No. 99-387
In the Supreme Court of the United States
THOMAS E. RALEIGH, CHAPTER 7 TRUSTEE
FOR ESTATE OF WILLIAM J. STOECKER, PETITIONER
v.
STATE OF ILLINOIS DEPARTMENT OF REVENUE
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENT
SETH P. WAXMAN
Solicitor General
Counsel of Record
PAULA M. JUNGHANS
Acting Assistant Attorney
General
LAWRENCE G. WALLACE
Deputy Solicitor General
KENT L. JONES
Assistant to the Solicitor
General
KENNETH L. GREENE
STEVEN W. PARKS
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Whether the burden of proof for a tax claim, which rests upon the taxpayer
as a matter of substantive law, is shifted to the government when that claim
is litigated in the taxpayer's bankruptcy case.
In the Supreme Court of the United States
No. 99-387
THOMAS E. RALEIGH, CHAPTER 7 TRUSTEE
FOR ESTATE OF WILLIAM J. STOECKER, PETITIONER
v.
STATE OF ILLINOIS DEPARTMENT OF REVENUE
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENT
INTEREST OF THE UNITED STATES
The Internal Revenue Service files more than 100,000 proofs of claim in
bankruptcy cases each year seeking to recover several billion dollars of
taxes. It has long been the general rule in litigation contesting tax liabilities
that the taxpayer bears the burden of proof. The question presented in this
case is whether that burden of proof is placed instead on the taxing authority
merely because the tax case is litigated in bankruptcy court. That question
is one of substantial recurring importance in the administration of the
federal tax laws.
STATEMENT
1. William J. Stoecker was the president and sole director of Chandler Enterprises,
Inc., an Illinois corporation. That corporation purchased an airplane from
an out-of-state seller in 1988. Pet. App. B2. The State of Illinois imposes
a use tax on Illinois residents "upon the privilege of using in this
State tangible personal property" whether such property is purchased
in Illinois or elsewhere. Ill. Rev. Stat. ch. 120, ¶ 439.3 (Smith-Hurd
1989). Retailers in Illinois, and foreign retailers with an adequate nexus
to Illinois, are required to collect and pay over that tax to Illinois.
Ibid. Any tax "not paid to a retailer * * * shall be paid to the Department
[of Revenue] directly by any person using such property within [Illinois]."
Ibid. A purchaser whose seller does not pay the use tax is thus to file
a return with the Department of Revenue and pay the tax. Id. ¶ 439.10.
In this case, however, neither Chandler Enterprises nor the out-of-state
seller of the airplane filed an Illinois use tax return or paid the Illinois
use tax. Pet. App. B2-B3.
2. In 1989, the creditors of Mr. Stoecker initiated involuntary bankruptcy
proceedings against him under Chapter 11 of the Bankruptcy Code. The bankruptcy
case was later converted to a liquidation proceeding under Chapter 7 of
the Bankruptcy Code. Pet. App. C12. While the bankruptcy case was pending,
the Illinois Department of Revenue issued a Notice of Tax Liability to Chandler
Enterprises for the unpaid use tax on the airplane. The corporation had
been involuntarily dissolved, however, and thus did not pay the use tax.
Id. at B2-B3.
Under Illinois law, a corporate officer "who has the control, supervision
or responsibility of filing returns and making payment of the amount of
any * * * tax * * * who wilfully fails to file the return or make the payment
* * * shall be personally liable for a penalty equal to the total amount
of tax unpaid by the [corporation]." 35 Ill. Comp. Stat. Ann. 735/3-7
(West 1999). Invoking that provision, the Illinois Department of Revenue
issued a Notice of Penalty Liability asserting that Mr. Stoecker was personally
liable for the unpaid taxes of the corporation. Pet. App. B2-B3, C20-C21.
The State thereafter filed a proof of claim in the amount of $911,769 in
Mr. Stoecker's bankruptcy case. Id. at C20 & n.12.
3. The bankruptcy court upheld the trustee's objection to the State's claim.
Pet. App. C1-C81. Relying on Franchise Tax Board of California v. MacFarlane,
83 F.3d 1041, 1045 (9th Cir. 1996), cert. denied, 520 U.S. 1115 (1997),
the bankruptcy court concluded that the State had the burden of proof on
its tax claim because "the ultimate burden of persuasion always remains
with the claimant to prove entitlement to the claim." Pet. App. C5.
The court held that the Department's notice of liability and proof of claim
constituted "prima facie proof as to all elements of [the tax] liability"
and that "[t]he burden then shifted to the Trustee to rebut the presumption
created by" the notice. Id. at C73. The court stated, however, that
the trustee had properly rebutted that presumption by "showing that
the Debtor was not in control [of the corporation] and thus could not have
voluntarily or willfully failed to pay the tax." Ibid. The court held
that "[t]he ultimate burden of proof then shifted back" to the
State to show that its claim should be allowed. Ibid. The court ruled against
the State because it failed to "refute" the debtor's evidence
"and to ultimately sustain its burden of proof * * * ." Id. at
C74.
