Pitts v. United States (In re Pitts)

• Decision Date: 14 August 2013
• Docket Number: Adversary No. 6:12–ap–01191–SC.,Bankruptcy No. 6:12–bk–15291–SC.
• Citation: 497 B.R. 73
• Parties: In re Wendy K. PITTS, faw DIR Waterproofing and Wadsworth General Contracting, faw Wadsworth Glazing, Inc., Debtor. Wendy K. Pitts, faw DIR Waterproofing and Wadsworth General Contracting, faw Wadsworth Glazing, Inc., Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Central District of California

497 B.R. 73

In re Wendy K. PITTS, faw DIR Waterproofing and Wadsworth General Contracting, faw Wadsworth Glazing, Inc., Debtor.Wendy K. Pitts, faw DIR Waterproofing and Wadsworth General Contracting, faw Wadsworth Glazing, Inc., Plaintiff,

v.United States of America, Defendant.

Bankruptcy No. 6:12–bk–15291–SC.

Adversary No. 6:12–ap–01191–SC.

United States Bankruptcy Court,

C.D. California,

Riverside Division.

Aug. 14, 2013.

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

Eric M. Heller, Office of Chief Counsel IRS, Laguna Niguel, CA, for Defendant.

MEMORANDUM DECISION AND ORDER RE: CROSS MOTIONS FOR SUMMARY JUDGMENT

SCOTT C. CLARKSON, Bankruptcy Judge.

This matter is before the Court on the hearing on the cross-motions for summary judgment of the instant adversary proceeding on August 7, 2013, at 1:30 p.m. in Courtroom 5C, located at 411 W Fourth Street, Santa Ana, CA 92701, the Honorable Scott C. Clarkson presiding. David Haberbush, Esq. and Vanessa Haberbush, Esq. appeared on behalf of Plaintiff Wendy K. Pitts. Eric Heller, Esq. appeared on behalf of Defendant the United States of America.

MEMORANDUM OPINION

Believing that certain tax is not a partnership debt to which the Plaintiff should be liable, the Plaintiff brought this suit to determine her liability and dischargeability of the tax debt. Plaintiff and the Government have now cross-moved for summary judgment. After a review of the record and briefing, there are no genuine issues of material fact, only questions of law, and therefore summary judgment is appropriate.

I. Factual and Procedural History

The factual and procedural history set forth below is based on the joint statement of undisputed facts filed on June 26, 2013 and docketed in the adversary proceeding as No. 30.

The Plaintiff Wendy K. Pitts (“Plaintiff” or “Debtor”), commenced her Chapter 7 case by filing a voluntary petition on March 1, 2012. [Facts 1, 4]. Plaintiff was a general partner of DIR Waterproofing, a California general partnership (“DIR”). [Fact 5].

DIR failed to pay in full its Federal Insurance Contribution Act taxes (“FICA” or “941” taxes) for certain tax periods occurring between December 2005 and December 2007. [Fact 6]. These FICA tax liabilities, including accrued interest, penalties and statutory additions allegedly totaled $106,675.40. [Facts 10–26].

DIR also failed to pay in full its Federal Unemployment Tax Act taxes (“FUTA” or “940” taxes) for the annual periods ending December 31, 2005, December 31, 2006, and December 31, 2007. [Fact 7]. These FUTA tax liabilities including accrued interest, penalties and statutory additions allegedly totaled $2,145.08. [Facts 27–29]. DIR also had an unpaid late filing penalty assessed for filing its U.S. Return of Partnership Income (“Form 1065” penalties) for the 2005 tax year. [Fact 8]. These penalties and statutory additions allegedly totaled $2,858.51. [Facts 30–31].

The IRS gave DIR a Notice of its Rights to a Hearing (“Notice of Rights”) under Internal Revenue Code (“IRC”) § 6320 by certified mail, addressing the Notice of Rights to DIR and listing Plaintiff as a partner. [Facts 38–40].

On June 21, 2007, the IRS issued a Notice of Federal Taxes Due (“Notice of Taxes Due”) for failure to pay taxes, and addressed the Notice of Taxes Due to Trans–National Escrow Corporation. [Facts 41–42]. The Notice of Taxes Due identified DIR as the taxpayer and identified Plaintiff as a partner. [Facts 41–42]. The Notice of Taxes Due listed the total liability as $19,666.08. [Fact 41]. On August 7, 2007, the IRS issued a second Notice of Federal Taxes Due (“Second Notice of Taxes Due”), addressed to Trans–National Escrow Corporation and identified DIR as the taxpayer and Plaintiff as a partner. The Second Notice of Taxes Due listed the total liability as $114,858.80. [Fact 45]. The tax debts identified in each of these Notices of Taxes Due were not paid. [Fact 49].

