Tenth Circuit Refuses to Void Ruling on Taxpayer's Employment Tax Liability

(Parker Tax Publishing June 2022)

The Tenth Circuit affirmed a district court's order denying a taxpayer's motion for relief from the district court's judgment holding the taxpayer personally liable for the unpaid employment taxes of a corporation of which the taxpayer was the sole member. The Tenth Circuit concluded that the district court had an arguable basis for finding that it had jurisdiction and rejected the taxpayer's argument that the regulation on which the IRS's assessment was based was invalid. U.S. v. Lamberd, 2022 PTC 157 (10th Cir. 2022).

Background

The U.S. government brought suit against Jerry Lamberd asserting that, as the sole member of Pro-Tec Roofing Supply, LLC, which had not elected to be taxed as a corporation, Lamberd personally owed Pro-Tec's unpaid employment and unemployment taxes plus penalties and interest for certain tax years before 2009. The district court issued a pretrial order that included stipulations to the fact of the assessments and to the court's subject matter jurisdiction. The government then moved for summary judgment. In response, Lamberd contended only that the amounts owed were not presumptively correct. The district court granted summary judgment to the government on both of its claims (one for the amount owed and one for enforcement of a tax lien on real property Lamberd owned). Lamberd did not appeal that judgment.

Almost eleven months later, Lamberd filed a motion under Federal Rule of Civil Procedure 60(b)(4) (Rule 60(b)(4)). He argued that Reg. Sec. 301.7701-2(a), which the government had relied on in deeming Pro-Tec a disregarded entity for employment tax purposes, was invalid. In relevant part, the regulation provides that, for the time periods at issue here (before 2009), "[a] business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner."

Observation: For wages paid on or after January 1, 2009, Reg. Sec. 301.7701-2(c)(2)(iv) and Reg. Sec. 301.7701-2(e)(5) provide that a single-owner business entity is not disregarded as an entity separate from its owner, but is instead treated as a corporation for employment tax purposes.

Lamberd contended that the regulation was invalid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), because it allowed an assessment to be made against him personally without the showing Congress required in Code Sec. 6672(a) - that he was a responsible person who willfully failed to pay over withheld payroll taxes. He urged that an assessment based on an invalid regulation is itself invalid, and lacking a valid assessment, the district court lacked subject matter jurisdiction and its judgment was void.

The district court denied the motion because: (1) Lamberd had not shown that an invalid regulation deprives a district court of subject matter jurisdiction; (2) Lamberd provided no authority to support his argument that a valid tax assessment is a subject matter jurisdiction prerequisite under the Case or Controversy Clause of the United States Constitution; (3) subject matter jurisdiction cannot be attacked collaterally under Rule 60(b)(4); (4) Lamberd did not show there was no arguable basis for subject matter jurisdiction; and (5) Lamberd did not show that the regulation should be invalidated. Lamberd appealed to the Tenth Circuit.

Under Rule 60(b)(4), a court may relieve a party from a final judgment if "the judgment is void." In Gschwind v. Cessna Aircraft Co., 232 F.3d 1342 (10th Cir. 2000), the Tenth Circuit held that a judgment is void for Rule 60(b)(4) purposes if the rendering court was powerless to enter it. This occurs, according to the Tenth Circuit, only where there is a plain usurpation of power or when a court wrongfully extends its jurisdiction beyond the scope of its authority. The Tenth Circuit held that a court does not usurp its power when it erroneously exercises jurisdiction. Instead, there must be "no arguable basis" on which the court could have rested a finding that it had jurisdiction.

Analysis

The Tenth Circuit affirmed the district court's order denying Lamberd's Rule 60(b)(4) motion. The court found that Lamberd did not address, let alone meet, the "no arguable basis" standard under Gschwind.

According to the Tenth Circuit, at least three statutes gave the district court an arguable basis on which it could have found subject matter jurisdiction: Code Sec. 7402, which confers jurisdiction on the district courts in all cases involving the enforcement of the internal revenue laws; 28 U.S.C. Section 1340, which provides district courts with original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue; and 28 U.S.C. Section 1345, which vests district courts with original jurisdiction of all civil actions, suits or proceedings commenced by the United States. In the court's view, the novelty of Lamberd's invalid-regulation argument - particularly whether the regulation, if invalid, affects subject matter jurisdiction - demonstrated that the district court did not usurp its power to adjudicate the case by failing to conjure up and resolve that argument of its own accord.

The Tenth Circuit rejected Lamberd's contention that if Reg. Sec. 301.7701-2(a) is invalid, then there was no case or controversy between the parties. To the contrary, the court found that whether the regulation and resulting tax assessments were valid surely bears the hallmarks of a case or controversy, and if Lamberd had raised the issue, the district court arguably would have had jurisdiction to decide it. Further, the court found that Lamberd provided no support for his contention that a valid assessment is required for jurisdiction under 28 U.S.C. Sections 1340 or 1345 or Code Sec. 7402. The court noted its holding in Marvel v. U.S., 719 F.2d 1507 (10th Cir. 1983), in which it held that there is no requirement in the Code that before liability for employment taxes accrues, a notice of deficiency or assessment be given.

Finally, the Tenth Circuit noted that Lamberd stipulated in the pretrial order that the district court had subject matter and found that, although his stipulation was not controlling, his agreement that the district court had such jurisdiction supported a determination that the district court had an arguable basis for exercising subject matter jurisdiction over this action.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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