Source: https://www.justice.gov/osg/brief/united-states-v-galletti-brief-merits
Timestamp: 2019-04-25 08:43:04
Document Index: 440039220

Matched Legal Cases: ['§ 16306', '§ 16306', '§6501', '§ 6502', '§ 2', '§ 16111', '§ 15103', '§ 15105', '§ 3505']

United States v. Galletti - Brief (Merits) | OSG | Department of Justice
United States v. Galletti - Brief (Merits)
1.	Respondents are the general partners of a partnership named Marina Cabrillo Partners. Pet. App. 4a. During the years relevant to this case, the partnership employed various workers and, as a consequence, accrued liability for federal employment taxes.2 Federal employment taxes accrue against the "employer" (e.g., 26 U.S.C. 3102(b), 26 U.S.C. 3111(a)) of any person who "performs or performed any service, of whatever nature, as the employee of such person." 26 U.S.C. 3401(d). Because the partnership was the "employer," the withheld income taxes, social security (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes relating to its employees were direct liabilities of the partnership. Pet. App. 62a.
2.	After respondents encountered financial difficulties, they sought protection from their creditors under Chapter 13 of the Bankruptcy Code. The United States filed proofs of claim in their personal bankruptcy cases to recover the unpaid federal employment taxes owed by the partnership. Pet. App. 45a, 57a.
a.	Respondents objected to the proofs of claim. They acknowledged that, as general partners, they were derivatively liable for all lawful debts of the partnership under state law (Cal. Corp. Code § 16306 (West Supp. 2003)). They also acknowledged that the assessments of the employment taxes against the partnership were timely and valid. They contended, however, that federal law prohibits the collection of the tax liabilities of the partnership from its partners unless a separate assessment of the taxes has been made against the partners individually. Pet. App. 45a, 58a. They further contended that the United States is now barred by 26 U.S.C. 6501(a) from making such assessments against the partners because more than three years had elapsed since the partnership filed the tax returns for the periods for which the tax liabilities arose. Pet. App. 46a-47a, 59a.
b.	The bankruptcy court disallowed the government's claims, and the district court affirmed that ruling. Relying on the proposition that "a valid assessment is a prerequisite to tax collection" (Pet. App. 28a (quoting El Paso Refining, Inc. v. IRS, 205 B.R. 497, 499 (Bankr. W.D. Tex. 1996)), these courts held that the employment taxes owed by the partnership must be assessed against the partners directly before they could be collected directly from them. Because no assessment had been made against the partners individually within the three-year period provided by 26 U.S.C. 6501, the bankruptcy court and district court concluded that the government's claims are now barred in this case. Pet. App. 28a-29a, 41a-42a; id. at 51a-54a, 62a-66a.
3.	The court of appeals affirmed. Pet. App. 1a-17a. The court first stated that, under Section 6501(a) of the Internal Revenue Code, the government is to collect tax deficiencies "by making an assessment against the taxpayer within three years of the filing of the taxpayer's return." Pet. App. 6a. The court reasoned that respondents, as general partners, are "taxpayers" who are subject to assessment for the employment taxes owed by the partnership. The court noted that the term "taxpayer" is defined in Section 7701(a)(14) of the Code as "any person subject to any internal revenue tax" and Section 7701(a)(1), in turn, defines the word "person" to include "an individual" as well as a "partnership." Pet. App. 7a-8a. Relying on these definitional provisions, the court concluded that, while "[t]he Partnership is a 'taxpayer' within the meaning of the statute, * * * so also is each individual [partner] a separate 'taxpayer'" subject to assessment for this tax. Pet. App. 8a.
4.	In a petition for rehearing with suggestion for rehearing en banc, the government argued that the panel decision in this case conflicts with the decision of the Seventh Circuit in United States v. Wright, 57 F.3d 561 (1995). In response to the petition for rehearing, the court amended its opinion to state that "Wright is distinguishable because, in that case, the IRS had assessed both the partnership * * * and the individual partners." Pet. App. 2a. The court acknowledged that the action by the government to collect taxes owed by the partnership from the individual partners in Wright was brought after the end of the limitations period that would have been applicable if the individual partners had been directly liable for the tax under federal law. Pet. App. 3a. The court nonetheless stated that, because both the partners and the partnership received assessments in Wright, "[t]he Seventh Circuit * * * had no opportunity to address the question before us." Ibid.
