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

M ar as owe No. me.

In The

Supreme Court of the

THOMAS E. RALEIGH, Chapter 7 Trustee for

Estate of William J. Stoecker,

Petitioner,

V.

STATE OF ILLINOIS, DEPARTMENT OF REVENUE,

Respondent.

6

On Writ Of Certiorari To The

United States Court Of Appeals

For The Seventh Circuit

o

BRIEF AMICI CURIAE FOR THE STATES OF

NEW MEXICO, ARIZONA, CALIFORNIA, COLORADO,

CONNECTICUT, DELAWARE, FLORIDA, IOWA, KANSAS,

LOUISIANA, MAINE, MARYLAND, MASSACHUSETTS,

MICHIGAN, MINNESOTA, MISSOURI, MONTANA,

NEBRASKA, NEVADA, NEW JERSEY, NORTH DAKOTA,

OHIO, OREGON, PENNSYLVANIA, RHODE ISLAND,

SOUTH DAKOTA, TENNESSEE, UTAH, VERMONT,

WASHINGTON AND WYOMING IN

SUPPORT OF RESPONDENT

e

Patricia A. Maprip

Attorney General of New Mexico

Donavp F. Harris

(Counsel of Record)

Special Assistant Attorney

General

New Mexico Taxation and

Revenue Department

P.O. Box 22690

Santa Fe, New Mexico 87502-2690

505-841-6583

On Brief:

James I. SHEPARD

2682 West Dovewood Lane

Fresno, California 93711-2518

{Additional Attorneys General Listed On Inside Cover]

BEST AVAILABLE COPY Iam

HONORABLE JANET

NAPOLITANO

Attorney General of Arizona

Office of the Attorney

General

1275 West Washington Street

Phoenix, AZ 85007

Honorasie Birt Lockyer

Attorney General

of California

Office of the Attorney

General

1300 I Street, Suite 1740

Sacramento, CA 95814

HONORABLE KEN SALAZAR

Attorney General

of Colorado

Office of the Attorney

General

Department of Law

1525 Sherman Street

Denver, CO 80203

HONORABLE RICHARD

BLUMENTHAL

Attorney General

of Connecticut

Office of the Attorney

General

55 Elm Street

Hartford, CT 06141-0120

HONORABLE M. JANE Brapy

Attorney General

of Delaware

Office of the Attorney

General

Carvel State Office Building

820 North French Street

Wilmington, DE 19801

HONORABLE Rosert A.

BUTTERWORTH

Attorney General

of Florida

Office of the Attorney

General

The Capitol

PL 01

Tallahassee, FL 32399-1050

HONORABLE THOMAS J.

MILLER .

Attorney General of lowa

Office of the Attorney

General

‘Hoover State Office

Building

1305 East Walnut

Des Moines, IA 50319

HONORABLE CARLA J. STOVALL

Attorney General of Kansas

Office of the Attorney

General

120 S.W. Tenth Avenue

2nd Floor

Topeka, KS 66612

HONORABLE RicHarp P.

IEYouB

Attorney General

of Louisiana

Office of the Attorney

General

Department of Justice

Post Office Box 94095

Baton Rouge, LA

70804-4095

HoNoRABLE ANDREW

KETTERER

Attorney General

of Maine

Office of the Attorney

General

State House Station Six

Augusta, ME 04333

HONORABLE J. JOSEPH

CURRAN Jr.

Attorney General

of Maryland

Office of the Attorney

General

200 Saint Paul Place

Baltimore, MD 21202-2202

Honoras_e THOmas F.

REILLY

Attorney General

of Massachusetts

Office of the Attorney

General

One Ashburton Place

Boston, MA 02108-1698

HONORABLE JENNIFER M.

GRANHOLM

Attorney General

of Michigan

Office of the Attorney

General

Post Office Box 30212

525 West Ottawa Street

Lansing, MI 48909-0212

Honoras_e Mike Hatcu

Attorney General

of Minnesota

Office of the Attorney

General

State Capitol

Suite 102

St. Paul, MN 55155

HONORABLE JEREMIAH W.

(Jay) Nixon

Attorney General

of Missouri

Office of the Attorney

General

Supreme Court Building

207 West High Street

Jefferson City, MO 65101 |

HONORABLE JOsEPH P. .

MAZUREK

Attorney General

of Montana

Office of the Attorney

General

Justice Building, 215 North

Sanders

Helena, MT 59620-1401

Honoras_e Don STENBERG

Attorney General

of Nebraska

Office of the Attorney

General

State Capitol

Post Office Box 98920

Lincoln, NE 68509-8920

HONORABLE FRANKIE

Sue Det Papa

Attorney General

of Nevada

Office of the Attorney

General

Old Supreme Court

Building

100 North Carson Street

Carson City, NV 89701

HONORABLE JOHN J.

FARMER, JR.

Attorney General of

New Jersey

Office of the Attorney

General

Richard J. Hughes Justice

Complex

25 Market Street, CN 080

Trenton, NJ 08625

Honorasce Her Herrkamp

Attorney General of

North Dakota

Office of the Attorney

General

State Capitol

600 East Boulevard

Avenue

Bismarck, ND 58505-0040

Honoraste Betty D.

MONTGOMERY

Attorney General of Ohio

Office of the Attorney

General

State Office Tower

30 East Broad Street

Columbus, OH 43266-0410

Honoras_te Harpy Myers

Attorney General

of Oregon

Office of the Attorney

General

Justice Building

1162 Court Street NE

Salem, OR 97310

Honoraste D. MICHAEL

FISHER

Attorney General

of Pennsylvania

Office of the Attorney

General

Strawberry Square

Harrisburg, PA 17120

HONORABLE SHELDON

WHITEHOUSE

Attorney General

of Rhode Island

Office of the Attorney

General

150 South Main Street

Providence, RI 02903

Honoras_ce Mark BARNETT

Attorney General of

South Dakota

Office of the Attorney

General

500 East Capitol

Pierre, SD 57501-5070

Honoraste Paut G.

SUMMERS

Attorney General

of Tennessee

Office of the Attorney

General

500 Charlotte Avenue

Nashville, TN 37243

HONORABLE JAN GRAHAM

Attorney General of Utah

Office of the Attorney

General

State Capitol, Room 236

Salt Lake City, UT

84114-0810

Honorasie Wituiam H.

SORRELL

Attorney General

of Vermont

Office of the Attorney

General

109 State Street

Montpelier, VT 05609-1001

HONORABLE CuHrisTINE O.

GREGOIRE

Attorney General

of Washington

Office of the Attorney

General

P.O. Box 40100

1125 Washington Street, SE

Olympia, WA 98504-0100

Honorasite Gay

WoopHOUusE

Attorney General

of Wyoming

Office of the Attorney

General

State Capitol Building

Cheyenne, WY 82002

TABLE OF CONTENTS

Page

INTEREST OF AMICI CURIAE..............2000005 1

SUMMARY OF ARGUMENT...................0065 2

RPGS che ccc dinesvccsasvevedecssssicesscvvcse 4

I.

Il.

III.

IV.

THERE HAS NEVER BEEN A BANKRUPTCY

POLICY REGARDING UNIFORM BURDENS

OF PROOF IN THE CLAIM OBJECTION PRO-

GEE woecccevesedcesecevecsesucctecenseséces

THE COURT SHOULD AFFIRM BASED ON

THE UNDERLYING PRINCIPLES OF BUTNER

v. UNITED STATES, 440 U.S. 48 (1979) AND 28

ae nes

ERIE v. TOMPKINS, 304 U.S. 64 (1938)

APPLIES IN BANKRUPTCY COURT WHEN

PURELY STATE LAW ISSUES ARE BEING

LITIGATED IN THE FEDERAL FORUM .....

A RULE OVERRIDING NONBANKRPUTCY

LAW BURDENS OF PROOF HAS ONLY BEEN

APPLIED TO TAXING AUTHORITIES. A

TRULY “UNIFORM” RULE WOULD BE

UNWORKABLE ............secccceeceeeeees

IF THE OPINION BELOW IS NOT AFFIRMED,

THE BANKRUPTCY COURTS COULD

BECOME THE STATE AND FEDERAL TAX

COURT OF CHOICE. ESTABLISHED POLICY

FAVORS NON-INTERFERENCE WITH STATE

TAX LAWS AND AVOIDING GIVING

DEBTORS A COMPETITIVE TAX ADVAN-

TAGE BY FILING BANKRUPTCY............

ee | PPPPPPPITTTTTTTTITTTTTTITIT TT LTT

10

12

18

**

ll —

TABLE OF AUTHORITIES

Page

Cases

Agency Holding Corp. v. Malley-Duff & Assoc., Inc.,

Gee WED TEP Goer Pr ccccedscvedisnitcsvesdessccence 17

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) .... 20

Baker v. Bullock, 529 S.W.2d 279 (Tex. App. 1975) .... 11

Burton Coal Co. v. Franklin Coal Co., 67 F.2d 796

Se Gh Pc nddedustchecithsudestsud dh chdiin 6

Butner v. United States, 440 U.S. 48 (1979) ....3, 11, 17, 18

California Bd. of Equalization v. Sierra Summit, 490

ae GES GPO 6 eek ceed cpeusbdac teesnceseseessetes 27

Cities Service Oil Co. v. Dunlap, 308 U.S. 208 (1939) .... 12

Coastal Steel Corp. v. Tilghman Wheelabrater, Ltd.,

FOO Teas TOD BG Cae, TOG oc cccscccccccovcccccces 16

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967) .... 17

Connecticut Nat. Bank v. Germain, 503 U.S. 249

GUPEED oc evechnchogsncnndesnnséuedinchedessinectosus 6

DelCostello v. International Brotherhood of Teamsters,

Gi a SS Gr hee ont kncecenkisdcstiesevacceste 14

Dick v. New York Life Ins. Co., 359 U.S. 437 (1959) .... 11

Director, Office of Workers’ Compensation Programs,

Dept. of Labor v. Greenwich Collieries, 512 U.S. 267

GOED cvcnrenccdstendgencdoncidadetinds dadeiakdecas 12

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)...12, 14, 15, 16

Garrett v. Moore-McCormack Co., 317 U.S. 239

1 ee Decdédutdarrabsteassstisoncakesininii. 12

Grogan v. Garner, 498 U.S. 279 (1991)............. 11, 20

TABLE OF AUTHORITIES - Continued

Page

Gutierrez de Martinez v. Lamagno, 515 U.S. 417

GIOTED oi cvccncesdvveccce soscensccecescvcccccccce 14

Hawes v. LeCraw, 121 Ga. App. 532, 174 S.E.2d

IPE v cncccecescvesccstancdcvccetsroverssocscscce 11

Heiser v. Woodruff, 327 U.S. 726 (1946).........-.-+.- 17

Hollus v. Amtrak Northeast Corridor, 937 F. Supp.

