Issues
Whether 26 U.S.C. § 7426, which is designed specifically for wrongful levy actions and has a shorter statute of limitations, is the exclusive remedy for an individual seeking a refund after a wrongful levy assessed by the IRS.
Elmer and Dorothy Cullers created the EC Term of Years Trust (“the Trust”) to reduce the impact of federal taxes on their estate. When the IRS claimed the Cullers had transferred property to the Trust to avoid paying taxes, the Trust opened a bank account to pay the back-taxes. The IRS levied on the account. Afterwards , the Trust sought to recover the funds under 26 U.S.C. § 7426 (wrongful levy statute) and 28 U.S.C. § 1346 (tax refund statute). At issue in this case is whether 26 U.S.C. § 7426, with its shorter statute of limitations, is the exclusive remedy for wrongful levy actions by third parties, or whether third parties may alternatively seek relief under the more general tax refund provisions of 28 U.S.C. § 1346, which has a longer statute of limitations. The Court’s decision in this case will determine whether wrongful levy claimants will have this longer statutory period during which to bring suit against the U.S. The Court’s decision will also implicitly give weight to particular methods of statutory interpretation and ways of determining congressional intent.
Questions as Framed for the Court by the Parties
May a person who is not the assessed taxpayer utilize 28 U.S.C. § 1346 to seek a refund when its funds were seized through a wrongful levy and it had an opportunity to utilize the wrongful levy procedure under 26 U.S.C. § 7426?
Facts
Elmer and Dorothy Cullers created the EC Term of Years Trust (“the Trust”), the Petitioner, in 1991 to reduce the impact of federal taxes on their estate. Brief for Petitioner at 3. Two years later, the Internal Revenue Service (the “IRS”) assessed additional federal income taxes, penalties, and interest against the Cullers for the tax years 1981 through 1984. Id. In 1999, claiming that the Cullers had transferred property to the Trust to avoid paying the assessed taxes and penalties, the IRS filed transferee tax liens against the Trust for the tax liability owed by the Cullers. Id. The Trust created a bank account for the purpose of dispatching the Cullers debt, and the IRS seized the total amount owed, more than $3 million, from the account. Id.
The Trust, believing that the additional taxes and penalties had been wrongfully assessed, filed suit against the United States almost one year after the levy was assessed, seeking a refund. Brief for Respondent at 4. The Trust filed suit for wrongful levy under 26 U.S.C. § 7426 more than nine months after the levy was assessed. Id. The District Court dismissed the claim, ruling that the court lacked subject matter jurisdiction because the suit had not been filed within the nine-month limitation period imposed by 26 U.S.C. § 7426. Brief for Petitioner at 4. The lower court ruled that 26 U.S.C. § 7426 was the exclusive remedy for an innocent third party whose property had been confiscated by the IRS to satisfy another person’s tax liability. Brief for Respondent at 4.
In 2001, the Trust brought a different action, an administrative claim, for a refund of the total amount seized by the IRS. Brief for Petitioner at 4. However, this claim was denied, and the Trust filed a complaint for a tax refund in the local District Court under 28 U.S.C. § 1346. Id. The District Court dismissed this claim, ruling that this was not an appropriate remedy for this type of action; 26 U.S.C. § 7426 was the sole remedy. Brief for Respondent at 5. The lower court rejected the Trust’s claim that the decision in U.S. v. Williams, 514 U.S. 527 (1995), overruled the exclusivity rule with respect to wrongful levy claims, stating that Williams applied only in cases where the claimant has no other remedy. Id.
The Trust appealed the case to the Fifth Circuit, relying on the Supreme Court’s holding in Williams and the Ninth Circuit’s holding in WWSM Investors v. U.S., 64 F.3d 456 (9th. Cir. 1995). Brief for Petitioner at 4. The Fifth Circuit held that the wrongful levy procedure under 26 U.S.C. § 7426, with its nine-month statute of limitations, is the exclusive remedy for a wrongful levy by the IRS, and affirmed the District Court’s dismissal of the Trust’s tax refund complaint for lack of subject matter jurisdiction. Id. With the circuit courts arriving at different conclusions regarding whether 26 U.S.C. § 7426 is the sole remedy in such situations, the Supreme Court granted certiorari on October 27, 2006.
Analysis
According to the Fifth Circuit, this case involves a straightforward question of whether a wrongful levy action under 26 U.S.C. § 7426 is the exclusive remedy for an innocent third party whose property was confiscated by the IRS to satisfy another person’s tax liability. EC Term of Years Trust v. U.S., 434 F.3d 807, 809 (5th Cir. 2006). With several circuit courts of appeals deciding this issue differently, the Supreme Court must make a decision regarding the proper interpretation of the statute. Both parties make arguments that require careful statutory interpretation and a determination of congressional intent.