1.	The taxes involved in this case accrued from the operations of a partnership. As a matter of federal law, the partnership itself was directly liable for those taxes. The derivative liability of the partners for the taxes owed by their partnership arose under state law, not under the provisions of the Internal Revenue Code. Under the applicable principles of state partnership law, it is well established that partners are derivatively liable "for the debts and liabilities of the partnership, including its tax liabilities." Young v. Riddell, 283 F.2d 909, 910 (9th Cir. 1960).
2.	The Internal Revenue Code does not require that separate assessments be made for each partner in order to enforce their derivative liability for partnership taxes under state law. Section 6201(a) of the Code authorizes assessment of "all taxes * * * imposed by this title." 26 U.S.C. 6201(a). The assessment of a tax is a formal bookkeeping notation by which the amount of a tax liability is officially recorded. As the predecessor of the Federal Circuit explained in Anderson v. United States, 15 F. Supp. 216, 225 (Ct. Cl. 1936), cert. denied, 300 U.S. 675 (1937), it is the "tax" and not the "taxpayer" that is assessed. Once the amount of the "tax" is assessed, no additional or separate "assessment" is required to collect the tax, either from the party who is directly liable for the tax or from other parties who are derivatively liable for it. Ibid.
3.	The court of appeals also erred in suggesting that California partnership law precludes collection of the tax debts involved in this case. Section 16307(c) of the California Corporations Code, on which the court relied, specifies that "a judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner." Pet. App. 73a.
A.	The Internal Revenue Code Does Not Require That A Partner Be Assessed Individually For Taxes Owed By The Partnership
1.	The Derivative Liability of Partners for the Tax Debts of a Partnership Arises under State Law, not under the Internal Revenue Code. The court erred initially by misapprehending the essential nature of the government's claim in this case. The government's derivative claim against the partners for the recovery of taxes owed by the partnership is based upon state partnership law. It is brought under the principles of state law that specify that "all partners are liable jointly and severally for all obligations of the partnership" (Cal. Corp. Code § 16306(a) (West Supp. 2003) (emphasis added)).4 While federal law creates the debt of the partnership for these employment taxes (see pages 2-3, supra), it is state law that makes the partners derivatively liable for that debt.
2.	No Assessment of Partners is Required to Permit Collection of Their Derivative Liability for Taxes Owed by the Partnership. Without directly challenging the established rule that general partners are liable for the valid debts of their partnership under state law, the court of appeals concluded that these taxes could not be collected from the partners in this case because they had been assessed by the IRS only against the partnership and not directly against the partners. Pet. App. 7a-8a. The court stated that, because no assessment was made against the partners "within the three-year period provided under §6501(a), [that statute] bars [the government] from collecting the unpaid debts of the Partnership directly from [the partners]." Pet. App. 8a.5 This conclusion of the court of appeals is based on a fundamental misunderstanding of the function and nature of an assessment under the Internal Revenue Code.
a.	The Internal Revenue Code does not require that separate assessments be made for each partner in order to enforce their derivative liability for partnership taxes under state law. An assessment is merely a formal record of the amount of tax that is due. Once the amount of a tax is determined and recorded in an assessment, the Commissioner may enforce that liability against any party that is directly or derivatively liable for it.
b.	When (as in the present case) the IRS makes a timely assessment of a tax, two important consequences ensue.7 First, after a tax is assessed, the IRS may employ administrative enforcement methods such as tax liens and levies to collect the outstanding tax. 26 U.S.C. 6321-6327, 6331-6344.8 Second, when a timely assessment is made, the time within which the IRS may collect the tax either administratively or by a "proceeding in court" is extended to 10 years after the date of assessment. 26 U.S.C. 6502(a).
c.	The court of appeals incorrectly rejected this straightforward application of these statutes on the ground that they apply only when the assessment is made "against the taxpayer" from whom the taxes are being collected. Pet. App. 6a. The court failed to understand that, when a valid assessment is made of the tax owed by the person directly or primarily liable, no further or separate assessment is required before a collection action may proceed against individuals who are derivatively liable for the tax.
d.	Accordingly, prior to the decision in this case, the decisions of this Court and other courts of appeals had consistently held that an assessment of a party whose liability for a tax is only derivative is not required to extend the statute of limitations provided by Section 6502(a). Under the holdings of these numerous, consistent decisions, the government's collection action in the present case is timely because it was brought "within 10 years after the assessment of the tax" owed by the partnership. 26 U.S.C. 6502(a)(1). The court below erred by failing to honor and follow this substantial body of precedent in this case.
