Pitts v. United States (In re Pitts)

• Decision Date: 12 August 2014
• Docket Number: No. 5:13–v–02099–ODW.,Adversary No. 6:12–ap–01191–SC.,Bankruptcy No. 6:12–cv–15291–SC.,5:13–v–02099–ODW.
• Citation: 515 B.R. 317
• Court: U.S. District Court — Central District of California
• Parties: In re Wendy K. PITTS, Debtor. Wendy K. Pitts, Appellant, v. United States of America, Appellee.

515 B.R. 317

In re Wendy K. PITTS, Debtor.Wendy K. Pitts, Appellant,

v.United States of America, Appellee.

No. 5:13–v–02099–ODW.

Bankruptcy No. 6:12–cv–15291–SC.

Adversary No. 6:12–ap–01191–SC.

United States District Court, C.D. California.

Signed Aug. 12, 2014.

David R. Haberbush, Vanessa M. Haberbush, Haberbush & Associates LLP, Long Beach, CA, for Appellant.

Eric M. Heller, Office of Chief Counsel, Hans F. Famularo, Laguna Niguel, CA, for Appellee.

ORDER AFFIRMING BANKRUPTCY COURT'S DECISION

OTIS D. WRIGHT, II, District Judge.

I. INTRODUCTION

When a general partnership fails to pay required federal taxes, how can the Internal Revenue Service (“IRS”) recover those obligations from general partners? The United States Supreme Court resolved many issues relating to general-partner liability for unpaid partnership tax debts in United States v. Galletti, 541 U.S. 114, 124 S.Ct. 1548, 158 L.Ed.2d 279 (2004). But the Court also left many issues unresolved, including whether the IRS could employ administrative-collection procedures against the general partner and whether a federal or state statute of limitations applies to the IRS's collection efforts. Those unsettled issues are now squarely before the Court for resolution.

Appellant Wendy K. Pitts was a general partner of DIR Waterproofing, a California general partnership. DIR failed to pay several employment taxes, and the IRS recorded Notices of Federal Tax Liens against Pitts's property in her personal capacity. After she filed for Chapter 7 bankruptcy, Pitts filed an adversary proceeding against the United States seeking to invalidate the liens and discharge any tax liability she had stemming from DIR. The United States Bankruptcy Court for the Central District of California found that the liens were valid, as Pitts was liable for DIR's tax debts by operation of California law. The court also found that the relevant federal statute of limitations applied and therefore the IRS timely recorded its liens.

Pitts appealed the decision to this Court. After reviewing the parties' arguments and relevant case law, the Court finds that the bankruptcy court did not err and accordingly AFFIRMS the judgment in favor of the United States.

II. FACTUAL BACKGROUND

Pitts, a California resident, was a general partner of DIR Waterproofing, a California general partnership (“DIR”). (ER 20.¹) On March 1, 2012, Pitts filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Central District of California. ( Id.) As of that date, DIR had unpaid Federal Insurance Contribution Act (“FICA”) taxes and unpaid Federal Unemployment Tax Act (“FUTA”) taxes for various quarters in 2005, 2006, and 2007. ( Id.) DIR also had unpaid penalties for filing its 2005 federal Return of Partnership Income late and intentionally failing to file correct return information under 26 U.S.C. § 6721. ( Id. at 20–21.) In total, DIR failed to pay $106,675.40 in FICA taxes, $2,145.08 in FUTA taxes, and $2,858.51 in late-filing penalties, including interest, further penalties, and statutory additions. ( Id. at 400.)

Between 2007 and 2008, the IRS recorded a total of four Notices of Federal Tax Liens (“NFTL”) in Riverside and Orange Counties, California, naming DIR and Pitts as the taxpayers for these unpaid amounts. ( Id. at 25.) The IRS identified Pitts as a DIR partner on the NFTLs. ( Id.) The NFTLs continue to encumber Pitts's property. ( Id. at 26.)

On June 21, 2007, and August 7, 2007, the IRS issued Notices of Federal Taxes Due naming DIR as the taxpayer and Pitts as a partner. ( Id.)

As of the time of the summary-judgment briefing in June 2013, DIR still owed at least $114,858.80 in tax debt plus unassessed interest. ( Id.) But the IRS never assessed DIR's taxes against Pitts. ( Id.) The IRS has also never brought a judicial action against Pitts. ( Id.)

On May 31, 2012, Pitts filed this adversary proceeding against the United States to determine the dischargeability of debts under 11 U.S.C. § 523; the nature, extent, and validity of liens under 11 U.S.C. § 506; and whether the IRS violated 11 U.S.C. § 524's discharge injunction. ( Id. at 20; see also id. at 1–9 (Second Amended Complaint).) On June 11, 2012, Pitts received a bankruptcy discharge. ( Id. at 26.)

