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In the
United States Court of Appeals
For the Seventh Circuit
No. 98-3590
In Re: William Stoecker,
Debtor,
Appeal of: State of Illinois, Department
of Revenue.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 414--Wayne R. Andersen, Judge.
Argued April 16, 1999--Decided June 2, 1999
Before Posner, Chief Judge, and Bauer and Rovner,
Circuit Judges.
Posner, Chief Judge. This bankruptcy appeal has
a complicated procedural history that we shall
ignore; the curious are referred to 151 B.R. 989
(Bankr. N.D. Ill. 1992); 179 B.R. 532 (N.D. Ill.
1994), and 202 B.R. 429 (Bankr. N.D. Ill. 1996).
All that matters is that the bankruptcy court
eventually disallowed Illinois's claim against
the debtor's estate for some $900,000 in unpaid
Illinois use tax (including interest), Ill. Rev.
Stat. ch. 120, para. 439.12 (1989), which was
owed on the purchase of a corporate aircraft.
(The current statute, 35 ILCS 105/12, has a
narrower scope, but we shall cite to it because
the provisions that we discuss are materially the
same.) The district court affirmed the
disallowance, precipitating this appeal by the
state against the trustee in bankruptcy.
The plane had been bought by Chandler
Enterprises, Inc., an Illinois company (now
defunct) of which Stoecker was president. The
state claims that Stoecker is liable for the tax
as a "responsible officer" of Chandler. 35 ILCS
735/3-7. If this is right, the liability is a
debt of the estate in bankruptcy.
Chandler had asked Jack Prewitt & Associates
(JPA), an established buyer and seller of
corporate jets, to find one for it. JPA located a
suitable jet that was for sale by Bezwada
Investments and agreed with Chandler to broker
the purchase. But Chandler did not have the cash
to pay the plane's full purchase price, which was
in excess of $12 million, right away; so JPA
turned to an affiliate, Prewitt Leasing, Inc.
(PLI), which does airplane leasing and financing,
for help with the sale. JPA bought the plane from
Bezwada and transferred the title from itself to
PLI. PLI then entered into an "Aircraft/Lease
Purchase Agreement" with Chandler under which
Chandler agreed to pay PLI $2.4 million
immediately to be "applied to the final purchase
price of the aircraft" and $10 million more (plus
interest denominated "lease payments" on the $10
million) in 90 days if it decided to buy. Until
the purchase option was exercised, title would
remain in PLI. But during the 90-day option
period, Chandler would have the full use of the
plane and indeed could modify it as it saw fit.
In June 1998, Chandler took delivery of the plane
and transported it to Illinois and in September
it exercised the option and PLI transferred title
to it. Thus the transaction was Bezwada-JPA-PLI-
Chandler.
The Illinois use tax is a sales-tax substitute
imposed on Illinois residents (which Chandler is
conceded to be, or rather to have been, since it
is now defunct) who buy from out-of-state
sellers. If the seller doesn't pay the tax, the
buyer must file a return and pay the tax and in
the case of aircraft the return must be filed and
the tax paid within 30 days after the aircraft
enters the state. 35 ILCS 105/10. When no return
is filed--and Chandler filed no return--the
Illinois Department of Revenue determines the
amount of tax due and issues a Notice of Tax
Liability to the taxpayer. 35 ILCS 105/12, 120/4.
Unless the taxpayer protests the notice within
the time provided, it become a final assessment
although it is still subject to judicial review
in the Illinois circuit court. 35 ILCS 120/4, 12.
The taxpayer may not be the only one liable for
a tax. Under Illinois law, any corporate officer
"who has the control, supervision or
responsibility of filing returns and making
payment of the amount of any . . . tax . . . who
willfully 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 ILCS 735/3-7. The
Department determines the penalty, and its
determination is "prima facie evidence of a
penalty due." Id. It embodies this determination
in a Notice of Penalty Liability which is sent to
the officer. The procedures for challenging a
Notice of Penalty Liability are similar to those
for challenging a Notice of Tax Liability.