The Trust argues that the Fifth Circuit made the wrong decision by ruling that 26 U.S.C. § 7426 is the exclusive remedy for wrongful levy actions. The Trust focuses on the language of the statute and points out that 26 U.S.C. § 7426 does not contain any language expressly stating that it is the sole and exclusive remedy of a third party, such as the Trust, whose property has been seized by a wrongful levy. Brief For Petitioner at 5. According to the Trust, other provisions of the Internal Revenue Code have included exclusivity language when Congress intended to preclude resort to other remedies. Id.
Additionally, the Trust claims that other methods of proving congressional intent are non-existent. Congressional intent cannot be shown through a review of the Senate and House reports that were published shortly before the enactment of 26 U.S.C. § 7426 in 1966. Brief for Petitioner at 5. Furthermore, Congressional intent cannot be inferred from the structure and organization of the statute because it does not show that Congress was dealing with an entirely new situation that had not been subject to judicial action. Id. Instead, Congressional reports show that the purpose of 26 U.S.C. § 7426 was to clarify and codify existing remedies for third parties whose property had been confiscated by the IRS. Id.
Moreover, the Trust argues that the Fifth Circuit fashioned its holding through an improper application of the rules designed to determine Congressional intent. Id. The Fifth Circuit reasoned that Congress must have intended for 26 U.S.C. § 7426 to be the exclusive remedy simply because the statute contains a statute of limitations period that is shorter than 28 U.S.C. § 1346, the general tax refund statute. Id. However, the Trust contends that this argument entirely ignores accepted methods of determining Congressional intent, such as the lack of explicit language. Id. Further, the Trust claims that the Supreme Court rejected the Fifth Circuit’s reasoning when it decided Williams. Id.
In Williams, the issue was whether Ms. Williams, who, under duress, had paid taxes assessed against her former husband in order to remove a tax lien on her property, could seek a tax refund under 28 U.S.C. § 1346. Id. at 10. The Supreme Court determined that Ms. Williams, a third party taxpayer, had the right to seek a refund under 28 U.S.C. § 1346, and was not precluded from such recourse by an overly narrow definition of “taxpayer.” Id. Also, the Court determined that Ms. Williams had no other avenue open to her to seek a refund, and 28 U.S.C. § 1346 was her only hope because she had not been subject to a wrongful levy, governed by 26 U.S.C. § 7426, and she could not bring a quiet title action. Id. at 12.
While the Trust focuses on the Court’s seemingly expansive reading of 28 U.S.C. § 1346 in Williams and the similarities between a tax lien and a tax levy, arguing that a tax levy falls within the Court’s holding, the U.S. contends that the Williams holding was much narrower. The U.S. focuses on the Court’s determination that 28 U.S.C. § 1346 was Ms. Williams’ only remedy. Brief for Respondent at 8. According to the U.S., Williams “establishes only the scope of the tax-refund remedy for third parties who have no other statutory remedy; it does not speak to the exclusivity of the specific wrongful-levy action that Congress created precisely for third parties in petitioner’s situation.” Id.
The U.S. contends that the Fifth Circuit correctly held that the Trust could not seek relief from a wrongful tax levy through the general tax refund mechanism in 28 U.S.C. § 1346, thereby circumventing the statutory limitation period that applies to wrongful levy actions under 26 U.S.C. § 7426. Id. at 6. The U.S. argues that Congress took the time to create a specific and carefully drawn remedy for wrongful levy actions under 26 U.S.C. §7426,and the Trust is in precisely the exact situation contemplated by Congress. Id. at 6-7. Therefore, this provision should be applied to the Trust because it constitutes the exclusive remedy for third parties whose property has been levied upon to collect taxes assessed against another. Id. at 7.
According to the U.S., the Supreme Court has held in numerous contexts that if Congress creates a specific remedy tailored to a particular set of circumstances, this will foreclose the claimant’s ability to seek a more general remedy. Id. “That result is clearly appropriate when, as here, the ‘balance, completeness, and structural integrity’ of the specific remedy suggests that it was intended by Congress to be the exclusive avenue of relief.” Id.
Even more significant, according to the U.S., is the fact that Congress created 26 U.S.C. § 7426, a specific remedy, with a shorter statute of limitations. This is a powerful indicator that Congress intended this remedy to be exclusive, foreclosing other potentially available remedies with longer limitation periods. Id. This is especially true considering the relevant provisions authorize suits against the U.S. Id. “[I]n those circumstances the shorter limitation period defines the scope of the waiver of the United States’ sovereign immunity. Id. Here, a wrongful levy action under 28 U.S.C. § 1346 would render meaningless the shorter statutory limitation period under 26 U.S.C. § 7426, the statute that specifically addresses wrongful levy actions by third parties. Id. at 7-8.
