Source: https://supreme.justia.com/cases/federal/us/479/442/
Timestamp: 2019-04-21 08:09:37+00:00

Document:
Section 3505 of the Internal Revenue Code of 1964 (Code) provides that persons such as lenders, who are not employers but who directly or indirectly pay employees' wages, will be personally liable for all or a portion of "a sum equal to" any Social Security and income taxes that are not withheld from the wages and paid to the Government as required by Subtitle C of the Code. Code § 6303(a) requires the Government, within 60 days of making an assessment of unpaid taxes, to notify "each person liable for the unpaid tax" of the amount of the assessment, and to make a demand for payment. Without first giving a § 6303(a) notice, the Government brought suit against petitioner in Federal District Court seeking a determination that it was liable under § 3505 for amounts reflecting unpaid taxes required to be withheld from wages paid to employees of a third-party employer. The District Court granted summary judgment for petitioner, holding that a § 6303(a) notice was required. The Court of Appeals reversed.
Held: Section 6303(a) does not require the Government to provide notice and a demand for payment to a lender before bringing a civil suit to collect sums for which the lender is liable under § 3505. Pp. 479 U. S. 446-449.
(a) Section 6303(a)'s description of an assessment notice recipient as a person "liable for the unpaid tax" does not clearly include a § 3505 third-party lender, who is liable for all or part of "a sum equal to" the unpaid taxes. Pp. 479 U. S. 446.
(b) Compliance with § 6303(a)'s requirements that the notice "stat[e] the amount" assessed and "deman[d] payment thereof " would frequently have little meaning to lenders in § 3505 cases, since the amount stated and demanded (1) could include the employer's share of unpaid Social Security taxes, for which the lender is not liable; (2) could equal the lender's liability only if the lender provided payroll financing throughout the period covered by the assessment; and (3) would rarely be accurate for a lender liable only under § 3505(b), which limits exposure to 25% of the funds loaned to the employer. Pp. 479 U. S. 446-447.
greater need for such a notice than third-party lenders, upon whom liability can be imposed only after a civil suit. Pp. 479 U. S. 447-448.
(d) A third-party lender would not be unfairly prejudiced by lack of a § 6303(a) notice even if, as contended by petitioner, a timely assessment under § 6501(a) would trigger an additional 6-year limitation period under § 6502(a)(1) for a collection suit against the lender, since, as § 3505's legislative history suggests, Congress envisioned a system in which third-party lenders would take their potential § 3505 liability into consideration by including the amount of potential withholding liability in their loans and taking adequate security, and since, even without a § 6303(a) notice, a prudent lender may be alerted to its § 3505 liability at the time it engages in "net payroll financing," e.g., providing funds to the employer for wages, but not for withholding taxes. Pp. 479 U. S. 448-449.
employee's share of the Social Security tax. If the employer fails to pay over the withheld Social Security and income taxes to the Government, the employer is liable for their payment. Within 60 days of making an assessment of unpaid taxes against an employer, the Government is required, under § 6303(a) of the Code, to provide the employer with notice of the assessment and demand for payment. In some instances, a person other than the employer, such as a lender, may directly or indirectly pay the employee's wages. Section 3505 of the Code provides that such a person may be personally liable if the employee's Social Security and income taxes are not withheld and paid to the Government. This case presents the question whether § 6303(a) requires the Government to provide notice and demand for payment to a lender before bringing a civil suit against the lender to collect sums for which it is liable under § 3605. We hold that it does not.
conflict over the issue decided by the Court of Appeals. [Footnote 5] 476 U.S. 1157 (1986). We now affirm.