The IRS has filed four Notices of Federal Tax Lien (“NFTL”), which were recorded in Riverside County, Orange County, or both. [Facts 32–35]. The NFTLs name both DIR and Plaintiff, as a partner of DIR, as the taxpayer for unpaid taxes and penalties thereon. [Facts 32, 36–37]. The first NFTL was recorded on January 29, 2007, in Orange County and Riverside County, California relating to unpaid FUTA taxes for the annual period ending December 31, 2005, unpaid FICA taxes for the quarter ending December 31, 2005, and unpaid penalties relating to DIR's U.S. Return of Partnership Income for the calendar years ending 2003 and 2004. [Fact 32]. The second NFTL was recorded on August 13, 2007, in Orange County, California, and relates to DIR's unpaid FICA taxes for the quarter ending June 30, 2006. [Fact 33]. The third NFTL was recorded on December 31, 2007 in Riverside California, and relates to DIR's unpaid FICA taxes for the quarters ending September 30, 2006 and December 31, 2006. [Fact 34]. The fourth NFTL was recorded on January 30, 2008, in Orange County, California, and relates to unpaid FUTA taxes for the calendar year ending December 31, 2006. [Fact 35].

The United States has not, at any time, brought a judicial action against Plaintiff in order to collect DIR's tax debt. [Fact 50]. DIR's taxes were never assessed against Plaintiff personally. [Fact 51].

Plaintiff brought the present adversary proceeding seeking alternative relief, including: (1) that Plaintiff's liability for DIR's tax debt is solely as a partner, and as such it is not a tax debt pursuant to 11 U.S.C. § 507(a)(8)(A) which should be dischargeable [Second Amended Compl. ¶¶ 34–38]; (2) that the IRS holds invalid liens on Plaintiff's personal property [Second Amended Compl. ¶¶ 39–47]; and (3) that the IRS violated the Plaintiff's discharge injunction by failing to extinguish its liens on Plaintiff's personal property. [Second Amended Compl. ¶¶ 48–53.]

II. Legal Standard

Summary judgment may be granted when appropriate if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is “material” when the fact is capable of affecting the substantive outcome of the litigation. Anderson, 477 U.S. at 248, 106 S.Ct. 2505;Dark v. Curry Cnty., 451 F.3d 1078, 1085 (9th Cir.2006). A dispute is “genuine” when the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007); Anderson, 477 U.S. at 248, 106 S.Ct. 2505;Dark, 451 F.3d at 1091.

III. DiscussionAssessment of the Taxes

U.S. v. Galletti, is the seminal case regarding the ability of the IRS to make a single assessment of taxes against a general partnership and its general partner. 541 U.S. 114, 124 S.Ct. 1548, 158 L.Ed.2d 279 (2004). The Supreme Court held, in a succinct ruling, that an assessment against a partnership was also deemed a sufficient assessment against the general partner. No additional, independent assessment was required. Id. at 116, 124 S.Ct. 1548. The Court explained:

The Code does not require the Government to make separate assessments of a single tax debt against persons or entities secondarily liable for that debt in order for § 6502's extended limitations period to apply to judicial collection actions against those persons or entities. It is clear that “assessment” refers to little more than the calculation or recording of a tax liability, see, e.g., § 6201, and that it is the tax that is assessed, not the taxpayer, see, e.g.,§ 6501.

Id. at 115, 124 S.Ct. 1548.

There is no dispute that a timely assessment (within 3 years) was made for taxes owed by DIR. Accordingly, the assessment issued against DIR constitutes a sufficient assessment against the Plaintiff or any other persons secondarily liable.

Statute of Limitations for collection activities

The collection period for collecting taxes expires ten years after the assessment. IRC § 6503. The IRS is authorized under IRC §§ 6321 and 6331 to use its administrative collection procedures, including the filing of a tax lien and levying on a person's assets.

The issue raised in these summary judgment motions is whether the ten year period and the use of administrative collection procedures applies when seeking to collect taxes from the general partner, as opposed to the partnership itself.

Debtor argues that, because the IRS has sought to collect the taxes against her using Cal. Corp.Code § 16306, which creates liability in each general partner for the partnership's debts, the IRS is bound by California's statute of limitations and collection procedures. Plaintiff suggests that the California statute of limitations is three years (Code Civ. Proc. 369.5), rather than ten, and that the IRS is required to commence litigation within the three years to collect a general partnership debt. SeeCal. Corp.Code § 16307. Plaintiff further contends that the tax obligation is like any other non-priority unsecured debt owed by Plaintiff on behalf of the partnership.

The IRS correctly argues that collection of federal taxes is a sovereign function and that the IRS's ability to collect taxes cannot be constrained by state collection statutes. See U.S. v. Rodgers, 461 U.S. 677, 697, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983). In U.S. v. Summerlin, the Court explained:

It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights (citations omitted). The same rule applies whether the United States brings its suit in its own courts or in a state court....

... When the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state sta...