On June 26, 2013, Pitts and the United States filed cross-summary-judgment motions. (ER tabs 5, 6.) The bankruptcy court subsequently held a hearing on the motions. ( Id. at 399.) The court denied Pitts's motion and granted the Government's motion. ( Id. at 413.) On October 23, 2013, the bankruptcy court issued a judgment in favor of the United States. ( Id. at 430–32.) The court included a detailed table determining which taxes and amounts were dischargeable under 11 U.S.C. § 523. ( Id. at 426.) The court also determined that the Government's NFTLs against Pitts's property were valid and perfected and that the IRS did not violate the discharge injunction under § 524. ( Id. at 427.)

On November 15, 2013, Pitts timely appealed the bankruptcy court's ruling to this Court. (ECF No. 2.) Both parties timely submitted briefing, and the Court subsequently took the matter under submission. That appeal is now before the Court for decision.

III. JURISDICTION

The Court has jurisdiction to hear this bankruptcy-court appeal under 28 U.S.C. § 158(a) and Federal Rule of Bankruptcy Procedure 8001(b).

IV. STANDARD OF REVIEW

In reviewing a bankruptcy court's decision, a district court reviews legal determinations de novo. In re Olshan, 356 F.3d 1078, 1083 (9th Cir.2004). This means that the court reviews the legal issues involved “independently and without deference.” In re JTS Corp., 617 F.3d 1102, 1109 (9th Cir.2010). But the district court must accept factual findings unless clearly erroneous, that is, the court must be “left with the definite and firm conviction that a mistake has been committed.” Id. at 1109 (internal quotation marks omitted).

V. DISCUSSION

Pitts's arguments center on the notion that since California law creates her liability for DIR's debts, the IRS cannot employ federal remedies against her. But the Court finds that Pitts is liable for federal taxes, thereby empowering the IRS to utilize administrative-collection procedures. The Court also finds that the federal tax-collection statute of limitations applies, and that the bankruptcy court did not err in finding that certain of Pitts's tax debts were nondischargeable.

A. General partner's liability for partnership's federal tax debts

Under the Internal Revenue Code (“IRC”), an “employer” must deduct and withhold certain tax amounts from the wages it pays its employees. 26 U.S.C. § 3402. The employer is then liable for paying those withholdings to the IRS. § 3403.² Under § 6672(a), “[a]ny person required to collect, truthfully account for, and pay over any tax” required by the IRC who willfully fails to do so is liable for the tax plus a penalty equal to the tax amount. The section also sets forth a notice system and three-year statute of limitations. § 6672(b) (incorporating the three-year statute of limitations set forth in § 6501(a)). If the IRS assesses a tax to a responsible person within three years, the IRS then has 10 years from the assessment date to collect the tax. § 6502(a)(1).

Pitts readily admits that she is liable for DIR's obligations as a general partner per California partnership law. But the threshold issue she raises is whether she is liable under the IRC for DIR's unpaid employment-tax withholdings and thus subject to the IRC's collection remedies. Pitts argues that in United States v. Galletti, 541 U.S. 114, 124 S.Ct. 1548, 158 L.Ed.2d 279 (2004), the United States Supreme Court held that a general partner is not a “taxpayer” with respect to payroll tax-withholding liabilities of her general partnership under 26 U.S.C. § 3403. She therefore contends that the IRS cannot rely on § 3403 to create her liability for DIR's tax debts.

She further asserts that the IRS had two main ways of making her liable: either under federal or state law. To make her a responsible party under § 6672, Pitts asserts that the IRS had to separately assess her within the applicable three-year statute of limitations. Since it is undisputed that the IRS never assessed Pitts's tax liability, she avers that she is not responsible for DIR's tax debt under federal law. Additionally, she proffers that since general partners are not “taxpayers” under § 3403, the IRS cannot separately assess them when it assesses the partnership for those tax withholdings.

Pitts additionally contends that though she is jointly and severally liable for DIR's obligations under California law, she is merely liable for DIR's debt and not its “tax” liability under the IRC as that term is used in its legal sense.

But the Government argues that contrary to Pitts's argument, once the IRS assesses a tax against a general partnership, it need not separately assess the general partners in order to make them liable. The Government contends that since Pitts is liable for DIR's debts under California law, the tax assessment against DIR for its unpaid employment-tax withholdings suffices to create a tax debt owed by Pitts to the IRS. The IRS further asserts that it did not have to proceed against Pitts under § 6672 but rather could separately pursue her under state law.

The Supreme Court has already weighed in on many issues relevant to this appeal in Galletti. Interpreting § 3403, the Court held that the “employer” liable for paying the tax withholdings to the IRS is the general partnership. 541 U.S. at 120–21, 124 S.Ct. 1548 (“When an employer fails to withhold and submit the requisite amount of employment taxes, § 3403 makes clear that the liable taxpayer is the employer.”). The Court specifically rejected the argument that imposing a tax on the general partnership is equivalent to imposing a tax directly on the general partners, that is, the general partners are not primarily liable for the tax. Id....