UNITED STATES v. GALLETTI
Abel Galletti and his wife, along with another couple, the Briguglios, formed a business partnership. The partnership underpaid its federal employment taxes, and the IRS assessed the unpaid taxes against the partnership (meaning the partnership would be forced to pay the taxes). According to the Internal Revenue Code, if a tax debt is assessed within three years after the return was filed, the government has 10 additional years to collected the money.
More than three years later, the Gallettis and the Briguglios separately filed for bankruptcy. The IRS made a claim in bankruptcy court against the two couples for the taxes assessed against the partnership. The couples objected, arguing that because the partners themselves had not been separately assessed, the statute of limitations had not been extended to the partners.
The bankruptcy court ruled against the IRS, holding that the IRS must assess tax claims against individual partners, not just the partnership, in order to later collect on those claims from the individuals. The district court and a Ninth Circuit Court of Appeals panel both affirmed the decision.
To qualify for the 10-year extension in the statute of limitations, does the government need to assess - beyond just the partnership that owes money - each individual partner for the debt?
Legal provision: Internal Revenue Code
No. In a unanimous opinion delivered by Justice Clarence Thomas, the Court held that the IRS' assessment against the partnership was sufficient to extend the statute of limitations by 10 years to collect the money from the partners themselves. The Internal Revenue Code does not require the government to make separate assessments of a single debt against people or entities secondarily liable in order to extend the statute of limitations. The statute of limitations extension is attached to the debt - without reference to the entities who owe the debt.
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument now in No. 02-1389, the United States v. Abel Cosmo Galletti.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Federal employment taxes owed by a partnership were assessed by the commissioner, and when the partnership failed to pay the taxes, the United States brought this action to recover the taxes against the individual partners who were derivatively liable under State law for all debts of the partnership, including its tax debts.
Justice Kennedy: Did the Government have to wait until the partnership failed to pay?
Could it have proceeded immediately against the partners under... under the governing State law?
Mr. Jones: You've addressed an... an unanswered question that isn't presented here, of course.
It's unanswered because Federal law--
Justice Scalia: It... it's not presented, depending on what you mean by derivative liability.
I... I always thought that derivative liability would be liability that doesn't attach unless and until the person primarily liable fails to... fails to pay up.
Mr. Jones: --And... and I agree with that, and... and the Uniform Partnership Act, which California has adopted, contains a provision that specifies that the creditor must exhaust his efforts to recover from the partnership before he can recover from the partners.
Justice Scalia: I see.
Mr. Jones: And... and so that's what makes it clear this indeed a derivative secondary liability.
Justice Scalia: You think maybe the United States may not be bound by that.
You... you don't want to... you don't want to concede that the United States is bound by that.
Mr. Jones: It's not so much I don't want to concede.
I don't feel that I'm able to concede that not because it is related to this case, but because of a... a structural intellectual problem about the extent to which whose law governs in that situation.
If it's a limitations provision, we know Federal law governs when the United States is bringing a claim that it acquires in its sovereign capacity.
Whether this would be regarded as a procedural restriction that the State substantive law didn't... now, whether you want to think this is substantive or procedural may affect the answer to the question... the hypothetical that you've raised.
Justice Kennedy: Well, can you tell me as a matter of practice if... if you know?
Suppose there's a partnership which is a little murky.
It's in the Cayman Islands and they're behind, but that one of the... the general partners is in California.
Can you just proceed against him, do you know?
Does the Revenue Service--
Mr. Jones: Well, there--
Justice Kennedy: --ever do that?
Mr. Jones: There... there is an... the uniform... in the case law, there's a discussion of situations where the partnership is known to be insolvent.
You're not required to do a senseless act.
You're not required to pursue and exhaust against the partnership when it's known to be insolvent.
So in that situation, you have exhausted because the partnership is insolvent.
Justice Kennedy: And I take it in that situation... you correct me if I'm wrong... but you can't just levy on the account if the tax has not been assessed against that partner individually, but you can commence some other sorts of proceedings which would allow a subsequent levy.
Or am I wrong, or is that clear?
Mr. Jones: --Well, you've brought me through... to a lot of levels of complexity, but I think the answer to the question is we... we don't dispute that you need to give a... a notice of assessment in order to collect administratively through liens and levies.
That's not relevant to this case because this is a judicial collection case.
Justice Kennedy: Of course.
Mr. Jones: But, nonetheless, there is case law that says that when you give notice to the partnership of its liability, that's sufficient as constructive notice to the partners to permit administrative collection through liens and levies.
Justice Ginsburg: Mr. Kent, if you're not right about that and you do have to have individual notice and demand to the partners, then there's a consequence other than liens and levies, isn't there, where you have whopping penalties and interest attached?
I thought if you don't give notice and demand within the 60-day period, then not only can't you impose liens, but that the interest and penalties stop running.
Mr. Jones: I'm... I'm familiar with the... the concept of interest doesn't run until notice of the assessment is made, but nonetheless again, notice to the partnership would be constructive to the partners.
Justice Ginsburg: But if you're wrong about that constructive notice, then you could still say, well, the statute has been extended 10 years because of the assessment.
However, one might conclude that the interest stops running and that you can't use administrative collection procedures.
Mr. Jones: Well, I... I don't mean to be... I don't mean to sound like I'm retreating from that issue.
I'm just... it's not presented here, and so I'm not really capable standing here--
Justice Ginsburg: Well, it would be to the extent on... if... if this thing is remanded with instructions that the assessment counts against all of them, that there would be the question remaining about the interest and penalties.
Mr. Jones: --That's... I don't... it is possible, and if the Court were to reverse and remand for further proceedings, it's possible that that issue would be raised.
Justice Ginsburg: Are you... are you saying that we should maybe flag it but not decide it?
Mr. Jones: I don't... I don't know what your practice would be.
I would think your practice would be to decide the issue that's presented.
You could note other issues haven't been raised, but since those issues haven't been briefed here, we're not really in a position to advise you on their proper resolution.
Chief Justice Rehnquist: --Why don't you go ahead with the issues that are presented?
Mr. Jones: Okay.
Well, the point I was making was that the court ruled against us because they said that the partnership taxes had not been assessed directly against the partners.
But respondents now correctly concede that there is no requirement of Federal law that a derivative or secondary State law liability to pay a tax has to be assessed before it can be collected, and that concession is plainly correct in light of this Court's decision in 1933 in the Leighton case where the Court held that a derivative or secondary liability that arises under State law to pay a tax may be recovered... and I quote... without assessment of that liability.
And there are numerous cases that have applied that principle in... in related secondary and derivative liability contexts.
And as... as I've already indicated, those principles plainly apply here because under the Uniform Partnership Act, which applies in California, the liability of the partner is derivative for the... and secondary rather than principal, as I've discussed with Justice Scalia.