Finally, the U.S. contends that 26 U.S.C. § 7426 is part of a comprehensive and complex tax collection scheme that is in large part designed to facilitate the swift resolution of challenges to tax collection activities of the IRS, and also to work harmoniously with other, related provisions of the tax code. Id. at 8. The U.S., claims that many courts have recognized that the shorter statute of limitations period for wrongful levy actions by third parties ensures that the IRS will quickly learn whether it needs to pursue collection efforts against the taxpayer, certainly part of Congress’ intent when it created the shorter nine-month limitation period under 26 U.S.C. § 7426. See Id.
Discussion
Due to the differing decisions among federal circuit courts of appeals, the Supreme Court’s ruling in this case will have a significant impact on the interpretation of the tax code in reference to wrongful levy claims by third parties whose property was confiscated by the IRS. Additionally, the Supreme Court’s decision will have an implicit impact on future cases that involve statutory interpretation and congressional intent, as each party in this case takes a different approach to these issues.
The Trust argues that 26 U.S.C. § 7426 is only one of a couple of remedies afforded to third parties claiming a wrongful levy by the IRS. Brief for Petitioner at 5. The Trust contends that if Congress had intended 26 U.S.C. § 7426 to be the exclusive remedy for this type of action, Congress would have explicitly included exclusivity language in the statute and/or would have included some reference to exclusivity in the congressional record. Id. Instead, 26 U.S.C. § 7426 leaves out any mention of exclusivity, leaving the door open to a different interpretation. Id. The Trust relies on such traditional methods of determining congressional intent and finds that Congress left open the possibility that third party wrongful levy claimants may resort to 28 U.S.C. § 1346, the tax refund statute, as well. Id.
The U.S., on the other hand, contends that 26 U.S.C. § 7426 is the only remedy available to third party wrongful levy claimants. Brief for Respondent at 6-7. The U.S. forgoes any reliance on explicit exclusivity language in the statute or any evidence of exclusivity in the congressional record; instead, the U.S. chooses to analyze the existence of 26 U.S.C. § 7426 itself, along with its shorter statutory period. Id. at 7. In situations where Congress has created a very specific statute, with a shorter statute of limitations period than other possible remedies, the U.S. argues that a claimant cannot refuse to rely on the stricter statute in favor of a more liberal statute. Id. at 7-8. Here, the U.S. contends that the Trust is improperly attempting to get around the shorter limitations period imposed by Congress on third party claimants seeking a refund for a wrongful levy. Id. at 8. The U.S. argues this would be clearly against congressional intent. Id. at 8.
A decision in favor of the Trust will make it easier for third party claimants to bring wrongful levy claims. Parties will be free to file claims even after the nine-month statute of limitations expires under 26 U.S.C. § 7426. Brief for Petitioner at 5. Such claimants will be able to seek a refund under 28 U.S.C. § 1346, which has a limitations period of at least two years. Id. Additionally, a decision for the Trust has the potential to affect other actions involving a question of remedy exclusivity. If the statute itself or the congressional record makes no mention of exclusivity, the claimants will be free to assume that they can seek relief under a more liberal statute that provides a less specific remedy. This will both potentially expand the types of actions claimants can bring and affect the way Congress writes new statutes, making sure they are very specific in expressing congressional intent. A decision for the Trust could also undermine Congress’ efforts to secure expeditious resolutions of tax liability by imposing the shortened limitations period.
A decision for the U.S., however, will make it much more difficult for third party claimants to bring wrongful levy claims, since those claims will be hampered by the shorter statute of limitations period under 26 U.S.C. § 7426. Brief for Respondent at 7. Claimants who fail to bring a timely action under 26 U.S.C. § 7426 will not be able to resort to the more liberal tax refund statute, 28 U.S.C. § 1346. Id. at 8. Furthermore, a decision for the U.S. will give weight to the argument that more specific remedy statutes should usually be viewed as the exclusive remedy for the specific set of circumstances provided by Congress. This is the case even if the statute and the congressional record do not contain explicit exclusivity references. Such a decision will limit the types of actions claimants can bring to only those cases that conform to the exclusive remedy statute. Other more liberal remedies will not be available. A decision for the U.S. could also promote efficiency, resolving tax liability disputes promptly by requiring that wrongful levy claimants adhere to the shorter limitations period under 26 U.S.C. § 7426. With its decision, the Court will set a consistent standard for review for third party claimants seeking to challenge tax levies.
Conclusion
The Court’s decision in this case will have an important impact on the determination of complex tax cases and other statutory interpretation cases in the future. A decision for the Trust will give particular weight to more traditional methods of statutory interpretation (such as looking to specific statutory language and legislative history,)and will extend the types of remedies wrongful levy claimants may seek under the tax code, including remedies with longer limitation periods. A decision for the U.S. will favor broader methods of statutory interpretation (such as inferring exclusivity from a shorter limitations period) and will limit the types of remedies for wrongful levy claimants to a single, more specific remedy.Written by:
Miguel Loza