
2a
proof [when reviewing tax assessment] is on the pro-
testant assessed.”) (citations omitted).
California: American Airlines, Inc. v. San Mateo,
912 P.2d 1198, 1210 (Cal. 1996) (“The law generally
‘presumes that an assessor has performed [his or
her] duty and has assessed all properties fairly and
on an equal basis. The taxpayer has the burden of
proving otherwise.’ ”’).
Colorado: Colo. Rev. Stat. Ann. § 39-21-105 (2) (b)
(West 1990) (in appeal of tax determination, “the
taxpayer shall have the burden of proof with respect
to the issues raised in the notice of appeal except as
to the issue of whether the taxpayer has been guilty
of fraud with intent to evade tax.“).
Connecticut: Advanced Bus. Sys. v. Crystal, 650 A.2d
540, 541 (Conn. 1994) (per curiam) (“A taxpayer
bears the burden of proving the impropriety of an
adverse assessment concerning a tax exemption.“).
Delaware: Del. Code Ann. tit. 30, §526(a) (1974)
(In any tax proceeding, “the burden of proof shall be
on the taxpayer” except in limited circumstances ex-
pressly provided for by statute. ).
District of Columbia: Petworth Pharmacy, Inc. v.
District of Columbia, 335 A.2d 256, 258 (D.C. App.
1975) (“In a tax case the petitioner bears the burden
of proving the incorrectness of the government’s as-
sessment of a deficiency.’’).
Florida: Straughn v. Tuck, 354 So.2d 368, 371 (Fla.
1977) (“Tax assessors are constitutional officers and
as such their actions are clothed with the presump-
tion of correctness. One asserting error on the part
of the tax assessor must show by ‘proof’ that every
3a
reasonable hypothesis has been excluded which would
support the tax assessor.’’).
Georgia: Fowler v. Strickland, 252 S.E.2d 459, 460
(Ga. 1979) (“The effect of the language of the previ-
ously quoted statute is to shift to the taxpayer the
burden of going forward with evidence to dispute the
correctness of a[] [sales tax] assessment made there-
under.”’).
Hawaii: In re EWA Plantation Co., 384 P.2d 287,
292 (Haw. 1963) (“taxpayers have the burden to
show clearly the invalidity claimed by overcoming the
presumption that the tax assessor has faithfully per-
formed his duty.’’).
Idaho: Greenfield Village Apts. v. Ada County, 938
P.2d 1245, 1247 (Idaho 1997) (“The value of prop-
erty for purposes of taxation determined by an as-
sessor is presumed correct, and the burden of proof
is on the taxpayer to show by clear and convincing
evidence that the taxpayer is entitled to the relief
claimed.”’).
Illinois: 35 Ill. Comp. Stat. Ann. 200/23-15(b) (2)
(West 1993 & Supp. 1999) (“The taxes, assessments,
and levies that are the subject of the objection shall
be presumed correct and legal, but the presumption
is rebuttable. The plaintiff has the burden of proving
any contested matter of fact by clear and convincing
evidence.”’).
Indiana: Scheub v. State Bd. of Tax Comm’rs, 716
N.E.2d 638, 642 (Ind. Tax. 1999) (taxpayer “bears
the burden of demonstrating that the [taxing au-
thority]’s final determination is invalid.”).
Iowa: Boekeloo v. Clinton Bd. of Rev., 529 N.W.2d
275, 276-77 (Iowa 1995) (“An appealing property
44
owner has a twofold burden on appeal. First, the
property owner bears the burden to prove that an
assessment is excessive. Second, the appealing party
must establish what the correct valuation should be.’
If the property owner ‘offers competent evidence by
at least two disinterested witnesses that the market
value of the property is less than the market value
determined by the assessor,’ the burden of proof
shifts to the board of review to uphold the assessed
value.”) (citations omitted) (citing Iowa Code
§ 441.21(1)(a) (1993)); Iowa Code § 421.60(b)
(1999) (Except in certain limited circumstances ex-
pressly provided for by statute, “the burden of proof
shall be on the taxpayer who challenges the assess-
ment or refund denial, except that, with respect to any
new matter or affirmative defense, the burden of
proof shall be upon the department.”’).
