Technical
Advice Memorandum
Number
200043003
Internal
Revenue Service
July
11, 2000
Release
Date: 10/27/00
DEPARTMENT
OF THE TREASURY
INTERNAL
REVENUE SERVICE
WASHINGTON
,
D.C.
20224
July
11, 2000
MEMORANDUM
FOR DISTRICT COUNSEL, NORTH TEXAS DISTRICT
FROM:
Kathryn A. Zuba
Chief,
Branch 2 (General Litigation)
SUBJECT:
Offer in Compromise --This memorandum responds
to your request for advice dated April 13, 2000.
This document may not be cited as precedent by
taxpayers.
ISSUE:
Whether
the Service can compromise with a general
partner for his individual, derivative share of
the employment tax obligations of a partnership.
CONCLUSION:
The
employment tax obligations of a partnership
represent a single liability assessed against
the partnership entity. Although the federal tax
lien allows the Service to collect from general
partners, there remains one tax liability
subject to compromise, that of the partnership.
BACKGROUND:
The
taxpayer is liable for unpaid income tax
liabilities for the years Year 2, Year 4, Year
5, and Year 8. He also owes a trust fund
recovery penalty assessed against him for Year
3. Two partnerships of which the taxpayer was a
general partner are liable for unpaid employment
taxes. Partnership A owes FICA taxes for the
first and fourth quarters of Year 1 and the
first and second quarters of Year 2, as well as
FUTA taxes for both of those years. Partnership
B owes FICA taxes for the second quarter of Year
1 and FUTA taxes for both Year 1 and Year 2. On
Date A, the taxpayer submitted an offer in
compromise intended to cover both his personal
income tax liabilities and his portion of the
partnerships’ liabilities.
The
Offer in Compromise Handbook, IRM 5.8, contains
no guidance on compromising a derivative portion
of a partnership’s employment tax liabilities.
With regard to compromising the liabilities of a
partnership, the handbook provides:
The
amount that must be offered to compromise a
partnership tax liability must include the
maximum collection potential for the partnership
and all general partners. Secure Collection
Information Statements from the partnership and
all partners before beginning your analysis.
IRM
5.8.1.12(1).
The
case history indicates that the revenue officer
assigned to process the offer initially inquired
as to the status of the partnership and the
existence or location of other partners, and
requested documentation regarding the potential
for collection from partnership assets or the
assets of other general partners. The
taxpayer’s representative responded that the
taxpayer was proposing to compromise only his
personal share of the liabilities of the two
partnerships, not the liability of the
partnership or the other partner(s). On this
theory, the revenue officer investigated only
the collection potential of the taxpayer.
Therefore, the file contains no information on
the partnerships or any other partners. The
revenue officer appears to have proceeded on the
assumption that the partnerships are now
defunct.
The
taxpayer’s offer in compromise has been
recommended for acceptance by the revenue
officer because the amount offered is consistent
with the taxpayer’s ability to pay, and has
been submitted to your office for review so that
you can issue the required opinion of Counsel. See
I.R.C. § 7122(b). In your proposed response
to the district, you agree that the offer is
adequate in amount, but suggest several changes
intended to insure that the Service adequately
protects its rights to proceed against any
assets of the partnership or other partners.
Most significantly, you suggested that a
collateral agreement be secured which clearly
states the intent of the parties to compromise
only the liabilities of the taxpayer and retains
the right to proceed against other partners.
DISCUSSION:
The
Internal Revenue Code requires employers to
deduct and withhold income and Federal Insurance
Contributions Act (FICA) taxes from their
employees’ wages. See I.R.C. §§
3402(a) and 3102(a). The Code imposes additional
FICA taxes on employers themselves, as well as
Federal Unemployment Tax Act (FUTA) taxes. See
I.R.C. §§ 3111 and 3301. These taxes are
generally referred to collectively as
“employment taxes.” The Code provides that
the “employer” is the entity liable for
payment of employment taxes. See I.R.C.