1110 (D.N.J. 1996) .....ccccccccccccccvcvvvevcveees 13

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

S.D.N.Y. 1999) ...ccccccccccccccccccvcvsvevecvveees 19

In re Bastyr & Assocs., Inc., 81 B.R. 978 (Bankr. D.

Mii. 1968) .... ccc ccccccccccccccccccccccevvecess 21

In re Bell, 34 F.2d 677 (D. Pa. 1929), modified, 39

F.2d 361 (3d Cir. 1930).......-.. cece cece eee eee eeeee 9

In re Biglari Import Export, Inc., 130 B.R. 43 (Bankr.

W.D. Tex. 1991) ...cccccvcccccccccccccvccccsvcees 19

In re Borum, 60 B.R. 516 (Bankr. E.D. Ark. 1986)..... 19

In re Brummer, 147 B.R. 552 (Bankr. D. Mont. 1992) .... 19

In re Canady, 43 A.F.T.R. 2d 79-472 (N.D. Ga. 1978) ..... 8

In re Certified Credit Corp., 329 F. Supp. 1402 (S.D.

CBO 1971) 0. cccccccccccccccvccscccccsecvcvvcceees 9

In re Custom Distribution Serv., Inc., 216 B.R. 136

(Bankr. D.N.Y. 1997) .....2.00c cece eee eeeeees ieee 22

In re Cutty’s Gurnee, Inc., 133 B.R. 934 (Bankr. N.D.

i. | PPPPPPTTTPPITITITTTrririrrrir eT 21

In re El Paso Refining, Inc., 192 B.R. 144 (Bankr.

W.D. Tex. 1996) .....ccccccccccccccccccccesccsvees 19

iv

TABLE OF AUTHORITIES - Continued

Page

In re Emergency Beacon, Corp., 48 B.R. 341 (Bankr.

DES ee BO coudececsnscsievesndetsccoesiavetts 21

In re Farris, 194 B.R. 931 (Bankr. E.D. Pa. 1996) ..... 19

In re Fidelity Holding Co., 837 F.2d 696 (5th Cir.

Sos veerccccobecediskes céabdennsesesnesoneedeunes 4

In re Gandolfi & Co., 42 F. Supp. 706 (S.D.N.Y. 1940) ..... 9

In re Garfield Bag & Stationery Co., 42 F. Supp. 708

SS ED Kh ck oc beskdvédesbeekadadbosieecsseca 9

In re Glotzer, 42 F. Supp. 712 (S.D.N.Y. 1941) ......... 9

In re Glover-McConnell Co., 9 F.2d 683 (D. Ga. 1925) ..... )

In re Hood, 95 B.R. 696 (Bankr. W.D. Mo. 1989)...... 19

In re Johnson, 189 B.R. 744 (N.D. Iowa 1995)......... 22

In re Kirk, 114 B.R. 771 (Bankr. M.D. Fla. 1990)...... 21

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

denied sub nom. Hipp v. Boyle, 303 U.S. 637 (1938) ..... 8

In re Lasky, 38 F. Supp. 24 (N.D. Ala. 1941) .......... 9

In re Madeline Marie Nursing Homes, 694 F.2d 433

Gees GA, Fe a0 svacecsnticcssnmnsncdarrusivessce 16

In re Menefee, 40 A.F.T.R. 2d 77-5006 (E.D. Mo.

DUT Pad ccdévcapsetvnetdadéeosenatuneetsedadadenedes 8

In re Mid America Co., 31 F. Supp. 601 (N.D. II.

FOOO Pes cccdcdcovecscvcesedsepéaneaeseuntedebbucvade 9

In re Niles, 106 F.3d 1456 (9th Cir. 1997) ............ 20

In re Noble, 15 F. Supp. 648 (W.D.N.Y. 1936).......... 6

In re O'Neill, 80-2 U.S.T.C. (CCH) | 9716 (Bankr.

WEE “Uils WET évdns 45.4ddasonad tes hadsncased wodwes 10

Vv

TABLE OF AUTHORITIES - Continued

Page

In re Osborn, 4 B.R. 431 (Bankr. W.D. Mo. 1979)...... y

In re Oxford Ass'n, 10 A.F.T.R. 2d 5957 (D.N.J.

BE beds csp sdnescesedcvndunet dsdeabeqeiseoeerssees 9

In re Parr, 205 F. Supp. 492 (S.D. Tex. 1962).......... 9

In re Petersilge, 70 F. Supp. 95 (N.D. Ohio 1946)...... 9

In re Progress Drilling & Marine, 122 B.R. 62 (Bankr.

PN PENG: TOO we Wonwecevebekencesseeccecquceceses 21

In re Raflowitz, 37 F. Supp. 202 (D. Conn. 1941) ...... 9

In re Reeves, 25 A.F.T.R. 2d 70-761 (D. Colo. 1970) ..... 9

In re Shackelford, 3 B.R. 42 (Bankr. W.D. Mo. 1980) ..... 9

In re Standard Mill, 324 F. Supp. 386 (N.D. Tex.

Ess wi dvceredvecccnsvecescccbocsoscedeacsesgeces 9

In re Stoecker, 179 F.3d 546 (7th Cir. 1999)......... 3, 22

In re Thinking Machines, 203 B.R. 1 (Bankr. D.

Mass. 1996), modified 203 B.R. 426 (D. Mass.

SPs vcd vdiksdpsvccvccusesebeccdaveeesdvessi ces 20

In re Trans State Outdoor Advertising Co., 140 F.3d

Fee Be Ge ED vcd verre ccsisccesccvcdonssécoeds 23

In re Transystems, Inc., 569 F.2d 1364 (5th Cir. 1978) .... 16

In re Trustees System Co. of Louisville, 30 F. Supp.

eS SG RTT ere 9

In re Uneco, Inc., 532 F.2d 1204 (8th Cir. 1976)........ 8

In re Unioil, 962 F.2d 988 (10th Cir. 1992) ........... 18

In re Ward, 131 F. Supp. 387 (D. Colo. 1955) ......... 9

vi

TABLE OF AUTHORITIES - Continued

Page

In re Wilhem, 173 B.R. 398 (Bankr. E.D. Wis. 1994) .... 28

In re Wills, 126 B.R. 489 (Bankr. E.D. Va. 1991)...... 19

In re Woehr, 121 B.R. 743 (N.D. Tex. 1990)........... 19

James v. Huddleston, 795 S.W.2d 661 (Tenn. 1990)..... 11

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

GER vo niccescvcdncsicapedadebavscbadcsteteaceesin 12

Maternally Yours v. Your Maternity Shop, 234 F.2d

Se Ge GE SD be he chnncavanedadesnnctonsaeves 14

Morgan v. South Bend Community School Corp., 797

- Fg 8 Er ere re ree 15

National Private Truck Council, Inc. v. Oklahoma Tax

Commission, 515 U.S. 582 (1995)................... 27

Northern Pipeline Construction Co. v. Marathon Pipe

Eine Co, GED UB, Fe GR oe oe cvccscacesiecciéone 15

O’Melveny & Meyers v. F.D.I.C. 512 U.S. 79 (1994) .... 14

One Lot Emerald Cut Stones and One Ring v. ULS.,

GaP WAG. Ae MEA hntndceniicdcencubecesiansiusss 24

Palmer v. Hoffman, 318 U.S. 109 (1943)............... 12

Palmer v. Webster and Atlas Nat'l Bank, 312 U.S. 156

GIP GED v cesacnsestensecéshaginecekdtauchsaemanaseies 28

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

Stohr v. New Mexico Bureau of Revenue, 90 N.M. 43,

See Fe Ge GEO RO. Tete de cccnscddescvesccess 11

The Bible Speaks v. Dovydenas, 81 B.R. 750 (D. Mass.

Ben Thy s veeess ccnab ed ucusdaenesacnstkanweaves ois 19

Thinking Machines v. New Mexico Tax. and Rev.