Chandler not only failed to file a use-tax
return; it failed to register the plane with the
Illinois Department of Aviation, as it was
required to do. As a result, it took the
Department of Revenue years to discover that
Chandler owed use tax and by that time the
company was defunct and Stoecker, its president,
was in bankruptcy. The Department issued both a
Notice of Tax Liability, futilely, against
Chandler and a Notice of Penalty Liability
against Stoecker.
There are two principal issues. The first, which
the district court resolved in favor of the
state, is whether Chandler owed use tax on the
purchase of the plane. The second, which the
court resolved in favor of the trustee, is
whether, if Chandler did owe use tax, Stoecker is
liable for that tax as a responsible officer.
Since Chandler, now a ghost, cannot pay the tax,
the court's second ruling spelled defeat for the
state. The trustee defends the second ruling but
attacks the first, arguing that no use tax was
owed, in which event Stoecker had no responsible-
officer liability regardless.
The district court thought itself and the
bankruptcy court barred by the Tax Injunction
Act, 28 U.S.C. sec. 1341, from reexamining
Chandler's liability for use tax. The Act forbids
federal courts to enjoin the assessment or
collection of state taxes unless the taxpayer has
no adequate remedy in the state courts. But
Illinois is not trying to extract taxes from
Chandler. It is trying to get a penalty in lieu
of taxes from Stoecker's estate in bankruptcy.
Its right to do so depends on whether Chandler
owed use tax, and the district judge thought that
a federal court cannot decide an issue of state
tax law. That is incorrect. The Bankruptcy Code
expressly authorizes bankruptcy courts to decide
tax issues, 11 U.S.C. sec. 505(a)(1), and
although state taxes are not specified, the
courts have interpreted the statute to cover
them. Adams v. Indiana, 795 F.2d 27, 29 (7th Cir.
1986); City Vending of Muskogee, Inc. v. Oklahoma
Tax Comm'n, 898 F.2d 122, 123-24 (10th Cir. 1990)
(per curiam). The Act is anyway addressed only to
injunctive remedies (or a declaratory judgment
viewed as a preliminary to an injunction,
National Private Truck Counsel, Inc. v. Oklahoma
Tax Comm'n, 515 U.S. 582, 586 (1995)), and no one
is seeking an injunction against the state's
going after Chandler for the taxes that the state
believes Chandler owes it. If federal courts
could not determine the debtor's liability for
state taxes--if they had to abstain pending a
determination of that liability in state court--
bankruptcy proceedings would be even more
protracted than they are.
So we can consider the trustee's argument
against that liability, and it is that PLI's sale
of the aircraft to Chandler was an "isolated or
occasional sale of tangible personal property at
retail by a person who does not hold himself out
as being engaged (or who does not habitually
engage) in selling such tangible personal
property at retail." 35 ILCS 105/2. An example
would be a good bought at a garage sale; no use
tax would be due. See 86 Ill. Admin. Code sec.
130.110(b) (1991); cf. Knowledge Data Systems v.
Utah State Tax Comm'n, 865 P.2d 1387 (Utah App.
1993); Nevada Tax Comm'n v. Bernhard, 683 P.2d 21
(Nev. 1984) (per curiam).
PLI, unlike its affiliate JPA, was not engaged
in the regular sale of aircraft at retail (or at
wholesale, for that matter). In fact the sale to
Chandler was apparently the first sale of an
aircraft that PLI had made. The trustee thus
wants us to confine our attention to the transfer
of title from PLI to Chandler. But that would be
myopic. PLI is the financing arm of JPA, which is
a retailer of aircraft. JPA found the plane for
Chandler, took title to it from its previous
owner, Bezwada, and brought PLI in to finance
Chandler's purchase of it. Bezwada was (so far as
we can tell) not a retailer. But JPA was and it
acted as the intermediary in the sale to
Chandler, at one point actually holding title, as
in the ordinary retail sale where the retailer
buys from a supplier and resells to a consumer.