Kansas: Ness County Bd. of County Comm’rs v. Ban-
koff Oil Co., 960 P.2d 1279, 1288 (Kan. 1998)
(“party challenging the validity of [taxing author-
ity]’s action has the burden of proving it was
erroneous’).
Kentucky: Kentucky Rev. Cabinet v. Gillig, 957 S.W.
2d 206, 209-10 (Ky. 1997) (“While recognizing that
the tax assessor’s valuation merely reflects an estima-
tion of what the market logically should be, since
at least 1932, the law of Kentucky has also granted
the estimated property tax assessment a presumption
of validity and has placed the burden of establishing
that the assessment was incorrect on the taxpayer.“).
Louisiana: La. Rev. Stat. Ann. § 13-5034 (West
1991) (Whenever the pleadings filed on behalf of
Ja
the state, or on behalf of any of its officers charged
with the duty of collecting any tax, excise, license,
interest, penalty, or attorney’s fees, shall be accom-
panied by an affidavit of the officer or of one of his
deputies or assistants, or of the counsel or attorney
filing the same, that the facts as alleged are true to
the best of the affiant’s knowledge or belief, all of the
facts alleged in the pleadings shall be accepted as
prima facie true and as constituting a prima facie
case, and the burden of proof to establish anything
to the contrary shall rest wholly on the defendant or
opposing party.“).
Maine: Chase v. Machiasport, 721 A.2d 636, 640
(Me. 1998) (“A taxpayer seeking an abatement from
the County Commissioners has the burden of proving
that the assessed valuation is ‘manifestly wrong.“);
Me. Rev. Stat. Ann. tit. 36, § 1763 (West 1990)
(“The burden of proving that a transaction was not
taxable shall be upon the person charged with tax
liability.“).
Maryland: Md. Code Ann., Tax-Gen. § 11-103 (b)
(1997) (“The person required to pay the sales and
use tax has the burden of proving that a sale in the
State is not subject to the sales and use tax.“).
Massachusetts: Mass. Gen. Laws Ann. ch. 64H, § 8(a)
(West 1998 & Supp. 1999) (presumption that all
sales are taxable; “[t]he burden of proving that a
sale of services or tangible personal property by any
vendor is not a sale at retail shall be upon such
vendor“).
Michigan: Elias Bros. Rest., Inc. v. Treasury Dep’t,
549 N. W. 2d 837, 840 (Mich. 1996) (“Because tax
exemptions are disfavored, the burden of proving
6a
entitlement to an exemption rests on [the taxpayer],
the party asserting the right to the exemption.’’).
Minnesota: Minnesota Twins Partnership v. Commis-
sioner of Rev., 587 N.W.2d 287, 289 (Minn. 1998)
(“Tax assessments by the commissioner ‘are pre-
sumed to be valid and correctly determined’ and the
burden of showing that the assessment is invalid lies
with the taxpayer.“) (citing Minn. Stat. § 270.68 (3)
(1998) ).
Mississippi: City of Cleveland v. T.V. Cable Co., 121
So.2d 862, 863 (Miss. 1960) (in tax assessment dis-
pute, “the burden is upon the taxpayer to show by
two or more competent witnesses who know of their
own personal knowledge that the property is assessed
for a higher sum than its true value.“).
Missouri: Westwood Country Club v. Director of
Rev., 6 S.W.3d 885, 887 (Mo. Supp. 2000) (“Exemp-
tions from taxation are to be strictly construed, and,
as such, it is the burden of the taxpayer claiming the
exemption to show that it fits the statutory language
exactly.”) (citations omitted); Mo. Ann. Stat.