Dept., 211 B.R. 426 (D. Mass. 1997) ................ 4

me

Vii

TABLE OF AUTHORITIES - Continued

Page

Thomson v. Boswell, 166 F.2d 106 (6th Cir. 1948)...... 20

Thor Power Tool Co. v. Commissioner, 439 U.S. 522

SD dash acveteccnddnesdeqahnsibeduandédvednteweer 24

United Savings Ass’n of Texas v. Timbers of Inwood

Forest Assocs., Ltd., 484 U.S. 365 (1988)............ 10

United States v. Generes, 405 U.S. 93 (1972) .......... 23

United States v. Knox Powell Stockton, Co., 83 F.2d

Ge ES ED ih adn de deaCuansndisscevesesenes 8

United States v. Noland, 517 U.S. 535 (1996).......... 22

Vanston Bondholders Protective Comm. v. Green, 329

SE. DE ok 0 0h00.600 sinc dndenstapadtonec neces 17

Whitney v. Dresser, 200 U.S. 532 (1906), aff’g-in re

Dresser, 135 F. 495 (2d Cir. 1905)................... 4

STATUTES

OS Des Se ab cine sdoscdancsccscentsccccapess 6, 7, 8

is 0 an Fe Ko bes encc ccicedescved cocendcdesute 6

SE TRG, Be 0 0 cin ce citccevccccesesoscocecte 10, 17

BE TEBE. Bs occ cc cveccscccccoccecspcqescnme 17

Go Greer TT TT reer r yee 26

TE DE Be hb vice ccgccbccctcecsccccccccncses 22

Be TB BH Rsv eccasccccccrcssccccccicces 10, 24

T2 WBC. & SIRE). 0 cc ccccvecesvccssccccesss 23, 24

BD BI BS 6 hc ccesicccccsecccteccencscecss 26

Vili

TABLE OF AUTHORITIES - Continued

Page

Ce en Oe IN access cdc detackcwnesdatas 23

SS Cees Os ES oki bckscnedundncbunaseeuwed 23

Se ae Oe ED < Ndnesccucdecsuces errr re 17

Ge Wen UP EE nduuihos sgn ccdenhdeedanucnsaceenies 23

Be: Ws OF an bicvacivenen sss dectaueiensoaned 26

ee lies OE 6b d bude sesksccsedcduneteaneuadeseiene 10

Be ics Se in 6-0 094 40450005 000s canes edeaeueues 27, 28

ee Was OF aba Cindi dnndeedeckckdetensiewne 14

ee ey Ee eA Gowbasasbcdndndnctehbas beemeaael 14

ee Mes Ob MI 9p widié wenn onde kddcdadscuckccaeuns 14

Wrens Oy SE yh ccccncaducei saves oveosccesnetsen 14

ee Wis OP ED hh kao desdccccotibaa vubehandcie 14, 26

ee Sis Ue ass iececbicdsticntuseedee 2, 10, 12

Senn Sp PURE Kib6-0 ov iddekns ede seebeeneudsanneete 25

SaDee fb PPE 6cctuune cneeeisedegenatad canmaneen 25

Sean (SPEED 6 pdobbbbade chen been cessescaseunnee 25

Ariz. Rev. Stat. §§ 42-1254-D-4 (1999) ............... 11

National Bankruptcy Act of 1898, § 57n.............. 5

Act of June 18, 1934, ch. 585, 48 Stat. 993 (1934)

SS SP atten Oe is a cc dk dcevins Wicbeamanes 28

Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. No. 105-206 (1998) .... 25

52 Stat. 840, 867 (1938) .............. pocseenedenecess 6

Pub. L. No. 86-519, 74 Stat. 217 (1960) ............... 7

ix

TABLE OF AUTHORITIES - Continued

Page

Rutes & Copes

8 Se 8 re one 7

Pa: Eh, CRIA DE GEE oc vv cvkwecuaCectuecceneus 4,7,8

Gy Ce ED N0.0:560s bone necbavedsandsetien 15

. Se GG re 15

5 & Se TT en ree 10

PO Gh, BOs GD Cn ck ccecccedweebicecupenuanceasaes 8, 11

ek. 0 Rs DIDS. oi isssscintiscienseceen 11

OTHER AUTHORITIES

19 C. Wright, A. Miller & C. Cooper, Federal Prac-

tice and Procedure: Jurisdiction 2d § 4520 (1996) .... 16

Administrative Office of the U.S. Courts’ Publica-

tion Entitled Bankruptcy Basics at 3 and 14,

reprinted at http://www.uscourts.gov /bank

BOSC 5 osc vccccvcvcsctetccccnveseucetecsensedves 1

Alfred Hill, Erie Doctrine In Bankruptcy, 66 Harv. L.

eT GED 6 bcc eee tan eeds ces ccateecunt 15, 17, 18

Black’s Law Dictionary 1224 (6th ed. 1990)........... 6

Carol E. Goldberg-Ambrose, The Protective Juris-

diction of the Federal Courts, 30 UCLA L. Rev. 542

PI 0 vc chebne cd credescdcgvinesteestdedeesnveds 13

Dean Faust, Chapter 11 Never Looked So Good,

March 20, 2000, Business Week at 44.............. 22

TABLE OF AUTHORITIES - Continued

Francis M. Allegra, Bankruptcy Courts: The Tax

Forum for the ‘90s 38 Fev. Bar News anp J. 338

EEE DOU cn tasdadevscvuddeasesosscocvosecs

H.R. Rep. No. 1409, 75th Cong., Ist Sess. at 13

DSA KCRG AWERERSDAS TOS SL RRO VES Seeekeuec ve

H.R. Rep. No. 1138, 73d Cong., 2d Sess. (1934)...

Leo P. Martinez, Tax Collection and Populist Rheto-

ric: Shifting. the Burden of Proof in Tax Cases, 39

tie ie A Es SwS bcc cecvecitcetocccces

News Release, Administrative Office of the U.S.

Courts, March 3, 2000, reprinted at http://

www.uscourts.gov /Press_Releases/cy99bk.pdf. .

Paul J. Mishkin, Federal “Question” in the District

Courts, 53 Corum. L. Rev. 157 (1953) ...........

REPORT OF THE NATIONAL BANKRUPTCY REvIEW Com-

MISSION, Recommendation 3.2.5 (Oct. 20, 1997) ..

S. Rep. No. 989, 95th Cong., 2d Sess. 13-14 (1978) ....

Steve R. Johnson, The Dangers of Symbolic Legisla-

tion: Perceptions and Reality of the New Burden-of-

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

Page

| 1

INTEREST OF AMICI CURIAE

One of the primary law enforcement responsibilities

of state government is ensuring that citizens comply with

state tax laws. The amici states have a vital interest in this

case. The decision below must be affirmed in order to

ensure that the bankruptcy court does not become a

master state and federal tax court. If the burdens of proof

are more favorable in bankruptcy court than in state

tribunals, the result will significantly, unfairly and erro-

neously hamper the enforcement of state tax laws. Simply

stated, the bankruptcy courts could become a tax haven.

At issue is whether a taxpayer who has the burden of

proof under state law can shift the burden to the govern-

ment by filing for bankruptcy. The bankruptcy court’s

consideration of the validity of a tax claim is not a rare or

unusual situation. Slightly more than 1.3 million bank-

ruptcies were filed in calendar year 1999 in the United

States. Nearly 400,000 of those cases were Chapter 13 or

Chapter 11 cases where the debtors/taxpayers were the

real parties in interest.! The vast majority of the remain-

ing cases were “no-asset” Chapter 7 cases, in which little,

if any, litigation took place. The remaining minority, the

“asset” cases, involved a Chapter 7 trustee administering

and distributing those assets. An enormous amount of tax

1 1,319,465 bankruptcy petitions were filed in calendar year

1999. Of those, 382,214 were Chapter 13 cases and 9,315 were

Chapter 11 cases. See News Release, Administrative Office of the

U.S. Courts, March 3, 2000, reprinted at http://

www.uscourts.gov/Press___Releases/cy99bk.pdf. Although

the total numbers have declined somewhat since the record high

filing levels of over 1.4 million cases in 1998, Chapter 11's have

actually increased and the decline in Chapter 13’s has been

slight. Id.

2 See Administrative Office of the U.S. Courts’ Publication

entitled Bankruptcy Basics at 3 and 14, reprinted at http://

www.uscourts.gov /bankbasic.pdf.

2

revenues are subject to the review and control of the

bankruptcy courts.*

On several occasions, this Court has noted that bur-

den of proof is an issue of substantive law. It will often

determine the prevailing party in a legal proceeding. In

the tax context, a rule of requiring the taxpayer to bear

the burden of proof is essential and promotes the policies

of tax administration. The alternative of requiring the

government to disprove a claimed deduction of the tax-

payer, for instance, would not only be impractical, it

would seriously undermine the companion laws requir-

ing taxpayers to keep adequate documentation. More-

over, the government's relative lack of knowledge of the

particulars of the taxpayer’s financial affairs makes plac-

ing the burden of proof on the taxpayer necessary and

fair. Placing the burden of proof on the government in

bankruptcy cases will promote forum shopping, reward

irresponsibility, and increase the burden on other tax-

payers because of the loss of tax revenue.

SUMMARY OF ARGUMENT

1.) There has never been an established bankruptcy

policy assigning uniform burdens of proof, as the peti-

tioner argues, nor should there be. In fact, the majority of

cases under the Bankruptcy Act properly applied non-

bankruptcy law burdens of proof when addressing an

objection to a tax claim.

2.) The Seventh Circuit’s decision below to apply

the state law burden of proof to Illinois’ tax claim is

consistent with both federal statutory and common law

and with this Court’s decisions. See 28 U.S.C. § 1652 (state

3 Francis M. Allegra, Bankruptcy Courts: The Tax Forum for

the ‘90s 38 Fev. Bar News anp J. 338 (August 1991) (reporting

that in 1991, the nine largest bankruptcy tax claims totaled $9.6

billion in federal taxes).

3

law provides the “rules of decision in civil actions” in

which state law is decided in federal court); Butner v.

United States, 440 U.S. 48 (1979) (unless Congress speci-

fically states otherwise, the basic rule in bankruptcy is

that state law determines the substantive rights of the

parties). The court below correctly determined that in a

bankruptcy proceeding the party seeking to refute the tax

assessment has the ultimate burden of proving its claim.

The court succinctly stated that “bankruptcy is not a

‘free-for-all balancing act.’” In re Stoecker, 179 F.3d 546,

551 (7th Cir. 1999) (citation omitted).

3.) Bankruptcy courts hear a wide range of issues,

especially at the claim objection stage. Because bank-

ruptcy courts often are the forum for litigating purely

state-law issues, issues which do not implicate any provi-

sion of the bankruptcy code, the Erie doctrine should be

clearly applicable in bankruptcy when such non-

bankruptcy issues are addressed.

4.) A review of cases indicates that only as against

the government have some courts been attempting to

fashion a “uniform” rule. In other contexts, when non-

bankruptcy law requires varying burdens or standards of

proof, other than the ordinary plaintiff-carries-the-burden

rubric, the courts have perceived no conflict with bank-

ruptcy policy and applied nonbankruptcy law. The so-

called uniform rule has never been uniformly applied,

and in fact, has been discriminatorily applied. A truly

“uniform” policy regarding burdens of proof when liti-

gating nonbankruptcy law in bankruptcy court would

make no sense.

