“The Tax Is Assessed, Not the Taxpayer”

No tax can be collected without first being properly assessed. Under IRC section 6501, the IRS has three years from the filing of a return to assess any additional tax liability, and the method of assessment is dictated by IRC section 6203. Once a proper assessment is made, the IRS has 10 years to collect the deficiency.

In United States v. Galletti, Marina Cabrillo Partners (the partnership) failed to pay federal employment taxes for the years 1992 through 1995, which it was required to withhold under IRC section 3402. The IRS properly assessed the tax against the partnership within the requisite three-year period; however, the partnership never paid the deficiency. Subsequently, Abel Galletti and three other general partners filed petitions for bankruptcy. The IRS filed proof of claims with the bankruptcy court related to the unpaid taxes, which the court disallowed on the basis they were not enforceable against the individual partners. The IRS appealed the disallowance of the claim to the federal district court, which affirmed the bankruptcy court decision. The IRS then appealed to the Ninth Circuit Court of Appeals.

The issue before the Ninth Circuit, and subsequently before the U.S. Supreme Court, was whether a proper assessment of tax against a partnership is extended to individual partners. The IRS argued that the code did not require the individual partners to be assessed and that the valid assessment of the partnership should extend to the individual partners. Galletti and the other partners, however, argued that since section 6203 requires assessment of the taxpayer , a term defined in IRC section 7701(a)(14) as including individuals, they were entitled to a separate assessment naming each individually. Further, since the three-year statute of limitations on assessment had expired, they argued that no proper assessment ever could be made and the IRS was permanently prohibited from collecting the deficiency from them.

The Ninth Circuit agreed with the partners. Basing its opinion on the definition of the term taxpayer in IRC section 7701(a)(14), it found the partners were taxpayers separate and distinct from the partnership and, therefore, an assessment that did not name them individually was not valid. The IRS petitioned the U.S. Supreme Court and was granted certiorari.

Result. For the IRS. Reversing the decision of the Ninth Circuit, the Supreme Court unanimously held that the proper assessment of the partnership extended to the general partners. While the Court agreed with the Ninth Circuit that the partners could be considered taxpayers within IRC section 7701(a)(14), it focused on the language of section 6203, which states the “liability of the taxpayer” must be properly assessed. The assessment requirements do not focus on all possible taxpayers, but rather only on one—the taxpayer on which the liability was imposed. Therefore, it is necessary to determine which person or entity is liable for the tax.

The tax deficiency in Galletti arose under section 3403, which holds an employer liable for taxes it is required to withhold from wages paid to its employees. Accordingly, for purposes of assessment, the employer is the taxpayer, and in Galletti the employer was the partnership, not the general partners. The fact that the partners were ultimately called upon to satisfy the partnership’s deficiency was irrelevant. Once a tax has been properly assessed, the code doesn’t require the IRS to then separately assess the same tax against the parties that are secondarily liable for it.

Thus, as long as the IRS makes a proper assessment of tax that names the person or entity that primarily is responsible for the deficiency, the assessment is considered valid for purposes of collection, even if such collection procedures are initiated against persons other than those named in the assessment. As the Court explained, “it is the tax that is assessed, not the taxpayer.“

United States v. Galletti, 541 US 114 (2004).

Prepared by Laura Lee Mannino, CPA, LLM, assistant professor of accounting and taxation, St. John’s University, Jamaica, New York.