Not only is it clear from the legal structure of the UPA, but the official comments to the... of... to that act state that the liability of the partnership for partnership debts is principal and that the liability of partners is... is in the nature of a guarantor.
It arises only when the partnership doesn't pay its own debts.
Federal law also makes clear that this is a liability that attaches directly to the partnership.
This is a Federal employment tax.
It applies to employers because, under California law, the... the partnership is a separate and distinct legal entity.
It is the employer.
It pays the wages.
Its payment of wages is what causes the taxes to be imposed.
Chief Justice Rehnquist: But you... you agree that it's the law of California that imposes the derivative liability on the partners?
Mr. Jones: That's the way the cases describe it.
From my... and that's the way this Court described it in... in Commissioner v. Stern.
Chief Justice Rehnquist: What more do you want?
Mr. Jones: Pardon me?
Chief Justice Rehnquist: I say what more do you want.
Mr. Jones: Well, I don't want more.
I'm just being finicky I guess, because to me we... the Court in Commissioner v. Stern said that these... historically these are substantive liabilities that Congress accepts from State law.
And therefore, the Court applies the substantive body of State rules in... in implementing that liability.
You could also think of this... and I'm not asking the Court to reconsider Commissioner v. Stern.
But you can... even in light of Commissioner v. Stern, you can think of this as Federal law borrowing State law for this remedial purpose, and Congress has sanctioned that by not altering the principles that have long existed on this.
The... but the... the point that this Court made in Leighton is that these principles that they apply come from State law and you don't a... actually respondents now admit there's no mechanism in Federal law to assist this... assess this sort of secondary derivative State law liability, and that's correct.
That's what the Court addressed in the Leighton case.
And the court of appeals in this case just misapplied those well-accepted principles.
Once the assessment of the partnership taxes was made, under section 6502 the United States has 10 years from the date of the assessment to bring any proceeding in court to collect the taxes.
And in the Updike case in 1930, the Court held that that 10 years applies not only to actions against the directly liable party but also to a person whose liability is derivative or secondary and arises from State law.
And the Court explained that the broad purpose and broad text of 6502 applies equally in both cases because in the Court's words, in a real sense the action against the derivatively liable party is a proceeding in court to collect the tax.
As the Court said in Updike, the aim in the one case, as in the other, is the same.
It's to collect the tax liability.
Now, in this Court respondents do not dispute that accepted understanding of 6502.
Instead, they raise here a new and, indeed, a radical claim that no court has adopted and that they did not raise prior to their merits brief in this Court.
What they argue now for the first time is that the Federal statute of limitations should not govern this derivative liability claim because since it stems from substantive State law, the State statute of limitations should govern it.
Now, since they didn't raise that claim at any time before their merits brief in this Court... and it is a statute of limitations which is an affirmative defense... they're... they've waived the claim as too rate to... too late to raise it.
But nonetheless, I think it is important to note that their claim is plainly inconsistent with this Court's decisions.
For example, in the Summerlin case, this Court held that whenever the United States acquires a claim acting in its governmental capacity, that claim of the United States is not subject to a State statute of limitations because of the sovereign rights... sovereign immunity of the United States.
And they applied that holding in Summerlin to a situation where what the United States obtained was a right to enforce a private note and private mortgage that the--
Justice Stevens: May I interrupt for this question?
You know, there are some State statutes of limitations that... or some States have limitations provisions that are either affirmative defenses or some are, in effect, conditions precedent to bringing an action.
If California had the latter form of action, how would you decide this case?
Mr. Jones: --I think that in... in Commissioner v. Bresson where the Ninth Circuit addressed that very point, they... they were... they wrote a very useful opinion that seems to me to be perfectly correct, that the... that if it is the passage of time after the United States acquires its right that causes the claim to expire, that that is what is barred by the Summerlin rationale because the sovereign rights of the United States can't be extinguished.
And so whether you think of it as extinguishing the claim or limiting the... the period of recovery, in either event what's instrumental is that the... the United States had the right at the time it obtained the claim and that the State law could not thereafter cut that right off.
Justice Breyer: Why not?
Why... why... suppose that you have a... a bank that guarantees a debt, and the debt is Smith's debt.
And the guarantee is to pay, including tax debts.
That's what it says.
It was a condition of the borrowing or some other thing.
Now, why wouldn't State law govern the period of time in respect to which any creditor, including the Government, has to assert a... a claim under that note, let's say, or under that particular written guarantee since the liability there is a creation of State law and the State would have the right to define its contours?
And after all, that guarantor is not the taxpayer.
The... the guarantor's liability arises solely out of the fact that he happens to have entered into a note with a guarantor who promised to pay.
Mr. Jones: So you're talking about a... a private contractual right--
Justice Breyer: Yes.
Say a private--
Mr. Jones: --that the United States somehow obtained rights under by--
Justice Breyer: --Yes.
Mr. Jones: --levying, for example--
Justice Breyer: Yes, yes.
Mr. Jones: --on the... on the right.
Justice Breyer: Yes, yes, and then I'm going to say why isn't this that.
Mr. Jones: That's... that's a... that's exactly frankly what happened in Summerlin--
Justice Breyer: Yes.
Mr. Jones: --except Summerlin involved a housing program instead of the Internal Revenue Code.
In Summerlin, the Government obtained a private note and enforced it, regardless of the State statute of limitations, and the Court's reasoning was that the... that the United States as sovereign cannot be subject to limitations imposed on the rights that it obtains.
Justice Breyer: So if I... if I enter into a promise with you and say in return for my lending, you know, whatever it is, I... I promise that I will pay your tax debts, but by the way, I don't want to pay any tax debt that isn't definite before January the 5th, 2004 or 2010.
I don't want to pay anything that arises--
Mr. Jones: It's a limit... if you're talking about a substantive limitation in the document itself, well, the United States takes its... stands in the shoes of the assignor in that situation, and we don't get a better substantive right... substantive right.
Justice Breyer: --Okay.
So it's a substantive procedural distinction.
Mr. Jones: Well, certainly that's the way the Court has looked at it, and I--
Justice Scalia: But you know, in... in other cases, let's say when the... when the Federal Government creates a Federal right without establishing a statute of limitations for that Federal right, State law does not govern, but Federal law looks to the... to the State statute of limitations as a matter of Federal law.
I don't know why it wouldn't be the same thing with respect to a... a Federal claim.
You mean there is no statute of limitations whatever on Federal claims?
Mr. Jones: --No.
Well, that's the second route that the Court has used to say the State's limitations don't control, and that is, when there's a Federal limitations period that applies to the claim, then the State provision doesn't control.
Justice Scalia: Of course.