The fact that title passed from the retailer to
its affiliate before coming to rest with Chandler
did not make PLI the real seller. Otherwise
transactions would be easily structured to avoid
use tax by having an out-of-state retailer
transfer title to its nonretailer affiliate for
retransfer to the in-state purchaser. The
"substance over form" doctrine of tax law, on
which see Gregory v. Helvering, 293 U.S. 465
(1935); Segal v. Commissioner, 41 F.3d 1144, 1148
(7th Cir. 1994); Yosha v. Commissioner, 861 F.2d
494 (7th Cir. 1988); ACM Partnership v.
Commissioner, 157 F.3d 231, 246-47 (3d Cir.
1998), would presumably allow the state to defeat
the bankruptcy trustee's attempt to invoke the
"isolated or occasional sale" exemption by
recharacterizing the transaction as a sale by JPA
to Chandler. Cf. Continental Illinois Leasing
Corp. v. Department of Revenue, 439 N.E.2d 118
(Ill. App. 1982).
But this analysis is incomplete, because there
is another and equally good way of playing
"substance over form" in this case, and that is
to treat the "real" sale as Bezwada to Chandler,
with JPA and PLI holding title merely as security
for financing the sale. See UCC sec.sec. 1-
201(37), 9-102, 810 ILCS 5/1-201(37), 5/9-102;
Orix Credit Alliance, Inc. v. Pappas, 946 F.2d
1258 (7th Cir. 1991); Tilghman Hardware, Inc. v.
Larrimore, 628 A.2d 215 (Md. 1993). This
particular application of the "substance over
form" doctrine, however, is nixed by Illinois
law, which expressly treats a transfer of title
to a retailer as a sale even if the purpose is
merely to grant a security interest. 86 Ill.
Admin. Code sec. 130.1060(a); Illinois Dept. of
Revenue Private Letter No. 92-0113, 1992 WL
154376 (Feb. 27, 1992). JPA took title; JPA is a
retailer; therefore use tax was due on the
subsequent transfer of title by JPA to Chandler.
So Chandler was liable for the tax and the next
question is whether Mr. Stoecker was liable too
under the "responsible officer" rule. The record
contains no evidence about the structure, scale,
or operations of Chandler--even about what
business it was engaged in--except that we do
know that it had an officer named Pluhar who
acted as the company's financial officer. There
is no evidence concerning Stoecker's role in the
filing of Chandler's tax returns or the payment
of any taxes due, and so no proof either that he
was responsible for these corporate functions or
that he willfully evaded the payment of the use
tax. But just as under the corresponding federal
law of responsible-officer liability for unpaid
taxes, 26 U.S.C. sec. 6672; United States v.
Running, 7 F.3d 1293, 1297 (7th Cir. 1993);
United States v. McCombs, 30 F.3d 310, 318 (2d
Cir. 1994), Illinois shifts the burden of proof--
both production and persuasion--to the officer
once a Notice of Penalty Liability is issued,
Branson v. Department of Revenue, 659 N.E.2d 961,
968 (Ill. 1995); and the trustee has not carried
it. He may have satisfied his burden of
production by identifying Pluhar as Chandler's
corporate financial officer, but he has not
satisfied the burden of persuasion. Stoecker was
the president and as far as we know he and Pluhar
were the only officers and both deeply involved
in the tax affairs of their corporation.
It is true that, just as under the corresponding
federal law, Wright v. United States, 809 F.2d
425, 427 (7th Cir. 1987), the failure to pay must
be willful, implying at least gross negligence.
