Opinion ID: 780265
Heading Depth: 2
Heading Rank: 1

Heading: Assessment of the Partnership

Text: 7 As noted, the IRS may collect tax deficiencies from a taxpayer by making an assessment against the taxpayer within three years of the filing of the taxpayer's return. 26 U.S.C. §§ 6203, 6501(a). By assessing a tax deficiency, the IRS gains advantages in its collection efforts. For example, assessment extends the statute of limitations for a judicial action to collect the tax liability to ten years from the date of the assessment. 26 U.S.C. § 6502(a). 1 Similarly, because a final assessment operates in much the same way as a judgment, the IRS may proceed directly against the assets of a taxpayer whose tax deficiency has been properly assessed. Id. 2 8 The IRS made a timely assessment against the Partnership for unpaid employment taxes. The IRS argues that Debtors, as partners, are not separate taxpayers within the meaning of the statutory provisions governing assessment and collection of taxes. It follows, says the IRS, that the timely assessment against the Partnership allows the IRS to collect taxes directly from the individual partners. We are not persuaded.
9 Section 6203 of the Internal Revenue Code provides that an assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. 26 U.S.C. § 6203. As defined under the code, a taxpayer is any person subject to any internal revenue tax, and a person includes an individual, a trust, estate, partnership, association, company or corporation. 26 U.S.C. § 7701(a)(14), (a)(1). 10 As noted, an individual is included in the statutory definitions of person and taxpayer in § 7701 and, by extension, in §§ 6203 and 6501. An individual can be a partner but is distinct from a partnership. The regulation interpreting § 6203 provides that a valid assessment shall provide identification of the taxpayer.  26 C.F.R. § 301.6203-1 (emphasis added). Section 6502, which governs collection of tax after an assessment has been made, likewise presumes that the taxpayer against whom a deficiency has been assessed is the same taxpayer for whom the statute of limitations is extended. In all these statutes, the individual or entity assessed must be a separately identified taxpayer. 11 The Partnership is a taxpayer within the meaning of the statute, but so is each individual Debtor a separate taxpayer. Each has its, his, or her own taxpayer identification number. Thus, the IRS's failure to assess tax deficiencies against Debtors within the three-year period provided under § 6501(a) bars it from collecting the unpaid debts of the Partnership directly from Debtors. The assessment against the Partnership extended the statute of limitations only with respect to the Partnership, but it left unaltered the limitations period applicable to Debtors. Because the bankruptcy court may disallow claims that are unenforceable against the debtor and the property of the debtor, 11 U.S.C. § 502(b)(1), the court did not err in sustaining Debtors' objections to the IRS's claims.
12 Although no published Ninth Circuit decision directly addresses the question before us, our precedents weigh against the IRS's position. 13 The IRS argues that we should follow Young v. Riddell, 60-1 U.S. Tax Cas. (CCH) ¶ 9831, at 76,049 (S.D.Cal.1959), aff'd 283 F.2d 909 (9th Cir.1960). 3 In that case, the IRS had assessed unpaid taxes against a partnership called the Riviera Room. Id. at 76,054. One of the general partners paid his share of the taxes but later brought an action for a refund. Id. at 76,050. The district court held that the partner was not entitled to a refund: 14 Where 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. 15 Id. at 76,054. Although the government had not made a valid assessment against the partner, the court refused to order a refund because state law made the partner substantively liable for taxes assessed against the partnership. 16 The district court's holding in Young was more limited than the IRS suggests. The court did not hold that the government would have been entitled to collect the same tax in the absence of an individual assessment, a judgment against the partner, or a voluntary payment. In fact, other portions of the court's opinion demonstrate that the opposite is true: 17 It is the government's contention that where an assessment names an entity such as in the instant case, that it is unnecessary to name the individual members of the entity in order to establish individual liability and that the only reason for naming such individual or adding such individuals' names as here is to enable collection of the tax without resorting to court action. With this contention I agree .... 18 Id. at 76,050 (emphasis added). Thus, the court acknowledged that to collect the tax for which the partner was liable, the IRS would have had to either resort to court action or individually assess the taxes against the partner. An assessment was unnecessary only because the tax already had been collected. Id. at 76,054. The district court's holding, therefore, was much narrower than the IRS acknowledges, namely, that [a] person liable for taxes may not recover a refund of taxes he paid because of the fact the assessment did not name him. Id. at 76,054 (emphasis added). 