EC Term of Years Trust v. U.S. (04/30/2007)

Question presented: Whether a party which would have been entitled to commence a timely action under 26 U.S.C. 7426 to challenge an allegedly wrongful Internal Revenue Service levy upon its property to collect ec taxes owed by another, but failed to commence such an action within the applicable limitations period, may seek a refund of the amount collected by the levy through a tax-refund action under 28 U.S.C. 1346(a)(1)?

BY EBONNE RUFFINS, MEDILL NEWS SERVICE

American cowboy humorist Will Rogers once said that "the only difference between death and taxes is that death doesn't get worse every time Congress meets." EC Term of Years Turst v. U.S. is Elmer Cullers, Jr. and Dorothy Cullers' way to ensure that two Congressional tax statutes won't get worse when they die.

In September of 1999, the Internal Revenue Service filed tax liens against EC Term of Years Trust, an account created by the Cullers totaling more than $3.3 million. The IRS contended that the Cullers transferred property to the Trust to avoid paying income taxes for tax years 1981 through 1984.

The Cullers and other Trust members disagreed with the IRS' contentions but opened a bank account in August of 1999 to pay the IRS back-taxes. The IRS levied on the account and a check was issued to the IRS in October of 1999.

"A person, company or institution that is served by a federal tax levy has to comply," said Michael Krainbrank, client intake director for the Law Offices of Roni Lynn Deutch, one of the largest tax firms in the nation. "If you have $1,000 and you owe $500, they could and will levy an account and take $500 from it."

The Trust contends the total amount collected by the IRS exceeded the tax funds owed. On Sept. 7, 2000, close to one year after the taxes were collected, the Trust filed a wrongful levy claim, pursuant to 26 U.S.C. " 7426. This statute contains a time element: authorizing a challenge to a wrongful levy within nine months after the levy is collected. The District Court for the Western District of Texas took a close watch at the clock and honed a procedurally driven stance. The court held that the ec's claim was tardy, having been filed more than nine months after the levy and dismissed the wrongful levy complaint for lack of subjectt matter jurisdiction.

The ec then filed a refund complaint under 28 U.S.C. " 1346, to recover more than $3.3 million seized through the October 1999 IRS levy. In November of 2004, the district court dismissed the refund claim on the grounds that the ec's first wrongful levy claim was the "sole and exclusive remedy."

Recognizing that the "sole and exclusive remedy" was no longer available because the court held that they'd filed beyond the nine month deadline, the ec appealed the district court decision. But the 5th Circuit Court of Appeals agreed with the lower court, stating that if the ec was wrongly charged or if property was wrongly confiscated, relief is only available under the wrongful levy statute and only within the nine-month statute of limitations.

A conflict exists among the courts of appeals on how to negotiate the wrongful tax levy statute (26 U.S.C. " 7426) and the tax refund statute (28 U.S.C. " 1346). The 9th Circuit permits challenges to IRS levies through either a wrongful-levy action or a refund action, whereas individuals or parties like the ec in the 5th and 10th Circuits are limited to wrongful-levy actions and the nine-month deadline for filing their levy complaints to the IRS.

On April 30, 2007, a unanimous Supreme Court affirmed the 5th Circuit's dismissal of the third-party wrongful-levy action.

"The demand for greater haste when a third party contests a levy is no accident; as the government explained in the hearings before passage of the act," Justice David Souter wrote for the Court. "We simply cannot reconcile the 9-month limitations period for a wrongful levy claim under "7426(a)(1) with the notion that the same challenge would be open under "1346(a)(1) for up to four years."

The decision was also a rebuke to the 9th Circuit, which has held that "7426 was not the exclusive remedy for third parties challenging a levy.