© Originally published in Communiqué (November 2003, Vol. 24, No. 11), the official journal of the Clark County Bar Association. All rights reserved.
Among the cases to be decided by the U.S. Supreme Court during 2003-2004 are three that should be of interest to commercial clients. The Court will address:
- How a corporate owner's payments into a profit sharing plan under ERISA should be treated in a bankruptcy case (Yates v. Henton);
- How credit card limit fees are characterized in the Truth in Lending Act (Household Credit Services, Inc. v. Pfennig); and
- Whether the IRS may collect the tax debts of a partnership from individual partners absent a separate assessment against those partners (United States v. Galletti).
A brief synopsis of these cases follow.
ERISA: Is a Working Sole Shareholder Precluded from Participating in an ERISA Plan?
Yates v. Henton, No. 02-0458
Yates was the sole shareholder and president of a professional corporation that maintained a profit sharing plan ("the plan"). He was also the plan's administrator and trustee. The plan contained an anti-alienation provision as required by Section 401 of the Internal Revenue Service Code, 26 U.S.C. § 401(a)(13) and by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1056(d). With the exception of loans to plan participants, no interest in the plan could be subject to voluntary or involuntary alienation.
In 1989, Yates borrowed $20,000 from the plan and pledged his vested interest in the plan as security for the loan. Yates made no payments on the loan until 1996 when he repaid the loan in full. Three weeks later, Yates filed for bankruptcy under Chapter 7.
The bankruptcy trustee commenced adversary proceedings and asked the bankruptcy court to set aside the loan repayment as a preferential transfer. The court granted summary judgment for the trustee. The district court affirmed and cited Sixth Circuit decisions holding that neither a sole proprietor nor a sole shareholder of a corporate employer may be a participant in an ERISA plan. The Sixth Circuit affirmed.
Circuit courts of appeal are divided on whether sole shareholders who work for corporations that they own can participate in an ERISA plan. The First and Sixth Circuits hold that a sole shareholder cannot participate in an ERISA plan. See Kwatcher v. Massachusetts Serv. Employees Pension Fund, 879 F.2d 957 (1st Cir. 1989); Agrawal v. Paul Revere Life Ins. Co., 205 F.3d 297 (6th Cir. 2000). The Fourth and Fifth Circuits hold that a sole shareholder can participate in an ERISA plan. Madonna v. Blue Cross & Blue Shield, 11 F.3d 444 (4th Cir. 1993); Vega v. National Life Ins. Servs., Inc., 188 F.3d 287 (5th Cir. 1999).
Likewise, circuit courts of appeal disagree on whether a sole shareholder may be the beneficiary of an ERISA plan. In Agrawal and Yates, the Sixth Circuit found that a sole shareholder may not. In contrast, the Eighth and Eleventh Circuits found that a sole shareholder can be a beneficiary. Robinson v. Linomaz, 58 F.3d 365 (8th Cir. 1995); Gilbert v. Alta Health & Life Ins. Co., 276 F.3d 1292 (11th Cir. 2001).
The court's resolution of the treatment of working sole shareholders under ERISA should provide sufficient guidance to enable the lower courts to treat working owners of business uniformly under ERISA regardless of the form of business entity.
Truth In Lending Act: Can a Lender Disclose Fees for Exceeding A Credit Limit as a Separate Fee?
Household Credit Services, Inc. v. Pfennig, No. 02-0957
The Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., was enacted in 1968 to "assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit . . ." 15 U.S.C. § 1601(a). Finance charges are defined under the TILA as "the sum of all charges, payable directly or indirectly by the person to whom the credit is extended and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a). The TILA gives specific examples of charges that must be included in the finance charge, and it also describes charges that must be excluded. The TILA is silent as to over-the-credit-limit charges.
Under the TILA, the Federal Reserve Board of Governors may draft regulations describing creditor charges and how they must be disclosed. 15 U.S.C. § 1604(a). The Board issued Regulation Z providing that over the-credit-limit-fees are not included in the finance charge. 12 C.F.R. § 226.4(c)(2).
Pfennig brought suit against Household alleging that it violated the TILA by allowing her to exceed her credit limit, imposing an over-the-credit-limit fee, and failing to disclose it as a finance charge. The district court deferred to Regulation Z and granted Household's motion to dismiss. A divided Sixth Circuit disagreed. It found the TILA to be unambiguous and declined to defer to Regulation Z (the fee "falls squarely within the statutory definition of a finance charge"). The court ruled that credit card companies must include over-the credit-limit fees in the finance charge it discloses to consumers.
The case is important to issuers of credit cards. However, this case is also important to all business subject to the TILA because the Court will probably address to what degree a court must defer to the regulations issued by Federal Reserve Board of Governors.
Tax & Partnerships: Does the IRS Have to Assess Individual Partners for Partnership's Tax Liability to Collect From a Partner?
United States v. Galletti, No. 02-1389
Al and Sarah Galletti ("the Gallettis") were general partners of the Cabrillo Partnership ("the Partnership"). The Partnership failed to pay its federal employment taxes between 1992 and 1995. This prompted the IRS to assess those unpaid taxes against the Partnership in 1994, 1995 and 1996. Each of those assessments was timely made within three years after the filing of the Partnership's employment tax return.
In 1999, the Gallettis filed Chapter 13. The IRS filed proofs of claim to recover the unpaid federal employment taxes owed by the Partnership. The Gallettis admitted they were liable for the Partnership's taxes. However, they argued (1) only the Partnership had been assessed and not the individual partners; and (2) that the statute of limitations had run on an assessment against the partners.
The IRS countered that an individual, as a partner, is not a separate "taxpayer" within the meaning of the Tax Code for the purposes of tax assessment. Accordingly, its timely assessment against the Partnership allowed it to collect directly from individual partners.
The bankruptcy court sustained the Gallettis' objection. The district court affirmed. On appeal, the Ninth Circuit held that within the meaning of Section 603 of the Tax Code, each individual partner is also a "taxpayer." The IRS's failure to timely assess tax liabilities against the individual partners procedurally barred it from collecting the unpaid tax liability of the Partnership from the individual partners.
Galletti is an interesting procedural case. The Gallettis, as individual partners, are liable for the partnership's taxes. However, the Court's resolution will clarify what procedures the IRS must follow to collect from individual partners.
John S. Delikanakis formerly served as an assistant general counsel at Park Place Entertainment Corporation, the world's largest gaming company. He has recently re-entered private practice and joined the Las Vegas office of Bullivant Houser Bailey PC.