5.) If the opinion below is not affirmed, the bank-

ruptcy courts could become the tax court of choice for

both state and federal tax disputes. The petitioner asserts

that when a claim objection is filed, the dispute ceases

being one between the taxpayer and the government and

instead becomes one between the government and the

4

taxpayers’ creditors. This is not the amici states’ experi-

ence. Although the dispute here is between the state of

Illinois and a chapter 7 bankruptcy trustee for the credi-

tors, most tax litigation in bankruptcy court involves

direct disputes between the government and the tax-

payers. Whatever rule the Court crafts will presumably

apply in other cases as well. The petitioner seeks a result

which will “funnel people with tax problems into the

bankruptcy courts, and thus undermine the enforcement

of state tax law.” Thinking Machines v. New Mexico Tax. and

Rev. Dept., 211 B.R. 426, 431 (D. Mass. 1997). Firmly

established federal policy indicates a reluctance to inter-

fere with state tax laws, and indicates that reorganizing

businesses should not have a competitive advantage with

regard to tax liability. Moreover, the decision below is in

harmony with Congress’ intent that tax claims be paid as

shown by the priority and exception from discharge

afforded those claims.

ARGUMENT

I. THERE HAS NEVER BEEN A BANKRUPTCY POL-

ICY REGARDING UNIFORM BURDENS OF

PROOF IN T#?é CLAIM OBJECTION PROCESS.

Confusion has arisen over the effect of Rule 3001(f),

of the Federal Rules Bankruptcy Procedure, which states

that “[a] proof of claim executed and filed in accordance

with these rules shall constitute prima facie evidence of

the validity and amount of the claim.” Some courts have

construed this initial prima facie effect of claims as con-

taining a negative implication that the ultimate burden of

proof is always on every creditor. In re Fidelity Holding Co.,

837 F.2d 696 (5th Cir. 1988). No such result was intended.

Rule 3001(f) is merely an adaptation of Whitney v. Dresser,

200 U.S. 532 (1906), aff’g In re Dresser, 135 F. 495 (2d Cir.

1905).

5

In Whitney v. Dresser the trustee had objected to a

proof of claim seeking payment on a debt for moneys

loaned, alleging that the obligation was not owed by the

company but, rather, by its principal. After the trustee's

testimony, the referee granted the creditor’s motion to

strike the trustee’s objection to the proof of claim and

allowed the claim without the creditor having to put on

his case. In re Dresser, 135 F. 495, 497. The following issue

was ultimately put before this Court: Does a proof of

claim have some prima facie evidentiary validity which

must be overcome by an objector, as an initial matter, or

rather, does the trustee have the rights of a defendant in a

civil lawsuit which require the claimant to prove up the

case whenever the debt is merely denied? Whitney v.

Dresser, 200 U.S. at 534-35. In Dresser, the Court of

Appeals stated that if “a proof of claim in bankruptcy

[were] entitled to no greater weight than a complaint in

an ordinary action at law the most serious results will

follow. Any vindictive or contumacious creditor can, by

filing objections, compel creditors to come from distant

states and even from foreign countries to testify in sup-

port of their claims before a word of testimony impeach-

ing their validity has been adduced.” 135 F. at 498.

This Court affirmed the Court of Appeals and ruled

that a proof of claim has some probative force that must

be met with evidence. Whitney v. Dresser, 200 U.S. at

534-535. Justice Holmes succinctly identified the issue

that is presently before the Court and distinguished that

issue from the evidentiary weight to be given a sworn

proof of claim: “It is not a question of the burden of proof

in a technical sense - a burden which does not change,

whatever the state of the evidence — but simply whether the

sworn proof is evidence at all.” Id. (emphasis added).

In 1938, Congress amended § 57n of the National

Bankruptcy Act of 1898 (hereafter the Act) to require that

government claims be “proved and filed in the manner

provided in this section,” as the petitioner correctly

6

states. Brief of Petitioner 11; 52 Stat. 840, 867 (1938).

Petitioner implies, however, that this statutory change

indicated a congressional intent to affect the burdens of

persuasion. Brief of Petitioner 8. But the petitioner mis-

construes the simple reason for this change. “The provi-

sion in respect to government claims is added in order to

overcome the decisions which hold that the bar time for

filing claims is not binding on the sovereign.” H.R. Rep.

No. 1409, 75th Cong., Ist Sess. at 13 (1937). The term

“prove” was not defined in the Act, but when used in

legal matters and proceedings it is understood to mean

“to establish, to render or make certain.” Black’s Law

Dictionary 1224 (6th ed. 1990). Nothing in the history of

the amendment to § 57n indicates that it had anything

whatever to do with allocating burdens of persuasion.

The obvious intent of the requirement that government

claims be “proved and filed” on time was merely that a

proof of claim be filed timely. “Redundancies across stat-

utes are not unusual events in drafting. . . . ” Connecticut

Nat. Bank v. Germain, 503 U.S. 249, 253 (1992). Although

the terminology “proof of claim” has been retained in the

Bankruptcy Code, the Code no longer refers to claims

being “proved.”

Prior to 1960, section 57a of the Act (11 U.S.C. § 93a),

provided that proofs of claim consisted of, among other

things, “a statement under oath, in writing, and setting

forth the claim.” 52 Stat. 840, 866 (1938). In a 1960 amend-

ment to § 57a of the Bankruptcy Act, Congress removed

the requirement that proofs of claim be under oath, while,

at the same time, codifying the “prima facie evidence”

effect of a proof of claim originally announced in Whitney

4 At the time, courts equated “proving” a claim with filing a

claim which complied with the statutory requirements. Burton

Coal Co. v. Franklin Coal Co., 67 F.2d 796, 800 (8th Cir. 1933); In re

Noble, 15 F. Supp. 648 (W.D.N.Y. 1936).

—- ee ee

7

v. Dresser, 200 U.S. at 535-36. From 1960 until the Bank-

ruptcy Code became law in 1979, the last sentence of

§ 57a of the Act read: “A proof of claim filed in accor-

dance with the requirements of the Bankruptcy Act, the

General Orders of the Supreme Court, and the official

forms, even though not verified under oath, shall consti-

tute prima facie evidence of the validity and amount of

the claim.” Pub. L. No. 86-519, 74 Stat. 217 (1960). Merely

removing the requirement that claims be under oath does

not evidence any intent to expand Whitney v. Dresser’s

singular, manifest rule that proofs of claim constitute

prima facie evidence.

In the early 1970’s, a conceried effort to arrive at

comprehensive procedural bankruptcy rules was made

and Bankruptcy Rule 301 was adopted. Subsection (b) of

that rule stated that “[a] proof of claim executed and filed .

in accordance with these rules shall constitute prima facie

evidence of the validity and amount of the claim.”

According to the 1971 Advisory Committee’s Note, the

rule was an “adaptation of section 57a of the Act.” No

statute similar to § 57a of the Act was provided in the

Bankruptcy Code when enacted, although Rule 301 con-

tinued to apply under the Code until 1983. The Rules

were substantially revised again in 1983 and the provi-

sions of Rules 301 and 302 were combined into Rule

3001.5 Rule 3001(f) used the precise language as former

Rule 301(b) and very similar language to § 57a of the Act.

Fed. R. Bankr. P. 3001(f).

From this discussion two things are apparent: (1)

Nothing in Rule 3001(f), or its predecessors, indicates an

intention to alter the underlying substantive laws regard-

ing burdens of proof, and (2) the Rule was derived from

5 The format was changed from three-digit to the current

four-digit format, among other changes. In 1991, the official

citation of the Bankruptcy Rules was changed to Federal Rules

of Bankruptcy Procedure. Fed. R. Bankr. P. 1001.

8

Whitney v. Dresser’s intent to protect creditors against hav-

ing to travel “from distant states and even from foreign

countries” to defend against unsupported claim objec-

tions. In re Dresser, 135 F. at 498; Fed. R. Bankr. P. 3001(f).

The modest protection for creditors provided by Whitney

v. Dresser and the subsequent statutory and regulatory

adaptations cannot be read as assigning the ultimate bur-

den of proof to creditors who were not otherwise

required to bear those evidentiary burdens. As Justice

Holmes stated, “[i]t is not a question of the burden of

proof... which does not change. . . . ” 200 U.S. at 534-35.

Most cases involving the issue of the ultimate burden

of proof in regard to tax claims decided under the Bank-

ruptcy Act appear to have apprehended the singular sig-

nificance of Whitney v. Dresser in attaching evidentiary

value to a proof of claim, the similar effect of both the

corresponding amendment of § 57a of the Act, in 1960,

and the adoption of Rule 301(b), in 1971. The clear major-

ity of Act cases ruled that the ultimate burden of proof

did not shift to the government when a tax claim was

litigated in bankruptcy court. Although the petitioner

cites contrary authority, the more numerous cases sup-

porting the respondent are set out in the margin.® The

6 See, e.g., In re Uneco, Inc., 532 F.2d 1204 (8th Cir. 1976)

(trustee had burden of proving bad debt deduction in dispute

with IRS); Paschal v. Blieden, 127 F.2d 398 (8th Cir. 1942) (burden

of proof was on trustee to prove assessment incorrect); In re

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

nom. Hipp v. Boyle, 303 U.S. 637 (citing nonbankruptcy law, court

ruled that trustee had burden of proving that property taxes

were arbitrary; standard of proof was clear and convincing

evidence); United States v. Knox Powell Stockton, Co., 83 F.2d. 423

(9th Cir. 1936); In re Canady, 43 A.F.T.R. 2d 79-472 (N.D. Ga.

1978) (nonbankruptcy burden of proof applies in objection to

tax claim); In re Menefee, 40 A.F.T.R. 2d 77-5006, 5013 (E.D. Mo.

1977) (bankrupt had burden of proof on IRS counterclaim to

ie

9

divided case authority under the Act, coupled with the

fact that the Code does not address the issue, establishes,

action initiated by bankrupt); In re Certified Credit Corp., 329 F.

