Opinion
Case No. LA 99-48587-ER
September 11, 2000
MEMORANDUM OF DECISION
On May 15, 2000, the Court heard the Objection to Claim of United States of America, Department of the Treasury, Internal Revenue Service ("Claim Objection") filed by the Debtors and the Opposition thereto filed by the United States of America, Department of the Treasury, Internal Revenue Service ("IRS"). Appearances were as noted on the record. The Court continued the matter to July 31, 2000 and ordered further briefing on the issues presented. After entertaining oral argument at the continued hearing on July 31, 2000, the Court tool the matter under submission. For the reasons set forth more fully below, the Court sustains the Claim Objection.
I. FACTS
Debtors filed a joint voluntary chapter 13 petition on October 20, 1999. The IRS filed a proof of claim in the amount of $395,179.89 (the "claim"). The claim consists of the following:
1. Secured claims totaling $395,006.37 for taxes assessed between January, 1994 and July, 1995 against taxpayer identification number 86-0641090.
2. Unsecured priority claim in the amount of $160.36 for taxes assessed on December 4, 1995 against taxpayer identification number 86-0641090.
3. Unsecured general claim in the amount of $13.16 for penaltie against the unsecured priority claim.
Debtors' social security numbers are 379-34-6851 and 371-42-5311. Taxpayer identification number 86-0641090 belongs to the Marina Cabrillo Partners. The Debtors were partners of Marina Cabrillo Partners (the "partnership")
Debtors filed an objection to the IRS claim on April 17, 2000. Debtors argue that the claim should be disallowed because it is not a proven claim against the estate. The claim consists of taxes assessed against the partnership. While Debtors do not dispute that California law makes all partners jointly and severally liable for the debts of a partnership, they argue that they must be individually assessed before collection can be effected against them.
Debtors assert that relevant case law supports their position. In El Paso Refining, Inc. v. IRS, the bankruptcy court held that a valid assessment against individual partners was a prerequisite to tax collection by the IRS. See El Paso, 205 B.R. 497 (Bankr. W.D. Tex. 1996). The El Paso court strictly interpreted Internal Revenue Code § 6203, which provides that an assessment is made by recording the liability of the taxpayer in the office of the Secretary. See id. 26 U.S.C. § 6203.
All statutory references are to the Internal Revenue Code unless otherwise indicated.
Debtors also rely on the holdings of Coson v. United States, 169 F. Supp. 671 (S.D. Cal. 1958), modified on other grounds, 286 F.2d 453 (9th Cir. 1961), and Bailey v. United States, 355 F. Supp. 325 (E.D. Penn. 1973). In Coson, the court held that assessment against the plaintiff's business was insufficient to create a lien against the individual plaintiff's property because the individual was never assessed. See id. However, in Bailey, the court found that although the individual partner was never assessed, he was liable because he was listed on the certificate of assessment against the partnership. Here only the partnership was listed on the assessment. Therefore, Debtors assert that they have not been properly assessed as individuals and the IRS claim is invalid.
Further, Debtors assert that the IRS claim is invalid because it is beyond the statute of limitations. Under § 6501, tax liabilities must be assessed within three years of the date a tax return is filed or should have been filed. Because the tax liabilities are for the years 1992 through 1995, Debtors assert that the statute of limitation has passed.
In Opposition, the IRS asserts that a separate assessment against a general partner is not required by the Internal Revenue Code if the partnership was properly assessed. The IRS asserts that in order to determine whether the assessment is valid against the Debtors as general partners, § 6203 is not applicable. Under that provision, an assessment is made by recording the liability of the taxpayer in the office of the Secretary. The term "taxpayer" is defined as any person subject to any internal revenue tax and the definition of "person" includes an individual or partnership. See §§ 7701(a)(1) and (a)(13). The IRS argues that "general partner" is not included in the definitic of "taxpayer" and, therefore, § 6203 does not apply.
The IRS asserts that the starting point in this analysis is § 3401. Under § 3401, an employer is liable for the payment of employment taxes required to be withheld from an employee's salary. The term "employer" is defined to be an individual or a partnership (among other entities). However, the definition of the term "employer" does not include a "general partner" or "partner" and, therefore, the IRS asserts that they are not subject to liability under § 3401. Based upon the foregoing, the IRS argues that a general partner is neither a "taxpayer" subject to an internal revenue tax nor a "person." Therefore, the assessment referred to in § 3401 is the assessment against the partnership and the applicable "taxpayer" for identification purposes is the partnership.
