Are Alleged Alter Egos, Successors In Interest and/or Transferees Entitled to their Own CDP Rights?

The Statutes

Section 6320 states that any “person described in section 6321” of the Code is entitled to CDP rights under §6320. Section 6320(a)(1). The “person” who is described in §6321 is “any person liable to pay any tax”. Thus, §6320 should apply if there is a “person, ” a tax is owed, and the “person” is “liable” for that tax. Section 7701(a)(1) defines the term “person” very broadly.

The language of §6330 appears to be broader than the language of §6320 in its application. It seemingly requires the IRS to follow the levy CDP procedures not just where the IRS intends to levy on property owned by the person who is liable for the unpaid taxes in question but also where the IRS wants to levy on property that is owned by a person other than the person who is liable for the unpaid taxes in question on which the IRS has a valid lien. Section 6330(a)(1) states that “[n]o levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.”

Section 6331(a) of the Code permits the IRS to levy on “all [non-exempt] property and rights to property” of the “person liable to pay any tax” and on any property on which the IRS has a lien under Chapter 64 (which consists of §§6301 through 6344 of the Code). The ability of the IRS under§ 6331(a) to levy on property on which it has a tax lien, even if the property is not owned by the person who is liable for the unpaid tax liability, seemingly reinforces the notion that §6330 gives CDP rights to all “persons” who own property on which there is a tax lien, even if those persons are not personally liable for the unpaid taxes.

The Regulations

Ah, but what the Code seemingly gives, the regulations clearly tax away. Treasury Regulation §301.6330-1(a) provides in relevant part:

(3)Questions and answers. The questions and answers illustrate the provisions of this paragraph (a) as follows:

Q-A1. Who is the person to be notified under section 6330?

A-A1. Under section 6330(a)(1), a pre-levy or post-levy CDP Notice is required to be given only to the person whose property or right to property is intended to be levied upon, or, in the case of a levy made on a state tax refund or a jeopardy levy, the person whose property or right to property was levied upon. The person described in section 6330(a)(1) is the same person described in section 6331(a) – i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer). A pre-levy or post-levy CDP Notice therefore will be given only to the taxpayer.

Q-A2. Will the IRS give notification to a known nominee of, a person holding property of, or a person who holds property subject to a lien with respect to, the taxpayer of the IRS’ intention to issue a levy?

A-A2. No. Such a person is not the person described in section 6331(a)(1), but such persons have other remedies. See A-B5 of paragraph (b)(2) of this section.

What the IRS has done in its regulations is to say that the term “any person” does not really mean any person, but instead means “any person liable for the tax under §6331(a).” While it seems to me that the language of the regulation is inconsistent with the statute on this point,  I will leave that discussion and that fight for another day.   It is not necessary for courts to strike down this regulation to reach the conclusion that alleged alter egos, successors in interest and/or transferees are entitled to their own independent CDP rights under §6330, although striking down this regulation would make it much simpler to reach that conclusion. Striking down the regulation, however, would have no effect on the question of whether alleged alter egos, successors in interest and/or transferees have CDP rights under §6320.

What do the regulations under section 6320 have to say? Here is the relevant portion of Treasury Regulation § 301.6320-1:

(a)Notification –

* * *

Q-A1. Who is the person entitled to notice under section 6320?

A-A1. Under section 6320(a)(1), notification of the filing of a NFTL on or after January 19, 1999, is required to be given only to the person described in section 6321 who is named on the NFTL that is filed. The person described in section 6321 is the person liable to pay the tax due after notice and demand who refuses or neglects to pay the tax due (hereinafter, referred to as the taxpayer). * * *

(b) Entitlement to a CDP Hearing

(2) * * *

Q-B5. Is a nominee of, or a person holding property of, the taxpayer entitled to a CDP hearing or an equivalent hearing?

A-B5. No. Such person is not the person described in section 6321 and is, therefore, not entitled to a CDP hearing or an equivalent hearing (as discussed in paragraph (i) of this section). * * *

These regulations track the language of § 6320, more so than the regulations issued under § 6330 track the actual language of that section.

So what lessons are to be drawn from the regulations as to what “persons” are entitled to CDP rights under §§6320 and 6330? The most important lesson is that, per the regulations, in order for a person to be entitled to CDP rights, they must be a “person liable for the tax” under § 6320 or a “person liable to pay any tax” under § 6331(a).

The Case of Pitts v. United States

With that lesson in mind, I now discuss the important case of Pitts v. United States, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 668 Fed. Appx. 774, 2016 U.S. App. LEXIS 16287, 118 A.F.T.R.2d (RIA) 5644, 2016-2 U.S. Tax Cas. (CCH) P503992016 (9^th Cir. 2016)(unpublished opinion), a case which Keith blogged about here.

Importantly, Pitts was a government victory.   The unfortunate fact that the Ninth Circuit buried its conclusion in an unpublished opinion does not lessen the importance of the case. (Note: I filed an amicus curiae brief with the Ninth Circuit in Pitts. My argument in that amicus brief will be discussed in detail in one of the later blog posts on this topic.)