B.	California Partnership Law Does Not Preclude Collection Of The Partnership Tax Debts Involved In This Case
C.	The Decision Of The Court Of Appeals Would Impede And Burden Routine Enforcement Of The Tax Laws
1	The opinion and judgment of the court of appeals, as well as the order denying the petition for rehearing, contain separate docket numbers for the associated bankruptcy cases of the Gallettis and the Briguglios, who are the general partners of the partnership whose tax liabilities are at issue in this case.
2	A partnership is not a taxable entity for federal income tax purposes. 26 U.S.C. 701. The Internal Revenue Code instead imposes direct income tax liability on the partners for the income realized by the partnership. 26 U.S.C. 702. As explained in the text, however, the partnership, as the "employer," is itself directly liable for the federal employment taxes associated with its employees. See Pet. App. 62a.
3	"Until 1990 the statute of limitations for the collection of tax debts was six years from assessment. That year Congress increased the period to ten years. Pub. L. 101-508, amending 26 U.S.C. § 6502(a)." United States v. Wright, 57 F.3d 561, 562 (7th Cir. 1995).
4	This provision is contained in Section 306(a) of the Uniform Partnership Act (1997), which has been adopted by 31 States, the District of Columbia and the Virgin Islands. 6 U.L.A. 117 cmts. 1-2 (2001). California enacted this provision in 1996, 1996 Cal. Stat. ch. 1003 (A.B. 583), § 2, and it was made effective January 1, 1997. As of January 1, 1999, this provision became applicable to "all partnerships," regardless when formed. Cal. Corp. Code § 16111(b). Prior California law had also long provided that general partners are jointly and severally liable for the federal tax debts of their partnership. Cal. Corp. Code § 15103 (repealed); Cal. Corp. Code § 15105 (repealed). Young v. Riddell, 60-1 U.S. Tax Cas. (CCH) ¶ 9381, at 76,054 (S.D. Cal. 1959), aff'd, 283 F.2d 909 (9th Cir. 1960); see Danning v. United States, 532 F.2d 725, 726 (9th Cir. 1976); In re Crockett, 150 F. Supp. 352, 354 (N.D. Cal. 1957).
5	The period of limitations for the United States to enforce a claim held "in its governmental capacity" is determined by federal, rather than state, law. United States v. Summerlin, 310 U.S. 414, 417 (1940). See United States v. John Hancock Mut. Life Ins. Co., 364 U.S. 301, 308 (1960)("the United States is not subject to local statutes of limitation"). In United States v. California, 507 U.S. 746, 757 (1993), this Court stated that the cases applying this rule to state-law causes of action have involved situations in which "either the right at issue was obtained by the Government through, or created by, a federal statute" or "a federal statute provided the statute of limitations." In the present case, (i) the government plainly proceeds in its sovereign capacity in seeking to collect unpaid federal tax obligations; (ii) those underlying obligations are "created by" federal statute; and (iii) 26 U.S.C. 6502 provides the period of limitation for the collection of taxes either from persons directly or derivatively liable for them. See United States v. Updike, 281 U.S. 489, 494 (1930) ("[t]he aim in the one case, as in the other, is to enforce a tax liability"). Respondents acknowledge that Section 6501 and Section 6502 govern this case. They contend, for the reasons adopted by the courts below, that the time provided by these governing federal statutes has expired.
6	The "summary record of assessment" described in this regulation has historically been made on Form 23C and, more recently, on a similar computer-generated form entitled RACS Report 006. See March v. IRS, 335 F.3d 1186, 1188 (10th Cir. 2003); Huff v. United States, 10 F.3d 1440, 1446 & n.5 (9th Cir. 1993). Each "summary record of assessment" aggregates all of the taxes, penalties and interest assessed for income, excise, estate, gift and employment taxes at a particular service center on a particular date. The "summary record of assessment" does not identify any particular taxpayer or any particular tax period. Any identifying information is set forth in the "supporting records" that are not part of the assessment document itself. 26 C.F.R. 301.6203-1.
7	Even without any assessment of a tax, the United States may bring suit against any party liable for the tax to reduce the unassessed liability to judgment. Section 6501(a) of the Code makes this clear by specifying that "no proceeding in court without assessment" for the collection of any tax "shall be begun after the expiration of" three years from the date the applicable tax return was filed. 26 U.S.C. 6501(a). Under this statute, a collection suit may be begun either with or "without assessment" prior to the expiration of this three-year period. Goldston v. United States, 104 F.3d 1198, 1201 (10th Cir. 1997) (even in "the absence of an assessment" the government "may still file a civil action" or "a proof of claim in a bankruptcy proceeding" to collect the tax during this initial three-year period).
