Pitts v. United States (In re Pitts)
497 B.R. 73
Bankr. C.D. Cal.2013Background
- Debtor Wendy K. Pitts was a general partner of DIR Waterproofing (a CA general partnership) and filed Chapter 7 on March 1, 2012.
- DIR failed to pay FICA (Form 941) and FUTA (Form 940) taxes for periods from 2005–2007; IRS recorded multiple Notices of Federal Tax Lien naming DIR and Pitts as partner.
- IRS issued notices (identifying DIR and listing Pitts as a partner) and made assessments (including § 6020(b) substitute returns for some periods); IRS did not bring a judicial action naming Pitts nor assess taxes specifically against her person.
- Pitts sued seeking (1) determination that her liability is only as a partner and thus certain taxes are dischargeable, (2) invalidation of IRS liens on her property, and (3) a finding that IRS violated the discharge injunction.
- Parties filed cross-motions for summary judgment; court found no material factual disputes and decided legal issues on the record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IRS assessment against partnership suffices as assessment against general partner | Pitts: state-law partner-liability and state SOL govern; IRS must sue within state period to collect from partner | U.S.: federal assessment against partnership suffices under Galletti; federal collection rules and 10-year statute control | Held: Galletti applies; single assessment against partnership suffices as assessment against general partner; federal 10-year collection period applies |
| Whether IRS may use administrative collection (liens/levies) against a general partner without separate judicial action | Pitts: IRS must adjudicate partner liability like ordinary creditor | U.S.: IRS collection is sovereign; administrative remedies and liens may be used against partners | Held: IRS may use administrative collection procedures and file tax liens against a general partner |
| Whether IRS gave adequate notice to Pitts before perfecting liens | Pitts: notices referenced only DIR EIN and not her SSN so inadequate notice | U.S.: notices identified Pitts as a partner and were properly mailed/addressed | Held: Notices and demands satisfied § 6303/due process; liens were validly perfected |
| Which portions of DIR’s taxes are dischargeable in Pitts’s Chapter 7 | Pitts: various taxes/penalties should be dischargeable as partner debts or because late returns were filed | U.S.: trust-fund taxes and taxes assessed before late returns are non-dischargeable; some portions dischargeable per timing and § 6020(b) assessments | Held: Court parses each period: trust-fund (withheld) portions non-dischargeable; many non-trust portions non-dischargeable if IRS assessed via § 6020(b) before late returns; other portions and penalties older than three years are dischargeable per § 523/§ 507 rules (court directed IRS to file calculations) |
Key Cases Cited
- U.S. v. Galletti, 541 U.S. 114 (assessment against partnership suffices as assessment against general partner)
- U.S. v. Rodgers, 461 U.S. 677 (United States not bound by state statutes of limitation in enforcing federal claims)
- U.S. v. Summerlin, 310 U.S. 414 (states may not impose time limits on enforcement of federal governmental claims)
- Bresson v. C.I.R., 213 F.3d 1173 (9th Cir. 2000) (state extinguishment provisions cannot evade Summerlin rule for IRS collections)
- In re Crockett, 150 F. Supp. 352 (N.D. Cal. 1957) (general partner may be "person liable" and lien attaches if demand and neglect proven)
- In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999) (adopts Beard four-part test to determine whether late-filed return qualifies as a "return" for dischargeability)
- Johnson v. Home State Bank, 501 U.S. 78 (discharge extinguishes in personam remedies but leaves in rem remedies intact)
- McKay v. United States, 957 F.2d 689 (9th Cir. 1992) (penalties relating to taxes older than three years dischargeable under § 523(a)(7)(B))