In Pitts, a general partnership incurred unpaid employment taxes. Pitts was a general partner in the partnership. The IRS filed a notice of federal tax lien against Pitts, in her capacity as a general partner, without making a separate assessment against Pitts. Pitts later filed a chapter 7 bankruptcy petition. After obtaining a discharge, Pitts filed an adversary proceeding against the IRS, seeking, inter alia, to invalidate the tax liens evidenced by the notices of federal tax lien filed against her for the taxes incurred by the partnership.  The Bankruptcy Court upheld the validity of the liens, and Pitts appealed to the District Court.

The District Court, in a published opinion, affirmed the holding of the Bankruptcy Court. The District Court acknowledged that the case presented the question of whether the IRS could pursue administrative action against a general partner of a general partnership to collect taxes incurred by the partnership, a question left open by the Supreme Court in United States v. Galletti, 541 U.S. 114 (2004). (Note: I am very familiar with Galletti, because I was co-counsel for Galletti in the Supreme Court and authored almost all of the merits brief filed by Galletti.)

Pitts argued, unsuccessfully, that the IRS could not pursue administrative collection action against her to collect the employment taxes owed by the partnership without making a separate assessment against her under section 6672. She cited to the Supreme Court’s holding in Galletti that a general partner of a general partnership that incurs unpaid employment taxes is not the “employer” who incurs the tax and thus is not “primarily liable” for the partnership’s tax liability, even though the Supreme Court also held that Galletti was “secondarily liable” for those taxes by operation of state (California) law, which allowed the IRS to file a claim against Galletti in bankruptcy.

The District Court, in ruling for the government, characterized the government’s arguments as follows:

But the Government argues that contrary to Pitts’s argument, once the IRS assesses a tax against a general partnership, it need not separately assess the general partners in order to make them liable. The Government contends that since Pitts is liable for DIR’s debts under California law, the tax assessment against DIR for its unpaid employment-tax withholdings suffices to create a tax debt owed by Pitts to the IRS. The IRS further asserts that it did not have to proceed against Pitts under § 6672 but rather could separately pursue her under state law.

The District Court then went on to address the question of whether the IRS can pursue administrative enforcement remedies to collect against Pitts. The Court stated as follows:

But for the IRS to properly record a tax lien as provided under § 6321, Pitts must only be “any person liable to pay any tax”—not necessarily the primarily liable “taxpayer” as Congress has defined that term in § 7701(a)(14) (defining “taxpayer” as “any person subject to any internal revenue tax”). The determination whether Pitts is a “taxpayer” does not establish the IRS’s ability to record a statutory lien under § 6321. Rather, the existence of her federal tax liability for “any tax”—regardless of how that liability arises—is the defining criterion of the tax lien’s validity. As the Court established above, Pitts is in fact liable under federal law for DIR’s unpaid employment-tax withholdings.

This District Court thus held that Pitts was a “person liable to pay any tax” for purposes of section 6321, even though Pitts’ liability for the tax was grounded on state law (California’s version of the Uniform Partnership Act), not based on federal law, such as section 6672.

The Ninth Circuit affirmed the holding of the District Court, albeit in a cowardly manner, via an unpublished opinion. The Court stated:

First, pursuant to the plain language of 26 U.S.C. § 6321, Pitts is a “person liable to pay any tax,” and a lien in favor of the government arises by operation of federal law. See In re Crockett, 150 F.Supp. 352, 354 (N.D. Cal. 1957) (California partner was liable for debts of partnership under state law; accordingly, partner was liable for entire amount of partnership’s employment taxes, and was “person liable to pay” under § 6321’s identically worded predecessor); see also Bresson v. C.I.R., 213 F.3d 1173, 1178 (9th Cir. 2000) (where the IRS relied on state law to establish an individual’s liability, “the government’s underlying right to collect money in this case clearly derives from the operation of federal law (i.e., the Internal Revenue Code)”).

Second, the United States may utilize administrative enforcement procedures to collect the debt from Pitts, because she is secondarily liable for DIR’s assessed debt. See United States v. Galletti, 541 U.S. 114, 122, 124 S. Ct. 1548, 158 L. Ed. 2d 279 (2004) (“After the amount of liability has been established and recorded, the IRS can employ administrative enforcement methods to collect the tax”). The United States is not obligated to make a second assessment against Pitts individually, because the consequences of its assessment attach to the assessed debt “without reference to the special circumstances of the secondarily liable parties.” Id. at 123.

So there you have it. A person who is “secondarily liable” for a tax liability under state law is a “person liable to pay any tax” under §6321. Presumably that person is also “any person liable to pay any tax” for purposes of § 6331.

It would seem to follow that, if a person who is “secondarily liable” for a tax liability under state law is subject to administrative collection action under §§6321 and 6331, such person is also entitled to the protections of the CDP procedures. That topic will be explored in greater detail in the next blog post.