§ 3403 (employer liable for withheld income
taxes); I.R.C. § 3102(b) (employer liable for
withheld FICA tax); I.R.C. § 3111 (employer
liable for employer’s share of FICA tax);
I.R.C. § 3301 (employer liable for FUTA tax).
For
purposes of income tax withholding,
“employer” is defined as the person for whom
an individual performs any service as the
employee of such person. I.R.C. § 3401(d). The
term “person” includes an individual, trust,
estate, partnership, association, company, or
corporation. I.R.C. § 7701(a)(1). Although the
Code gives no comparable definition of employer
for purposes of determining liability for FICA
and FUTA taxes, courts have held that
“employer” for purposes of the FICA and FUTA
provisions should be defined the same as the
section 3401(d) definition. See Otte v.
United States , 419
U.S.
43, 51 (1974); In re Armadillo Corp. ,
410 F. Supp. 407 (D. Colo. 1976), aff’d ,
561 F.2d 1382 (10th Cir. 1977).
In
the case of employees who work for a
partnership, the Service takes the position that
the partnership is the employer for purposes of
employment tax obligations. However, because
under state law the general partners are liable
for the debts of the partnership, the general
partners are derivatively liable for the
partnership’s employment tax obligations.
Thus, one assessment is made against the
partnership, and this one assessment is
sufficient to make the general partners liable
for the assessed employment taxes. The Service
also takes the position that a notice and demand
on the partnership is sufficient to create a tax
lien on the property of the general partners for
the partnership debts. See IRM
5.12.1.18.3. The theory behind these procedures
is as follows:
In
a situation in which the partnership as an
entity is made liable under federal law for a
specific tax, as is true, e.g., with reference
to withholding requirements, social security,
and certain excise taxes, the added effect of
state law, making the partners individually
liable for the partnership debts, serves to
bring a lien to bear on the properties of
both–the partnership and the general partners.
Plumb,
Federal Tax Liens 31 (3d ed. 1972).
The
courts have generally agreed that where the
partnership, as taxpayer, is liable for
employment or excise taxes, general partners are
also liable pursuant to state law statutes
making general partners liable for partnership
debts. See Remington v. United States ,
210 F.3d 281, 283 (5th Cir. 2000) (“The
partnership is the primary obligor and its
partners are jointly and severally liable on its
debts.”); Ballard v. United States , 17
F.3d 116, 119 (5th Cir. 1994); United States
v. Hays , 877 F.2d 843, 844 n.3 (10th Cir.
1989); Calvey v. United States , 448 F.2d
177, 180 (6th Cir. 1971); United States v.
Underwood , 118 F.2d 760, 761 (5th Cir.
1941). Our longstanding position has been that,
although the Code creates a single employment
tax liability for which the partnership entity
is liable, the application of state law allows
the Service to collect the unpaid liability from
individual general partners.
Texas
partnership law, as does the law in most
jurisdictions, states that general partners are
jointly and severally liable for the debts and
obligations of the partnership. See
Tex.
Civ. Stat. Ann. art. 6132b-3.04.
Relying
on the principle that general partners are
jointly and severally liable for the unpaid
debts of the partnership, the district has
proposed acceptance of an offer by Taxpayer
which is intended to compromise only his
individual, derivative liability as a partner in
the two partnerships. The district is apparently
treating the joint and several liability of
partners as similar to the liability of a
husband and wife who elect to file a joint
return. See I.R.C. § 6013(d)(3) (if
joint return is made, liability for tax shall be
joint and several). When spouses are jointly and
severally liable for tax, the Offer in
Compromise Handbook provides procedures whereby
one spouse may reach a compromise with the
Service, but the Service preserves its rights to
proceed against the spouse who is not party to
the compromise. See IRM 5.8.6.2. The
compromising spouse must execute a collateral
agreement making clear that the offer relates to
the offeror’s personal liability only, and
that the Government may still collect from other
co-obligors. See Pattern Letters P-229
and P-230 (Rev. 6-90). The district reasons that
the joint and several liability of a general
partner can be compromised in the same way and
that the Service can later collect from other
partners.