4. The district court affirmed. Pet. App. B1-B21. The court first held that
it was barred by 28 U.S.C. 1341 from reviewing the State's determination
that the corporation was liable for the use tax. Pet. App. B13-B16. That
statute deprives the district courts of jurisdiction to enjoin or restrain
the assessment or collection of state taxes when a plain, speedy, and adequate
remedy may be had in the state courts. 28 U.S.C. 1341. The district court
concluded that this statute barred it from reviewing the validity of the
state tax assessment against the corporation. With respect to the State's
claim against the debtor in his individual capacity, however, the court
held that the State bore the burden of proof. Pet. App. B8. The court sustained
the conclusion of the bankruptcy court that the State failed to meet that
burden by showing that the debtor had control, supervision, or responsibility
for paying the use tax liability of the corporation. Id. at B9-B12.
5. The court of appeals reversed. Pet. App. A1-A13. The court of appeals
rejected the conclusion of the district court that 28 U.S.C. 1341 bars federal
courts from reviewing the tax liability of the corporation in this bankruptcy
case. On the merits, however, the court of appeals concluded that the state
tax had been lawfully assessed upon the corporation. Pet. App. A7.
Having thus reached the question of the debtor's individual liability for
that tax, the court of appeals stated that there was "no proof either
that [the debtor] was responsible for" filing Chandler's tax returns
or paying Chandler's taxes "or that he willfully evaded the payment
of the use tax." Pet. App. A7. The court concluded, however, that "just
as under the corresponding federal law of responsible-officer liability
for unpaid taxes, 26 U.S.C. § 6672 * * * , Illinois shifts the burden
of proof-both production and persuasion-to the officer once a Notice of
Penalty Liability is issued, * * * and the trustee has not carried it."
Pet. App. A7. The court stated that, while the debtor "may have satisfied
his burden of production by identifying" another individual as the
"corporate financial officer, * * * he has not satisfied the burden
of persuasion." Id. at A7-A8. Noting that the proper allocation of
the burden of proof "is critical" to resolution of this case,
the court of appeals held that the debtor was liable for the tax. Id. at
A8.
The court of appeals rejected the trustee's argument that "equity"
requires the burden of proof for tax claims to be placed on the government
in bankruptcy cases. Pet. App. A9. The court stated that "[b]ankruptcy
is not a 'free-for-all equity balancing act.'" Ibid. (quoting In re
Lapriano, 909 F.2d 221, 223 (7th Cir. 1990)). Instead, "it is now well
settled that although the origins, procedures, and many of the remedies
of bankruptcy are indeed equitable, a bankruptcy judge has no authority
to cut down the entitlements that creditors seek to enforce in bankruptcy,
except * * * as provided by the Bankruptcy Code itself." Pet. App.
A9. The court concluded that "[b]urden of proof is rightly classified
as a part of the creditor's entitlement" that "is not shifted
in bankruptcy." Id. at A10.
The court of appeals acknowledged that the decision of the Ninth Circuit
in Franchise Tax Board of California v. MacFarlane, 83 F.3d at 1045, conflicts
with the decision in this case. The court concluded, however, that the view
adopted here and in In re Landbank Equity Corp., 973 F.2d 265, 270 (4th
Cir. 1992), is preferable because (Pet. App. A10):
[i]t is supported by the general pattern of American tax law, in which "payment
precedes defense, and the burden of proof, normally on the claimant, is
shifted to the taxpayer," Bull v. United States, 295 U.S. 247, 260
(1935), and by the countless cases which hold that burden of proof is "substantive"
for purposes of the Erie doctrine, e.g., Director v. Greenwich Collieries,
512 U.S. 267, 271 (1994); American Dredging Co. v. Miller, 510 U.S. 443,
454 (1994) * * * .
The court of appeals noted that, although Congress could have provided a
different result for tax claims in bankruptcy cases, there is no indication
that it sought to do so. The court observed that, while close attention
was paid to issues of burden of proof in several provisions of the Bankruptcy
Code, the Code is silent on the burden of proof in tax cases. Pet. App.
A11. The court noted, moreover, that a rule shifting the burden of proof
to the government on tax claims in bankruptcy cases would create an undesirable
incentive for taxpayers to declare bankruptcy. Ibid. Concluding that the
burden of proof rests on the taxpayer in this case- just as it would if
the tax claim had been adjudicated outside of bankruptcy court-the court
of appeals held that "the state has a valid claim * * * and that the
decision of the district court must therefore be reversed." Id. at
A12.
SUMMARY OF ARGUMENT
The proper allocation of the burden of proof is a substantive rule governed
by the law that creates the underlying claim. The State of Illinois follows
the traditional rule that allocates the burden of proof on tax claims to
the taxpayer. The court of appeals correctly held that this substantive
rule of Illinois law is not abridged-and that the burden of proof on Illinois
tax claims is not placed on the State-simply because the tax claim is litigated
in bankruptcy court.
Except when Congress expressly provides otherwise, the substantive rules
that allocate the burden of proof for a creditor's claim in non-bankruptcy
cases also govern in bankruptcy proceedings. Nothing in the Bankruptcy Code
expressly shifts the burden of proof to the taxing authority on tax claims
litigated in bankruptcy court. To the contrary, while the Bankruptcy Code
does contain several provisions that, in other contexts, explicitly address
the burden of proof, there is nothing in the Code that establishes the "clear
and manifest" intent (BFP v. Resolution Trust Corp., 511 U.S. 531,
544 (1994)) required to displace the State's substantive rules governing
the burden of proof on tax claims.
