OCTOBER TERM, 1999
Syllabus
RALEIGH, CHAPTER 7 TRUSTEE FOR THE ESTATE OF STOECKER
v.
ILLINOIS DEPARTMENT
OF REVENUE
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH
CIRCUIT
No. 99-387. Argued April 17, 2000-Decided May 30, 2000
While debtor Stoecker was its president, a now-defunct Illinois
company purchased a plane out of State and moved it to Illinois.
Respondent claims that this purchase was subject to the State's use
tax. When such tax is unpaid, respondent issues a Notice of Tax
Liability to the taxpayer and may issue a Notice of Penalty
Liability against any corporate officer responsible for paying the
tax who willfully fails to file the return or make the payment. By
the time respondent discovered that the tax was unpaid in this
case, the company was defunct and Stoecker was in bankruptcy, with
petitioner as his trustee. Respondent filed,
inter alia, a
Notice of Penalty Liability against Stoecker. The fact that there
was no affirmative proof that he was responsible for or willfully
evaded the payment was not dispositive, for Illinois law shifts the
burden of proof, both on production and persuasion, to the
responsible officer once a Notice of Penalty Liability is issued.
The Seventh Circuit ruled for respondent, holding that the burden
of proof remained with petitioner, just as it would have been on
Stoecker had the proceedings taken place outside of bankruptcy, and
finding that petitioner had not satisfied the burden of
persuasion.
Held: When the substantive law creating a tax obligation
puts the burden of proof on a taxpayer, the burden of proof on the
tax claim in bankruptcy court remains where the substantive law put
it (in this case, on the trustee in bankruptcy). Pp.20-26.
(a) Creditors' entitlements in bankruptcy arise from the
underlying substantive law creating the debtor's obligation,
subject to any qualifying or contrary Bankruptcy Code provisions.
See
Butner v.
United States, 440 U. S. 48, 55. The
basic federal rule in bankruptcy is that state law governs the
substance of claims.
Id., at 57. In this case, Illinois tax
law establishes the estate's obligation to respondent, placing the
burden of proof on the responsible officer. That burden of proof is
a substantive aspect of such a claim, given its importance to the
outcome of cases. See,
e. g., Director, Office of Workers'
Compensation Programs v.
Greenwich Collieries, 512 U. S. 267, 271. Tax
law is no candidate for exception from the general rule, for the
very fact that the
16
burden has often been shifted to the taxpayer indicates how
critical it is. Several compelling rationales for this shift-the
government's vital interest in acquiring its revenue, the
taxpayer's readier access to the relevant information, and the
importance of encouraging voluntary compliance-are powerful
justifications not to be disregarded lightly. The Bankruptcy Code
makes no provision for altering the burden of proof on a tax claim,
and its silence indicates that no change was intended.
Pp.20-22.
(b) The trustee's appeals to Code silence are rejected. The
state of pre-Code law does not indicate that the Code is silent
because it was predicated on an alteration of the substantive law
of obligations once a taxpayer enters bankruptcy. And although
Vanston Bondholders Protective Comm. v.
Green,
329 U. S. 156,
suggested that "allowance" of claims is a federal matter, that case
concerned distribution of assets, not the validity of claims in the
first instance, which,
Vanston specifically states, is to be
determined by reference to state law,
id., at 161. Nor is
the trustee helped by the reference, in
City of New York v.
Saper, 336 U.
S. 328, 332, to "prov[ing]" government claims in the same
manner as other debts, for that reference was to the procedure by
which proof of claim was submitted, not to the validity of the
claim. Finally, the trustee's argument that the Code-mandated
priority enjoyed by taxing authorities over other creditors
requires a compensating equality of treatment when it comes to
demonstrating validity of claims distorts a bankruptcy court's
legitimate powers and begs the question about the relevant
principle of equality. Pp. 22-26.
179 F.3d
546, affirmed.
SOUTER, J., delivered the opinion for a unanimous Court.