The
liability of a partnership is fundamentally
different than that of a husband and wife who
file a joint return. As is explained above, the
partnership liability is a single liability,
assessed once against the partnership and owed
by the partnership itself. The Service’s
ability to collect from general partners is
created not by operation of the Code, but from
state law liability for the debts of a
partnership, liability which can be enforced
through means of the federal tax lien whether or
not the Service has obtained a judgment against
an individual general partner. 1 This
ability to collect does not alter the nature of
the liability itself–it remains a singular
debt for which the partnership entity is
primarily liable. 2
****************
1 Assessment gives the Government the ability to proceed against a
taxpayer without reducing a claim to judgment. See
Bull v.
United States
, 295
U.S.
247, 260 (1935). It is said to work a
“reversal” of the normal collection process,
in that “payment precedes defense.” Id .
Collection from general partners based on the
partnership assessment is a logical extension of
this principle, in that a private creditor could
no doubt execute against a general partner if it
obtained a judgment against the partnership.
2 Note that the Service cannot collect from partners or shareholders
where they are not liable for the debts of the
business under state law, such as in a
corporation, limited partnership, or limited
liability company. Each form of business
association has advantages and disadvantages
which must be weighed before choosing the form a
business will take. Treatment of the entity for
federal income and employment taxes should be
one of these considerations.
****************
The
joint and several liability of a husband and
wife, on the other hand, is provided for by the
Code. Section 6013(a) permits a husband and wife
to file a single, joint return for income taxes.
Section 6013(d)(1) states that if a joint return
is made, liability with respect to the tax will
be joint and several. This differs from the
partnership liability in that the Code imposes
the joint and several nature of the debt.
Compromise
of this liability will also necessarily have a
different effect. The Secretary has the
authority to compromise any “case arising
under the internal revenue laws.” I.R.C. §
7122(a). Regulations giving effect to that
section consider a “case” to be a “civil
or criminal liability.” See Temp.
Treas. Reg. § 301.7122-1T(a)(1). The liability
at issue in this case is that of the
partnership. , as a general partner, can bind
the partnership to a compromise. See
Tex.
Civ. Stat. Ann. art. 6132b-3.04. The compromise
would be binding on the partnership, the
Government, and all the partners. See Temp.
Treas. Reg. § 301.7122-1T(5).
************ The Offer
in Compromise Handbook’s instruction to
consider the reasonable collection potential of
the partnership and all general partners is a
recognition that the unpaid employment taxes of
a partnership represent one liability which can
be collected from several sources.
*********** Because the Code does
not provide that the employment tax liabilities
are joint and several, there is no individual
liability for Taxpayer to compromise. In
contrast, the Code recognizes the tax liability
of spouses filing a joint return to be joint and
several. As with any joint and several
co-obligors, one party to that assessment can
reach an accord with the Service without
necessarily affecting the Service’s right to
proceed against the other party.
Furthermore,
reliance on the joint and several liability of
partners under state law would subject the
Service to the vagaries of state partnership law
when determining whether the Service could still
collect from other partners. In United States
v. Ross , 176 F. Supp. 932 (D. Neb. 1959), a
general partner, Ross, challenged the
Service’s collection efforts against him after
a compromise had been reached between the
Service and another partner, Kornfeind. The
compromise agreement contained a clause which
read as follows:
This
offer is submitted in lieu of my liability to
pay balance of said tax, penalty, and interest,
remaining after deducting from assessment the
amount hereby tendered, collection of which
balance shall not be enforced against me by suit
or any other proceedings; it is being
understood that this undertaking shall not
release any other person from liability under
said assessment.
