People Place Auto Hand Carwash, LLC v. Commissioner

126 T.C. No. 19UNITED STATES TAX COURT
PEOPLE PLACE AUTO HAND CARWASH, LLC, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10708-05. Filed June 14, 2006.
P is a limited liability company (LLC) owned and
operated by H and W. When P filed this action for
redetermination of employment status, H and W were
debtors in bankruptcy. Held: Because this proceeding
concerns P’s employment tax liabilities and not the tax
liabilities of H and W, the automatic stay provision of
11 U.S.C. 362(a)(8) (2000) does not apply to this
proceeding. Held, further, consideration of equitable
relief pursuant to 11 U.S.C. sec. 105(a) (2000)
properly lies with the Bankruptcy Court rather than the
Tax Court.
Larry Conway (a member), for petitioner.
Donna Mayfield Palmer, for respondent.
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OPINION
THORNTON, Judge: This is an action for redetermination of
employment status pursuant to section 7436 and Rule 291.1
Petitioner, a limited liability company (LLC), is owned and
operated by Larry and Marilyn Conway (the Conways), who have
filed chapter 7 bankruptcy petitions. The question presently
before us is whether the automatic stay provision of 11 U.S.C.
section 362(a)(8) (2000) applies to these proceedings. As
discussed below, we conclude that it does not.
Background
Petitioner is a limited liability company, ostensibly
organized under Tennessee law. An LLC is a legal entity with
attributes of both a corporation and a partnership, although not
formally characterized as either one. Blakemore, “Limited
Liability Companies and the Bankruptcy Code: A Technical
Review”, 13 Am. Bankr. Inst. J. 12 (June 1994). Apparently, the
Conways are petitioner’s only members.
On June 13, 2005, petitioner filed its petition, signed by
Larry Conway “for” petitioner.2 The petition states, among other
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Respondent has raised no issue as to whether Larry Conway
has authority to represent petitioner in this proceeding. In his
Rule 91(f) motion, filed Jan. 13, 2006, respondent identifies
Larry Conway as “petitioner’s principal”. On the record
presently before us, it appears that Larry Conway is authorized
(continued...)
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things, that petitioner is “completely out of business with no
assets.” Attached to the petition is a Notice of Determination
of Worker Classification, dated March 16, 2005, and addressed to
petitioner in Memphis, Tennessee. In the notice of
determination, respondent determined that for purposes of Federal
employment taxes, 13 specified individuals were to be classified
as petitioner’s employees, and, as a consequence, petitioner owed
$6,207 in additional employment tax, additions to tax, and
penalties with respect to calendar year 2000.
On January 13, 2006, pursuant to Rule 91(f), respondent
filed a motion to show cause why proposed facts and evidence
should not be accepted as established. In its response,
petitioner stated that the Conways are “the whole owners and
personally liable parties for this defunct business and action
before the court is now involved in a chapter 7 liquidation case”
in the U.S. Bankruptcy Court in Memphis, Tennessee.3 Petitioner
contended that this case should be stayed pursuant to the
automatic stay provision of 11 U.S.C. section 362(a).
2
(...continued)
to represent petitioner in this proceeding. See Rule 24(b) (an
“unincorporated association” may be represented by an “authorized
member of the association”); cf. Scenic Wonders Gallery, LLC v.
Commissioner, T.C. Memo. 2000-64 (holding that an alleged co-
trustee of an LLC’s tax matters partner failed to establish that
he was authorized to act on behalf of the tax matters partner).
3
Petitioner has not alleged that it is a party to the
Conways’ bankruptcy proceedings or has itself filed any petition
in bankruptcy.
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On February 15, 2006, the Court struck this case for trial
from the February 27, 2006, Nashville, Tennessee, trial session
and calendared its January 18, 2006, Order to Show Cause for
hearing at the same trial session. The Court ordered the parties
to show cause in writing why the proceedings in this case should
not be stayed pursuant to 11 U.S.C. section 362(a)(8). In his
response, respondent contended that the automatic stay provisions
of 11 U.S.C. section 362(a) are inapplicable because petitioner
has filed no petition with the bankruptcy court and is not a
debtor therein. Respondent contended alternatively that if the
automatic stay is applicable to this proceeding, then the
petition was filed in violation of it, and accordingly this case
should be dismissed for lack of jurisdiction.4 See, e.g.,
Thompson v. Commissioner, 84 T.C. 645 (1985).