Branson v. Department of Revenue, supra, 659 F.2d
at 965. Chandler had an opinion letter from a
reputable lawyer that no tax was due because JPA
really had just a security interest; and reliance
on a reputable lawyer's opinion letter can negate
willfulness, Marrin v. Commissioner, 147 F.3d
147, 152 (2d Cir. 1998); cf. Hall v. Aqua Queen
Mfg., Inc., 93 F.3d 1548, 1555 (Fed. Cir. 1996);
Westvaco Corp v. International Paper Co., 991
F.2d 735, 743-44 (Fed. Cir. 1993), though it's
not an automatic safe harbor. Marrin v.
Commissioner, supra, 147 F.3d at 152-53; O'Connor
v. United States, 956 F.2d 48, 52 n. * (4th Cir.
1992); Smith v. United States, 894 F.2d 1549,
1554 (11th Cir. 1990). But no evidence was
presented that Stoecker ever saw the letter, let
alone that he relied on it. There is no other
evidence bearing on the issue of willfulness.
So the burden of proof is critical, and the
trustee argues that whatever the rule under state
law, the burden is on the state when the issue of
responsible-officer liability is adjudicated in a
bankruptcy proceeding. This shift is necessary,
he contends, to promote "equality" among
creditors in bankruptcy. Bankruptcy is an
equitable procedure, and "equality is equity"
(and vice versa), Cunningham v. Brown, 265 U.S.
1, 13 (1924); Scott v. Armstrong, 146 U.S. 499,
511 (1892); United States v. Real Property, 89
F.3d 551, 554 (9th Cir. 1996); Downriver
Community Federal Credit Union v. Penn Square
Bank, 879 F.2d 754, 761 (10th Cir. 1989); White
v. Carolina Paperboard Corp., 564 F.2d 1073, 1087
(4th Cir. 1977), as numerous bankruptcy cases
intone. E.g., In re Elcona Homes Corp., 863 F.2d
483, 484 (7th Cir. 1988); In re Joliet-Will
County Community Action Agency, 847 F.2d 430, 434
(7th Cir. 1988). These truisms have a particular
appeal for those bankruptcy judges who would like
to administer the bankruptcy laws in accordance
with their personal notions of fairness. But 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 (see, e.g., United States v.
Whiting Pools, Inc., 462 U.S. 198 (1983)) as
provided by the Bankruptcy Code itself. United
States v. Noland, 517 U.S. 535, 543 (1996);
Butner v. United States, 440 U.S. 48, 55-56
(1979); In re Carlson, 126 F.3d 915, 920 (7th
Cir. 1997); In re FBN Food Services, Inc., 82
F.3d 1387, 1396 (7th Cir. 1996); In re Lapiana,
909 F.2d 221, 223 (7th Cir. 1990); In re Landbank
Equity Corp., 973 F.2d 265, 271 (4th Cir. 1992).
Bankruptcy is not a "free-for-all equity
balancing act." In re Lapiana, supra, 909 F.2d at
2224. It is a forum in which creditors prove the
entitlements that state or federal law confers on
them, and these entitlements are then enforced
consistently with the provisions of the Code
governing preferences, priority, and other issues
that arise in the marshaling and collection of
debts from a bankrupt debtor, none of which
affects a state's tax claim. An equity free-for-
all would engender confusion and uncertainty and
increase the strategic incentives to petition for
bankruptcy either of debtors, if the bankruptcy
court curtailed entitlements, or of creditors, if
it expanded them. The closest to the power here
asserted of a free-wheeling equitable discretion
to cut down entitlements when they are sought to
be enforced in a bankruptcy proceeding is the
power of equitable subordination. 11 U.S.C. sec.
510. But it must be exercised case by case and
not over a whole class of claims. United States
v. Reorganized CF&I Fabricators of Utah, Inc.,
518 U.S. 213, 228-29 (1996); United States v.
Noland, supra, 517 U.S. at 543; cf. In re
Envirodyne Industries, Inc., 79 F.3d 579, 581
(7th Cir. 1996).