176
F. Supp at 934 (emphasis added).
Notwithstanding
this clause in the agreement, the court found
that the Service’s compromise with one partner
released the other partner. Because upon
dissolution of the partnership the partners had
agreed that Kornfeind would be liable for the
debts of the partnership, and the Service had
knowledge of that arrangement, reaching a
compromise with Kornfeind which “materially
altered” the nature or time of payment for the
tax obligation had the effect of releasing his
partner. Id . at 935 (applying the
Illinois
version of section 36 of the Uniform Partnership
Act).
The
same section was the law in
Texas
prior to 1994, so it may directly govern the
relationship between the partners in this case.
The Texas Revised Partnership Act contains a
similar, but broader, provision:
Material
Alteration of Obligation Without Consent
Discharges Withdrawn Partner. If a creditor of a
partnership has notice of a partner’s
withdrawal and without the consent of the
withdrawn partner agrees to a material
alteration in the nature or time of payment of
an obligation of the partnership incurred before
the withdrawal, the withdrawn partner is
discharged from the obligation.
Tex.
Civ. Stat. Ann. art 6132b-7.03(d). In this case,
it is not known if there were other general
partners, the circumstances surrounding the
dissolution of the partnership (if there was a
dissolution), or whether upon dissolution there
was an agreement allocating responsibility for
the partnership’s debts. ************
Further,
an agreement to discharge a partner can be
implied from a creditor’s course of dealings
with a remaining partner. Section 36 of the
Uniform Partnership Act states, in part:
A
partner is discharged from any existing
liability upon dissolution of the partnership by
an agreement to that effect between himself, the
partnership creditor and the person or
partnership continuing the business, and such
agreement may be inferred from the course of
dealing between the creditor having knowledge of
the dissolution and the person or partnership
continuing the business.
This
principle was applied in
Texas
in Victoria Air Conditioning, Inc. v.
Southwest Texas Mechanical Insulation Co. ,
850 S.W.2d 720 (Tex. App. 1993). Notably, the
creditor’s failure to pursue collection
against the other partner and failure to insist
that he be made a party to the agreement were
seen as evidence from which the jury could have
inferred an agreement to discharge the
non-contracting partner. Id . at 725.
********** One potential concern
about the current procedures for compromising
partnership liabilities is that they may prevent
one or more partners from compromising with the
Service if another general partner is
uncooperative. However, that inability to
compromise is owing more to the nature of a
partnership than anything else. Partnerships
have obvious income tax and business flexibility
advantages, but carry with them the risks that
partners will deadlock over a chosen course of
action or that individuals will be held liable
for actions of the other partners.
Furthermore,
an offer in compromise is a discretionary
collection tool which should be used when the
Service has judged it to be the appropriate
resolution of a particular case. The “ultimate
goal” of the compromise program is to reach
agreements that are “in the best interest of
both the taxpayer and the Service.” Policy
Statement P-5-100. In any situation where the
Commissioner does not believe that a compromise
can be constructed so as to adequately protect
the interests of the Government, it is within
his discretion to exercise other collection
methods.
This
does not present the only situation in which the
nature of the liabilities prevent the Service
from compromising despite the apparent
willingness of an individual taxpayer to do so.
For instance, an uncooperative responsible
officer will prevent the Service from
determining the reasonable collection potential
of a corporation so as to evaluate a proposed
compromise of employment taxes. See IRM
5.8.4.10. Also, the Service cannot compromise
with one spouse if state law provides no way to
preserve the ability to proceed against the
non-compromising spouse. See IRM
5.8.6.2(2).
CONCLUSION:
Although
the employment tax liabilities of a partnership
can be collected from individual general
partners, the liability itself is not joint and
several under the Internal Revenue Code. For
that reason, the Service’s procedures allow
for compromise of the entire partnership
liability and not the derivative liability of
individual general partners.
If
you have any questions, please contact the
attorney assigned to this case at (202)
622-3620.
cc.
Assistant Regional Counsel (GL)