Petitioner filed no response to the Court’s February 15,
2006, Order to Show Cause. At the hearing on February 27, 2006,
in Nashville, Tennessee, there was no appearance by or on behalf
of petitioner.
4
Attached as exhibits to respondent’s response are copies
of PACER Service Center case printouts with respect to 11 U.S.C.
ch. 7 petitions filed by Larry and Marilyn Conway on Feb. 26,
2002, and Dec. 18, 2003, respectively.
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Discussion
Title 11 of the U.S. Code provides uniform procedures to
promote the effective rehabilitation of the bankrupt debtor and,
when necessary, the equitable distribution of the debtor’s
assets. See H. Rept. 95-595, at 340 (1977). In furtherance of
these goals, 11 U.S.C. section 362(a) provides automatic stay
protection for the debtor and the bankruptcy estate.5 The
5
Tit. 11 U.S.C. sec. 362(a) (2000), as in effect for
relevant periods, provides:
Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or
303 of this title, or an application filed under
section 5(a)(3) of the Securities Investor Protection
Act of 1970, operates as a stay, applicable to all
entities, of--
(1) the commencement or continuation, including the
issuance or employment of process, of a judicial,
administrative, or other action or proceeding against the
debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a
claim against the debtor that arose before the commencement
of the case under this title;
(2) the enforcement, against the debtor or against
property of the estate, of a judgment obtained before the
commencement of the case under this title;
(3) any act to obtain possession of property of the
estate or of property from the estate or to exercise control
over property of the estate;
(4) any act to create, perfect, or enforce any lien
against property of the estate;
(5) any act to create, perfect, or enforce against
property of the debtor any lien to the extent that such lien
secures a claim that arose before the commencement of the
(continued...)
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automatic stay provisions, as set forth in paragraphs (1) through
(7) of 11 U.S.C. section 362(a), generally operate to temporarily
bar actions “against” the debtor or property of the debtor or the
bankruptcy estate. Paragraph (8) of 11 U.S.C section 362(a), as
in effect for relevant periods, specifically stays Tax Court
proceedings “concerning the debtor”.6
5
(...continued)
case under this title;
(6) any act to collect, assess, or recover a claim
against the debtor that arose before the commencement of the
case under this title;
(7) the setoff of any debt owing to the debtor that
arose before the commencement of the case under this title
against any claim against the debtor; and
(8) the commencement or continuation of a proceeding
before the United States Tax Court concerning the debtor.
6
The Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, Pub. L. 109-8, sec. 709, 119 Stat. 23, 127, amended
11 U.S.C. sec. 362(a)(8) to provide for a stay of--
the commencement or continuation of a proceeding before
the United States Tax Court concerning a corporate
debtor’s tax liability for a taxable period the
bankruptcy court may determine or concerning the tax
liability of a debtor who is an individual for a
taxable period ending before the date of the order for
relief under this title.
This amendment is effective with respect to petitions for relief
under the Bankruptcy Code filed on or after Oct. 17, 2005. See
id. sec. 1501, 119 Stat. 134. Consequently, this amendment is
inapplicable with respect to the bankruptcy cases filed by the
Conways. The legislative history describes the purpose of this
amendment as follows:
(continued...)
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As a general principle, automatic stay protection does not
inherently extend to legal entities separate from the debtor.
Patton v. Bearden, 8 F.3d 343, 349 (6th Cir. 1993). For this
purpose, “formal distinctions between debtor-affiliated entities
are maintained when applying the stay.” Maritime Elec. Co. v.
United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir. 1991) (holding
that the automatic stay did not extend to claims against the
debtor’s corporation); see also In re Palumbo, 154 Bankr. 357
(Bankr. S.D. Fla. 1992) (holding that the automatic stay did not
extend to claims against a family limited partnership in which
the debtor held 97-percent general and limited partnership
interests). Adhering to these general principles, at least one
court has held that the automatic stay is inapplicable to an
action against an LLC that is associated with a debtor in
6
(...continued)
Under current law, the filing of a petition for relief
under the Bankruptcy Code activates an automatic stay
that enjoins the commencement or continuation of a case
in the United States Tax Court. This rule was arguably
extended in Halpern v. Commissioner [96 T.C. 895(1991)], which held that the tax court did not have
jurisdiction to hear a case involving a postpetition
year. To address this issue, section 709 of the Act
amends section 362(a)(8) of the Bankruptcy Code to
specify that the automatic stay is limited to an
individual debtor’s prepetition taxes (taxes incurred
before entering bankruptcy). The amendment clarifies
that the automatic stay does not apply to an individual
debtor’s postpetition taxes. In addition, section 709
provides that the stay applies to both prepetition and
postpetition tax liabilities of a corporation so long
as it is a liability that the bankruptcy court may
determine. [H. Rept. 109-31 (Pt. 1), at 102 (2005).]
