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Can the IRS be Bound by State Statutes of Limitation?

The IRS is not shy when it comes to flexing its Federal muscles.

In a 2001 Chief Counsel Advice Memorandum, rather like a bodybuilder at the beach, the IRS so flexed (observed):

The federal government is not barred by any state statute of limitation periods (or otherwise labeled claim extinguishment provisions) from enforcing its rights under the Internal Revenue Code to assess or collect taxes, even though the federal government may be relying on state law created grounds for attacking the transfer as an actual or constructive fraud upon the transferor’s creditors. This is due to federal supremacy principles.[1]

If you’re not familiar with the Federal supremacy principles, they go something like this:

“We’re big; you’re small. We’re right; you’re wrong. We’re smart; you’re dumb.”

The Federal supremacy doctrine with regard to statutes of limitation arises primarily out of the Supreme Court case of U.S. v. Summerlin,[2] in which Chief Justice Hughes observed that “[i]t is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.”[3]

But is it “well settled”, though?  Or even settled?

The 1940 Summerlin Decision

In Summerlin, the Federal Housing Administrator, acting on behalf of the United States, had become the assignee of a claim against a decedent’s estate. A state statute provided that any claim against such an estate would be “void” if filed more than eight months after the first publication of notice to creditors. The United States filed its claim against the estate beyond the eight-month period.

A unanimous Supreme Court held that, to the extent that the state statute purported to render void a claim of the United States, it “transgressed the limits of state power.”[4] As noted above, the Supreme Court observed that it was well settled that the United States is neither bound by state statutes of limitations nor is subject to the defense of laches, and that the same rule applies whether the United States brings its suit in its own courts or in those of a state.

The Court articulated its rationale in the following terms: “When the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.”[5]

The Earlier 1938 Guaranty Trust Decision

Some of the limits of the seemingly broad principle announced in Summerlin are implicit in the Summerlin Court’s favorable citation to the Guaranty Trust opinion, issued two years earlier.[6] In Guaranty Trust, the Supreme Court addressed a situation in which, by executive agreement, the United States had become the assignee of all amounts owed to the Soviet Union by American nationals. The United States made demand upon the Guaranty Trust Company for monies deposited there by representatives of previous Russian governments. The action was dismissed on the ground that, at the time the United States government was assigned the rights of the Soviet government, New York’s six-year statute of limitations already had run against the Soviet Union.

In affirming the district court’s decision to dismiss the case, the Supreme Court identified the policies underlying the United States government’s traditional exemption from state statutes of limitations.  It observed that “[t]he true reason is to be found in the great public policy of preserving the public rights, revenues, and property from injury and loss, by the negligence of public officers.”[7]

The Supreme Court further concluded that those policies were not implicated under the circumstances of the Guaranty Trust case.  It noted that there had been no neglect or delay by the United States or its agents, and it lost no rights by any lapse of time after the assignment. As such, enforcement of the statute of limitations did not deprive the United States of any right, “for the proof demonstrates that the United States never acquired a right free of a pre-existing infirmity, the running of limitations against its assignor, which public policy does not forbid.”[8]

Thus, in Guaranty Trust, the Supreme Court held that because the relevant limitations period had expired before the United States acquired the claim it sought to enforce, the Summerlin principle did not apply, and the United States was barred from enforcement of the claim. The Supreme Court upheld this distinction in a 1993 case where the period of limitations expired before the United States acquired the claim.[9]

The 2019 Saccullo Decision

In Saccullo v. United States,[10] the Eleventh Circuit was faced with the question of whether Summerlin applied to the Florida statute which allows a five-year period to cure a recorded deed that otherwise lacked the requisite witnesses. In Saccullo a father deeded a piece of property to his son but failed to obtain a second witness.

Through operation of Fla. Stat. § 95.231(1) the defect was cured after five years. When the father died two years later, the IRS made a claim against the property of the estate, arguing that because the deed was deficient, its claim against the estate was valid. The government argued that the Summerlin principle “preserved” its claim against the estate.

The Eleventh Circuit, ever so respectfully calling “bullshit,” held that the real property deeded in Saccullo was validly transferred to the trust five years after deed was recorded, and two years before grantor’s death, by operation of Florida statute providing for cure of defective deeds after passage of five years.  Therefore, the property was not in grantor’s estate at time of death and was not subject to federal government’s estate-tax liens, despite government’s contention its claim was preserved by Summerlin rule.

The Eleventh Circuit held that the Summerlin rule only applied when a valid claim accrued to government only to perish through passage of time.  In Saccullo, therefore, the government’s claim never materialized because property dropped out of estate before any claim asserted by government could have accrued.

The Two “Countervailing” Principles

Taken together, Summerlin, Guaranty Trust, and Saccullo suggest two countervailing principles.[11] On the one hand, if the United States comes into possession of a valid claim, that claim cannot be “cut off” later by a state statute of limitations. On the other hand, if a claim already has become infirm (for example, when a limitations period expires) by the time the United States acquires the purported right, the rule of Summerlin will not operate to revive the claim. In short, the Summerlin principle can’t create rights that do not otherwise exist.[12]

Takeaways

In a sovereignty pissing contest, the United States government will come out on top 99% of the time.  If, however, the United States is tardy to the party in coming into possession of a valid claim—that is, if the claim has already been extinguished before the United States acquired it—then Uncle Sam can shove it.

As you can see from the General Counsel Advice Memorandum quoted at the beginning of the article, this position is not popular with the IRS. The government will doubtlessly assert Federal sovereignty, even if the claim was “infirm” by the time the United States acquired the purported right or claim. Nonetheless, the Supreme Court, the Eleventh Circuit, and the Ninth Circuit to a lesser extent (but who really trusts the Ninth Circuit?) have come down on the side of the little guy in such cases.

So, when the Government comes at you, biceps drawn, don’t be afraid to flex back.


Footnotes:

[1] IRS CCA 200136009 (Sept. 7, 2001).

[2] 310 U.S. 414 (1940).

[3] Id. at 416.

[4] Id. at 417.

[5] Id.

[6] Guaranty Trust Co. v. United States, 304 U.S. 126 (1938).

[7] Id. at 132 (quoting United States v. Hoar, 26 F. Cas. 329, 330 (C.C.D. Mass. 1821) (Story, J.)).

[8] Id. at 141-42.

[9] See also United States v. California, 507 U.S. 746, 757-58 (1993) (applying similar logic in a subrogation claim and holding that “Summerlin is clearly distinguishable”).

[10] Saccullo v. United States, 913 F.3d 1010, 1017 (11th Cir. 2019).

[11] Bresson v. Commissioner, 213 F.3d 1173, 1176 (9th Cir. 2000)

[12] Saccullo, 913 F.3d at 1017.

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