The legislative history of the Bankruptcy Code, and the prior practice under
the Bankruptcy Act, also do not support petitioner's contention. The case
law under the Bankruptcy Act had reached conflicting results. Some courts
had concluded that the burden of proof shifts to the taxing authorities
in bankruptcy; others had concluded that the burden was retained by the
debtor. In this context, it cannot plausibly be suggested that congressional
silence on the allocation of the burden of proof was intended to adopt any
particular view.
Nor does Bankruptcy Rule 3001(f) prescribe a burden of proof on claims in
bankruptcy. It provides only that the proof of claim executed by the claimant
is "prima facie evidence" of the validity and amount of the claim.
Fed. R. Bankr. P. 3001(f). That Rule does not purport to prescribe the ultimate
burden of proof to be applied when the "prima facie" case established
by the proof of claim is disputed by an objection in bankruptcy court. This
Bankruptcy Rule is subject to Rule 301 of the Rules of Evidence, which specifies
that such a presumption merely imposes a "burden of going forward with
evidence" "to rebut or meet the presumption" and "does
not shift * * * the burden of proof in the sense of the risk of nonpersuasion."
Fed. R. Evid. 301.
Petitioner also errs in suggesting that bankruptcy courts, as courts of
equity, may disregard the substantive rules governing burden of proof established
under non-bankruptcy law. Bankruptcy courts may not "contradict [the]
statutory or common law" placing the burden of proof on taxpayers simply
by invoking an "unrestricted power" to achieve "a fairer
result" (United States v. Noland, 517 U.S. 535, 543 (1996)).
ARGUMENT
THE BANKRUPTCY CODE DOES NOT ALTER THE SUBSTANTIVE RULES THAT GOVERN THE
BURDEN OF PROOF FOR TAX CLAIMS
1. It has long been the settled rule that, except as Congress provides otherwise,
the burden of proof in litigation involving federal tax liabilities rests
on the taxpayer. As this Court stated in Helvering v. Taylor, 293 U.S. 507,
515 (1935), "[u]nquestionably the burden of proof is on the taxpayer
to show that the commissioner's determination is invalid." Accord Bull
v. United States, 295 U.S. 247, 260 (1935); Welch v. Helvering, 290 U.S.
111, 115 (1933).1 The rule placing the burden of persuasion on the taxpayer
was first developed as a judge-made rule of common law and was thereafter
"repeatedly considered and approved by Congress." H.R. Conf. Rep.
No. 599, 105th Cong., 2d Sess. 238 (1998); S. Rep. No. 174, 105th Cong.,
2d Sess. 43 (1998).2 The States have also, by either statute or common law,
routinely adopted this traditional allocation of the burden of proof to
the taxpayer. See Amici States Br. Supporting Cert. at 6 n.3. In particular,
the traditional rule has long been followed by the State of Illinois. Pet.
App. A7; Branson v. Department of Revenue, 659 N.E.2d 961, 968 (Ill. 1995).
The court of appeals correctly concluded that the burden of proof in tax
cases is not shifted to the taxing authority simply because the tax issue
arises in the bankruptcy context. The validity of a creditor's claim is
governed by substantive state and federal non-bankruptcy law. Grogan v.
Garner, 498 U.S. 279, 283- 284 & n.9 (1991) (non-bankruptcy law governs
the standard of proof that a creditor must satisfy to establish a valid
claim in bankruptcy); Butner v. United States, 440 U.S. 48, 55 (1979); Vanston
Bondholders Protective Comm. v. Green, 329 U.S. 156, 161 (1946). Rules allocating
the burden of proof are part of the substantive law that governs a creditor's
claim. Director v. Greenwich Collieries, 512 U.S. 267, 271 (1994) ("the
assignment of the burden of proof is a rule of substantive law"); Dick
v. New York Life Ins. Co., 359 U.S. 437, 446 (1959); Cities Service Oil
Co. v. Dunlap, 308 U.S. 208, 212 (1939). Except when Congress expressly
provides otherwise, the substantive rules that allocate the burden of proof
for a creditor's claim in non-bankruptcy cases therefore also govern in
bankruptcy proceedings. See Vanston Bondholders Protective Comm. v. Green,
329 U.S. at 161; 21 C. Wright & K. Graham, Federal Practice and Procedure
§ 5122 (1977). See also note 2, supra. The substantive rule of Illinois
law, under which "the burden of proof, normally on the claimant, is
shifted to the taxpayer" (Bull v. United States, 295 U.S. at 260),
therefore governs in bankruptcy cases involving Illinois tax claims in the
absence of a contrary federal statutory rule.