Mr. Jones: And under... under Updike, what this Court concluded in Updike was that there is a Federal statute of limitations that applies to these proceedings in court to collect the taxes, which includes the derivative claim.
Justice Scalia: Well, that... that's fine.
But I'm talking about the more general proposition that... that you're... that you're defending or... or proposing that... that State law does not... never... never applies to a... to a Federal claim.
Mr. Jones: Well, it doesn't--
Justice Scalia: I mean, a claim by the United States.
Mr. Jones: --It doesn't--
Justice Scalia: I think it does.
Now, it may not apply of its own force.
Mr. Jones: --Exactly.
Justice Scalia: But it applies because of adoption by the United States.
Mr. Jones: If the... if the Court were to find it appropriate in a particular instance to adopt a State rule, that would not interfere with Summerlin, but that would... that would... I can't think of a case exactly like that.
There may well be some.
But most Federal claims--
Justice Scalia: I can't imagine our not doing it.
I can't imagine our saying that, you know--
Mr. Jones: --Most--
Justice Scalia: --the clock keeps ticking on Federal claims forever and ever.
Mr. Jones: --Most Federal claims come within some general statute of limitations, and this is certainly a situation like that.
Justice Ginsburg: Is it... is this question really academic in this case because you have not one but two Federal limitations, one, the regular 3-year period, then the extension by 10 years following an assessment?
Mr. Jones: Well, I think the Updike case makes this discussion somewhat hypothetical, and I understood Justice Scalia's question to be in that vein.
Justice Ginsburg: But here, what you're relying on are the Federal limitations period.
So you don't need to worry about suppose there had been no Federal limitations.
Mr. Jones: I... I don't need to worry about them, and I... but I'm only addressing them because respondents have raised them at this point in the case, and so I'm just discussing the two theories that this Court has applied in rejecting that kind of contention.
Chief Justice Rehnquist: You're saying it's doubly hypothetical because they can't raise the whole issue--
Mr. Jones: Yes.
Chief Justice Rehnquist: --at this point anyway.
Mr. Jones: Yes, sir.
Unknown Speaker: I thought their primary position, though, was that the partners are not secondarily liable, they're primarily liable, so that they are the taxpayer and they're entitled to assessment notice and demand.
Mr. Jones: That is now clearly their primary position, and for the reasons I've already described that position can't be reconciled with the Uniform Partnership Act or with... or with the Federal law that applies to these taxes.
Justice Kennedy: Can you... can you tell me in the case of a corporation, if the responsible officer does not withhold employment taxes, I... I take it... I thought I remembered that... that the responsible officer is personally liable.
Or am I wrong about that?
Mr. Jones: Yes.
There is a statute that authorizes an assessment of that liability against a responsible officer.
Justice Kennedy: Ah, but you have to assess it.
Mr. Jones: It... it authorizes the assessment.
That's... you know, it's interesting.
There are certain types--
Justice Kennedy: Can... can you proceed against the responsible officer without the assessment?
Mr. Jones: --If you have a claim based on State law or common law, and that's the reason we have a responsible officer statute is that this is a Federal claim.
There isn't... unlike in the partnership situation and in the ordinary transferee situation, there's not a backup State law action.
Justice Kennedy: Well, if... if in the case of corporate officers, there must be an assessment, then by analogy it would seem that it wouldn't be too much trouble for the IRS to assess the partners in your case.
Mr. Jones: Well, sometimes it is troublesome, but it's not required in any situation under our understanding of the existing law.
Justice Kennedy: I... I thought that it was required in the... in... in the corporate case.
You said it has to be assessed against the responsible officer.
Mr. Jones: Oh, I'm sorry.
I thought you were talking about the partnership then.
I... the responsible officers... officer liability is created by Federal statute, unlike the partners' obligation for the debts of the partnership.
Justice Kennedy: I'm simply wondering if... if that isn't a model, if that's what happens in the corporate instance, in this case where the statute is... is silent on the point, whether we shouldn't just assume that since it's not too much of a burden on the Government in the corporate context to require it to assess the responsible officer before the tax can be collected, that we shouldn't say the same thing here.
Mr. Jones: There is--
Justice Kennedy: I'm just--
Mr. Jones: --I understand.
But the responsible officer liability is... is really a radically different concept.
It only... it only arises when that officer had knowledge of the fact that the taxes weren't being paid as they accrued and willfully failed to pay them and... and was responsible, had the responsibility to pay them.
It is a... it is a malfeasance claim, whereas the derivative liability claim is just under State law, you are liable as is the partnership, and we can enforce that State law.
There's another example--
Justice Kennedy: --There's a--
Mr. Jones: --where the similar thing happened.
3505, which is the lender's liability.
There was no lender's liability for employment taxes that the Court discussed in the Jersey Shore case.
That liability didn't have a... a common law precedent, and so Congress created the liability because they saw a specific problem where lenders were allowing or in... in effect, helping employers evade employment taxes by loaning them money from which they paid wages but didn't pay taxes.
And so Congress created this separate statutory scheme.
But respondents are correct in their concession that there is no mechanism under Federal law for assessing the derivative State law liability of a partner for the debts of the partnership.
And so as the Court held in... in Leighton, we can proceed without assessment against them to enforce that liability.
Now, I do want to also mention the... the citations that respondents make to section 6303.
That section appears in the portion of the code that addresses administrative collection through liens and levies, and it states that the Secretary is to give notice of the assessment to any person liable for the tax.
The cases that have interpreted and applied that statute, which stem from 1954, have... have concluded correctly that that statute applies only to administrative collection through liens and levies and has no application to judicial collection actions.
And there's a... a sound historical explanation for that, and that is that prior to 1954, there were two independent routes for collecting taxes.
The Secretary was authorized by the code to bring a judicial collection suit, but there was a separate officer known as the collector of revenue for each district.
And the collector of revenue was, by the code, authorized to do the administrative collection through liens and levies.
And the predecessor of 6303 had said that the collector is to give notice of the assessment and make demands for payment.
And it was well established that that applied to his actions in administrative collection and had no application of the Secretary's independent authority to bring a judicial collection suit.
In 1954 in revising the code, Congress eliminated references to the collector in the code, placed the Secretary in charge both of the... of judicial and administrative enforcement and changed the predecessor language of 6303 from saying the collector is to give notice to saying the Secretary is to give notice.
But in doing so, Congress did not mean to change... and the courts that have reviewed this have correctly concluded did not change... the fact that this notice of assessment requirement applies only to the administrative collection area, has no application to judicial collection suits like this one.
Justice Ginsburg: --Are you conceding then that there could be no liens and levies against the partners here because there was no notice and demand--
Mr. Jones: I--
Justice Ginsburg: --individually to them?
Mr. Jones: --I don't think the record discusses whether there was notice to the partnership.
Justice Ginsburg: No, no.