8	The federal tax lien arises only "at the time the assessment is made." 26 U.S.C. 6322. In addition, before a tax lien arises or seizure and sale of property by levy may occur, the Secretary is to give notice of the assessment to, and make demand for payment upon, "each person liable for the unpaid tax" within 60 days after making the assessment. 26 U.S.C. 6303(a), 6321, 6331(a). Notice and demand for payment are not, however, preconditions to the filing of a judicial collection suit. United States v. Chila, 871 F.2d 1015, 1018-1019 (11th Cir. 1989); United States v. Berman, 825 F.2d 1053, 1060 (6th Cir. 1987); United States v. Hunter Eng'rs & Constructors, Inc., 789 F.2d 1436, 1441 (9th Cir. 1986), cert. denied, 479 U.S. 1063 (1987). Nor, as the plain text of the statute makes clear, is such notice and demand a condition for the extension of the period of limitations for such a suit under Section 6502(a), 26 U.S.C. 6502(a). See Blackston v. United States, 778 F. Supp. 244, 248 (D. Md. 1991).
9	For purposes of income tax withholding, the term "employer" is generally defined as "the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person." 26 U.S.C. 3401(d). The cited cases applied the same definition for purposes of FICA and FUTA taxes under 26 U.S.C. 3102, 3111, and 3301.
10	The court below erred in this case in stating that "Wright is distinguishable because * * * the IRS had assessed both the partnership * * * and the individual partners." Pet. App. 13a (emphasis omitted). The government had maintained in Wright that "the assessments were levied against the partnership only and not against any of the partners individually." United States v. Wright, 868 F. Supp. 1070, 1071 n.1 (S.D. Ind. 1994). The district court in Wright "made clear" that, although it appeared that an assessment may have been entered against the partners as well as against the partnership, that question was "not material to the resolution" of the case. Ibid. The Seventh Circuit also did not suggest that the existence of assessments against the partners would have been relevant in Wright. See 57 F.3d at 562-563. To the contrary, in a holding that directly conflicts with the decision in this case, the court concluded that "suits against persons derivatively liable for taxes are timely, or not, according to the rules for timeliness of suits against taxpayers." Id. at 564.
11	As the predecessor of the Federal Circuit, the decisions of the Court of Claims are binding precedent in that circuit. South Corp. v. United States, 690 F.2d 13678, 1370 (Fed. Cir. 1982).
12	The Internal Revenue Code imposes primary liability for the federal gift tax upon the donor. 26 U.S.C. 2502(c). If the donor fails to pay the tax, however, the donee is personally liable for the tax to the extent of the value of the gift. 26 U.S.C. 6324(b).
13	In fact, in Jersey Shore State Bank v. United States, 479 U.S. 442, 447 (1987), the Court observed that a lender's liability under Section 3505 cannot be assessed: "[T]he legislative history of § 3505 makes clear that the Government may forcibly collect against a lender only by filing a civil suit."
14	The court below also erred in suggesting that one of its own "precedents weigh against the IRS's position" in this case. Pet. App. 8a-11a. The case on which the court erroneously relied was Young v. Riddell, 283 F.2d 909 (9th Cir. 1960), aff'g 60-1 U.S. Tax Cas. (CCH) ¶ 9381 (S.D. Cal. 1959). In that case, the district court stated that, "[w]here taxes are assessed against a partnership and under state law each member of the partnership is jointly and severally liable for the debts of the partnership, it is unnecessary and superfluous to name the individual partners in the assessment in order to create liability; their liability arises as a matter of state law." 60-1 U.S. Tax Cas. (CCH) at 76,054 (emphasis added). The Ninth Circuit affirmed that decision, noting that the individual partner was "personally liable for the debts and liabilities of the partnership, including its tax liability" and would remain so "until the taxes were paid or otherwise discharged as to [the partner]." 283 F.2d at 910-911. This holding in Young is plainly consistent with the established rule that taxes may be collected from parties who are derivatively liable without need for separate and additional assessments issued to them directly.
15	Although the court presented this conclusion as a distinct alternative to its holding that the timely assessment of the partnership's employment tax liability did not extend the time for collection of that liability directly from the partners under 26 U.S.C. 6501(a), the court's state-law analysis plainly rests on that same reasoning. See Pet. App. 6a, 14a-17a.
16	The Bankruptcy Code does not require a preexisting judgment as a prerequisite for allowance of a claim in bankruptcy. Instead, it requires only a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. 101(5)(A) (emphasis added).
2002-1389.mer.aa.pdf