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IRS can assess partnership, but collect from partners.

In Galletti, S.Ct., 3/23/04, the Supreme Court decided that the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  could collect a partnership tax liability from the general partners without first assessing the tax against them. This result is not the boon to the IRS that it may appear; however, it does create several potential problems for practitioners and their clients.

Under Sec. 6501(a), generally, "the amount of any tax ... shall be assessed within 3 years after the return was filed ... and no proceeding in court without assessments for the collection of such tax shall be begun after the expiration of such period." Sec. 6203 requires the assessed liability to be recorded "in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary." According to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 Sec. 6303(a), notice of the assessment must be given within 60 days to "each person liable for the unpaid tax, stating the amount and demanding payment thereof." Assuming all this is properly done, Sec. 6502 provides that if tax is properly assessed within three years, the Years, The

the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109]

See : Time
 limitations period is extended by 10 years from the assessment date.


The taxpayers in Galletti, Abel and Sarah Galletti, and Francesco and Angela Briguglio, were general partners in Marina Cabrillo Company, a California partnership. During the years 1992-1995 inclusive, the company incurred large Federal payroll tax Payroll Tax

Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax.
 liabilities that it failed to pay. The failure continued even after the IRS timely assessed the taxes against the partnership. The assessment gave the IRS an additional 10 years to collect the unpaid taxes, under Sec. 6502.

On Oct. 20, 1999, and Feb. 4, 2060, the Gallettis and the Briguglios, respectively, filed joint petitions for relief under Chapter 13 of the Bankruptcy Code Bankruptcy Code may refer to:
  • Bankruptcy in Canada
  • Bankruptcy in the United States
  • Bankruptcy in China
. The IRS filed proofs of claim against the Gallettis for $395,179.89 and against the Briguglios for $403,264.06 for Marina Cabrillo's unpaid payroll taxes.

The taxpayers acknowledged their liability for the taxes under California law California Law consists of 29 codes, covering various subject areas, the State Constitution and Statutes. See also
  • Statute
  • Bill (proposed law)
  • California State Legislature
External links
 and agreed that the taxes had been properly assessed against the partnership. However, the taxes had never been assessed against them individually, as general partners. The taxpayers claimed that, because the three-year statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought.

Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law.
 under Sec. 6501 had expired, the Service could no longer attempt to collect the tax from them.

The taxpayers asserted that the Service had to assess them individually because, as individual general partners, they were primarily liable for the partnership's payroll taxes. This flows both from the fact that the taxpayers are the taxpayers referred to in Sec, 6203 (which requires the recording of the liability of "the taxpayer" following assessment) and because the taxpayers are liable for the partnership's debts under California law.

The Bankruptcy Court bankruptcy court n. the specialized Federal court in which bankruptcy matters under the Federal Bankruptcy Act are conducted. There are several bankruptcy courts in each state, and each one's territory covers several counties.  for the Central District of California, the Central California Central California can refer to one of several divisions or regions of the U.S state of California:
  • The state is sometimes described as being in three main sections: Northern California (the San Francisco Bay Area and Sacramento Valley northward), Southern California (south
 District Court and the Ninth Circuit all accepted the taxpayers' arguments. However, the Supreme Court rejected their arguments and found for the IRS.

Supreme Court's Reasoning

First, the Court found that the taxpayer under Sec. 6203 was the partnership, because the partnership incurred the payroll tax liabilities, not the individual partners. The partnership and the individual partners are separate entities. The Court then rejected the idea that separate tax assessments were required. An assessment, the Court determined, was merely the calculation and recording of a tax liability. Certain consequences may flow from that assessment, but the assessment is the recording. Hence, taxpayers are not assessed--taxes are. Those who are, "by reason of state law, liable for payment of" taxes, do not have to be individually assessed.

This appears to be a significant victory for the IRS, perhaps because of the tremendous effort the Service expended ex·pend  
tr.v. ex·pend·ed, ex·pend·ing, ex·pends
1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend.

 in litigating this matter through four courts. The Service does not have to ascertain the individuals who are secondarily liable for taxes under state law when it assesses taxes against an entity. However, to actually collect the taxes from those individuals, the Service must still determine who and where they are and then follow all of the Code's collection procedures--notice, due process, etc. Further, if the Service chooses to litigate the matter, it must follow all of the rules and procedures of the court in which the suit is litigated. Thus, in this case, the Service still had to go to the Bankruptcy Court, file its claims and follow the court's procedures.


This decision creates problems for tax advisers and their clients. First, several different types of individuals may be liable for taxes under state law--general partners (as in Galletti), but also beneficiaries of estates and fiduciaries, among others. Second, a taxpayer who is liable for paying taxes under state law may not receive notification that he or she is liable for such taxes until relatively late in the proceedings. This can put the taxpayer in a disadvantageous dis·ad·van·ta·geous  
Detrimental; unfavorable.


Third, the taxpayer may not have been aware of the tax controversy at all, if he or she was not part of the entity's administration and had no knowledge of the facts. Thus, the taxpayer may not be aware of available defenses. Moreover, the taxpayer may not have knowledge of the existence, or whereabouts where·a·bouts  
About where; in, at, or near what location: Whereabouts do you live?

n. (used with a sing. or pl.
, of other individuals secondarily liable, who may be able to bear the cost of defense and, ultimately, pay the overdue taxes. In short, the taxpayer may be confronted with a sudden blow, with no available defense. This is most likely to occur when either there has been a falling out among the individuals involved or one individual has moved away.

Tax advisers should watch for these situations, which may become more common because of the Supreme Court's decision in Galletti. They can be difficult because they arise out of nowhere.

FROM JIM LYNCH Jim Lynch redirects here. For the Survivor contestant of the same name, see:

James Robert Lynch (born August 28, 1945 in Lima, Ohio U.S.) was an American football linebacker who spent his entire eleven-year professional career (1967-1977) with the AFL and NFL
, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , SOBEL & Co., LLC (Logical Link Control) See "LANs" under data link protocol.

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Author:Lynch, Jim
Publication:The Tax Adviser
Date:Nov 1, 2004
Previous Article:Holding period of partnership/LLC interests.
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