Robert Radasevich argued the cause for petitioner. With
him on the briefs were
Phil C.
Neal, David A. Eide,
and
John W Guarisco.
A. Benjamin Goldgar, Assistant Attorney General of
Illinois, argued the cause for respondent. With him on the brief
were
James E. Ryan, Attorney General,
Joel D.
Bertocchi, Solicitor General, and
James D. Newbold,
Assistant Attorney General.
Deputy Solicitor General Wallace argued the cause for the
United States as
amicus curiae urging affirmance. With him
on the brief were
Solicitor General Waxman, Act-
17
ing Assistant Attorney General Junghans, Kent L. Jones, Kenneth
L. Greene, and Steven W Parks.
*
JUSTICE SOUTER delivered the opinion of the Court.
The question raised here is who bears the burden of proof on a
tax claim in bankruptcy court when the substantive law creating the
tax obligation puts the burden on the taxpayer (in this case, the
trustee in bankruptcy). We hold that bankruptcy does not alter the
burden imposed by the substantive law.
I
The issue of state tax liability in question had its genesis in
the purchase of an airplane by Chandler Enterprises, Inc., a
now-defunct Illinois company. William J. Stoecker, for whom
petitioner Raleigh is the trustee in bankruptcy, was president of
Chandler in 1988, when Chandler entered into a lease-purchase
agreement for the plane, moved it to Illinois,
*Briefs of
amici curiae urging affirmance were filed for
the Pension Benefit Guaranty Corporation by
James J.
Keightley, William G.
Beyer, Israel Goldowitz, Nathaniel
Rayle, and
Charles G.
Cole; for the State of New
Mexico et al. by
Patricia A. Madrid, Attorney General of New
Mexico,
Donald F.
Harris, Special Assistant Attorney
General, and
James I. Shepard, joined by the Attorneys
General for their respective States as follows:
Janet
Napolitano of Arizona,
Bill Lockyer of California,
Ken Salazar of Colorado,
Richard Blumenthal of
Connecticut,
M. Jane Brady of Delaware,
Robert A.
Butterworth of Florida,
Thomas J. Miller
of Iowa,
Carla J. Stovall of Kansas,
Richard P. Ieyoub of Louisiana,
Andrew Ketterer of
Maine,
J. Joseph Curran, Jr., of Maryland,
Thomas F.
Reilly of Massachusetts,
Jennifer M.
Granholm of Michigan,
Mike Hatch of Minnesota,
Jeremiah W (Jay) Nixon of Missouri,
Joseph P. Mazurek
of Montana,
Don Stenberg of Nebraska,
Frankie Sue Del
Papa of Nevada,
John J. Farmer, Jr., of
New Jersey,
Heidi Heitkamp of North Dakota,
Betty D.
Montgomery of Ohio,
Hardy Myers of Oregon,
D. Michael
Fisher of Pennsylvania,
Sheldon Whitehouse of Rhode
Island,
Mark Barnett of South Dakota,
Paul G.
Summers of Tennessee,
Jan Graham of Utah,
William
H. Sorrell of Vermont,
Christine Q Gregoire of
Washington, and
Gay Woodhouse of Wyoming; and for the
Council of State Governments et al. by
Richard Ruda, James I.
Crowley, and
Steven H. Goldblatt.
18
and ultimately took title under the agreement. See
In re
Stoecker, 179 F.3d
546, 548
(CA7 1999).
According to respondent State Department of Revenue, the
transaction was subject to the Illinois use tax, a sales-tax
substitute imposed on Illinois residents such as Chandler who
buyout of State. If the seller does not remit the tax, the buyer
must, and, when buying a plane, must file a return and pay the tax
within 30 days after the aircraft enters the State. Ill. Compo
Stat., ch. 35, § 105/10 (1999). Chandler failed to do this.