To the partners.
Mr. Jones: No.
Justice Ginsburg: You just explained these two different routes.
Mr. Jones: Yes.
Justice Ginsburg: And you said that this is a judicial collection proceeding.
Mr. Jones: Yes.
Justice Ginsburg: So the other doesn't apply.
So I'm asking you if you are now making the concession that those words... what are they... each person liable for unpaid tax, would stop you from using the administrative collection route because you didn't give notice and demand individually.
Mr. Jones: Let me... I can't say what we did or didn't do in notice because there's nothing in the record on that in this case because administrative collection isn't involved in this case.
Justice Ginsburg: Well, let's assume you gave notice and demand only to the partnership.
Mr. Jones: Okay, let's assume that.
If we gave notice and demand to the partnership, what we would be authorized to do is clearly under 6321 and... make a lien and levy against any assets of the partnership.
And then as I said, although... the... the cases are also perfectly consistent that the notice to the partnership is valid as constructive notice to the partners.
And so, for example, if we have a partnership employment tax liability from Smith Construction and the two partners are Bob Jones and Bill Wilson, notice of the assessment to the partnership is valid as notice to its two partners.
And so our lien arises, if they don't pay the tax, but if a third party creditor is out there, First National Bank, the First... our notice to the partnership may not be notice to the First National Bank.
And so in a lien contest we might not have the prior lien vis-a-vis this other party, but vis-a-vis the two partners, the cases say that our notice is valid for 6303 purposes to them because, well, of course, a partnership only acts through its partners and notice to one of them or to the partnership is valid, constructive notice to all the others.
There is no case inconsistent with that conclusion, but again, it's plainly not presented in this case and we would not ask the Court to address it.
There's no need for it to.
This is just a judicial collection case.
The only issue that is really before the Court is whether we have to give notice... I'm sorry... whether we have to assess the individual partners to collect the State law derivative liability.
And for the reasons I've described, that the decision below is incorrect on that and... and should be reversed.
And I would like to reserve the balance of my time.
Argument of David R. Haberbush
Chief Justice Rehnquist: Very well, Mr. Jones.
Mr. Haberbush: Mr. Chief Justice, and may it please the Court:
We've heard some interesting arguments, and I'd like to address the history here of the way in which this alleged derivative liability is imposed upon the partners.
We contend that the partners--
Chief Justice Rehnquist: Now, the Government says you... you did not raise what is now your principal argument until your merits brief.
Do you agree with that statement?
Mr. Haberbush: --Your Honor, no, I don't.
This case has always been about statutes of limitation.
We were addressing, in fact, a argument raised in the merits brief by the Government.
If the Court will note, at page 5... I'm sorry... page 12, footnote 5, this specific question is addressed by the Government stating that it's a Federal not a State statute of limitation that comes into play.
And our portion of the brief is simply a reply to that.
Justice Scalia: Wait.
It seems to me it's... it's... the burden is on you to make the claim that a State statute applies, and you never claimed that any State statute applies.
Now, the Government here, out of an excess of caution or maybe to explain the whole situation to us, puts in that footnote, but that doesn't create a claim on your part that the State statute governs.
Did you ever assert that... that this matter was governed by... by a State statute of limitations until your merits brief?
Mr. Haberbush: Yes, we did in the courts below and our briefs below.
Justice Scalia: You asserted that it was governed by a State statute of limitations.
Mr. Haberbush: Your Honor, what we argued was that if the Federal statutes did not apply, section 6303 requiring notice and demand, if these partners are not taxpayers under the Internal Revenue Code, then State law would govern.
And yes, we did raise it below.
Chief Justice Rehnquist: Did the court of appeals touch on it?
Mr. Haberbush: The court of appeals did not need to touch upon it, because the court of appeals felt and decided that these partners are taxpayers under the Internal Revenue Code.
And that's the precise question I would like to address.
Justice Stevens: Did you raise the statute of limitations point in your pleadings in the district court?
Mr. Haberbush: In the United... this originated in the bankruptcy court, so the district court--
Justice Stevens: Well, I mean in the bankruptcy court.
Mr. Haberbush: --Your Honor, we did.
We raised it both in terms of the statute of limitations under section 6303 and under State law.
Justice Souter: Did you raise it as an affirmative defense under State law?
Mr. Haberbush: Well, we objected to the proof of claim which is akin to an answer, and yes--
Justice Souter: And one ground of your objection was under State law it's barred?
Mr. Haberbush: --Our objection was a fairly generic objection in all honesty--
Justice Scalia: So we're talking about did you ever say this claim is barred by... it... it is too late under this State statute of limitations, citing the State statute of limitations?
Mr. Haberbush: --Yes, we did.
Justice Scalia: Would you provide us with--
Justice Stevens: --Where can we find that in the record?
Justice Scalia: Where will we find that?
Mr. Haberbush: I believe you'll find that at the... the district court level after the bankruptcy court.
Justice Souter: Well, isn't the place to raise it in the bankruptcy court?
I mean, that's where your pleadings... that's where your responsive pleadings were filed.
Mr. Haberbush: If indeed it is an affirmative defense, yes.
Our objection to the claim was this was not an enforceable claim under law, State or Federal, and our reason for it was barred by the limitations periods.
Justice Ginsburg: As a Federal--
Justice Kennedy: --Under California practice, I assume statute of limitations is an affirmative defense?
Mr. Haberbush: Yes, Your... Your Honor, it is.
We, however, believe that this case does not be controlled by State law, but rather by Federal law.
A partner's liability for the debts of a partnership may arise under State law, and this Court has noted in the case of United States v. Kraft that State law defines the rights as between the parties, but the manner by which it may be collected, the tax itself or the claim, is governed by Federal law.
And that is really the heart of what our argument is.
There is no specific Internal Revenue Code provision that makes a partner liable for a partnership debt.
What the Government in this case does is it relies specifically upon historical cases that stem from old section 280, which is adopted as section 6901 of the Internal Revenue Code, whereby assessments may be made against transferees, donees, and fiduciaries, and the cases interpreting those statutes basically find that there is a derivative liability with a coterminous statute of limitations.
Justice Breyer: This would be an odd State law, wouldn't it?
Imagine that I guarantee a debt or suppose a partner is like a guarantor.
And suppose that the primary... person primary... primarily liable is in litigation with the debtor... the creditor, rather.
And because of delays and so forth, it takes about 15 years to resolve this litigation.
I've never heard of a guarantor who wouldn't become liable at the time the thing is final and that the... he just becomes... I mean, how does it work?
I would have thought a guarantor is liable for the debt the debtor owes.
How does the statute work, the State statute?
Mr. Haberbush: Your Honor, we believe the State statute is... is one that does not require exhaustion of remedies as against the partnership.