Supp. 1402 (S.D. Ohio 1971) (presumption of correctness of IRS

assessment continued in bankruptcy; trustee had the burden of

proving deductions; taxing authorities’ entitlement to

nonbankruptcy burden of proof is no different than any other

creditor's right to require that the debtor prove certain defenses

or setoffs); In re Standard Mill, 324 F. Supp. 386, 390 (N.D. Tex.

1970) (trustee had burden to prove that property tax valuation

was grossly exaggerated under Texas law); In re Reeves, 25

A.F.T.R. 2d 70-761, 764 (D. Colo. 1970) (objecting party has

burden of proof when tax claim is objected to in bankruptcy

court); In re Parr, 205 F. Supp. 492, 497 (S.D. Tex. 1962) (adopting

Internal Revenue Code burdens of proof, trustee had burden of

proof of overcoming assessment if no fraud is claimed; IRS has

burden on fraud); In re Oxford Ass'n, 10 A.F.T.R. 2d 5957 (D.N.J.

1962); In re Ward, 131 F. Supp. 387 (D. Colo. 1955) (objecting

party had burden of proof on objection to tax claim); In re

Petersilge, 70 F. Supp. 95, 96 (N.D. Ohio 1946) (adopted Ohio law

regarding burden of proof for overcoming sales tax assessment);

In re Garfield Bag & Stationery Co., 42 F. Supp. 708, 711 (S.D.N.Y.

1941) (trustee had burden of proving deductions in city’s

business and sales taxes); In re Glotzer, 42 F. Supp 712 (S.D.N.Y.

1941); In re Raflowitz, 37 F. Supp. 202, 207 (D. Conn. 1941)

(presumption of correctness of tax assessment continues in

bankruptcy); In re Lasky, 38 F. Supp. 24, 30 (N.D. Ala. 1941)

(burden of proof on trustee to overcome property tax

assessments); In re Gandolfi & Co., 42 F. Supp. 706 (S.D.N.Y.

1940); In re Trustees System Co. of Louisville, 30 F. Supp. 361 (W.D.

Ky. 1939); In re Mid America Co., 31 F. Supp. 601, 606-07 (N.D. Ill.

1939) (trustee had burden under Illinois law of disproving issue

regarding employment taxes); In re Bell, 34 F.2d 677, 680 (D. Pa.

1929) (trustee had burden of proof on IRS deduction), modified,

39 F.2d 361 (3d Cir. 1930); In re Glover-McConnell Co., 9 F.2d 683

(D. Ga. 1925); In re Shackelford, 3 B.R. 42 (Bankr. W.D. Mo. 1980)

(in an action designated as discharge complaint by bankrupt,

but was in effect action seeking to determine that bankrupt

owed no taxes, bankrupt had burden of proof); In re Osborn, 4

10

at best, that there was never an accepted understanding

regarding taxing authorities and the ultimate burden of

proof in bankruptcy. In commenting on the similar de ye!-

opment of the law regarding certain creditors’ ability to

obtain relief from the stay to foreclose on their collateral,

the Court noted that “[t]he at best divided authority

under [the Act] removes all cause for wonder that the

alleged departure from it should not have been com-

mented upon in the legislative history.” United Savings

Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484

U.S. 365, 381-82 (1988).

Il. THE COURT SHOULD AFFIRM BASED ON THE

UNDERLYING PRINCIPLES OF BUTNER ov.

UNITED STATES, 440 U.S. 48 (1979) AND 28 U.S.C.

§ 1652.

The Bankruptcy Code does not address the issue of

burden of proof when claims are litigated in bankruptcy

court. In the most general terms possible, Congress has

stated only that, “if such objection to a claim is made, the

court, after notice and a hearing, shall determine the

amount of such claim in lawful currency. ...” Bank-

ruptcy Code § 502(b). Similarly, § 505(a)(1) permits

the court to “determine the amount or legality of any

tax. .. . ” Bankruptcy courts are units of the district

courts. 28 U.S.C. § 151. The Federal Rules of Evidence

apply in the bankruptcy courts. Fed. R. Evid. 101.

Where an issue of state law is to be determined in

federal court, the rules for making the decision are pro-

vided by state law. 28 U.S.C. § 1652. The traditional and

B.R. 431 (Bankr. W.D. Mo. 1979) (bankrupt had burden of proof

on IRS counterclaim asking for judgment for taxes owed); In re

O'Neill, 80-2 U.S.T.C. (CCH) ¥ 9716 (Bankr. W.D. Va. 1980) (in

action brought jointly by bankrupt and trustee to declare that no

taxes were owed, bankrupt and trustee had burden of proof).

11

well recognized rule of tax law is that the ultimate bur-

den of persuasion is placed on the taxpayer. E.g., Stohr v.

New Mexico Bureau of Revenue, 90 N.M. 43, 559 P.2d 420

(Ct. App. 1976).” Rule of Evidence 301 provides that the

ultimate burden of persuasion “remains throughout the

trial upon the party on whom it was originally cast.” Fed.

R. Evid. 301. Rule 302 provides that the effect of any

presumption arising under state law is to be determined

by state law. Fed. R. Evid. 302.

A fundamental principle of bankruptcy law was suc-

cinctly stated in Butner v. United States, 440 U.S. 48 (1979).

“Property interests are created and defined by state law.

Unless some federal interest requires a different result,

there is no reason why such interests should be analyzed

differently simply because an interested party is involved

in a bankruptcy proceeding.” Id. at 55. The Court noted

that the “basic rule” in bankruptcy proceedings “is that

state law governs.” Id. at 57. “The validity of a creditor’s

claim is determined by the rules of state law.” Grogan v.

Garner, 498 U.S. 279, 283 (1991) (referring to standards of

proof).

As this Court has noted time and time again in

diversity cases, burdens of proof are part of the substan-

tive law of the state. E.g., Dick v. New York Life Ins. Co., 359

7 A compilation of every state’s rules would reveal that

there are variations among the states. See, e.g., Ariz. Rev. Stat.

§§ 42-1254-D-4 (1999) (appearing to adopt rules similar to I.R.C.

§ 7491). Although it would appear that the traditional rule that

the taxpayer has the burden of persuasion applies in most

instances — ¢.g., James v. Huddleston, 795 S.W.2d 661, 663 (Tenn.

1990); Baker v. Bullock, 529 S.W.2d 279 (Tex. App. 1975); Hawes v.

LeCraw, 121 Ga. App. 532, 174 S.E.2d 382 (1970) - attempting to

impose a “uniform” rule in bankruptcy cour: would make the

application of state tax law in each state unpredictable, and

anything but uniform. In fact, such a uniform bankruptcy rule

would, in some manner, conflict with every states’ tax laws. See

Appendix, Br. Am. Cur. Council of State Governments et al.

12

U.S. 437 (1959); Palmer v. Hoffman, 318 U.S. 109 (1943);

Cities Service Oil Co. v. Dunlap, 308 U.S. 208 (1939). Con-

sistent with those cases, this Court has ruled that when a

federal claim is tried in state court, the state court must

apply the federal law burden of proof, noting it “was a

part of the very substance of his claim and cannot be

considered a mere incident of procedure.” Garrett v.

Moore-McCormack Co., 317 U.S. 239, 248-49 (1942). See

Director, Office of Workers’ Compensation Programs, Dept. of

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

(assignment of burden of proof to the claimant under

§ 7(c) of APA is statutory, and part of the “substantive

law” which cannot be overridden by agency regulation;

“true doubt” regulation, which shifted the risk of non-

persuasion to the employers in Black Lung Benefits and

Longshore and Harbor Workers Compensation Act pro-

ceedings, held to be invalid).

Whether a liability exists is often determined by

which party has the burden of establishing certain claims

or defenses, a principal reason why that burden is “a part

of the very substance of [the] claim.” Garrett, 317 U.S. at

249. This Court should not give debtors “a windfall

merely by reason of the happenstance of bankruptcy.”

Lewis v.. Manufacturers Nat'l Bank, 364 U.S. 603, 609 (1961).

Ill. ERIE v. TOMPKINS, 304 U.S. 64 (1938) APPLIES IN

BANKRUPTCY COURT WHEN PURELY STATE

LAW ISSUES ARE BEING LITIGATED IN THE

FEDERAL FORUM.

The petitioner argues that Erie R. Co. v. Tompkins, 304

U.S. 64 (1938) does not apply in bankruptcy, Brief of

Petitioner at 22, and, instead, that the Court should allo-

cate the burden of proof “in a manner that is consistent

with federal policies underlying the Code.” Brief of Peti-

tioner at 26. Because Erie v. Tompkins, supra, construed the

predecessor statute of the Rules of Decision Act, 28 U.S.C.

13

§ 1652 (state law provides the “rules of decision in civil

actions” in which state law is decided in federal court),

the petitioner implicitly argues that the Rules of Decision

Act does not apply in bankruptcy either. The petitioner’s

position is erroneous and misses the point.

In many instances, like district courts hearing diver-

sity of jurisdiction cases, bankruptcy courts are the

forums in which rights which arise solely from state law

are litigated. See Paul J. Mishkin, Federal “Question” in the

District Courts, 53 Coium. L. Rev. 47, 184-196 (1953) (dis-

cussing how certain cases are properly in federal court

because they protect a certain federal interest rather than

enabling enforcement of a federal law, where purely state

law is being addressed; the examples he used were diver-

sity cases, cases involving federally chartered corpora-

tions, and suits brought by bankruptcy trustees to acquire

moneys owed to the debtor under state law). The Erie

doctrine is not limited to diversity jurisdiction, but applies

in all cases of protective jurisdiction - cases where the

courts are not “vindicating any federally created rights”

but where the federal forum is providing for “the protec-

tion of some congressionally favored interest.” Hollus v.

Amtrak Northeast Corridor, 937 F. Supp. 1110, 1113 n.3

(D.N.J. 1996) (quoting Mishkin, supra, and applying Erie

in lawsuit brought in federal court pursuant to statute

granting jurisdiction in cases where the federal govern-

ment owned a majority of the shares of one of the corpo-

rate parties). “Typically, the purpose of the[] federal

[bankruptcy] rules has been to accommodate state laws in

the compressed process in which assets of the bankrupt

are gathered together and distributed to creditors.