Petitioner acknowledges (Pet. Br. 7-8, 15) that the court of appeals correctly
concluded (Pet. App. A11) that nothing in the Bankruptcy Code explicitly
shifts the burden of proof to the taxing authority for tax claims adjudicated
in bankruptcy court. See also Franchise Tax Board of California v. MacFarlane,
83 F.3d at 1045 ("[t]he bankruptcy code is silent on the allocation
of the ultimate burden of proof" in tax disputes). Neither Section
502 of the Bankruptcy Code, which governs the allowance of claims generally,
nor Section 505, which authorizes the bankruptcy courts to adjudicate tax
disputes, contains any provision addressing or allocating the burden of
proof. See 11 U.S.C. 502, 505. There is thus nothing in the Bankruptcy Code
that establishes the "clear and manifest" intent (BFP v. Resolution
Trust Corp., 511 U.S. 531, 544 (1994)) that is required to displace substantive
state and federal rules governing the burden of proof in the adjudication
of tax claims.
As the court of appeals noted in this case (Pet. App. A11), the Bankruptcy
Code does contain several provisions that, in other contexts, explicitly
address the burden of proof. See, e.g., 11 U.S.C. 362(g) (assigning burden
of proof to different parties on different issues in challenges to automatic
stay); 11 U.S.C. 363(o) (assigning burden to trustee on issue of adequate
protection of creditors in hearing on use of creditor's property); 11 U.S.C.
364(d)(2) (assigning burden to trustee on issue of adequate protection in
hearing on obtaining new credit); 11 U.S.C. 547(g) (assigning burden to
trustee seeking to avoid certain allegedly preferential transfers); 11 U.S.C.
1129(d) (assigning burden to government of proving claim of tax avoidance
as principal purpose of plan). As the court of appeals emphasized, the careful
attention that Congress thus gave to burden-shifting rules in the Bankruptcy
Code makes the legislative "silence on the burden of proof in tax cases
eloquent." Pet. App. A11.
2. Petitioner errs in suggesting (Pet. Br. 26-27 & n.10) that the allocation
of the burden of proof in bankruptcy cases should vary depending on whether
it is the taxpayer or a creditor of the taxpayer who disputes the government's
tax claim. The Bankruptcy Code reflects no intention by Congress to grant
to creditors who contest the validity of a tax claim rights that are superior
to the rights of the tax debtor himself.3 The identity of the party who
contests the tax liability obviously has no bearing on the substantive question
whether the debtor is in fact liable for the tax.
The general rule assigning the burden of proof on tax claims to the taxpayer
stems from the government's "imperious need" for taxes, which
are "the life-blood of government." Bull v. United States, 295
U.S. at 259. This need for prompt and efficient collection of tax revenues
is not dissipated merely because the taxpayer has filed for bankruptcy.
To the contrary, as the court of appeals emphasized (Pet. App. A11), shifting
the burden of proof to the taxing authority in bankruptcy proceedings would
simply make bankruptcy court a peculiarly favorable forum in which to dispute
tax claims and thereby create an open invitation for abuse of the bankruptcy
process. As the court emphasized (ibid.):
The position for which the trustee contends * * * would create a new incentive
to declare bankruptcy. We have enough bankruptcies.
The substantive rules of non-bankruptcy law that place the burden of proof
for tax claims on the taxpayer have the salutary effect of requiring the
taxpayer to maintain and produce appropriate records. See note 2, supra.
By contrast, the opposite burden of proof rule for which petitioner contends
would create a perverse incentive for debtors to obstruct enforcement of
tax claims simply by leaving their records in disarray. Neither logic nor
the provisions of the Bankruptcy Code suggest that debtors should benefit
at the expense of the public fisc from a failure to maintain and produce
required tax records. The shifting of the burden of proof that petitioner
proposes for tax claims litigated in bankruptcy court could yield inappropriate
windfalls for tax protestors or others who seek to avoid tax debts in bankruptcy.
3. Congress has expressly granted priority to tax claims in bankruptcy cases.
See, e.g., 11 U.S.C. 507(a)(8). In doing so, the House Judiciary Committee
explained that "[a] taxing authority is given preferred treatment [in
bankruptcy] because it is an involuntary creditor of the debtor. It cannot
choose its debtors, nor can it take security in advance of the time the
taxes become due." H.R. Rep. No. 595, 95th Cong., 1st Sess. 189-190
(1978). The express legislative determination to give tax claims priority
over the claims of other creditors in bankruptcy is manifestly inconsistent
with petitioner's assertion that Congress determined, sub silentio, to treat
tax claims less favorably when litigated in bankruptcy than when litigated
outside of bankruptcy.
Petitioner's basic premise is that the burden of proof should be allocated
to the government on a tax claim in bankruptcy court in order to treat the
government like "[e]very other creditor who files a claim in a bankruptcy
estate" (Pet. Br. 29). In making that assertion, however, petitioner
fails to confront the fact that the validity of any creditor's claim in
bankruptcy court- whether the creditor is a taxing authority or a non-governmental
entity-is governed by the substantive rules of non-bankruptcy law. When,
as with tax claims, the rules of substantive non-bankruptcy law place the
ultimate burden of proof on the debtor outside of bankruptcy, the debtor
or trustee continues to shoulder that burden of proof in bankruptcy cases.