Justice Souter: It has nothing to do with exhaustion of remedies.
Justice Breyer: I'm... and I'm talking about States... the State insofar as it sees the partner as a guarantor of the liability that is created by a different entity, namely the partnership.
And I'm asking if under State law of California, wouldn't it be the case that if he's a guarantor and you get the statute of limitations on a matter to determine liability extended, that the guarantee also extends.
Mr. Haberbush: That would--
Justice Breyer: There's no State law that says you have to sue the guarantor before the liability that he's guaranteeing is determined.
Mr. Haberbush: --That is correct.
Justice Breyer: All right.
If that's correct, what are we arguing about?
Mr. Haberbush: What we're arguing about here is that this is not a suretyship or a secondary liability--
Justice Breyer: Yes, yes.
You're back to your question of whether under partnership law in fact this is a guarantor or the equivalent or a surety.
I understand that argument, but it sounds to me as if that argument is resolved against you, this statute of limitations argument is a serious red herring because it won't matter.
Mr. Haberbush: --Well, unless Federal law controls.
Justice Breyer: Right.
Mr. Haberbush: Unless these parties are taxpayers under Federal law, in which case--
Justice Breyer: No, no.
If the primary argument, which you want to argue, that they're taxpayers or that they are primarily liable, you win it or you lose it.
If you win it, you win.
If you lose it, your statute of limitations argument adds nothing.
Mr. Haberbush: --I think not.
Justice Breyer: That's my... that's what I'm thinking.
Mr. Haberbush: I think not.
I think we win, and let me explain why.
It has nothing to do with limitations periods.
It has nothing to do with State law governing guarantees.
It has to do with the way this Court is asked to define this particular claim in this particular case.
Is it a tax claim or is it a claim which is derived from the partnership liability?
In other words, is it a tax debt or is it a debt because they're liable for a debt of the partnership so that it loses its nature as a tax claim?
If that's the case, this is a bankruptcy case.
Tax claims in bankruptcy have priority over other claims under section 507(a) of title 11 of the United States Code.
Those claims too are not dischargeable if they're a tax claim under section 523 of title 11.
So if the Court determines this is nothing more than a guarantee pursuant to State law and not a tax claim, then this debt will be discharged in this bankruptcy case.
Justice Scalia: Do you have... have any cases for that, that a tax claim loses its character as a tax claim when relief is sought not against the person primarily liable but against somebody derivatively liable?
It seems to me it's still a tax claim.
Mr. Haberbush: No, Your Honor, we do not have authority for that.
However, if it is a tax--
Justice Scalia: I wouldn't expect you to find any.
Mr. Haberbush: --However, if they are liable for the tax, this Court has already stated on a number of occasions, including the most recent case of U.S. v. Kraft, someone who is subject to the tax is someone who pays it, someone who is liable for it.
These parties are liable for the tax.
They are subject to the tax under section 7701(a)(14) of the Internal Revenue Code, and therefore they are taxpayers.
Once they are taxpayers, that invokes the provisions of section 6501 requiring assessment or suit within 3 years.
We don't claim that assessment is the only method.
We claim assessment or suit, which is consistent with the history of the cases, and that's a 3-year limitation period as to these--
Justice Souter: No, but you say that they're taxpayers because they're partners, and therefore they... and... and that's why the... their... their right to an assessment can be claimed.
But by the same reasoning that you follow, if they are taxpayers because they are partners, why isn't notice to the partnership notice to the partners or assessment against the partnership assessment against the partners?
Why... why do you, in effect, make a metaphysical distinction in the latter case but not in the former?
Mr. Haberbush: --Well, Your Honor, I don't think that we do.
I think that the argument that there is constructive notice merely because one is a partner creates notice to... notice to the partnership is notice to the partners.
There is no controlling case on this idea, and that would be too a question I think of State law, whether notice to a partnership is notice to the partners.
And we've clearly cited to California law that says you must commence a separate suit against the partner in order to obtain a judgment against it.
There is no California law that says that by filing a suit against the partner, that's sufficient for due process purposes of creating notice to the partners such that--
Chief Justice Rehnquist: We don't ordinarily decide questions of State law here.
I think we would generally feel perhaps the Ninth Circuit knows more about California law than we do.
Mr. Haberbush: --Well, certainly that's true.
Chief Justice Rehnquist: I said, we would think.
Mr. Haberbush: --Well, thank you.
And... and yes, this Court ordinarily does not address questions of State law.
We think that this is a Federal statutory interpretation.
Either these persons are taxpayers liable for a tax or they are not taxpayers liable some... for something that is not a tax.
Justice Breyer: The last part.
They are for... they are not taxpayers in the meaning of the statute who are liable for something that is a tax.
And I don't know why that wouldn't be.
Mr. Haberbush: Well, Your Honor--
Justice Breyer: And State law makes them, in effect, guarantors of debts.
This is a tax debt.
So they're guarantors of the tax debt.
So, therefore, they're liable for the tax or sureties or some other equivalent word.
Mr. Haberbush: --All of the cases referred to for the coterminous statute of limitations, which is what would be suggested would be applied here if in fact they are liable for this tax debt and therefore the provisions of the Internal Revenue Code apply, are all cases where specific enabling provisions created the liability of those persons.
Under section 6324, certain persons are made personally liable.
Under section 6901, certain persons may be assessed with taxes as transferees.
And those specific statutes have provisions in them that say that the assessment and collection and enforcement of the tax... this is 6901 and its predecessor, section 280, where the collection assessment and enforcement of the tax is subject to the same provisions and the same limitations as the tax itself.
So it's not surprising that you have cases like Leighton and Updike where the statute of limitations set forth in what is now 6502 applies to them because they're subject to the same limitation periods.
There is nothing in the Internal Revenue Code that sets forth a limitation period as to partners.
If one adopts the guarantor analogy, then this is conceivable a case where any number of years could pass where the partners would become liable.
Your... I would point out the Court's record in the joint appendix.
At pages 100 and 102, we have the proofs of claim that were filed in these bankruptcy cases, and these proofs of claim on their face show that the Government in this case is not simply filing a claim as though it were a lawsuit against these partners.
These proofs of claim were filed as secured claims in both of the two cases that are before the Court.
Secured by what?
Motor vehicles and real estate.
So the Internal Revenue Service is taking the position clearly, unequivocally that it can enforce this debt by the summary collection process which has been called awesome and... and super powers that are not available otherwise.
Justice Ginsburg: Whether they could or not, they're saying that the question here is a judicial action.
Mr. Haberbush: Well--
Justice Ginsburg: And... and so maybe they're wrong and maybe they're right about that, but that's not before the Court.
Mr. Haberbush: --That's not... that may not be before the Court, but the Government has taken the position the only way, the sole and single way, it can collect taxes is to file suits against partners.