19 Our affirmance of the district court's decision in Young did not reject the district court's interpretation. Young v. Riddell, 283 F.2d 909 (9th Cir.1960). Only one passage in our opinion lends any support to the IRS's position: Having been found a general member of the partnership, appellant is personally liable for the debts and liabilities of the partnership, including its tax liability, even though his status as a partner was not discovered or formally noted in tax records until after termination of the partnership. Id. at 910. That statement does not aid the IRS, however, as it merely restates the holding of the district court that the partner was not entitled to a refund because he was liable for the debts of the partnership under state law. Nothing in our opinion contradicts the district court's suggestion that the IRS could not have collected the tax against the partner had he refused to pay it. 20 Thus, ultimately our opinion in Young supports Debtors' position because their liability for the tax assessed against the Partnership is not at issue in this case. To the contrary, Debtors concede that they are liable for the tax but argue only that, in the absence of individual assessments or judgments against them, the IRS is procedurally barred from collecting the unpaid taxes from them. 21 The foregoing limited interpretation of Young is buttressed by United States v. Coson, 286 F.2d 453 (9th Cir.1961). In that case, the IRS assessed unpaid taxes against a partnership and later claimed a lien against the property of Coson, who allegedly was a general partner. Id. at 454. Coson challenged the validity of the lien on a number of grounds, including that the assessment against the partnership did not name him individually. Id. at 458; Coson v. United States, 169 F.Supp. 671, 675 (S.D.Cal.1958) (The plaintiff does not seek to contest the correctness of an assessment; instead, he contends there just never was any assessment of the taxes in question against him.). 22 The district court, pointing to § 6203 and its implementing regulations, noted that one of the requirements for a valid assessment was that the taxpayer be identified. Id. Further, it noted that the assessment at issue named only the partnership and an unknown number of unidentified taxpayers. Id. Relying on the fact that Coson had never been assessed individually, the district court held that the IRS's attempts to collect the unpaid taxes from Coson were improper: 23 [T]his court is of the opinion that such a lien does not exist against a particular individual's property pursuant to § [§] 6321 and 6322 unless the underlying tax obligation has been assessed against him under § 6203. 24 Since plaintiff never was assessed and no lien exists without such an assessment, it follows that the Government does not have any lien. Id. at 676 (footnote omitted). 4 25 On appeal, we affirmed. We relied on a different ground than the district court had used, namely, that the lien was procedurally defective for reasons other than the government's failure to timely assess the tax against Coson. Coson, 286 F.2d at 458, 462-63. Nonetheless, in a passage that supports Debtors' position in dictum, we noted: 26 In holding as we do that the lack of proper notice or demand was fatal to the acquisition of the Government's lien against Coson, the emphasis here is somewhat different than that employed by the trial judge who held that the assessment itself was void as against Coson because the taxes were never assessed to Coson, the record of assessment in the office of the Bureau making no reference whatever to Coson. The Government argues that there is no requirement that an assessment be made against any person. Although our decision as to the lack of proper notice or demand is sufficient to dispose of this case, it would appear that the trial court was right in holding the assessment was insufficient for failure to comply with the statutory requirements. 27 Id. at 464 (emphasis added). 28 In its petition for rehearing, the IRS asserts that the Seventh Circuit has held that the IRS can bring suit against individual partners, and obtain a judgment against them, for as long as the tax obligations remain a valid debt of the partnership, citing United States v. Wright, 57 F.3d 561 (7th Cir.1995). Wright is distinguishable because, in that case, the IRS had assessed both the partnership (Empire Wood Company) and the individual partners. United States v. Wright, 868 F.Supp. 1070, 1071 & n. 1 (S.D.Ind.1994). Those assessments extended to six years the statute of limitations with respect to both the partnership and the partners. By contrast, here, no assessment was made against the individual partners. 29 Subsequently, the Empire Wood partnership filed for bankruptcy protection and entered a period of reorganization, thus tolling of the statute of limitations as to the partnership. Wright, 57 F.3d at 562. See 26 U.S.C. § 6503(h) (tolling the statute of limitations during the period in which the Bankruptcy Code prohibits the government from pursuing a collection action). More than six years after the initial tax assessment but before the end of the limitations period applicable to the partnership, the IRS brought an action against the individual partners to collect the unpaid taxes. Wright, 57 F.3d at 562-63. The partners argued that, although an action against the partnership would have been timely, the statute of limitations had expired as to them because it had not been tolled during the period of the partnership's bankruptcy. Id. Accordingly, the only relevant question in Wright was whether the statute of limitations applicable to the partners should be tolled while the limitations period was tolled with respect to the partnership. The Seventh Circuit therefore had no opportunity to address the question before us. 30 In summary, we hold that the assessment of tax liability against the Partnership, without more, does not allow the IRS to collect those taxes directly from the individual partners.