It is, of course, the ordinary rule that the claimant- either inside or
outside of bankruptcy-bears the ultimate burden of proof. This is simply
an application of the ordinary rule that a plaintiff generally bears the
burden of proving his claim. But, when the substantive rule of non-bankruptcy
law places the burden of proof on the defendant rather than the plaintiff,
courts have recognized that the party objecting to the claim in bankruptcy
must then bear the ultimate burden of proof in the bankruptcy case. As the
Amici States have explained in detail (Amici States Br. Supporting Cert.
at 9-11), the burden of proof is routinely assigned to the debtor in bankruptcy
cases in non-tax contexts in which applicable non-bankruptcy law assigns
that burden to the party in the debtor's position. See, e.g., In re Unioil,
Inc., 962 F.2d 988, 994 (10th Cir. 1992) (burden of proving accord and satisfaction
rests on the debtor as an affirmative defense); In re Woehr, 121 B.R. 743,
746-747 (N.D. Tex. 1990) (burden of proving debt is usurious rests on the
debtor), aff'd, 957 F.2d 867 (5th Cir. 1992); In re Andover Togs, Inc.,
231 B.R. 521, 530 (Bankr. S.D. N.Y. 1999) (burden of proving laches); In
re Farris, 194 B.R. 933, 936-937 (Bankr. E.D. Pa. 1996) (burden of proving
Truth in Lending Act violation).
Contrary to petitioner's contention (Pet. Br. 18-20, 27), it is thus not
a special dispensation to taxing authorities to apply the rules established
under substantive non-bankruptcy law in allocating the burden of proof in
bankruptcy cases. Instead, it would be a distinctive discrimination against
taxing authorities to refuse to apply in bankruptcy cases the burden of
proof rules established under substantive non-bankruptcy law which govern
the adjudication of such claims outside of bankruptcy court. Under our self-reporting
systems of state and federal taxation, taxing authorities are obviously
not in a position comparable to that of ordinary commercial creditors whose
claims typically are based on transactions they had with the debtor that
would be reflected in the creditors' own records. The practical realities
of achieving fair resolution of tax disputes do not change merely because
the issue arises in bankruptcy proceedings.
4. Petitioner asserts (Pet. Br. 10-15, 19-20) that, prior to the enactment
of the Bankruptcy Code of 1978, the decisions of this Court in City of New
York v. Saper, 336 U.S. 328 (1949), and Nicholas v. United States, 384 U.S.
678 (1966), had led the "vast majority of lower courts adjudicating
objections to tax claims" (Pet. Br. 13) to place the ultimate burden
of proof on the taxing authority. Petitioner contends that, if Congress
wished to change this assertedly "established" law, it would have
done so explicitly (Pet. Br. 19). Neither the decisions of this Court in
Saper and Nicholas, nor the "vast majority" of lower court decisions,
however, support petitioner in this case.
a. In Saper, this Court addressed whether the tax claim of the City of New
York bore interest to the date the bankruptcy commenced or, instead, to
the subsequent date on which the claim was paid. Prior to 1938, a number
of courts had held that the claim of a taxing authority bears interest to
the date of payment. 336 U.S. at 333. Congress had generally provided by
statute, however, that interest would be allowed on bankruptcy claims only
to the date the bankruptcy commenced. Id. at 330. The City nonetheless asserted
that, by generally disallowing interest after the bankruptcy commenced,
Congress had not intended to disturb the preexisting decisions that allowed
interest on tax claims to the date of payment. Ibid. This Court rejected
that contention because the statutory provision that generally disallowed
interest on claims after commencement of the bankruptcy "contain[ed]
no provision * * * allowing an exception in favor of tax claims." Ibid.
It was in this specific context that this Court made the statements on which
petitioner seeks to rely (Pet. Br. 12, 27): (i) that the enactment of amendments
to the Bankruptcy Code in the Chandler Act of 1938, ch. 575, 52 Stat. 840,
had "assimilated taxes to other debts for all purposes including the
denial of post-bankruptcy interest" and (ii) that the Bankruptcy Code
"requires governmental claims to be proved in the same manner and within
the same time as other debts * * *." 336 U.S. at 332.
Neither of these isolated quotations from the decision in Saper has relevance
to the present case. Indeed, petitioner has significantly misinterpreted
the quoted text. When the Court referred to governmental claims being "proved
in the same manner and within the same time as other debts" (336 U.S.
at 332), the Court was not describing the method of proving a claim on the
merits. Under the terminology employed under the Bankruptcy Act, prior to
enactment of the Bankruptcy Code of 1978, a debt was "proved"
in the sense described in Saper by the submission of a timely "proof
of claims * * * under oath, in writing and signed by a creditor. "
11 U.S.C. 93(a) (1939). Under Section 58(d) of the Bankruptcy Act, as amended
in 1938, "[c]laims which have been duly proved" in this sense
were to "be allowed * * * unless objection to their allowance shall
be made by parties in interest * * * ." 11 U.S.C. 93(d) (1939). Thus,
under the Bankruptcy Act terminology, even when a claim was "proved"
by the filing of a timely, verified "proof of claim," it was to
be "allowed" upon objection only if the court thereafter determined
that it was a valid and enforceable claim on the merits. See J. Moore, Moore's
Bankruptcy Manual § 57, at 148 & n.1 (1939); 3A Collier on Bankruptcy
¶ 63.05 (14th ed. 1975). The ultimate burden of persuasion was simply
not relevant to whether a claim was "proved" under the terminology
employed in the Bankruptcy Act. The burden of persuasion became relevant
only in determining whether a "proved" claim, to which objection
had been made by a party in interest, would be "allowed" on the
merits.4 See 11 U.S. C. 93(d) (1939); J. Moore, supra, at 147. See also
In re Johns-Manville Corp., 57 B.R. 680, 686-687 (Bankr. S.D. N.Y. 1986).
