In re Galletti
| Decision Date | 08 August 2002 |
| Citation | 298 F.3d 1107 |
| Parties | In re Abel Cosmo GALLETTI, aka Al Galletti, and Sarah Galletti, Debtors. United States of America, on behalf of its agency, the Internal Revenue Service, Appellant, v. Abel Cosmo Galletti; Sarah Galletti, Appellees. In re Francesco Briguglio, aka Frank Briguglio, and Angela Briguglio, aka Angie Briguglio, Debtors. United States of America, Appellant. v. Francesco Briguglio, aka Frank Briguglio; Angela Briguglio, aka Angie Briguglio, Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Thomas J. Clark and Andrea R. Tebbets, Attorneys, Tax Division, Department of Justice, Washington, DC, for the appellant.
Mark R. Campbell, Haberbush & Campbell, LLP, Long Beach, CA, for the appellees.
Appeals from the United States District Court for the Central District of California Virginia A. Phillips, District Judge, Presiding. D.C. No. CV-00-00842-VAP, D.C. No. CV-00-00753-AP.
Before KLEINFELD and GRABER, Circuit Judges, and BOLTON,* District Judge.
Debtors Abel Cosmo Galletti, Sarah Galletti, Francesco Briguglio, and Angela Briguglio filed Chapter 13 bankruptcy petitions. The United States Internal Revenue Service (IRS) filed proofs of claim against Debtors for unpaid employment taxes assessed against a partnership in which Debtors were general partners. The bankruptcy court disallowed the IRS's claims, and the district court affirmed. We also affirm. The IRS's claims were properly disallowed because (1) the IRS cannot collect a partnership's tax deficiency directly from the partners without first making individualized assessments against the partners or obtaining judgments against the partners holding them jointly and severally liable for the partnership's tax debts; and (2) the statute of limitations now bars the IRS from making such individual assessments or obtaining such judgments.
Debtors were general partners of Marina Cabrillo Partners (the Partnership). From 1992 to 1995, the Partnership failed to pay the requisite amount of federal employment taxes, prompting the IRS to assess those unpaid taxes against the Partnership in 1994, 1995, and 1996.
On October 20, 1999, Debtors Abel and Sarah Galletti filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. Debtors Francesco and Angela Briguglio filed a joint petition under Chapter 13 on February 4, 2000. In the course of those bankruptcy proceedings, the IRS filed proofs of claim against all Debtors for the unpaid taxes that the IRS had assessed against the Partnership. Debtors objected to the claims on the ground that the IRS had assessed only the Partnership and not the individual partners and that the statute of limitations for assessment had run. The IRS conceded that it had not assessed Debtors within the usual three-year limit, 26 U.S.C. § 6501, but argued that its timely assessments against the Partnership extended the time for collection of the taxes from Debtors, 26 U.S.C. § 6502(a). The bankruptcy court sustained Debtors' objections in two separate orders.
The IRS timely appealed those orders. The district court affirmed, and the IRS filed timely notices of appeal. We consolidated the two appeals.
We review de novo the district court's decision on an appeal from a bankruptcy court. Neilson v. Chang (In re First T.D. & Inv., Inc.), 253 F.3d 520, 526 (9th Cir.2001) (citing Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1084 n. 9 (9th Cir.2000) (en banc)). We review the bankruptcy court's conclusions of law de novo and its factual findings for clear error. Id. (citing Beaupied v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir.1998)).
In order to collect unpaid taxes from a taxpayer, the IRS must, within three years after the filing of the taxpayer's return, either assess the tax against the taxpayer or bring an action to collect the tax. 26 U.S.C. § 6501(a). Here the IRS did neither. Nonetheless, it seeks to collect unpaid taxes from Debtors by way of proofs of claim in their bankruptcy proceedings. The IRS offers two theories to justify its filing of these claims against Debtors. First, the IRS argues that its timely assessment of taxes against the Partnership allows it to collect taxes directly from the individual partners even though no separate assessment of tax liability was made against them. Second, the IRS argues that, because California law makes partners jointly and severally liable for the debts of the partnership, the IRS could bring a state-law action against Debtors to collect the tax liability assessed against the Partnership. Neither theory gives rise to an allowable bankruptcy claim in the circumstances of this case.
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
(1) within 10 years after the assessment of the tax[.]
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.
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).
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."
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.
Although no published Ninth Circuit decision directly addresses the question before us, our precedents weigh against the IRS's position.
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:
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.
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.
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:
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 ....
Id. at 76,050 (emphasis added). Thus, the court acknowledged that to collect the tax for which the...
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In re Galletti
...Before KLEINFELD and GRABER, Circuit Judges, and BOLTON,* District Judge. ORDER AND AMENDED OPINION ORDER The opinion filed August 8, 2002, 298 F.3d 1107, is amended as On slip opinion page 11556, just before the summary paragraph, add the following two paragraphs: In its petition for rehea......
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5.5.c.3 Bankruptcy Court Discretion To Hear The Matter
...and (2) the statute of limitations now bars the IRS from making such individual assessments or obtaining such judgments. In re Galletti, 298 F.3d 1107 (9th Cir. 2002). Held, something less than actual knowledge that withholding taxes are not being paid, specifically, a reckless disregard of......