Partnership Assessment Extends Collection Statute Against Partners

Reversing the 9th Circuit Court of Appeals, the Supreme Court has held that a timely assessment against a California partnership extends the statute of limitations for collection of tax against the general partners. U.S. v. Galletti et al, 541 U.S. ___, (2004).

[Taxpayers were general partners of a partnership that failed to pay federal employment taxes from 1992 to 1995. The IRS timely assessed the partnership, but collected no tax. IRS attempted to collect the tax from the general partners, asserting a 10-year collection period under IRC § 6502(a). The partners argued that a timely assessment of the partnership did not extend the 3-year limitations period against the partners, since they had not been separately assessed within 3 years. The District Court held for the partners, stating that under IRC §§ 7701, 6203 and 6501, separate assessments against the partners were required.  § 7701 defines “taxpayer” to mean “any person subject to . . . tax.” §6501 provides that “tax imposed shall be assessed within 3 years after the return was filed.”  §6203 provides that within 60 days of the assessment, the Secretary shall “give notice to each person liable for the unpaid tax.

The 9th Circuit Affirmed. On appeal to Supreme Court, the partners argued that a valid assessment must name them individually because they were the “relevant taxpayers” under § 6203 and because they were jointly and severally liable for the tax debts of the partnership.]

Writing for a unanimous court, Justice Thomas found that although an individual partner can be a ‘taxpayer,’ § 6203 speaks of “the liability of the taxpayer.” This requires the identification of the “relevant” taxpayer. Since the liability arose from the partnership’s failure to deduct and withhold employment taxes pursuant to IRC §3402, the liability was clearly that of the partnership.

The partners argued that they were primarily liable for the partnership’s tax debt under California law. The Court found, however, that since under California’s partnership principles a partnership and a partner are separate entities, the partners “cannot argue that . . . imposing a tax directly on the Partnership is equivalent to imposing a tax directly on the general partners.”

The Court then rejected the argument that a separate assessment of a single tax debt was required against persons secondarily liable for that debt, remarking that “throughout the Code, it is clear that the term ‘assessment’ refers to little more than the calculation or recording of a tax liability.” The Court added that “nothing in the Code requires the IRS to duplicate its efforts by separately assessing the same tax on individuals . . . who are not the actual taxpayers but are, by reason of state law, liable for payment of the taxpayer’s debt.”

Understanding the decision requires one to forego an intuitive reading of the statutes involved: The general partners were not the “actual taxpayers” and were not “primarily liable” for the federal tax under federal law, yet they became liable under state law partnership principles. Further, the extension of the statute of limitations applied not to the taxpayers themselves but to the “collection of the debt.”

The Code grants the IRS greatly enhanced collection powers for “trust fund” taxes such as employment taxes. Although the sentiment was not betrayed in the opinion, the Court may have been concerned that an affirmance might result in an erosion of the government’s ability to recoup these taxes if taxpayer were to employ multiple entities.

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