In proper context, the quoted passages from Saper simply represent a straightforward
application of the settled rule that, when Congress expressly and comprehensively
addresses a particular subject, exceptions to the legislative rule are not
lightly to be implied. 336 U.S. at 330. In the present case, unlike in Saper,
it is undisputed that Congress has not expressly provided a general rule
detailing the burden of proof for tax claims or other types of claims in
bankruptcy. See Pet. Br. 19 (acknowledging "Congress' silence on the
applicable burden of persuasion in claim objection proceedings"). Instead,
each claimant comes to bankruptcy court with rights to be determined under
substantive non-bankruptcy law. One of the substantive rights that governs
the tax claim of the State of Illinois is the right to have the ultimate
burden of proof placed on the party objecting to the claim. See page 11,
supra. Since Congress has not provided a different rule, that substantive
rule of state law governs the determination of the State's claim in bankruptcy
court. See ibid.
b. The decision of this Court in the Nicholas case is similarly inapposite.
In Nicholas, the Court again addressed the right of a taxing authority to
receive interest on its claim in a bankruptcy case. In the circumstances
of that case, the Court held that interest on taxes incurred after the commencement
of a reorganization but before the conversion of that proceeding to a liquidation
was not an administrative expense of the bankruptcy estate. It was in this
context that the Court made the statement in a footnote quoted by petitioner
(Pet. Br. 12) that Saper "reflected an assimilation of tax debts to
the status of other debts in bankruptcy." 384 U.S. at 682 n. 10. The
fact that interest on tax debts was treated like interest on "other
debts in bankruptcy" has no bearing on the question presented in this
case.
c. Petitioner errs in asserting that, prior to the enactment of the Bankruptcy
Code of 1978, "the vast majority of lower courts" (Pet. Br. 13)
held that the taxing authority bears the burden of proof in establishing
its claim. In the first place, none of the cases referred to by petitioner
(Pet. Br. 13-15) suggests that either Saper or Nicholas is relevant to this
issue. Moreover, petitioner cites only one decision of a court of appeals
as support for its position. United States v. Sampsell, 224 F.2d 721 (9th
Cir. 1955).5 By contrast, two other courts of appeals had held under the
Bankruptcy Act that the burden of proof rests on the party who objects to
the tax claim. In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976); Paschal
v. Blieden, 127 F.2d 398, 401-402 (8th Cir. 1942); In re Lang Body Co.,
92 F.2d 338, 341 (6th Cir. 1937), cert. denied sub nom. Hipp v. Boyle, 303
U.S. 637 (1938).
The suggestion of petitioner (Pet. Br. 15-16, citing Dewsnup v. Timm, 502
U.S. 410, 419 (1992)) that Congress should be understood to have adopted
"pre-Code practice" thus lacks any force in this case. No conclusion
about legislative intent can be drawn from this conflicting precedent.
5. Petitioner incorrectly relies on the legislative history of the Bankruptcy
Code of 1978. As petitioner notes (Pet. Br. 17), the House and Senate reports
on that Act both state that a proof of claim constitutes "prima facie
evidence of the claim" and that, in the absence of an objection by
a party in interest, the claim is to be "allowed." H.R. Rep. No.
595, supra, at 352; S. Rep. No. 989, 95th Cong., 2d Sess. 62 (1978). The
legislative reports further state that "[t]he burden of proof on the
issue of allowance is left to the Rules of Bankruptcy Procedure." Ibid.
Congress thus manifestly declined itself to adopt a general provision addressing
the "burden of proof on allowance" in bankruptcy cases.
Petitioner incorrectly contends (Pet. Br. 17) that this Court adopted such
a burden of proof rule by issuing Rule 3001(f) of the Bankruptcy Rules.
That Rule specifies that (Fed. R. Bankr. P. 3001(f)):
A proof of claim executed and filed in accordance with these rules shall
constitute prima facie evidence of the validity and amount of the claim.
That Rule, by its very terms, does no more than adopt the accepted proposition
reflected in the legislative history that a properly filed proof of claim
is "prima facie evidence" of the claim. Nothing in that Rule purports
to establish an overriding, ultimate burden of proof rule to apply when
the "prima facie" case is disputed by an objection in bankruptcy
court. As the Fourth Circuit explained in In re Landbank Equity Corp, 973
F.2d at 269, the "prima facie evidence" rule stated in Bankruptcy
Rule 3001(f) is simply a procedural mechanism for facilitating administration
of the bankruptcy estate. It places the burden of coming forward with some
evidence to dispute the claim on the party who contests it; it does not
address the question of who bears the ultimate burden of persuasion once
the "prima facie" case has been placed at issue by the objecting
party.6 Ibid. Accord In re Yoder Co., 758 F.2d 1114, 1119-1120 (6th Cir.