We would suggest that if the Court were to permit assessment, rule that they are taxpayers subject to assessment, subject to suit, that that would enhance collection.
It would encourage partners at the earliest opportunity to cause their partnerships to pay taxes.
It would cause partners at the earliest opportunity to pay the taxes.
In this instance, you have proofs of claim--
Justice Souter: It... it would also cause an enormous number of assessments to be made that ultimately would have no... no use.
I mean, the... the amount of administrative assessing going on would... would be staggering.
Mr. Haberbush: --Well, the amount of suits could be staggering as well to collect these kinds of taxes.
Justice Breyer: What is the problem?
Suppose... I'm... I'm failing to see it but maybe... suppose it's true that what the Uniform Partnership Act says is true.
Partners are, quote, in the nature of guarantors, end quote, rather than principal debtors on the debts of the partnership.
So let's suppose they're like guarantors.
I would have thought that State law was something along the lines of a guarantor must be sued in order to collect a... a guaranteed debt within a period of time after it becomes determined that such a debt exists.
Now, I would think that that's how the normal State law runs.
So unless there's something Federal to the contrary... and by the way, if there is, they have 10 more years.
But unless there is something Federal to the contrary, there's no problem with bringing this case.
So the only question in this case is are they in the nature of guarantors.
And I'd be interested... well, A, I'm interested in your comment on what I just said, and I'm also interested in the comment of why they're not guarantors.
Mr. Haberbush: Very well.
Here the Internal Revenue Service has filed proofs of claim in the bankruptcy court not for the debt of the tax but for the tax, for the penalties, and for the interest.
Guarantors under California law are liable for the debt and perhaps the interest, but not for the penalties.
The Court will note that these proofs of claim are approximately three to four times as much as the amount of tax that was originally assessed against the partnership in the initial instance.
There is nothing in the record to suggest that these partners had knowledge or notice of these taxes at any time before these proofs of claim were filed.
Now, under California law, if you have a guarantor, the guarantor knows of the liability that that guarantor is offering surety for.
That guarantor knows that that liability exists.
That guarantor can encourage the principal party to pay the tax or the debt in question.
Here the policies that are urged by the Government do not encourage collection of this--
Chief Justice Rehnquist: Mr. Haberbush, do you defend the decision of the Ninth Circuit in this case?
Mr. Haberbush: --Yes, we do.
Chief Justice Rehnquist: That in order to collect against the partners, an assessment would have to be made against them?
Mr. Haberbush: No, not within that specific limitation.
We think that an assessment or a suit should be brought within the statutory period--
Chief Justice Rehnquist: Well, I thought... I thought the reasoning of the Ninth Circuit was that you couldn't collect against the partners unless you assess them too.
Mr. Haberbush: --To that extent, the opinion is wrong for the reason that it is a well-held proposition that suit or assessment may be brought under section 6501 within the 3-year period, so that it's not exclusively assessment that's involved.
And this Court and other courts, I believe, have... have ruled that assessment is not a prerequisite to collection.
However, some action must be taken within the statutory limitations periods.
Unknown Speaker: And the filing of a claim in a bankruptcy court is insufficient because?
Mr. Haberbush: It's untimely.
It is not done within the period of time--
Unknown Speaker: So this is simply a statute of limitations case.
Mr. Haberbush: --That's our position.
Yes, Your Honor.
It is simply a statute of limitations case.
The Government has contended that this is a tax governed by the Internal Revenue Code.
The liability may be created by State law, and this Court has consistently said while liability may be... be created by State law, the enforceability of that liability is a subject of Federal law.
The Federal laws provide for 6303 notice and demand.
They provide for... 6501 provides that assessment must be made.
The... the Government suggests that there can--
Justice O'Connor: Mr. Haberbush, would you be able, after the argument, to furnish the Court with the places in the record available to us where it shows that you raised the State statute of limitations issue below?
Mr. Haberbush: --Yes, I can.
Unknown Speaker: Thank you.
Mr. Haberbush: Yes, I can.
Justice Ginsburg: Why shouldn't an assessment against the partnership be good as to the partners as well?
I mean, the whole difference is that you'd have to add the... the names of the individual partners.
I mean, the assessment itself is something in a file in some building.
Mr. Haberbush: Well, the assessment is the notation or recording of the liability.
However, section 6203 says that to be a proper assessment, it must record the liability of the taxpayer and we, of course, say that the taxpayer also includes the partners.
And yes, there could be a single assessment naming numerous parties.
There are examples of that.
For example, a husband and wife are jointly assessed.
An assessment against a husband or a wife independently is not an assessment against the other.
So there are multiple assessments that are capable of being made under the code.
There are numerous other instances where assessments are made.
6901, for example, assessment--
Justice Ginsburg: Is it... does it... would it matter if in fact the partners knew... had received the... I assume that the notice and demand would come to the partnership.
This is a small partnership.
There were what?
Four partners involved?
If they had actual notice, would that make any difference?
Mr. Haberbush: --Your Honor, that might make a difference.
We... we would contend that it does not make a difference.
We have cited to cases... and I don't recall them right off the top of my... my head at this moment... where the assessment... in fact, that was Cool Fuel, Inc. out of the Ninth Circuit where the assessment actually has to be received and made.
It has to name who the taxpayer is.
Marvel v. the United States.
While the taxpayer there was named as a partnership's name, the individuals' Social Security numbers, taxpayer identification numbers, were on that... that assessment, and that was found to be good as to those persons even though they were not individually named.
Justice Ginsburg: But certainly they had actual notice.
Your big due process objection that you make would not... would... would be very thin, would it not?
Mr. Haberbush: I don't disagree with that, Your Honor.
There is nothing in the record below where there is... that issue has been addressed.
There is no facts that were derived at the trial of this matter where that was addressed.
There is nothing in the record--
Justice Ginsburg: But you addressed it in your brief.
You said if they didn't get individual notice and demand, that would be a violation of due process.
Mr. Haberbush: --Yes.
It is not before the Court, however, whether they did or didn't, and there's nothing in the record suggesting that they did get such notice.
That's why the... the Government relies so heavily on its constructive notice theory, although starkly absent from that argument is any California law to support that idea that notice to a partnership is constructive notice to its partners.
Turning back to the... the idea of the... the assessment in this case, the... there are striking examples throughout the brief of the Government, although the Government contends that it is not able legally to assess partners, there are no less than 12 cases cited in the briefs, 10 of which were cited by the Government, in which summary collection process was instituted against partners, and in... in any of those cases there was an assessment.
In fact, the one case that's cited by the Government, the... the United States v. Wright... that's the case which came out of the Seventh Circuit that the Government contends is in direct conflict with the Ninth Circuit case in this instance is one where the United States District Court in its findings found that the partners were assessed.
