People Place Auto Hand Carwash, LLC v. Commissioner

126 T.C. No. 19

UNITED 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.
 - 2 -

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...)
 - 3 -

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.
 - 4 -

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.
 - 5 -

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...)
 - 6 -

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...)
 - 7 -

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).]
 - 8 -

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).
 - 9 -

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.]
 - 10 -

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.
 - 11 -

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.
 - 12 -

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.