1985).
In this regard, Bankruptcy Rule 3001(f) parallels (and is subject to) Rule
301 of the Federal Rules of Evidence.7 That rule of evidence, which applies
to all cases in bankruptcy court, specifies that "a presumption imposes
on the party against whom it is directed the burden of going forward with
evidence to rebut or meet the presumption, but does not shift to such party
the burden of proof in the sense of the risk of nonpersuasion, which remains
throughout * * * upon the party on whom it was originally cast." Fed.
R. Evid. 301 (emphasis added).
6. Petitioner also errs in suggesting (Pet. Br. 26, 29) that, because bankruptcy
courts originated as courts of equity, they may disregard the substantive
rules governing burden of proof established under non-bankruptcy law. As
the court of appeals stated in this case (Pet. App. 9a, quoting In re Lapriano,
909 F.2d 221, 224 (7th Cir. 1990)), "[b]ankruptcy is not a 'free-for-all
equity balancing act.'" The equitable powers of a bankruptcy court
"must and can only be exercised within the confines of the Bankruptcy
Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988).
As this Court stated in Butner v. United States, 440 U.S. 48, 56 (1979),
"undefined considerations of equity provide no basis" for departing
from substantive rules establishing a claimant's rights under non-bankruptcy
law. Absent some "overruling federal law," the bankruptcy court
may not alter the substantive rights of creditors established under non-bankruptcy
law. Vanston Bondholders Protective Comm. v. Green, 329 U.S. at 161. See
also United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986); In re
Morristown & Erie R.R., 885 F.2d 98, 100 (3d Cir. 1989); Bird v. Carl's
Grocery Co. (In re NWFX, Inc.), 864 F.2d 593, 595 (8th Cir. 1989). As this
Court stated in United States v. Noland, 517 U.S. 535, 543 (1996) (quoting
In re Ahlswede, 516 F.2d 784, 787 (9th Cir.), cert. denied, 423 U.S. 913
(1975)), "the [equity] chancellor never did, and does not now, exercise
unrestricted power to contradict statutory or common law when he feels a
fairer result may be obtained by application of a different rule."
The Fourth Circuit correctly concluded in In re Landbank Equity Corp., 973
F.2d at 271, that the fact that a bankruptcy court is a court of equity
"does not confer on the court unlimited authority to ignore plain statutory
requirements and to alter the substantive rights of the parties."
Placing the burden of proof on the taxing authority in bankruptcy cases
would improperly disregard the substantive rights established under state
and federal law. Congress did not itself "mean[] to shift the burden
of proof from taxpayer to tax collector" in bankruptcy cases. Pet.
App. A11. Bankruptcy courts may not "contradict [the] statutory or
common law" placing the burden of proof on taxpayers by invoking an
"unrestricted power" to achieve what the court may consider to
be "a fairer result" (United States v. Noland, 517 U.S. at 543).
The court of appeals correctly held that the ultimate burden of proof for
tax claims rests on the taxpayer as a matter of substantive law-regardless
whether that claim is adjudicated inside, or outside, of bankruptcy.
CONCLUSION
The judgment of the court of appeals should be affirmed.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
PAULA M. JUNGHANS
Acting Assistant Attorney
General
LAWRENCE G. WALLACE
Deputy Solicitor General
KENT L. JONES
Assistant to the Solicitor
General
KENNETH L. GREENE
STEVEN W. PARKS
Attorneys
MARCH 2000
1 This allocation of the burden of proof historically applied whether the
tax claim was litigated in Tax Court in a deficiency proceeding (Tax Ct.
R. 142(a)), in district court or the Court of Federal Claims in a refund
case (Bull v. United States, 295 U.S. at 260), or in a tax collection action
brought by the government in district court (United States v. Rexach, 482
F.2d 10, 15-18 (1st Cir.), cert. denied, 414 U.S. 1039 (1973); Plisco v.
United States, 306 F.2d 784, 786 & n.2 (D.C. Cir. 1962), cert. denied,
371 U.S. 948 (1963)). In United States v. Janis, 428 U.S. 433, 440 (1976),
the Court stated, without deciding, that "[t]he policy behind the presumption
of correctness and the burden of proof * * * would appear to be applicable"
in tax collection suits and that allocating the burden to the taxpayer in
such suits would "accord[] * * * with the burden-of-proof rule which
prevails in the usual preassessment proceeding in the United States Tax
Court."