The IRS argues that requiring a separate assessment against the general partner would require expansion of the definitions of "employer" and "taxpayer" to include "general partners" in order to make them liable under § 3401. However, such interpretation is not the result intended by Congress and would render portions of § 3401 unconstitutional "because the making of such assessment expansion is premised upon the IRS' making an interpretation of the applicable state law that a general partner is liable for its debts." IRS Supplemental Memorandum at 5.
Further, the IRS asserts that binding Ninth Circuit authority favors the government's position. The IRS asserts that the only binding case is Young v. Riddell, 90-1 USTC ¶ 9381 (S.D. Cal. 1959), aff'd, 283 F.2d 909 (9th Cir. 1960), which held that
where taxes are assessed against the 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.
The IRS asserts that the cases relied upon by the Debtors are not directly on point because they do not address whether a separate assessment is required against the individual partners of a partnership.
Finally, the IRS argues that if no separate assessment against the general partners are required, then the Debtors' statute o limitation argument is rendered moot because the employment taxes were assessed within three years of the due date of employment tax returns under § 6501.
In Response, the Debtors assert that the IRS's statutory interpretation argument is without merit. Section 3401 does not exclude the individual liability of general partners. The terms "individual" and "taxpayer" include general partners. Further, Debtor argue that there is no binding authority to support the IRS's position The case relied upon by the IRS, Young v. Ridell, is an unpublished opinion. The Ninth Circuit opinion did not adopt or restate the language quoted by the IRS from the lower court decision.
Debtors assert that the IRS's attempt to distinguish the case law cited by the Debtors is false. The issue is whether a separate assessment is required to collect or enforce the payment of taxes against an individual partner. In the instant case, the proof of claim is the equivalent of a lien. Therefore, the issue is whether individual assessment was a procedural prerequisite to a lien (proof of claim).
California Corporations Code § 16306(a) provides: Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.
II. ANALYSIS
Neither party disputes that under California law all partner are jointly and severally liable for the debts of a partnership, including tax liabilities. See California Corporations Code § 16306(a) The Debtors do not dispute that they were partners in the partnership. The issues, therefore, are whether the tax assessments against the partnership were effective to bind the Debtors as partners and whether collection is barred by the statute of limitations.
A. The tax assessments against the partnership were not effective to bind the Debtors as partners.
1. The partnership is liable for the taxes required to be deducted or withheld.
Section 3403 provides that the "employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter." § 3403. As used in § 3403, "employer" means "the person for whom an individual performs or performed any service." § 3401(d). "Person" is defined in § 7701(a)(1) to include an individual or partnership. See § 7701(a)(1). The "person" for whom the Debtors performed services was the partnership. Therefore, the partnership is liable for the payment of taxes required to be deducted and withheld.
2. To hold a partner liable for the debts of a partnership under California law, a judgment must be entered against the partner.
In California, "a partnership is an entity distinct from its partners." California Corporations Code § 16201. Although all partners are liable jointly and severally for the obligations of the partnership, "a judgment against a partnership is not by itself a judgment against a partner." California Corporations Code §§ 16306 and 16307(c). In fact, "a judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner." California Corporations Code § 16307(c). It naturally follows that in order for partners to be jointly and severally liable for tax liabilities, they must be assessed separately
3. To be held liable for tax obligations, a taxpayer must be validly assessed.
In order to be held liable for taxes owed, the first requirement is valid assessment of the taxpayer. The Internal Revenue Code provides that a valid assessment is made by recording the liability of the "taxpayer" in the office of the Secretary. See § 6203. "Taxpayer" is defined as "any person subject to any internal revenue tax." § 7701(a)(14). The definition of "person" includes "an individual, a trust, estate, partnership, association, company or corporation." § 7701(a)(1). As noted by the IRS, the definitions of "taxpayer" and "person" do not include "partner" or "general partner." However, the definition of "person" includes an "individual" and the definition of "taxpayer" is simply one who is subject to taxation. A general partner may be, as is the case here, an individual person subject to taxation. Therefore, contrary to the IRS's argument, a partner must be assessed individually under § 6203 before he can be held liable.