And it's not surprising therefore, that the Wright court found that there were--
Justice Ginsburg: It said that... but I thought Judge Easterbrook said that that was irrelevant, that there might have been a fact question about that whether there were individual assessments.
But in any case, the court's rationale had nothing to do with that.
Mr. Haberbush: --That is correct.
However, the district court did find that there were assessments.
The Seventh Circuit found that that was irrelevant to the... the determination.
However, it is entirely consistent with the idea that in that case there were coterminous statute of limitations.
For the reason that assessments were made within the statutory period of time... that was still within the coterminous periods... then the collection.
The question was whether the 6502 allowed the collection against the partners who were jointly liable with the partnership in that instance.
The statutory period of time allowed to the partnership, because it had been tolled during a bankruptcy, the court found coterminous statute of limitations, relying on the Updike case as its example.
We... we believe that the collection of taxes would be enhanced by adopting the position that we have taken in this case.
We believe that requiring the filing of lawsuits in every instance where partners are liable for the debts of a partnership which has failed to pay its taxes and which may or may not be out of business, is simply a policy which would have litigation that is not required.
If the partnership is liable for the tax and this Court were to find that the notice provisions of 6302 and the provisions of 6501 allowing suit or assessment within 3 years applies, that that would enhance the collection of taxes.
We believe that... excuse me... we believe that by doing that, the tax will be paid at the earliest possible time.
Interest and penalties, such as have accrued in this case, would not accrue because the partners would be encouraged at every point and at every spot to cause their partnership to pay or to pay the tax themselves.
The Government is not in the business of banking tax claims, if you will, allowing them to accrue penalties and interest and thereafter, for who knows how many years, potentially as many as 3 plus 10, and if suit is filed within the 10 years under 6502, the... the term for enforcing a judgment.
So it could be 20-25 years that a partner could be out there liable for the tax during which penalties and interest continue to accrue, and then finally one day maybe that partner or that partner's estate or the partner's beneficiaries of the partner's estate might become liable for this tax.
We believe that by filing the tax... by filing an assessment at the earliest possible opportunity against the partners, this would encourage tax collection.
Justice Ginsburg: Nothing would stop a partner from paying the tax.
Mr. Haberbush: If the partner knows, that is correct.
Justice Kennedy: Isn't it reasonable to assume most partners know what's happening in their business?
Mr. Haberbush: --I don't know that it's unreasonable to assume that, but I suppose it is reasonable.
However, there are partnerships and there are partnerships, and some partnerships have managing partners who are actively involved in the business of the partnership and--
Justice Kennedy: Yes, but I... I would think, by and large, most partners know what's going on.
I mean, certainly there are exceptional cases, but certainly that's not typical.
Mr. Haberbush: --Unfortunately, I'm only involved in my law partnership and I know what's going on there.
I've not been involved--
Justice Scalia: Maybe you shouldn't be a general partner if... if you're not prepared to know what's going on.
It's pretty risky.
I mean, that's... that's the responsibility you assume when he... it only applies to general partners.
It doesn't apply to limited partners.
Mr. Haberbush: --That's exactly right.
Justice Scalia: So don't become a general partner if you're not willing to know what's going on in the partnership.
I... I thought that's the deal.
Mr. Haberbush: Well, Your Honor, I don't know whether that--
Justice Scalia: That's what it means to be a general partner.
You're... you're going to be liable for what the partnership does.
So you better pay attention.
I... and you're saying this is unjust somehow?
Mr. Haberbush: --Well, yes, it is, Your Honor, for the reason that does that mean that every partner has to go through every single piece of mail that enters the partnership and be familiar with every single thing that occurs?
Justice Kennedy: No, but when you accumulate tax liabilities of several hundred thousand dollars, they ought to find that... be able to find that out.
Mr. Haberbush: Well, Your Honor, these are over a number of quarters.
These were not all assessed at one time.
Justice Kennedy: Which is all the more reason they should have known about it a lot earlier.
Mr. Haberbush: Well, husbands oftentimes hide things from their wives who are a joint taxpayer as well.
Justice Ginsburg: But we're talking about a partnership that has not paid... what was it... FICA and FUTA taxes.
Surely, the partners were aware that they were not paying the taxes that were due year after year.
Mr. Haberbush: There's nothing in the record that suggests--
Justice Scalia: Who was responding to these letters from the Government?
Mr. Haberbush: --Your Honor--
Justice Scalia: I mean, does she take it in to... to her boss who was presumably one of the general partners and say, hey, you know--
Mr. Haberbush: --If it's a--
Justice Scalia: --the Government says we owe a lot of money.
Mr. Haberbush: --If it's a managing... if it's a managing general partner, I assume that that's the case.
If in fact the partnership had ceased its operations and these notices came afterwards, who knows who received the notices.
I don't think that the law imposes a burden upon every single general partner to look at every single bill and piece of paper that comes into a partnership.
Justice Kennedy: No, but you shouldn't rely on the United States Government to tell you what you... how your financial affairs are coming along and be the primary source of information.
Mr. Haberbush: That may be so, but if the... if the Government were required to do so, partners would at every point in time be encouraged to cause the partnership to meet its financial obligations.
Justice Breyer: It doesn't place that kind of a burden on the partners that you're talking about.
They're entirely free not to read the mail.
Mr. Haberbush: Well, that's... that's correct.
Justice Breyer: But... but the problem is they're going to be liable for whatever debts are incurred by the partnership if they don't do it.
That's the only burden imposed.
Mr. Haberbush: Well, Your Honor, and looking at burdens there is no... there is no insignificant... excuse me.
It's not a significant burden to place upon the Government to simply send another notice to the partners regarding their derivative liability for these claims.
Justice Souter: And it's not a very significant burden to a partner to say you better make sure they're paying the taxes.
Mr. Haberbush: Well, of course.
However, there... there have been dishonest partners, and the cases that I cite--
Justice Souter: You better be careful who you form a partnership--
Mr. Haberbush: --Well, yes, and there are cases cited in the briefs that say exactly that.
However, if... if the policy is to collect taxes and collect them promptly, then that is encouraged, rather than filing suit against partners, by a simple assessment sent in the mail to the partners.
If there is nothing further--
Justice Stevens: --Does an assessment affect your credit rating?
Mr. Haberbush: --Yes, it does.
Justice Stevens: So... so you want... all right.
Chief Justice Rehnquist: Thank you, Mr. Haberbush.
Mr. Haberbush: Thank you.
Unknown Speaker: Mr. Jones, you have 5 minutes remaining.
Rebuttal of Kent L. Jones
Mr. Jones: Thank you.
At page 3 of respondents' brief on the merits, they say... and I quote... if respondents are secondarily liable for the partnership taxes, then the Ninth Circuit's ruling that the IRS must assess respondents to collect the partnership taxes is incorrect.