Whether Congress could dictate the rules of decision in

trustees’ suits simply because it preferred certain com-

mercial law doctrines over contrary state rules has not

been tested in the courts.” Carol E. Goldberg-Ambrose,

14

The Protective Jurisdiction of the Federal Courts, 30 UCLA L.

Rev. 542, 581 (1983).§

The bankruptcy jurisdiction statute, 28 U.S.C. § 1334,

is different than the general federal question statute, 28

U.S.C. § 1331. There are three components to the bank-

ruptcy jurisdiction statute. Section 1334(a) provides that

certain proceedings are exclusively within federal juris-

diction. Section 1334(b) addresses proceedings where

jurisdiction is non-exclusive. The current bankruptcy

abstention statute, 28 U.S.C. § 1334(c), recognizes that

bankruptcy courts hear state law disputes in federal court

only because a debtor filed a bankruptcy petition.

Granted, federal courts are not always required to use

“state law to fill the gaps in federal substantive statutes.”

DelCostello v. International Brotherhood of Teamsters, 462

U.S. 151, 159 n.13 (1983) (construing whether to adopt a

state statute of limitations in lawsuit brought pursuant to

a federal statute with no state law equivalent). That is

hardly what is happening here. No federal statute pro-

vides the basis of liability. “[I]t is the source of the right

sued upon, and not the ground on which federal jurisdic-

tion over the case is founded, which determines the gov-

erning law.” Maternally Yours v. Your Maternity Shop, 234

F.2d 538, 540 n.1 (2d Cir. 1956). The source of the liability

is the Illinois legislature. The Illinois tax debt is by no

means an “interstitial . . . detail,” DelCostello, supra, of the

bankruptcy code.’

8 Ms. Goldberg-Ambrose’s article was cited with approval

in Gutierrez de Martinez v. Lamagno, 515 U.S. 417, 436 n.11 (1995).

% Even in areas that could be designated as a “gap” in

federal law, the Court has shown a preference to adopt state law.

See O'Melveny & Meyers v. F.D.I.C., 512 U.S. 79, 83-87 (1994)

(citing Erie v. Tompkins in a lawsuit brought by the FDIC, and

refusing to supplement the federal scheme with a common law

rule which would displace state law). The bankruptcy court is

the forum. The Illinois’ tax law provides the obligation and,

15

The nature of bankruptcy proceedings makes the

conclusion that the Erie doctrine applies in bankruptcy

inescapable. For instance, in Northern Pipeline Construc-

tion Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), this

Court struck down the initial jurisdictional scheme

accompanying the Bankruptcy Code because the non-

Article II] bankruptcy courts were authorized to hear

state law contract actions without any supervision by the

Article III] courts. Claim objection proceedings are dis-

crete “contested matters” which are brought pursuant to

Federal Rules of Bankruptcy Procedure 3007 and 9014;

Rule 9014 incorporates most of the Federal Rules of Civil

Procedure, or their bankruptcy equivalents. Claim objec-

tion proceedings are obviously “civil actions” seeking to

establish or negate liabilities which will generally be

derived from state law. “The fact that a suit arises under a

law of the United States does not mean that all the issues

for decision are federal issues; and nowhere is this more

true than in bankruptcy.” Hill, Erie Doctrine in Bankruptcy,

infra, at 1034. Nothing in the Rules of Decision Act limits

its application to diversity cases. Morgan v. South Bend

Community School Corp., 797 F.2d 471, 474-75 (7th Cir.

1986).

The power to administer her tax laws is one of the

more important attributes of Illinois’ sovereignty. There

could hardly be a scenario where the Erie v. Tompkins

concerns are more applicable:

[T]he mischievous results of the doctrine [of

federal general law] had become apparent. . . . It

made rights enjoyed under the unwritten “gen-

eral law” vary according to whether enforce-

ment was sought in the state or in the federal

court; and the privilege of selecting the court in

moreover, Illinois is the obligee. There is simply no “gap” to fill.

“To create additional ‘federal common-law’ exceptions is not to

‘supplement’ this scheme, but to alter it.” Id. At 87.

16

which the right should be determined was con-

ferred upon the noncitizen. Thus, the doctrine

rendered impossible equal protection of the law.

In attempting to promote uniformity of law

throughout the United States, the doctrine had

prevented uniformity in the administration of

the law of the state.

“But law in the sense in which courts speak of it

today does not exist without some definite

authority behind it. The common law so far as it

is enforced in a State, whether called common

law or not, is not the common law generally but

the law of that State existing by the authority of

that State... . ”

Erie R. Co. v. Tompkins, 304 U.S. 64, 74-79 (1938) (citations

omitted) (quoting Black & White Taxicab & Transfer Co. v.

Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 533

(1928) (Holmes, J. dissenting)).

The Erie doctrine was properly applied in bankruptcy

matters by the Courts of Appeals in such cases as In re

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

1982) (the court reasoned that the Vanston doctrine, infra,

has “never been applied, . . . to oust state law in the

original determination of the existence and amount of

liability”), and In re Transystems, Inc., 569 F.2d 1364, 1366

(Sth Cir. 1978) (whether a party was a secured creditor or

equity holder was solely a matter of state law under the

Erie doctrine). See Coastal Steel Corp. v. Tilghman Wheel-

abrator, Ltd., 709 F.2d 190, 201 (3d Cir. 1983) (bankruptcy

clause enables convenient federal forum to hear a state-

created obligations case but does not federalize those

relationships); 19 C. Wright, A. Miller & C. Cooper, Fed-

eral Practice and Procedure: Jurisdiction 2d § 4520 (1996)

(The statement that Erie v. Tompkins “applies only in

diversity of citizenship cases . . . simply is wrong.”).

17

The petitioner primarily relies on Vanston Bondholders

Protective Comm. v. Green, 329 U.S. 156, 161-63 (1946), and

to a lesser extent Heiser v. Woodruff, 327 U.S. 726, 732

(1946). Brief of Petitioner at 22-24. Both cases stand for

the unremarkable proposition that the Erie doctrine does

not apply to particular federal interests in bankruptcy.

The issue in Vanston was the proper treatment of post-

bankruptcy interest, which is part and parcel of the fed-

eral scheme of distribution. See Bankruptcy Code

§§ 502(b)(2) (unmatured interest is not allowable on

unsecured claims) and 506(b) (post-petition interest is

allowable on secured claims). The issue in Heiser was

whether a claim based on a judgment should be subject to

equitable subordination, which is also integral to the

federal distributive scheme. See Bankruptcy Code § 510(c)

(court may subordinate a claim to another claim or class

of claims under principles of equitable subordination).

The notion that Erie never applies in bankruptcy is

overbroad. See Alfred Hill, Erie Doctrine in Bankruptcy, 66

Harv. L. Rev. 1013 (1953) (hereinafter Hill). Hill’s article

was cited by this Court with approval in Butner v. United

States, 440 U.S. 48, 52 n.2 (1979), Agency Holding Corp. v.

Malley-Duff & Assoc., Inc., 483 U.S. 143, 164 n.2 (1987)

(Scalia, J., concurring) (the Erie doctrine and the Rules of

Decision Act are not limited to diversity cases), and Com-

missioner v. Estate of Bosch, 387 U.S. 456, 477 (1967) (Har-

lan, J., dissenting) (criticizing strict reliance on Erie

doctrine as applied in federal estate tax case).

Hill’s thesis, in his article written nearly 40 years ago,

seems eerily apropos to the heart of the dispute before

this Court:

In [Vanston and other] cases the Supreme Court

has employed general language to the effect that

questions of disallowance and subordination are

governed by paramount federal law, in view of

the bankruptcy objective of equitable distribu-

tion. Taken out of context, the language of these

18

cases comes close to suggesting that, in search of

independent grounds of disallowance or subor-

dination, the bankruptcy courts may range as

widely in the field of equity doctrine as the

equity court of a state. If this were so, all trans-

actions underlying claims in bankruptcy would

in effect be subject to federal review in the light

of an overriding federal commercial law.

It is probably safe to assume that no such result

was intended. But the problem remains, and it is

relatively unexplored, of the extent to which the

equity power of the bankruptcy courts may be

employed to defeat state-created rights.

Hill, supra, at 1013. The Court has an opportunity today

to remedy the problem examined by Hill and, as the

conflict in the lower courts indicates, was only partially

laid to rest by Butner.

IV. A RULE OVERRIDING NONBANKRUPTCY LAW

BURDENS OF PROOF HAS ONLY BEEN APPLIED

TO TAXING AUTHORITIES. A TRULY “UNI-

FORM” RULE WOULD BE UNWORKABLE.

The petitioner argues that the “Code’s fundamental

goal of equality of treatment of creditors is put at risk if

one class of creditor . . . is given the benefit of a favorable

presumption that is unavailable to other creditors.” Brief of

Petitioner at 27 (emphasis added). To the contrary, how-

ever, whenever nonbankruptcy law so provides other

creditors do receive “favorable presumptions.” It is only

the taxing authorities that are stripped of their non-

bankruptcy rights in the name of “equality.” In a variety

of nontax circumstances, including claim objection pro-

ceedings, courts have had little difficulty ruling that the

debtor retains the burden of proof where nonbankruptcy

law places the burden of proof on the debtor. E.g., In re

Unioil, 962 F.2d 988, 994 (10th Cir. 1992) (since party

19

seeking to prove an accord and satisfaction has the bur-

den of proof under Colorado law, the debtor had the

burden of proving an accord and satisfaction in a claim

objection proceeding). Many other examples are provided

in the margin.’ While it is generally true that claimants -

10 In re Andover Togs, Inc., 231 B.R. 521, 530-31 (Bankr.

S.D.N.Y. 1999) (in an administrative claim objection proceeding,

debtor/tenant had the burden of proving that lease provisions

were unenforceable due to equitable estoppel, as required by

New York law); In re Farris, 194 B.R. 931 (Bankr. E.D. Pa. 1996)

(debtor had burden of proving likely Truth in Lending Act

violation under nonbankruptcy federal law as any other party

raising this defense); In re El Paso Refining, Inc., 192 B.R. 144

(Bankr. W.D. Tex. 1996) (in claim objection proceeding in which

debtor was guarantor of debt, court followed nonbankruptcy

case law and ruled that debtor had burden of proving that debt

between creditor and primary obligor had been satisfied); In re

Brummer, 147 B.R. 552 (Bankr. D. Mont. 1992) (debtor had

burden of proving debt was usurious under Montana law); In re

Biglari Import Export, Inc., 130 B.R. 43 (Bankr. W.D. Tex. 1991) (in

claim objection proceeding, where creditor had seized collateral

prior to petition being filed, debtor had burden of proving that

creditor did not exercise reasonable care with regard to

repossessed collateral as required by Texas law); In re Wills, 126

B.R. 489, 497 (Bankr. E.D. Va. 1991) (summary judgment entered

for creditor in claim objection proceeding because debtor had

burden of proving by clear and convincing evidence under

Virginia law that contractual debt could be avoided on grounds

of incapacity); In re Woehr, 121 B.R. 743 (N.D. Tex. 1990) (debtor

had burden of proving debt usurious under Texas law); In re

Hood, 95 B.R. 696, 702 (Bankr. W.D Mo. 1989) (debtor had burden

under Missouri law of proving that contract was entered into

under duress); The Bible Speaks v. Dovydenas, 81 B.R. 750, 760 (D.