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bankruptcy but that is not itself a party to the bankruptcy.7 In
re Calhoun, 312 Bankr. 380 (Bankr. N.D. Iowa 2004). That case,
however, did not involve the automatic stay provision of 11
U.S.C. section 362(a)(8).
We have discovered no authority addressing the question of
whether a Tax Court proceeding instituted by an LLC should be
viewed as “concerning” debtor members of the LLC within the
meaning of 11 U.S.C. section 362(a)(8) so as to trigger the
automatic stay. For the reasons discussed below, we conclude
that the automatic stay protection of 11 U.S.C. section 362(a)(8)
does not extend to an LLC merely because the LLC’s members are
debtors in bankruptcy.
Legislative history sheds little light on the meaning of
“concerning the debtor” as that phrase is used in 11 U.S.C.
section 362(a)(8). See Halpern v. Commissioner, 96 T.C. 895,
898-902 (1991) (reviewing the legislative history of the
automatic stay provisions). This Court has construed “concerning
the debtor” narrowly to mean that the automatic stay should not
apply unless the Tax Court proceeding possibly would affect the
tax liability of the debtor in bankruptcy. 1983 W. Reserve Oil &
7
Although the Bankruptcy Code does not expressly mention
LLCs, it is generally accepted that an LLC is a “person” that may
qualify for relief as a “debtor” under the Bankruptcy Code. See
Gilliam v. Speier (In re KRSM Props., LLC), 318 Bankr. 712, 717
(B.A.P. 9th Cir. 2004); In re Calhoun, 312 Bankr. 380, 383
(Bankr. N.D. Iowa 2004); In re ICLNDS Notes Acquisition, LLC, 259
Bankr. 289 (Bankr. N.D. Ohio 2001).
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Gas Co. v. Commissioner, 95 T.C. 51 (1990), affd. without
published opinion 995 F.2d 235 (9th Cir. 1993);8 cf. Third
Dividend/Dardanos Associates v. Commissioner, 88 F.3d 821, 823
(9th Cir. 1996), revg. T.C. Memo. 1994-412; Chef’s Choice
Produce, Ltd. v. Commissioner, 95 T.C. 388 (1990); Madison
Recycling Association v. IRS, 87 AFTR 2d 1583, 2001-1 USTC par.
50,361 (E.D. Ky. 2001), affd. 45 Fed. Appx. 497 (6th Cir. 2002);
Durham Farms v. United States (In re W.J. Hoyt Sons Mgmt. Co.),
84 AFTR 2d 7152, 99-2 USTC par. 51,010 (Bankr. D. Or. 1999). We
note that this construction is also consistent with the recently
amended language of 11 U.S.C. sec. 362(a)(8), which, as
previously noted, refers to a Tax Court proceeding “concerning
8
In 1983 W. Reserve Oil & Gas Co. v. Commissioner, 95 T.C.
51 (1990), affd. without published opinion 995 F.2d 235 (9th Cir.
1993), the question was whether the automatic stay provision of
11 U.S.C. sec. 362(a)(8) applied to a partnership action
commenced in the Tax Court pursuant to Rule 241 after the
partnerships had filed petitions in bankruptcy. Id. This Court
held that the automatic stay did not apply, reasoning that
because partnerships are not subject to Federal income tax,
ultimately the partnership action affected only the income tax
liability of the individual partners and so “concerned” only the
partners and not the partnership. The Court stated:
To argue that the partnership proceeding requires the
Tax Court to make determinations with respect to the
items of income, gain, loss, or credit of the
partnership, rather than the individual partners, and
that a partnership proceeding involving a bankrupt
partnership thus “concerns” the partnership, not the
partners, is to exalt form over substance. [Id. at
57.]
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the tax liability of a debtor”, rather than “concerning a
debtor”.
