Houston Tax Attorney Blog
Houston Tax Attorney
The IRS has a number of collection tools at its disposal. This includes the ability to take the taxpayer’s property without court intervention. This power doesn’t extend to all property. For example, the IRS has to go through the courts to get at property held by third parties. As the court reminded the IRS in , United States v. Sims, No. 4:17-CV-00495 (E.D. Tex. 2017), the IRS generally cannot use the courts to collect from third parties who are located in another state.
The Facts & Procedural History
Billy Sims is an ex-NFL football player. The IRS alleges that he had outstanding federal income tax liabilities for the 2001, 2004-2011, and 2014 tax years.
Billy lives in Texas, but he owned an interest in a S corp. in Oklahoma. His S corp. entered into publicity rights arrangement with a third party LLC located in Oklahoma. The LLC was authorized to use Sims’ name, nicknames, image, voice, likeness, personality, history and memorabilia in its franchised restaurants that go by the name ‘Billy Sims BBQ restaurants.’ The restaurants are located in of Oklahoma, Kansas, Iowa, Missouri, and Colorado; however, there was one franchised restaurant located in Texas for a period of time.
The IRS brought suit against Sims in Texas to collect unpaid taxes. The IRS named the third-party LLC as a party to the suit to collect the contracts held by Sim’s S corp.
The third-party LLC filed a motion to dismiss for lack of jurisdiction, which was the subject of the court’s opinion.
The Rules for Personal Jurisdiction
The Federal courts have devised rules for determining whether a court in one state has personal jurisdiction over a party located in another state. These rules dictate whether, as in this case, the IRS can haul someone before a court in a different state.
The rules create a two-step process for this analysis, i.e., the rules consider the forum state’s long-arm jurisdiction and due process considerations. The Texas long-arm statute gives the courts power over out of state parties if there is general or specific jurisdiction.
The court has general jurisdiction only when the party’s contacts with the state constitute “continuous and systematic” general contacts with the forum. This typically means the state an individual is domiciled in and the state a corporation is headquartered in.
The court has specific jurisdiction if the dispute involves a cause of action that grows out of or relates to a contact between the party and the forum state. The claim has to be related to or arise out of the party’s contacts with the forum state.
The Fifth Circuit, which includes Texas courts, apply the following factors in determining whether a claim is related to or arises from the party’s contacts with the forum state: (1) whether the party has minimum contacts with the forum state, i.e., whether it purposely directed its activities toward the forum state or purposefully availed itself of the privileges of conducting activities there; (2) whether the claimant’s cause of action arises out of or results from the other party’s forum-related contacts; and (3) whether the exercise of personal jurisdiction is fair and reasonable.
No Personal Jurisdiction in this Case
The third-party LLC in this case argued that the Texas court did not have jurisdiction over it. More specifically, it argued that it was not subject to the court’s general jurisdiction because its contacts were not systematic and continuous and that specific jurisdiction is lacking because its contacts with Texas, relating to the transaction at issue, do not rise to the level of minimum contacts.
The court had this to say about general jurisdiction:
Legendary is a limited liability company organized under the laws of the State of Oklahoma, with its principle place of business in Tulsa, Oklahoma. It has no offices or employees in Texas and does not do business in Texas (Dkt. #9 at p. 2). At best, the facts establish that Legendary conducted business in Texas in 2014 and 2015, through a franchise agreement with Quality Brands, LLC, and subsequently with Blue Ribbon BBQ, LLC, both of whom are Oklahoma limited liability companies (Dkt. #21). Legendary does not have sufficient ties to Texas for general personal jurisdiction to attach.
The court had this to say about specific jurisdiction:
[The third-party LLC] executed the Licensing Agreement with [Sims S corp.] to use Sims’ publicity rights in order to market the Billy Sims BBQ restaurants. The Licensing Agreement between [the third-party LLC] and [Sims S corp.] was executed in Oklahoma and is governed by Oklahoma law. Although Sims is a Texas resident, this conduct does not establish specific personal jurisdiction over [the third-party LLC]. See Chang v. Virgin Mobile USA, LLC, No. 3:07-CV-1767-D, 2009 WL 111570, at *4 (N.D. Tex. Jan. 16, 2009). “[M]erely contracting with a resident of the forum state does not establish minimum contacts.” Moncrief Oil Int’l Inc. v. Oao Gazprom, 481 F.3d 309, 311 (5th Cir. 2007) (citing cases). The choice-of-law clause in the Licensing Agreement further supports the conclusion that [the third-party LLC] did not intend to avail itself of the privileges of doing business in Texas and believed that any dispute over the contract would be resolved under Oklahoma law.
Given the absence of general or specific jurisdiction, the court granted the third-party LLC’s motion to dismiss.
Why Does it Matter?
The court only dismissed the third-party LLC from the suit. The IRS suit will continue and, if successful, the IRS will reduce its lien to a judgment. The judgment can then be enforced in other jurisdictions. So why does this matter?
The answer is that the third-party LLC does not have to bear the costs of participating in the suit. The savings of money and time can be significant.
Also, and potentially more important, its property and any payments do not have to be turned over to the IRS given the court’s decision. There are timing rules, and it appears that time has been passing by in this case, which may mean that the third-party LLC’s payments to and property are dissipated and/or now beyond the IRS’s reach–either intentionally or not. This could impact the amount the IRS is able to collect from the third-party LLC and possibly Sims.