Mass. 1988) (in claim objection proceeding against debtor/

church to recover monies obtained on the grounds of undue

influence, court applied Massachusetts law which creates

presumption of undue influence after a confidential

relationship has been established); In re Borum, 60 B.R. 516

(Bankr. E.D. Ark. 1986) (debtor had burden of proving usury

20

as creditors and therefore the functional equivalent of

plaintiffs under nonbankruptcy law - usually bear the

burden of proof in bankruptcy, as they would outside of

bankruptcy, this observation should not form a basis for a

so-called uniform rule.

Courts routinely rule .. . that the ultimate bur-

den of proof rests upon the claimant. This is

intended to place the claimant in the same posi-

tion it would have been had the claimant been a

plaintiff in a civil action. The application of this

rule is problematical when the claimant is a

taxing authority.

In re Thinking Machines, 203 B.R. 1, 2 (Bankr. D. Mass.

1996), modified, 203 B.R. 426 (D. Mass 1997).

Although less frequent, courts have also dealt with

issues regarding standards of proof in claim objection

proceedings.'! It would seem axiomatic that standards of

proof are as much a substantive component of a litigant’s

claim or defense as are burdens of proof. See, e.g., Anderson

under Arkansas law); see also, In re Niles, 106 F.3d 1456 (9th Cir.

1997) (state law that places burden of proof on fiduciary to

properly account for funds was equally applicable in discharge

action); Thomson v. Boswell, 166 F.2d 106, 108 (6th Cir. 1948) (in

railroad reorganization proceeding, estate was liable in an

accident involving a passenger vehicle on the train tracks

because Arkansas law required railroad operator to

affirmatively prove that it maintained an adequate lookout).

1! This should be contrasted with discharge proceedings,

where this Court has held that, as a matter of bankruptcy law,

objections to discharge must be shown by a preponderance of

the evidence. Grogan v. Garner, 498 U.S. 279 (1991). The Grogan

case illustrates how the petitioner and many courts have

confused different aspects of the bankruptcy process. The

purely federal issues involve what is dischargeable and how

assets are distributed. The purely nonbankruptcy issues

generally involve the amount and legality of the debt as of the

petition filing date.

21

v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (because plaintiff

was required to prove case by “clear and convincing”

evidence, court must consider that evidentiary standard

when gauging whether a “genuine issue” of fact existed

for summary judgment purposes). Similarly, bankruptcy

courts applying nonbankruptcy standards of proof in

claim objection proceedings have not perceived a conflict

with “bankruptcy policy.” E.g., In re Progress Drilling &

Marine, 122 B.R. 62 (Bankr. S.D. Tex. 1990) (creditor’s

claim disallowed where Texas law required proof of oral

contract by clear and convincing evidence). Other exam-

ples are provided in the margin.’?

The authority cited here indicates that when courts

have determined the amount of any debt in a bankruptcy

case, pursuant to nonbankruptcy law, they have not gen-

erally applied either “uniform” burdens or standards of

proof. It would seem that courts have fashioned the sup-

posedly “uniform” bankruptcy rule only when they dis-

approved of the nonbankruptcy law that would enable a

creditor, with statutory priority over other creditors, to

prevail. Petitioner argues, in effect, that the taxing

authorities’ statutory priority dictates the result he seeks

to achieve here - that Congress has given the government

too much. However, this Court has recently ruled that a

12 In re Cutty’s Gurnee, Inc., 133 B.R. 934, 945 (Bankr. N.D.

Ill. 1991) (adopting Illinois law requiring creditor to show

existence of equitable lien by clear and convincing evidence); In

re Bastyr & Assocs., Inc., 81 B.R. 978, 982 (Bankr. D. Minn. 1988)

(in claim objection proceeding, court applied Minnesota law

which requires clear and convincing evidence to show oral

modification of contract); In re Emergency Beacon, Corp., 48 B.R.

341, 353 n.5 (Bankr. S.D.N.Y. 1985) (clear and convincing

standard of proof under New York law applied in objection to

claim based on fraud); In re Kirk, 114 B.R. 771, 775 (Bankr. M.D.

Fla. 1990) (adopting nonbankruptcy federal tax lew requiring

IRS to prove fraud by clear and convincing evidence).

22

court may not use equitable principles to override choices

made on a legislative level. United States v. Noland, 517

U.S. 535, 539-41 (1996). As the court below so astutely

concluded, bankruptcy judges are not permitted to

indulge in result-oriented decision making, to “cut down

the entitlements that creditors seek to enforce in bank-

ruptcy” and to engage in “[a]n equity free-for-all [which]

would engender confusion and uncertainty and increase

the strategic incentives to petition for bankruptcy.” In re

Stoecker, 151 F.3d at 551. 7

V. IF THE OPINION BELOW IS NOT AFFIRMED,

THE BANKRUPTCY COURTS COULD BECOME

THE STATE AND FEDERAL TAX COURT OF

CHOICE. ESTABLISHED POLICY FAVORS NON-

INTERFERENCE WITH STATE TAX LAWS AND

AVOIDING GIVING DEBTORS A COMPETITIVE

TAX ADVANTAGE BY FILING BANKRUPTCY.

Whether to file bankruptcy, and under what chapter,

is a generally unilateral decision of the debtor. A debtor

does not have to be insolvent to file a bankruptcy peti-

tion. In re Johnson, 189 B.R. 744, 747 (N.D. Iowa 1995).

“But financially strapped or not, a new breed of execu-

tives is showing no remorse about wielding bankruptcy

as a weapon.” Dean Faust, Chapter 11 Never Looked So

Good, March 20, 2000, Business Week at 44 (discussing the

sharp rise in solvent, publicly held corporations filing for

Chapter 11). Many courts have held that the bankruptcy

code gives a debtor the opportunity to contest a tax

obligation, even where all of the deadlines for doing so

under nonbankruptcy law have passed. Bankruptcy Code

§ 505(a); In re Custom Distribution Serv., Inc., 216 B.R. 136,

148 (Bankr. D.N.J. 1997). If the position of the trustee is

adopted by the Court, there will be no incentive whatever

for taxpayers to exercise their state administrative

remedies.

23

The magnitude of the potential harm to state tax

administration is significant. When construing the tax

laws, the Court has taken into consideration our “tax

system that is so largely dependent on voluntary compli-

ance.” United States v. Generes, 405 U.S. 93, 104 (1972). The

bankruptcy code provides that many taxes are entitled to

priority in distribution and are non-dischargeable if they

pertain to recent periods, were recently assessed prior

to the bankruptcy petition being filed, or were “assess-

able” after the petition is filed. Bankruptcy Code

§§ 507(a)(8)(A) and 523(a).15 What is intended is that the

honest taxpayer who files his returns reflecting a liability

will have to deal with the problem, either in bankruptcy

or out. If the burden of proof were on the government the

incentive to be forthright disappears. There would be no

reason to file accurate returns — an audit is scheduled, the

records are “lost,” and a bankruptcy petition is imminent.

The states’ audit resources will be wasted.

The states’ requirements regarding record keeping

and exercising one’s administrative remedies could

become mere voluntary aspirations. They would often be

unenforceable. The provision in the bankruptcy code pro-

hibiting relitigation of tax disputes previously contested

in an administrative proceeding, Code § 505(a)(2)(A),

would become a fairly hollow protection, because there

would be no incentive to utilize such administrative

forums. If the decision below is reversed, accountants

and tax lawyers could commit malpractice if they do not

advise their clients of the benefits of litigating their tax

disputes in bankruptcy court. Because bankruptcy courts

are bound by the determinations of any administrative

tax proceeding, In re Trans State Outdoor Advertising Co.,

13 Most states’ primary revenue source is sales tax, which,

if a trust fund tax, is entitled to priority under bankruptcy code

§ 507(a)(8)(C), and never loses its priority status due to lapse of

time.