§ 136.300 (West Supp. 2000) (“The director of reve-
nue shall have the burden of proof with respect to
any factual issue relevant to ascertaining the liabil-
ity of a taxpayer” in certain limited circumstances
expressly provided for by statute. ).
Montana: Farmers Union Central Exch., Ine. v.
Dep’t of Rev. of Montana, 901 P.2d 561, 564 (Mont.
1995) (at tax dispute hearing, “[taxpayer] bore the
burden of proving that the [Department of Reve-
nue]’s classification was incorrect.“).
Nebraska: Neb. Rev. Stat. § 77-2781 (1995) (“In any
proceeding before the Tax Commissioner, the burden
Ja
of proof shall be on the taxpayer” except in limited
circumstances as expressly provided for by statute.).
Nevada: Nev. Rev. Stat. § 372.155 (1986) (“For the
purpose of the proper administration of this chapter
and to prevent evasion of the sales tax it is presumed
that all gross receipts are subject to the tax until the
contrary is established. The burden of proving that
a sale of tangible personal property is not a sale at
retail is upon the person who makes the sale unless
he takes from the purchaser a certificate to the effect
that the property is purchased for resale.“
New Hampshire: Public Serv. Co. of New Hampshire
v. Town of Ashland, 377 A.2d 124, 127 (N.H. 1977)
(in property tax assessment dispute, “[t]he tax-
payer has the burden of proof and it is the taxpay-
er’s responsibility to satisfy the board as to the dis-
proportionality of the tax burden imposed by the
selectmen.“).
New Jersey: Seventeen Thirty Corp. v. Director, New
Jersey Div. of Tax., 18 N.J. Tax 168, 179 (NW.
Tax Ct. 1999) (“The determination by [the taxing
authority] that additional Corporation Business Tax
payments are due from [plaintiff taxpayer corpora-
tion] is entitled to a presumption of correctness.
Plaintiff bears the initial burden of overcoming this
presumption, and, if it does so, it then has the bur-
den of proof that the assessment of taxes was in-
correct.”’).
New Mexico: Brim Healthcare, Inc. v. New Mexico
Tax. & Rev. Dep’t, 896 P.2d 498, 500 (N.M. Ct.
App. 1995) (“Where the taxpayer claims an exemp-
tion from the gross receipts tax, the exemption must
be unambiguously expressed in the statute and
clearly established by the taxpayer. The taxpayer
therefore has the burden of overcoming the statutory
presumption that all receipts of a person engaging
in business are subject to the gross receipts tax.”)
(citations omitted).
New York: Grace v. New York Tax Comm'n, 332
N.E.2d 886, 888 (N.Y. 1975) (“The burden of proof
to overcome tax assessments rests upon the tax-
payer.“).
North Carolina: Albemarle Elec. Membership Corp.
v. Alexander, 192 S.E.2d 811, 816 (N.C. 1972) (“The
members of the State Board of Assessment are public
officers, and the Board’s official acts are presumed to
be made in good faith and in accordance with law.
The burden is upon the party asserting otherwise to
overcome such presumptions by competent evidence
to the contrary. Every reasonable intendment will
be made in support of these presumptions.’’).
North Dakota: T'rollwood Village Ltd. Partnership v.
Cass County Bd. of County Comm'rs, 557 N.W.2d
732, 736 (N.D. 1996) (in tax assessment dispute,
“the [taxpayer] carries the burden on appeal of show-
ing error.“).
Ohio: Maxxim Med., Inc. v. Tracy, 720 N.E.2d 911,
913 (Ohio 1999) (“‘when an assessment is con-
tested, the taxpayer has the burden’. . to show in
what manner and to what extent . . the commis-
sioner’s investigation and audit, and the findings and
assessments based thereon, were faulty and incorrect.’
The Tax Commissioner’s findings are presumptively
valid, absent a demonstration that those findings are
clearly unreasonable or unlawful.”).