It is clear to us that there is... this is a secondary derivative liability that partners have under State law.
I didn't hear respondents give any explanation of why that isn't so.
Given those two facts, then this Court's holding in Leighton seems clearly applicable, which is that we don't have to assess a derivative State law liability to bring suit to recover upon that liability.
Now, respondents say, well, somehow that holding is influenced by the fact that transferee liability is provided in 6901 of the code.
It's interesting that in... in the Leighton case what the Court held was that the 6901 transferee liability is a supplementary remedy that did not displace and, indeed, left in place the right of the United States to bring its suit upon the derivative State law liability without assessment.
So the... the principle that we draw from the Leighton case is not dependent on any of the specific statutes that address specific types of... of assignments of transferees.
In fact, it's utterly independent of that, which was the very issue the Court decided in Leighton.
Given that and... and given that there's a derivative sub-secondary liability, we can recover against State law.
Then the only other question is, well, what statute of limitations applies to that, which the Court held in Updike that it's 6502 which applies both to the direct liability and the derivative liability.
Justice Breyer: See, that's what I'm really wondering about.
I mean... but... but I mean, A, they may have not have raised it below.
B, it's not within the scope of the question.
C, it may not make any difference because the State and Federal may give you enough time anyway.
But if you do have to get to it, I'm... I'm a little worried about it because I don't... I don't really see why it should be Federal.
Mr. Jones: The reason it should be Federal is because all of these actions are designed, as the Court stressed in Updike, to collect the tax.
We have different remedies.
Congress could Federalize all of this.
Congress could write a statute that said, you know, you can bring suits for derivative liabilities and that those suits will... specifically subject to 6502.
And what the Court noted in Stern was that Congress hasn't done that because the Court has consistently applied State law to permit such tax collection to occur.
And... and so that's why Updike has got to be right because this is a strong Federal interest in collecting taxes, not to be too big about it, but I mean, this Court has noted that the collection of taxes is the lifeblood of Government.
This is as sovereign a claim as we have, and... and because of that, we need to have a uniform statute of limitations, which Congress has provided under 6502.
If... if we were left to the haphazards of State law, we would certainly want Congress to... to address that and correct it, but they don't need to correct it because since 1930 in the Updike case, the Court has explained that 6502 is broad enough to cover both types of... of judicial collection proceedings.
In the Court's words, the action against derivatively liable party is in every real sense a proceeding in court to collect the tax, and that's the... that's the statutory language.
And... and I... there has been no contention that that's not a correct interpretation of 6502.
I do not know what references respondents may have in mind to arguments they raised under State statutes of limitations before.
We're not familiar with those.
The statute that's referred to in their merits brief is a specific State statute.
We're not aware that that statute was ever cited before by the parties in this case, but even if it was, it seems to us that the reasoning of the Summerlin case and... and of Updike, which is... there's already a Federal statute... should control that question and--
Justice Ginsburg: Mr. Jones, why isn't Mr. Haberbush right at least when he says everybody would be better off if you went ahead and listed the partners as well on the assessment and gave them notice and demand?
Then there would never be any hassle of whether you could use both remedies, administrative and judicial.
Mr. Jones: --I think it's a question for Congress what's... you know, what makes everybody better off.
And what Congress has said is that we can assess these taxes against the employer.
The employer under State law is a separate and distinct legal entity known as the partnership.
Justice Ginsburg: Do you think you're impeded that you have no authority to give the partners notice individually?
Mr. Jones: We... well, we have authority to give them notice of an assessment and collect from them administratively, but in terms of, if you will, making an assessment them directly, we're supposed to assess the party whose subject to the tax.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.
Argument of Speaker
Mr. Jones: The opinion of the Court in No. 02-1389, United States against Galletti will be announced by Justice Thomas.
Argument of Justice Thomas
Mr. Thomas: This case comes to us on a writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
Respondents were general partners of the Marina Cabrillo Company a partnership.
From 1992 to 1995 the partnership incurred substantial federal employment tax liabilities arising from its failure to withhold the requisite amount of federal income taxes from its employees.
The IRS assessed those taxes against the partnership within the statutory 3-year requirement thereby triggering the 10-year extension to the statute of limitations on a tax collection action.
However, the partnership never satisfied the debt.
Several years later, the respondent filed for bankruptcy.
In the bankruptcy proceedings, the IRS filed proofs of claims for the partnership’s unpaid employment taxes.
Since under California law, respondents were liable generally for the debts of the partnership.
Respondents objected to the claims arguing that the taxes had never been assessed against them and thus, the statute of limitations for collecting the tax debt had expired.
Both the Bankruptcy Court and the District Court agreed and sustained the respondent’s objections to the claims.
A Ninth Circuit panel affirmed.
The Ninth Circuit acknowledged that the IRS had timely assessed the taxes against the partnership which triggered a 10-year extension to the limitations period for collecting the taxes.
The Ninth Circuit held however, that the assessment against the partnership extended the statute of limitation only with respect to the partnership because the partners were separate tax payers under the Internal Revenue Code and thus must me separately assessed.
Since the 3-year statute of limitations were assessing the tax debt against respondent had expired, the Ninth Circuit included that the IRS’ claim against the partners was time barred.
In an opinion filed with the Clerk today, we reverse the judgment of the Court of Appeals.
Respondents argued that a valid assessment triggering the 10-year extension of statute of limitation must name them individually because they are primarily liable for the tax debt.
First, respondents argued that they are primarily liable because 26 U.S.C. Section 6203 requires a Secretary to assess taxes by recording the liability of the tax payer and they are each separate tax payers under the Code.
The statute’s reference to the tax payer’s liability however, indicates that we must look to the underlying liability to identify the relevant tax payer against whom the tax must be assessed.
Here, the tax liability arose from the partnership’s failure to comply with the requirement that employers deduct and withhold certain amounts of employment taxes.
Thus, the relevant tax payer is the employer.
Respondents also argued that they are primarily liable for the tax debt because California law makes them jointly and severally liable for all of the partnership’s debts.
This fact is irrelevant, however.
In order to show that they are primarily liable for the debt, respondents must demonstrate that the employment taxes were imposed directly upon them as the employer.
Respondents have not shown that they are primarily liable for the tax debt and the Code does not require the government to make separate assessments of a single tax debt against secondarily liable parties in order to trigger the extended limitations period, because it is the tax rather than the person that is assessed.
The assessment's consequence is the extension of the limitation’s period for the collecting of the debt attached to the collection of the debt without reference to the identities of the secondarily liable parties.
In this case, the government’s timely assessment of the partnership was sufficient to extend the limitation’s period for the collection of the taxes from respondents.
The opinion of the Court is unanimous.