24

140 F.3d 618 (5th Cir. 1998), tax professionals would have

to be very careful about advising their clients to take

advantage of the state forum if the burdens are more

favorable in the federal forum. This cannot be what Con-

gress intended. The relationship between bankruptcy

code § 505(a)(1) (court may determine tax liability) and

§ 505(a)(2)(A) (court may not determine tax liability if the

tax was contested in a judicial or administrative proceed-

ing prior to bankruptcy), leads to the ordinary conclusion

that Congress intended there be no difference in the

outcome whether taxes are litigated in or out of bank-

ruptcy.'4

In fact, section 505(a)(2)(A) (prohibiting relitigation)

appears to be an effort by Congress to promote horizontal

equity, the notion that the “tax system [is] designed to

ensure as far as possible that similarly situated taxpayers

pay the same tax.” Thor Power Tool Co. v. Commissioner,

439 U.S. 522, 544 (1979) (dicta). “A tax system in which

the burden of proof is borne by the government does

little to encourage the preservation of records held by the

taxpayer; on the contrary, such a system would lend itself

to easy concealment of tax obligation.” Leo P. Martinez,

Tax Collection and Populist Rhetoric: Shifting the Burden of

Proof in Tax Cases, 39 Hast. L. J. 239, 280 (1988) (arguing

that political rhetoric regarding shifting the burden of

proof is naive, and that the traditional rule placing the

burden on the taxpayer is well-supported historically and

logically). “Taxpayers who win the ‘hide the ball’ game

will pay less tax than similar taxpayers who choose not to

play.” Steve R. Johnson, The Dangers of Symbolic Legisla-

tion: Perceptions and Reality of the New Burden-of-Proof

Rules, 84 Iowa L. Rev. 413, 456 (1999) (asserting that the

14 One Lot Emerald Cut Stones and One Ring v. U.S., 409 U.S.

232 (1972) (no collateral estoppel or res judicata if losing party

in first proceeding could possibly prevail by sustaining a lower

standard of proof in second proceeding).

25

strict conditions in the new federal law purporting to

shift the burden of proof to the IRS render the burden

shift more symbolic than real, and arguing that a genuine

burden shift would cause the government to become

more intrusive, make audits and tax litigation more

expensive for everyone involved, cause a loss of revenue

and would create an incentive to “hide the ball” which

would be perceived by the public as unfair).15 The

1S The Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. No. 105-206 (1998), H.R. 2676, amended the

Internal Revenue Code to add § 7491 which purportedly

changes the burden of proof from the taxpayer to the IRS in the

litigation of federal tax matters. The question for bankruptcy

practitioners and courts is whether this change in the burden of

proof of tax matters has any impact on the litigation of federal

tax questions in bankruptcy. The statute states that it pertains to

“any court proceeding” with respect to litigation of any federal

income and estate and gift tax matter. I.R.C. § 7491(a)(1). The

taxpayer will not be entitled to the benefit of this change unless

and until four conditions are satisfied: The taxpayer must 1.)

satisfy the requirements presently found in the Internal

Revenue Code to substantiate any item, 2.) satisfy the

requirements to maintain books and records presently found in

the Code, 3.) satisfy the requirements of cooperation, including

reasonable assistance in obtaining access to witnesses,

documents, etc., and 4.) introduce credible evidence with

respect to a factual issue relevant to ascertaining the taxpayer’s

income tax liability. I.R.C. § 7491(a). If the taxpayer satisfies

those four conditions the IRS has the burden of proof with

respect to “such issue.” I.R.C. § 7491(a)(1). If the decision of the

Court in the instant case is reversed, however, it could signal

support from this Court to disregard the detailed preconditions

which a taxpayer must fulfill before obtaining the statutory

burden shift, I.R.C. § 7491(a)(2). In fact, what the statute actually

requires is that the burden will seldom, if ever, shift in federal

bankruptcy/tax litigation, which often involves the

paradigmatic lack of records problem. Properly understood, the

new statute actually underscores the record keeping

requirements and the reasons why the burden of proof was

26

petitioner seeks a result that will promote this game-

smanship.

If a taxpayer initiates an administrative proceeding

and then realizes it is going badly bankruptcy will

become a ready escape valve. If an administrative or

judicial proceeding under state law is pending prior to

the filing of the bankruptcy and different burdens of

proof apply in the different forums, it would be foolish

for a trustee or debtor to permit the nonbankruptcy pro-

ceeding to go forward instead of litigating the matter in

bankruptcy court to take advantage of the more favorable

burden of proof. It is doubtful that Congress intended the

anomalous situation in which the very same claim adjudi-

cation proceeding would be subject to different burdens

of proof depending upon whether the bankruptcy court

abstained from hearing the proceeding and deferred to a

state adjudication. See 28 U.S.C. § 1334(c).

The tax provisions governing priority and discharge

in the bankruptcy code, §§ 503(b)(1), 507(a)(8) and

523(a)(1), were enacted to prevent the bankruptcy courts

from being used for tax avoidance.'® But if the petitioner

traditionally placed on the taxpayer. See generally, Steve R.

Johnson, The Dangers of Symbolic Legislation: Perceptions and

Realities of the New Burden-of-Proof Rules, 84 lowa L. Rev. 413

(1999).

16 Since tax authorities are creditors of practically

every taxpayer, another important element is that tax

collection rules for bankruptcy cases have a direct

impact on the integrity of the Federal, State and local

tax systems. These tax systems, generally based on

voluntary assessment, works [sic] to the extent that

the majority of taxpayers think they are fair. This

presumption of fairness is an asset which should be

protected and not jeopardized by permitting

taxpayers to use bankruptcy as a means of improperly

avoiding their tax debts. To the extent that debtors in

27

prevails here those statutes will become empty formal-

isms in many instances. The protection that they provide

with regard to distribution and discharge will be insig-

nificant whenever the underlying debt is readily and

unfairly eliminated outright. While the greater harm lies

in the contest of tax matters between debtors and tax

authorities, where debtors would be motivated to with-

hold or destroy evidence, it is not difficult to envision

cases where debtors would solicit trustees’ cooperation in

denying claims for the debtor’s benefit, creating collateral

estoppel for a subsequent discharge determination.

In National Private Truck Council, Inc. v. Oklahoma Tax

Commission, 515 U.S. 582 (1995), the Court noted that

federal laws must be construed against “the background

presumption that federal law generally will not interfere

with administration of state taxes... ,” and that “Con-

gress and [the Supreme Court] repeatedly have shown an

aversion to federal interference with state tax administra-

tion.” Id. at 588. The Court has also stated that 28 U.S.C.

§ 960 indicates “a Congressional purpose to facilitate -

not to obstruct — enforcement of state laws.” California Bd.

of Equalization v. Sierra Summit, 490 U.S. 844, 852-53

(1989). Sierra Summit ruled that bankruptcy sales were

subject to state sales tax, notwithstanding the lack of

specific authority for states to tax those sales. The Court

stated that state tax law did not need approval before it

applied in bankruptcy court, but to the contrary “[iJf

Congress wished to declare otherwise, its intent would

have to be ‘clearly expressed, not left to be collected or

inferred from disputable considerations of convenience in

administering the estate of the bankrupt.’” Id. at 854.

a bankruptcy are freed from paying their tax

liabilities, the burden of making up the revenues thus

lost must be shifted to other taxpayers.

S. Rep. No. 989, 95th Cong., 2d Sess. 13-14 (1978).

28

The Court’s reference to 28 U.S.C. § 960, in its Sierra

Summit opinion, highlights another congressional bank-

ruptcy tax policy. Section 960 was enacted in 1934 in

response to judicial decisions holding that bankruptcy

estates were not required to pay state and local taxes and

to prevent debtors from obtaining a competitive advan-

tage against those operating businesses outside of bank-

ruptcy. Act of June 18, 1934, ch. 585, 48 Stat. 993 (1934)

(former 28 U.S.C. § 124a); H.R. Rep. No. 1138, 73d Cong.,

2d Sess. (1934); Palmer v. Webster and Atlas Nat'l Bank, 312

U.S. 156, 166 (1941) (“Its obvious purpose was to negative

the idea that a federal receiver or trustee could ignore the

rules of law of the state of operation affecting the conduct

of the business committed to his charge.”).

“he stated justification supporting the reversal of the

burden of proof from that generally recognized in non-

bankruptcy tax litigation is the bankruptcy policy of fair-

ness to other creditors. Brief of Petitioner at 27; In re

Wilhem, 173 B.R. 398 (Bankr. E.D. Wis. 1994) (policy con-

siderations which place the burden of persuasion on the

taxpayer are unpersuasive in bankruptcy and the policy

goals of the bankruptcy system are put at risk when one

class of creditors is given the benefit of a favorable pre-

sumption which has its origins outside of bankruptcy

law; IRS held to have ultimate burden of persuasion). The

policy is inapposite here. The petitioner and many courts

have failed to distinguish between the determination of

the existence of the obligation, under nonbankruptcy

rules, and the determination of distribution to creditors

of equal priority, under bankruptcy rules.

The petitioner’s conclusion that this Court should

federalize the burden of proof rules for all tax litigation

in bankruptcy court — and treat the tax authority as if it

were a typical creditor when determining the amount of

the liability - is unworkable. The National Bankruptcy

Review Commission recognized the inequities of placing

the burden of proof on the taxing authority when it

29

adopted a proposal to “clarify that the burden of proof /

persuasion rules . . . applicable under nonbankruptcy law

are equally applicable in bankruptcy court... . ” Report

OF THE NaTIONAL Bankruptcy Review Commission, Recom-

mendation 3.2.5, at 811 (Oct. 20, 1997).1!7

‘7 The Commission's Report explained the reason why

Congress should clarify that the burden of proof should be the

same in bankruptcy court as it is in nonbankruptcy tax

litigation:

The Government's position as a tax creditor in a

claims contest is different from other creditors in a

normal debtor-creditor relationship. It is generally

the debtor or the debtor in possession who has access

to all of the relevant records, information and

knowledge required to substantiate or contest the

validity of a tax claim. As such, “[t}he common law

rule placing the burden on the party with access to

the facts seems particularly applicable in a self-

assessment system which provides for the taxpayer to

make the initial determination of liability” and

bolsters the record-keeping requirement the Internal

Revenue Code imposes upon taxpayers. To the extent

one creditor is prevented from being able to prove its

claim due to lack of information, other creditors

benefit to the detriment of that creditor. The

Recommendation is designed to protect tax creditors

from that result.

Id. at 816 (citations omitted).

30

CONCLUSION

For all of the foregoing reasons, the opinion of the

court below should be affirmed.

On Brief:

James I. SHEPARD

Respectfully submitted,

Patricia A. Maprip

Attorney General of New Mexico

Donavp F. Harris

(Counsel of Record)

Special Assistant Attorney

General

New Mexico Taxation and

Revenue Department

P.O. Box 22690

Santa Fe, New Mexico 87502-2690

505-841-6583

2682 West Dovewood Lane

Fresno, California 93711-2518