When the State discovers a failure to file and pay taxes, its
Department of Revenue (the respondent here) determines the amount
of tax due and issues a Notice of Tax Liability to the taxpayer. §§
105/12, 120/4. Unless the taxpayer protests within the time
provided, the assessment becomes final, though still subject to
judicial review in the Illinois circuit court. §§ 120/4, 12.
Illinois law also provides that any 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]." § 735/3-7. The department determines the amount,
and its determination is "prima facie evidence of a penalty due,"
ibid., though a Notice of Penalty Liability issued under
this provision is open to challenge much like the antecedent Notice
of Tax Liability.
By the time the department discovered the unpaid tax in this
case, Chandler was defunct and Stoecker was in bankruptcy. The
department issued both a Notice of Tax Liability against Chandler
and a Notice of Penalty Liability against Stoecker. See 179 F. 3d,
at 549.
The record evidence about Chandler's operations is minimal. A
person named Pluhar acted as its financial officer.
19
There is no evidence directly addressing Stoecker's role in the
filing of Chandler's tax returns or the payment of any taxes, and
so no affirmative proof that he either was responsible for or
willfully evaded the payment of the use tax, see
id., at
550. This evidentiary dearth is not necessarily dispositive,
however, due to the provision of Illinois law shifting the burden
of proof, on both production and persuasion, to the responsible
officer once a Notice of Penalty Liability is issued, see
Branson v.
Department of Revenue, 168 Ill. 2d 247,
256-261, 659 N. E. 2d 961, 966-968 (1995). The Court of Appeals for
the Seventh Circuit accordingly ruled for the Department of
Revenue. 179 F. 3d, at 550.
The Court of Appeals thought the trustee may have satisfied his
burden of production by identifying Pluhar as the financial officer
but, in any event, had not satisfied his burden of persuasion.
Because Stoecker was the president and, as far as the record
showed, he and Pluhar were the only officers, each would have been
involved in Chandler's tax affairs.
Ibid. While it is true
that failure to pay must be willful (at least grossly negligent) to
justify the penalty under Illinois law, see
Branson, supra,
at 254-255, 659 N. E. 2d, at 965, and true that Chandler had an
opinion letter from a reputable lawyer that no tax was due because
of certain details of the lease-purchase agreement, there was no
evidence that Stoecker ever saw the letter or relied on it, and
nothing else bearing on the issue of willfulness. See 179 F. 3d, at
550-551.
Obviously, the burden of proof was critical to the resolution of
the case, which the Department of Revenue won because the Court of
Appeals held that the burden remained on the trustee, just as it
would have been on the taxpayer had the proceedings taken place
outside of bankruptcy. The Courts of Appeals are divided on this
point: the Seventh Circuit joined the Third and Fourth Circuits in
leaving the burden on the taxpayer. See
Resyn Corp. v.
United States,
20
851 F.2d
660, 663
(CA3 1988);
In re Landbank Equity Corp.,
973 F.2d
265, 270-271
(CA4 1992). The Courts of Appeals for the
Fifth, Eighth, Ninth, and Tenth Circuits have come out the other
way. See
In re Placid Oil Co., 988 F.2d
554,
557 (CA5 1993);
In re Brown, 82 F.3d
801, 804-805
(CA8 1996); In re Macfarlane, 83 F.3d
1041, 1044-1045
(CA9 1996), cert. denied, 520 U. S. 1115
(1997);
In re Fullmer, 962 F.2d
1463, 1466 (CAlO 1992). We granted certiorari to resolve the
issue, 528 U. S. 1068 (2000), and now affirm.
II
Creditors' entitlements in bankruptcy arise in the first
instance from the underlying substantive law creating the debtor's
obligation, subject to any qualifying or contrary provisions of the
Bankruptcy Code. See
Butner v.
United States,
440 U. S. 48, 55
(1979);
Vanston Bondholders Protective Comm. v.
Green, 329 U.