Burden of proof is rightly classified as a part
of the creditor's entitlement, implying that it
is not shifted in bankruptcy. In re Landbank
Equity Corp., supra, 973 F.3d at 270, so holds,
though In re Macfarlane, 83 F.3d 1041, 1045 (9th
Cir. 1996), is to the contrary. We acknowledged
the division of authority in In re Carlson,
supra, 126 F.3d at 921, without having to choose.
Today we choose, and we choose Landbank. It 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); Dick v. New York Life
Ins. Co., 359 U.S. 437, 446 (1959); Koppers Co.
v. Aetna Casualty & Surety Co., 98 F.3d 1440,
1446 (3d Cir. 1996), in recognition of the
critical importance of burden of proof to a
person's rights. Illinois has given its taxing
authorities an entitlement to collect a penalty
tax pursuant to a Notice of Penalty Liability
that is defeasible only if the taxpayer can
persuade the adjudicator that the tax is not due.
That is different from an entitlement to collect
the taxes listed in the notice upon proof by the
state that the tax is due. On the latter view,
the Notice of Penalty Liability really is just a
notice, conferring no rights, adding nothing to
the Notice of Tax Liability; on the former view,
which seems to us the sound view, the Notice of
Penalty Liability creates a defeasible right.
Congress can alter entitlements in bankruptcy,
and sometimes does so, but there is no indication
that it meant to shift the burden of proof from
taxpayer to tax collector. Rather the contrary.
The Code itself grants a favored position to
claims of unpaid taxes, 11 U.S.C. sec.sec.
507(a)(8), 523(a)(1) (we're about to see another
example); and the close attention that the
drafters of the Code paid to issues of burden of
proof, e.g., 11 U.S.C. sec.sec. 362(g), 363(o),
364(d)(2), 547(g), 1129(d), makes their silence
on the burden of proof in tax cases eloquent. The
position for which the trustee contends has no
more basis in the Code than in the law of
Illinois, and it would create a new incentive to
declare bankruptcy. We have enough bankruptcies.
The last string to the trustee's bow is the
argument that the state's tax claim was untimely.
Bankruptcy Rule 3002(c) requires, with immaterial
exceptions, that a proof of claim be filed with
the bankruptcy court within 90 days after the
first date set for the meeting of creditors,
which in this case would have been by June 26,
1990. See also Bankr. R. 9006(b)(3). The state's
claim was not filed until 18 months later and it
was therefore untimely. But in a conflict between
the Code and the rules, the Code controls, 28
U.S.C. sec. 2075; In re Pacific Atlantic Trading
Co., 33 F.3d 1064, 1066 (9th Cir. 1994), and it
permits--without even a loss of priority--the
filing of certain untimely claims (other than by
the debtor, In re Danielson, 981 F.2d 296 (7th
Cir. 1992)), including the state's tax claims in
this case. See 11 U.S.C. sec.sec. 507(a)(8)(E),
726(a)(1). This is crystal clear under the
current version of section 726(a)(1), but was
clear enough under the old version, e.g., Cooper
v. Internal Revenue, 167 F.3d 857 (4th Cir.
1999), the one applicable to this suit, though
some courts disagreed. See cases cited in id. at
859.
The exception for instances of inexcusable
delay, in which the tardy claim may be equitably
subordinated to timely claims, 11 U.S.C. sec.
726(a) (incorporating sec. 510), is not available
to Stoecker. Chandler's failure to register the
aircraft or file a tax return prevented the state
from discovering Stoecker's liability until long
after the bankruptcy proceeding was commenced, an
express purpose of the requirement of
registration being to make sure that "all
applicable fees and taxes shall be paid." 620
ILCS 5/42.
We conclude that the state has a valid claim
against Stoecker's estate and that the decision
of the district court must therefore be reversed.
We wish in closing to commend counsel for both
parties (Benjamin Goldgar for the state and
Robert Radasevich for the trustee) for their
excellent briefs and argument.
Reversed and Remanded.
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