The dispute in the instant case ultimately concerns
petitioner’s liability for unpaid employment taxes and not the
Conways’ own tax liability. As an LLC, petitioner is a separate
legal entity from the Conways.9 For Federal tax purposes, an LLC
with more than one member generally is treated as a partnership
unless the LLC elects to be treated as an association (i.e., a
9
Tennessee law provides that an LLC is generally dissolved
upon the occurrence of any of various specified events, including
the “Bankruptcy of any member”. Tenn. Code Ann. sec. 48-245-
101(a)(5)(G) (2002). Tennessee law also contemplates, however,
that a dissolved LLC continues to exist for purposes of winding
up its affairs and litigating claims against it. See, e.g.,
Tenn. Code Ann. sec. 48-245-502 (2002) (providing procedures to
be followed by a dissolved LLC in handling claims against it as
part of the winding-up process); Tenn. Code Ann. sec. 48-245-1201
(2002) (providing that after a dissolved LLC has been terminated,
“any of its former managers, governors, or members may assert or
defend, in the name of the LLC, any claim by or against the
LLC”); cf. In re Midpoint Dev., LLC, 313 Bankr. 486 (Bankr. W.D.
Okla. 2004) (holding that a dissolved Oklahoma LLC continued to
exist for purposes of winding up its affairs and qualified as a
“debtor” under the Bankruptcy Code).
We conclude that even if petitioner was dissolved or
terminated pursuant to Tennessee law consequent to the Conways’
filing bankruptcy petitions, petitioner continued to exist for
purposes of challenging its liability for the employment taxes at
issue and engaging in this litigation relating to that liability.
Otherwise, the question would arise as to whether this case
should be dismissed for lack of jurisdiction because of
petitioner’s lack of capacity to engage in this litigation. See
Rule 60. Respondent has not questioned petitioner’s capacity to
engage in this litigation. For essentially the same reasons just
discussed, on the basis of the present record we are satisfied
that petitioner has the requisite capacity to engage in this
litigation.
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corporation). See sec. 301.7701-3(b)(1)(i), Proced. & Admin.
Regs. We infer that petitioner has made no such election and for
tax purposes is to be treated as a partnership.10 Such
classification for tax purposes, however, has no effect on the
legal status of the ownership of LLC assets and provides no basis
for disregarding petitioner’s separate identity from the
Conways’. See Gilliam v. Speier (In re KRSM Props., LLC), 318
Bankr. 712, 718-719 (B.A.P. 9th Cir. 2004). More fundamentally,
regardless of petitioner’s classification as a partnership for
Federal tax purposes, petitioner is the “employer” within the
meaning of section 3403; accordingly, the liability for the
employment taxes is petitioner’s and not the Conways’. See
United States v. Galletti, 541 U.S. 114, 121 (2004). Because
petitioner is a separate entity from the Conways, the imposition
of employment tax on petitioner cannot be viewed as equivalent to
the imposition of employment tax on its members. See id.Accordingly, the automatic stay provision of 11 U.S.C. section
362(a)(8) is inapplicable to this case.
In “unusual circumstances”, a bankruptcy court may properly
stay a proceeding against a nonbankrupt third party, if “there is
such identity between debtor and the third-party defendant that
the debtor may be said to be the real party defendant and that a
10
Attached as an exhibit to respondent’s Rule 91(f) motion
is a Form 1065, U.S. Partnership Return of Income, which
respondent alleges petitioner filed for taxable year 1999.
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judgment or finding against third-party defendant will in effect
be a judgment against the debtor.” A.H. Robins Co. v. Piccinin,
788 F.2d 994, 999 (4th Cir. 1986); see Amedisys, Inc. v. Natl.
Century Fin. Enters., Inc., 423 F.3d 567, 577 (6th Cir. 2005);
Patton v. Bearden, 8 F.3d 343, 349 (6th Cir. 1993). Any such
stay, however, would not arise pursuant to the automatic stay
provisions of 11 U.S.C. section 362(a) but rather pursuant to the
bankruptcy court’s equitable power to issue an order as
“necessary or appropriate to carry out the provisions” of the
Bankruptcy Code, as provided by 11 U.S.C. section 105(a) (2000).
See Amedisys, Inc. v. Natl. Century Fin. Enters., Inc., supra.
“[R]equests for such relief can only be presented to the
bankruptcy court.” Patton v. Bearden, supra at 349.
Accordingly, consideration of any such relief lies beyond the
purview of this Court.
An appropriate Order
will be issued.