Section 6303(a) requires notice of an assessment to "each person liable for the unpaid tax." According to Jersey Shore, this phrase clearly describes a third-party lender liable under § 3505 for unpaid withholding taxes assessed against an employer. The relationship between § 3505 and § 6303(a), however, is not as clear as Jersey Shore maintains. Section 3505 does not declare that a lender is "liable for the unpaid tax." Instead, the section imposes liability on the lender for all or part of "a sum equal to the taxes." §§ 3505(a),(b).
employer's portion of payroll taxes"); S.Rep. No. 1708, 89th Cong., 2d Sess., 23 (1966) (same). Even where the assessment does not include such taxes, the lender's liability could equal the amount stated in the notice only if the lender provided payroll financing throughout the time period reflected in the assessment. Moreover, the chances are slim that the notice amount would be accurate for lenders liable only under § 3505(b), which limits a lender's exposure to 25 percent of the funds supplied to the employer. Accordingly, if sent to a lender, the notice required under § 6303(a) is likely to demand payment of an amount different from that for which the lender is liable. We find it improbable that Congress intended such a result. Reading the two sections together, we agree with the Court of Appeals that § 6303(a) is most logically read not to apply where the Government seeks to collect from a lender under § 3505.
notice than third-party lenders, who are not subject to summary collection procedures.
"the amount of any tax imposed . . . shall be assessed within 3 years after the return was filed . . . and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period."
Nevertheless, where a proper assessment has been made, the unpaid tax generally "may be collected by levy or by a proceeding in court . . . begun . . . within 6 years after the assessment." § 6502(a)(1). Under Jersey Shore's reading of these provisions, the Government enjoys an additional 6-year limitations period for collecting against a lender if it makes an assessment against the employer within three years after the corresponding employment tax return is filed. Jersey Shore submits that Congress could not have intended the Government to benefit from this longer statute of limitations when it seeks to collect against a lender without also requiring the Government to provide the lender with notice of the assessment against the employer.
"[S]ureties can protect themselves against any losses attributable to withholding taxes by including this risk of liability in establishing their premiums, and lenders by including the amounts in their loans and taking adequate security."
"Congress envisioned a system in which third parties would take their potential liability under section 3505 into consideration at the time they entered into the transaction exposing them to liability under the statute."
"[I]f a lender, surety, or other person, who is not an employer . . . with respect to an employee, . . . pays wages directly to such an employee. . . , such lender, surety, or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) required to be deducted and withheld. . . ."
"If a lender, surety, or other person supplies funds to . . . an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge . . . that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required . . . to be deducted and withheld by such employer . . . , such lender, surety, or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) which are not paid over to the United States by such employer. However, . . . the liability of such lender, surety, or other person shall be limited to an amount equal to 25 percent of the amount so supplied to . . . such employer for such purpose."
"Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof."
One judge dissented from the majority opinion, arguing that the plain language of § 6303(a) required that the Government provide notice to the lender.
In addition to the Court of Appeals for the Third Circuit, four other Circuits have addressed whether the Government must provide § 6303(a) notice to third parties liable under § 3505. See United States v. Messina Builders & Contractors Co., 801 F.2d 1029 (CA8 1986) (§ 6303(a) notice required), cert. pending, No. 86-1007; United States v. Hunter Engineers & Constructors, Inc., 789 F.2d 1436 (CA9 1986) (§ 6303(a) notice not required), cert. pending, No. 86-209; United States v. Merchants National Bank of Mobile, 772 F.2d 1522 (CA11 1985) (§ 6303(a) notice required), cert. pending, No. 85-1480; United States v. Associates Commercial Corp., 721 F.2d 1094 (CA7 1983) (§ 6303(a) notice required); see also United States v. Friedman, 739 F.2d 252 (CA7 1984) (failure to provide notice within 60 days of assessment will not bar suit where Government has provided notice before assessment to person liable under § 3505).
Jersey Shore argues that this passage does not relate to §3505, but instead refers only to an amendment to the Miller Act concerning the requirements for performance bonds on public works. It is true that the passage appears in each Committee Report under subheadings referencing the Miller Act. In both Reports, however, the passage immediately follows a discussion of lenders, sureties, and other persons liable under § 3505, and is prefaced with the phrase "[i]n the cases discussed above." Thus, the context of the passage makes clear that it relates to § 3505.

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