Oklahoma: Okla. Stat. tit. 68, § 1365(C) (1992) (In
sales tax disputes, the “burden of proving that a sale
9a
was not a taxable sale shall be upon the person who
made the sale.“
Oregon: Or. Rev. Stat. § 305.427 (1997) (in all tax
proceedings, “[t]he burden of proof shall fall upon
the party seeking affirmative relief“).
Pennsylvania: 72 Pa. Cons. Stat. Ann. § 3402-505
(West 1995) (“In all cases of petitions for reassess-
ment and appeals, the burden of proof shall be on
the petitioner or appellant”).
Rhode Island: Rhode Island Lithograph Corp. v.
Clark, 519 A.2d 589, 591 (R.I. 1987) (“It is a set-
tled rule in this jurisdiction that tax-exemption stat-
utes are construed against the taxpayer and further
that the taxpayer must discharge the burden of proof
in establishing by competent evidence that it is en-
titled to an exemption.”’).
South Carolina: South Carolina Tax Comm’n v. South
Carolina Tax Bd. of Rev., 299 S.E.2d 489, 492-93
(S.C. 1983) (in tax assessment dispute, taxpayers
“have the burden to overcome the presumption that
the valuation is correct.’’).
South Dakota: Fall River County v. South Dakota
Dep’t of Rev., 601 N.W.2d 816, 823 (S.D. 1999) (“In
challenging a tax assessment ruling, the challenger
has two presumptions to overcome: ‘First, there is a
presumption that tax officials will do their duty in
accordance with the law and not act unfairly and ar-
bitrarily regarding the assessment of property. Sec-
ond, there is a presumption that [Department of
Revenue]’s valuations are correct.’”’).
Tennessee: Howard v. United States, 566 S.W.2d 521,
528 (Tenn. 1978) (“There is a presumption that tax
10a
assessments are valid and the burden is on the tax-
payer to prove that they are erroneous.”’).
Texas: Bullock v. National Bancshares Corp., 584
S.W.2d 268, 272 (Tex. 1979) (in claim for exemp-
tion from franchise tax, “the burden of proof is on
the claimant to clearly show that it comes within the
statutory exemption.”’).
Utah: Utah Code Ann. § 59-10-5438 (1996) (“In any
proceeding before the [tax] commission . . . the bur-
den of proof shall be upon the petitioner” except in
certain limited circumstances expressly provided for
by statute. ).
Vermont: Vt. Stat. Ann. tit. 32, § 5291 (1994) (when
taxpayer disputes validity of tax appraisal, “the bur-
den of proof shall be on the plaintiff in so far as the
validity of such tax is thus put in issue.”’).
Virginia: Winchester & Western R.R. Co. v. State
Corp. Comm’n, 374 S.E.2d 66, 68 (Va. 1988) (On tax
assessment appeal, “the burden is on the taxpayer to
prove that the assessment is erroneous.”).
Washington: In re Sehome Park Care Ctr., Inc., 903
P.2d 443, 445 (Wash. 1995) (en banc) (“A tax ex-
emption presupposes a taxable status and the burden
is on the taxpayer to establish eligibility for the
benefit.“)
West Virginia: Appalachian Power Co. v. West Vir-
ginia Tax Dep’t, 466 S.E.2d 424, 444 (W. Va. 1995)
(“It is universally recognized that taxpayers have
the burden to prove the Tax Commissioner's deter-
mination is not correct.”) (citing Welch v. Helvering,
290 U.S. 111 (1933) ).
lla
—
Wisconsin: Wis. Stat. Ann. § 70.109 (West 1999)
(property tax exemptions shall be strictly construed
in every instance with a presumptien that the prop-
erty in question is taxable, and the burden of proof
is on the person who claims the exemption.“).
Wyoming: Amoco Prod. Co. v. Wyoming State Bd. of
Equalization, 899 P.2d 855, 858 (Wyo. 1995) (in tax
valuation dispute, “ “The burden of proof is upon the
party asserting an improper valuation.’”) (citations
omitted).
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.