Summary of Supreme Court’s Galletti decision
Prepared by Charles F. Rosen,
Vice-chair, ABI Bankruptcy Taxation Committee
Law Offices of A. Lavar Taylor
(714) 546-0446
chuckrosen@taylorlaw.com


On March 23, 2004, the Supreme Court published its decision in United States v. Galletti (no. 02-1389). Keep in mind that this is a pure tax case and not a bankruptcy issue, though it arose from a chapter 13 case. The unanimous decision written by Justice Thomas decided the question of ". . . [W]hether the United States can collect the partnership's unpaid employment taxes from respondents in a judicial proceeding occurring more than three years after the tax return was filed but within the 10-year extension to the three-year limitations period that attached when the tax was timely assessed against the partnership." Justice Thomas at 4. Put differently as stated in the taxpayer's brief to the Court, "What steps must the Internal Revenue Service take to collect a tax liability from a general partner of that partnership?" The Court also decided the question of ". . . [W]hether the Government must make separate assessments of a single tax debt against persons or entities secondarily liable for that debt in order for [Internal Revenue Code] §6502's extended statute of limitations to apply to those persons or entities." Justice Thomas at 7.

Mr. and Mrs. Galletti and Mr. and Mrs. Briguglio were all partners in a business in Los Angeles. The partnership failed to pay certain federal payroll tax liabilities and eventually ceased business. Subsequently, the Gallettis and the Briguglios filed chapter 13 cases. The IRS filed proofs of claim in both cases claiming the unpaid taxes of the partnership. The bankruptcy court sustained the objections, as did the Bankruptcy Appellate Panel and the Ninth Circuit at 314 F.3d 336. The Solicitor General sought certiorari stating the issue as, "Whether, in order to enforce the derivative liability of partners for the tax debts of their partnership, the United States must make a separate assessment of the taxes owed by the partnership against each of the partners directly."

In a narrow decision, the Court limited itself to whether the three-year statute or the federal tax collection statute governed the time within which a suit must be filed within which to reduce the partnership's tax liability to judgement against the partners. The Court found that a bankruptcy case was such a judicial proceeding and that the Internal Revenue Code’s 10-year collection statute governed rather than the three-year state statute. In the second issue, the Court determined that a separate assessment is not necessary to hold the secondary parties liable for the tax liabilities.

The Court also made three other related important statements in the case. First, the Court said that the partners are not the employer. "In this case, the ‘employer’ was the Partnership." Page 6. Thus, it is now unclear whether outside of litigation IRS can hold the partners liable for the tax, especially if they were not specifically named in the assessment of the tax. Further, in a footnote the Court said, ". . . [W]e do not address whether an assessment only against the partnership is sufficient for the IRS to commence administrative collection of the partnership's tax debts by lien or levy against respondents' [the Gallettis] property." In the same footnote, the Court said, "We also decline to address whether an assessment against the partnership suffices to trigger liability against the partners for interest and penalties without separate notice and demand to them." Both in footnote 1. Thus the case stands for the limited proposition that the IRS collection statute is sufficient to keep the statute open so the partners may be sued, both under federal law or state law to secure a judgment reducing a partnership liability against the individual partners. It leaves open the question of whether the service may administratively enforce the collection of partnership debts from the assets of the individual partners.

To read the actual opinion, click here

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