S. 156, 161-162 (1946). The "basic federal rule" in bankruptcy
is that state law governs the substance of claims,
Butner,
supra, at 57, Congress having "generally left the determination
of property rights in the assets of a bankrupt's estate to state
law," 440 U. S., at 54 (footnote omitted). "Unless some federal
interest requires a different result, there is no reason why [the
state] interests should be analyzed differently simply because an
interested party is involved in a bankruptcy proceeding."
Id., at 55. In this case, the bankruptcy estate's obligation
to the Illinois Department of Revenue is established by that
State's tax code, which puts the burden of proof on the responsible
officer of the taxpayer, see
Branson, supra, at 260-262, 659
N. E. 2d, at 968.
The scope of the obligation is the issue here. Do the State's
right and the taxpayer's obligation include the burden of proof?
Our cases point to an affirmative answer. Given its importance to
the outcome of cases, we have long held the burden of proof to be a
"substantive" aspect of a
21
claim. See,
e. g., Director, Office of Workers' Compensation
Programs v.
Greenwich Collieries, 512 U. S. 267, 271
(1994);
Dick v.
New York Life Ins. Co., 359 U. S. 437, 446
(1959);
Garrett v.
Moore-McCormack Co., 317 U. S. 239, 249
(1942). That is, the burden of proof is an essential element of the
claim itself; one who asserts a claim is entitled to the burden of
proof that normally comes with it.
Tax law is no candidate for exception from this general rule,
for the very fact that the burden of proof has often been placed on
the taxpayer indicates how critical the burden rule is, and
reflects several compelling rationales: the vital interest of the
government in acquiring its lifeblood, revenue, see
Arkansas
v.
Farm Credit Servs. of Central Ark., 520 U. S. 821, 826
(1997); the taxpayer's readier access to the relevant information,
see
United States v.
Rexach, 482
F.2d 10, 16
(CA1), cert. denied, 414 U. S. 1039 (1973);
and the importance of encouraging voluntary compliance by giving
taxpayers incentives to self-report and to keep adequate records in
case of dispute, see
United States v.
Bisceglia,
420 U. S. 141,
145 (1975). These are powerful justifications not to be disregarded
lightly.l
Congress of course may do what it likes with entitlements in
bankruptcy, but there is no sign that Congress meant to alter the
burdens of production and persuasion on tax claims. The Code in
several places, to be sure, establishes particular burdens of
proof. See,
e. g., 11 U. S. C. § 362(g) (relief from
automatic stay), §
363(0) (adequate protection for
creditors),
1 It is true that a trustee may have less access to the facts
than a taxpayer with personal knowledge, but the trustee takes
custody of the taxpayer's records, see 11 U. S. C. § 521(4), and
may have greater access to the taxpayer than a creditor. Even if
the trustee's advantage is somewhat less than the original
taxpayer's, the difference hardly overcomes the compelling
justifications for shifting the burden of proof. The government, of
course, is in no better position than it ever was, and remains
without access to sources of proof when the taxpayer has not kept
sufficient documentation.
22
§ 364(d)(2) (same), § 547(g) (avoidability of preferential
transfer), § 1129(d) (confirmation of plan for purpose of avoiding
taxes). But the Code makes no provision for altering the burden on
a tax claim, and its silence says that no change was intended.2
III
The trustee looks for an advantage in the very silence of the
Code, however, first by arguing that actual, historical practice
favored trustees under the Bankruptcy Act of 1898 and various
pre-Code revisions up to the current Code's enactment in 1978. He
says that courts operating in the days of the Bankruptcy Act, which
was silent on the burden to prove the validity of claims, almost
uniformly placed the burden on those seeking a share of the
bankruptcy estate. Because the Code generally incorporates pre-Code
practice in the absence of explicit revision, the argument goes,
and because the Code is silent here, we should follow the preCode
practice even when this would reverse the burden imposed outside
bankruptcy. This tradition makes sense, petitioner urges, because
in bankruptcy tax authorities are no longer opposed to the original
taxpayer, and the choice is no longer merely whether the tax claim
is paid but whether other innocent creditors must share the
bankruptcy estate with the taxing government.