2 Congress has recently added Section 7491 to the Internal Revenue Code
to provide that, "in any court proceeding," the burden of proof
on factual issues relevant to ascertaining the taxpayer's federal tax liability
will rest with the United States if the taxpayer satisfies the following
conditions: (i) the taxpayer "introduces credible evidence" on
the issue; (ii) the taxpayer has complied with substantiation requirements
imposed by the Internal Revenue Code; (iii) the taxpayer has "maintained
all records" required by the Internal Revenue Code, and "has cooperated
with reasonable requests" for witnesses, information, documents, meetings,
and interviews; and, (iv) in the case of a partnership, corporation or certain
trusts, the taxpayer's net worth does not exceed $7 million, and it has
no more than 500 employees. Internal Revenue Service Restructing and Reform
Act of 1998, Pub. L. No. 105-206, Tit. III, § 3001(a), 112 Stat. 727
(to be codified at 26 U.S.C. 7491(a)). This new provision applies only to
court proceedings that arise in connection with examinations commenced after
July 22, 1998, or, in a case in which no examination occurred, to court
proceedings arising in connection with taxable periods beginning, or events
occurring, after July 22, 1998.
The new rules of Section 7491 also apply only to taxes imposed by Subtitles
A ("Income Taxes") and B ("Estate and Gift Taxes") of
the Internal Revenue Code. 26 U.S.C. 7491(a)(1). This provision thus does
not alter the traditional rule which places the burden of proof on the taxpayer
in proceedings involving other types of taxes, such as employment taxes
and excise taxes. In order to shift the burden of proof to the government,
the taxpayer bears the burden of proving that the conditions imposed by
26 U.S.C. 7491 have been satisfied. If the taxpayer fails to sustain that
burden, the ultimate burden of proof remains with the taxpayer. See S. Rep.
No. 174, supra, at 45; H.R. Conf. Rep. No. 599, supra, at 242.
Even after enactment of Section 7491, the proper allocation of the burden
of proof with respect to federal tax claims in bankruptcy proceedings thus
remains of substantial importance to the United States. It is precisely
in instances in which the taxpayer has not complied with the substantiation
rules or has not cooperated with an investigation that the government would
incur the greatest prejudice from bearing the burden of proof on tax claims
in bankruptcy cases. Congress recognized that fact by leaving the burden
of proof on the taxpayer in those situations "in any court proceeding."
26 U.S.C. 7491(a).
3 Unless the court orders otherwise, both bankruptcy trustees and non-governmental
creditors have the right to obtain information needed to contest the debtor's
tax liability. See 11 U.S.C. 521(4) (imposing a duty on the debtor to "surrender
to the trustee * * * any recorded information, including books, documents,
records, and papers, relating to property of the estate"); 11 U.S.C.
704(7) (requiring the trustee to "furnish such information concerning
the estate and the estate's administration as is requested by a party in
interest"); Fed. R. Bankr. P. 4002 (imposing a duty on the debtor to
"cooperate with the trustee in * * * the examination of proofs of claim");
6 Collier on Bankruptcy ¶¶ 704.09[1], 704.11 (15th ed. rev. 1999);
9 id. ¶ 4002.05[2].
4 Petitioner plainly errs in relying (Pet Br. 11) on the portion of the
legislative history of the Chandler Act which states that governmental claims
would "be subjected to the same requirements as other claims"
under that Act. S. Rep. No. 1916, 75th Cong., 3d Sess. 5 (1938). In the
Chandler Act, Congress for the first time required governmental claims to
be filed and "proved" in the same manner as other bankruptcy claims.
See 11 U.S.C. 93(n) (1939); J. Moore, supra, at 148 & n.1. The claims
of the United States had formerly not been subject to the same time limits
and "proof of claim" requirements imposed on other creditors.
Ibid. ("[p]rovision in respect to government claims was added to avoid
decisions which had held that the time limit [on submitting claims] was
not binding upon the sovereign"). The language that petitioner quotes
from the 1938 Senate report simply describes the newly adopted requirement
that there be a timely "proof of claim" for government claims.
The Senate Report generally agreed with the House proposal that, with respect
to the requirement that "claims must actually be filed within the bar
time," "governmental claims should be subject to the same requirements
as other claims." S. Rep. No. 1916, supra, at 5. The Report went on
to state, however, that this time "limitation should be tempered by
[a] provision for extension, for the reason that it is sometimes difficult
for the Government to prepare and present its claims within a fixed time."
Ibid. By thus subjecting governments to the requirement of a timely "proof
of claim," Congress did not purport, even by implication, to address
the proper allocation of the burden of proof for determining whether a claim
is ultimately to be "allowed" against the estate.
5 Petitioner erroneously cites (Pet. Br. 14) Fiori v. Rothensies, 99 F.2d
922 (3d Cir. 1938), and Dickinson v. Riley, 86 F.2d 385 (8th Cir. 1936),
in this context. Neither of those cases addresses the proper allocation
of the ultimate burden of proof. Petitioner also errs in citing (Pet. Br.
15) In re Highway Construction Co. of Ohio, 105 F.2d 863 (6th Cir. 1939),
which ruled against the government claim simply because it had been rebutted
by the debtor and the government had failed "to introduce evidence
to establish its claim." Id. at 866.
6 Moreover, because the allocation of the ultimate burden of proof is a
part of the substantive rights of the claimant (see page 10, supra), the
Bankruptcy Court rules could not lawfully "abridge, enlarge, or modify
[that] substantive right." 28 U.S.C. 2075.
7 The Federal Rules of Evidence are expressly applicable to all proceedings
conducted in bankruptcy court. See Fed. R. Evid. 1101(a).