Section 6203 provides in relevant part:
The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with the rules or regulations prescribed by the Secretary.
4. Relevant case law provides that individual assessment is required in order to hold partners liable for the tax obligations of a partnership.
In El Paso, the bankruptcy court was faced with a similar fact situation. The IRS assessed the partnership, but not the partner individually. The bankruptcy court held that a valid assessment against a partner was a "prerequisite to tax collection," even when the partnership had been assessed. See El Paso, 205 B.R. at 500. The court reasoned that the IRS must strictly comply with § 6203. See id.
The court also held that demand and notice on the partnership was insufficient to establish a federal tax lien on the separate property of the partner. See El Paso, 205 B.R. at 500.
Further, in Coson v. United States, 169 F. Supp. 671 (S.D. Cal. 1958), modified and aff'd on other grounds, 286 F.2d 453 (9th Cir. 1961), the taxpayer brought an action to quiet title against the government's notice of federal tax liens against his property. The assessment did not identify the taxpayer. The court stated that "[n]o case has been discovered which deals with the required identification of an individual in order for there to be an assessment of taxes against him. However, on the facts of this case, it is concluded that the [taxpayer] herein never was assessed for these taxes." Id. at 676. Since a tax lien arises at the time of assessment, the court held that since the taxpayer was never assessed, the government did not have a lien. See id.
On appeal, the Ninth Circuit affirmed the lower court's decision that the lien was invalid. See Coson, 286 F.2d 453. However, the Court focused on the fact that notice and demand had not been give] to the taxpayer instead of the assessment problem. The Court did state however, that "[a]lthough our decision as to the lack of proper notice and 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." Id. at 464.
The court in Bailey v. United States, 355 F. Supp. 325 (E.D. Penn. 1973), did not hold that separate assessment was mandatory in order to find individual partners liable. However, the certificate of assessment against the partnership listed the individual partners as well. In the instant case, the certificate of assessment only listed the partnership.
The only case cited by the IRS is support of their argument is an unpublished decision. In Young v. Riddell, 90-1 USTC ¶ 9381 (S.D Cal. 1959), the court held that:
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.
The Ninth Circuit decision which affirmed the lower court's ruling did not address the issues before the Court at this time. See Young v. Riddell, 283 F.2d 909 (9th Cir. 1960). The Court's holding was focused on the fact that a dormant partner is also liable for the debts of a partnership.
Based upon the foregoing, the Court finds that the Debtors, as general partners, are not bound by the assessment of the partnership.
B. The statute of limitations bars collection of the partnership tax liability from the Debtors.
Section 6501(a) provides that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed . . ." § 6501(a). The partnership taxes were incurred between 1992 and 1995 and were assessed against the partnership between January, 1994 and December, 1995. Since the Debtors, as individual partners, were not assessed within the three year statute of limitations, collection is barred. See § 6501(a).
C. The Debtors have met their burden to defeat the IRS claim.
Title 11 U.S.C. § 502(a) provides that "a claim or interest, proof of which is filed under § 501 of this title, is deemed allowed, unless a party in interest . . . objects." A proof of claim "executed and filed in accordance with [the Bankruptcy Rules constitutes] prima facie evidence of the validity and amount of the claim." Federal Rule of Bankruptcy 3001(f). "The debtor or trustee has the burden of presenting evidence to rebut this prima facie validity." In re MacFarlane, 83 F.3d 1041, 1044 (9th Cir. 1996). The objecting party must show facts which would tend to defeat the claim by "probative force equal to that of the allegations of the proofs of claim themselves." In re Holm, 931 F.2d 620, 623 (9th Cir. 1991).
If that burden is met, the creditor must present evidence to prove the claim. The claimant must prove the validity of the claim by a preponderance of the evidence. "The ultimate burden of proof therefore is on the creditor." MacFarlane, 83 F.3d at 1044.
In the instant case, the Debtors have met their burden of proof to rebut the validity of the IRS claim. Therefore, the Court sustains the Debtors' claim objection.
III.
Conclusion
Based upon the foregoing, the claim objection is sustained. The Court will prepare an order consistent with this memorandum of decision.