We, however, find history less availing to the trustee than he
says. While some pre-Code cases put the burden of proof
2 The legislative history indicates that the burden of proof on
the issue of establishing claims was left to the Rules of
Bankruptcy Procedure. See S. Rep. No. 95-989, p. 62 (1978); H. R.
Rep. No. 95-595, p. 352 (1977). The Bankruptcy Rules are silent on
the burden of proof for claims; while Federal Rule of Bankruptcy
Procedure 3001(f) provides that a proof of claim (the name for the
proper form for filing a claim against a debtor) is "prima facie
evidence of the validity and amount of the claim," this rule does
not address the burden of proof when a trustee disputes a claim.
The Rules thus provide no additional guidance.
23
on taxing authorities,3 others put it on the trustee,4 and still
others cannot be fathomed.5 This state of things is the end of the
argument, for without the weight of solid authority on the
trustee's side, we cannot treat the Code as predicated on an
alteration of the substantive law of obligations once a taxpayer
enters bankruptcy. Cf.
United Sav. Assn. of Tex. v.
Timbers of Inwood Forest Associates, Ltd., 484 U. S. 365, 381-382
(1988) ("The at best divided [pre-Code] authority ... removes all
cause for wonder that the alleged departure from it should not have
been commented upon in the legislative history").
The trustee makes a different appeal to Code silence in pointing
to language in
Vanston Bondholders Protective Comm. v.
Green, 329 U.
S. 156 (1946), suggesting that "allowance" of claims is a
federal matter. But "allowance" referred to the ordering of valid
claims when that case was decided, see
id., at 162-163, and
Vanston, in fact, concerned
3 See,
e. g., United States v.
Sampsell, 224 F.2d
721, 722-723
(CA9 1955); In re Avien, Inc., 390
F. Supp. 1335, 1341-1342 (EDNY 1975), aff'd,
532
F.2d 273 (CA2 1976);
In re Gorgeous Blouse Co.,
106 F. Supp. 465 (SDNY 1952); see also
In re Highway Constr.
Co., 105 F.2d 863, 866
(CA6 1939) (apparently accepting
lower court's placement of burden of proof on tax authority).
4 See,
e. g., In re Uneco, Inc., 532
F.2d 1204, 1207
(CA8 1976);
Paschal v.
Blieden, 127 F.2d 398, 401-402
(CA8 1942);
In re
Lang Body Co., 92 F. 2d 338, 341
(CA6 1937),
cert. denied
sub nom. Hipp v.
Boyle, 303 U. S. 637
(1938);
United States v.
Knox-Powell-Stockton Co., 83
F.2d 423, 425
(CA9), cert. denied, 299 U. S. 573 (1936).
Some of these cases, such as
Paschal and
Lang Body
Co., appear to confuse the burden of production (which ceases
to be relevant upon presentation of a trustee's case) with the
burden of persuasion, under tax statutes that shift the entire
burden of proof to the taxpayer. Whatever we make of their
reasoning, these cases do not follow the rule whose pedigree
petitioner wishes to establish.
5 See,
e. g., Fiori v.
Rothensies, 99 F.2d 922
(CA3 1938)
(per curiam) (discussing prima facie value
of tax authority's claim, but failing to discuss burden of proof);
Dickinson v.
Riley, 86 F.2d 385
(CA8 1936)
(resolving claim without reference to burden of proof);
In re
Clayton Magazines, Inc., 77 F.2d 852
(CA2 1935)
(same).
24
distribution of assets, not the validity of claims in the first
instance, see
In re Highland Superstores, Inc., 154 F.3d
573,
578 (CA6 1998);
Fahs v.
Martin,
224 F.2d
387, 394-395
(CA5 1955). The burden of proof rule in
question here bears only on validity, and as to that the
Vanston opinion specifically states that "[w]hat claims of
creditors are valid and subsisting obligations ... is to be
determined by reference to state law." 329 U. S., at 161 (footnote
omitted). Nor is the trustee helped by
City of New York v.
Saper, 336 U.
S. 328, 332 (1949), which mentions "prov[ing]" government
claims in the same manner as other debts; the reference was to the
procedure by which proof of claim was submitted and not to the
validity of the claim. While it is true that federal law has
generally evolved to impose the same procedural requirements for
claim submission on tax authorities as on other creditors,
ibid., nothing in that evolution has touched the underlying
laws on the elements sufficient to prove a valid state claim.
Finally, the trustee argues that the Code-mandated priority
enjoyed by taxing authorities over other creditors, see 11 U. S. C.
§§ 507(a), 503(b)(1)(B), requires a compensating equality of
treatment when it comes to demonstrating validity of claims. But we
think his argument distorts the legitimate powers of a bankruptcy
court and begs the question about the relevant principle of
equality.
Bankruptcy courts do indeed have some equitable powers to adjust
rights between creditors. See,
e. g., § 510(c)
(equitable subordination). That is, within the limits of the Code,
courts may reorder distributions from the bankruptcy estate, in
whole or in part, for the sake of treating legitimate claimants to
the estate equitably. But the scope of a bankruptcy court's
equitable power must be understood in the light of the principle of
bankruptcy law discussed already, that the validity of a claim is
generally a function of underlying substantive law. Bankruptcy
courts are not authorized in the name of equity to make wholesale
substitution
25
of underlying law controlling the validity of creditors'
entitlements, but are limited to what the Bankruptcy Code itself
provides. See
United States v.
Reorganized CF&I
Fabricators of Utah, Inc., 518 U. S. 213, 228-229
(1996);
United States v.
Noland, 517 U. S. 535, 543
(1996).
Moreover, even on the assumption that a bankruptcy court were to
have a free hand, the case for a rule placing the burden of proof
uniformly on all bankruptcy creditors is not self-evidently
justified by the trustee's invocation of equality. Certainly the
trustee has not shown that equal treatment of all bankruptcy
creditors in proving debts is more compelling than equal treatment
of comparable creditors in and out of bankruptcy. The latter sort
of equality can be provided by a bankruptcy court as a matter of
course, whereas the trustee's notion of equality could not be
uniformly observed consistently with other bankruptcy principles.
Consider the case when tax litigation is pending at the time the
taxpayer files for bankruptcy. The tax litigation will be subject
to an automatic stay, but the stay can be lifted by the bankruptcy
court for cause, see 11 U. S. C. § 362(d)(1), which could well
include, among other things, a lack of good faith in attempting to
avoid tax proceedings, or in attempting to favor private creditors
who might escape the disadvantage of a priority tax claim under the
trustee's proposed rule. See generally 3 Collier on Bankruptcy ~
362.07[6][a], pp. 362-101 to 362-102 (rev. 15th ed. 2000) (noting
that bad faith commencement of case justifies lifting stay);
Internal Revenue Service v.
Bacha, 166 B. R. 611, 612
(Bkrtcy. Ct. Md. 1993) (lifting automatic stay when bankruptcy
filing was attempt to avoid tax proceedings). If the bankruptcy
court exercises its discretion to lift the stay, the burden of
proof will be on the taxpayer in the pre-existing tax litigation,
and a tax liability determination will be final. See 11 U. S. C. §
505(a)(2)(A). We see no reason that Congress would have intended
the burden of proof (and consequent vindication of this trustee's
vision of equality) to depend on whether
26
tax authorities have initiated proceedings against a debtor
before a bankruptcy filing. Thus, the uncertainty and increased
complexity that would be generated by the trustee's position is
another reason to stick with the simpler rule, that in the absence
of modification expressed in the Bankruptcy Code the burden of
proof on a tax claim in bankruptcy remains where the substantive
tax law puts it.
The judgment of the Court of Appeals is affirmed.
It is so ordered.
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