Internal Revenue Bulletin: 2005-30
July 25, 2005
Judicial remedy for wrongful levies. This ruling clarifies that a wrongful levy action under section 7426 of the Code is the only remedy available to a third person whose property was levied to satisfy the tax debt of another.
Whether a wrongful levy suit is the only judicial remedy for a person asserting that its property was wrongfully levied upon by the Internal Revenue Service (the Service) to satisfy the tax debt of another?
On June 1, 2002, the Service assessed taxes against X. The Service sent notice and demand for payment to X, who refused to pay. The Service discovers and identifies a bank account that it believes belongs to X, but that is held in the name of Y. Y is not liable for the taxes assessed against X. After providing notification of collection due process rights to X, on January 2, 2003, the Service served a levy on the bank requesting that it turn over all property belonging to X, including the account held in the name of Y. In response to the levy, the bank turned over to the Service cash from the account that was held in the name of Y. On October 15, 2003, Y filed an action in district court seeking a return of its property. In its complaint, Y asserted a wrongful levy claim under section 7426(a)(1) and, in the alternative, asserted a claim under 28 U.S.C. § 1346(a)(1) for refund of taxes erroneously or illegally collected.
If a person liable to pay any tax fails to pay the tax after notice and demand for payment and notification of collection due process rights under section 6330, pursuant to section 6331, the Service may collect such tax by levy upon all property or rights to property belonging to such person. A person other than the person against whom the tax is assessed (a third person) claiming an interest in levied property may bring a wrongful levy suit under section 7426(a)(1). A third person also may file an administrative request under section 6343(b) and section 301.6343-2(b) of the Regulations on Procedure and Administration for the return of property wrongfully levied upon. An administrative request under section 6343 is not a prerequisite to filing suit for wrongful levy under section 7426. Unless a timely administrative request for the return of wrongfully levied property is filed with the Service, “no suit or proceeding under section 7426 shall be begun after the expiration of 9 months from the date of the levy. . ..” I.R.C. § 6532(c)(1).
A taxpayer may file a civil action under 28 U.S.C. § 1346(a)(1) for the refund of taxes erroneously or illegally collected. Under section 7422(a), no suit for the recovery of taxes shall be made before an administrative claim for refund is filed with the Secretary in accordance with section 6511 and the regulations thereunder. No suit may be filed for six months after an administrative claim is filed, unless the Secretary acts earlier to deny the claim. In all events, no suit may be filed later than two years from the date the Secretary’s notice of disallowance of the claim is mailed. I.R.C. § 6532(a).
Courts have held that the exclusive judicial remedy for a third person claiming an interest in property levied upon by the Service is a wrongful levy suit under section 7426. See, e.g., Dahn v. United States, 127 F.3d 1249 (10th Cir. 1997); EC Term of Years Trust v. United States, 93 A.F.T.R.2d 2004-2005, 2004 WL 911307 (W.D. Tex. Apr. 23, 2004). The Ninth Circuit held to the contrary in WWSM Investors v. United States, 64 F.3d 456 (9th Cir. 1995). WWSM was, however, incorrectly decided. In WWSM, the Ninth Circuit held that a third person claiming an interest in property levied upon by the Service may file a refund suit after the nine-month limitations period for filing a wrongful levy suit has run. The court relied on United States v. Williams, 514 U.S. 527 (1995), which held that 28 U.S.C. § 1346(a)(1) permits a refund suit when a third person pays a tax under protest to discharge a tax lien from its property. The Supreme Court’s opinion in Williams was premised on a finding that in the absence of a refund suit, the third person would have no meaningful judicial remedy. The Tenth Circuit, in Dahn, disagreed with WWSM and distinguished Williams as addressing only the unavailability of a wrongful levy or any other remedy to the third person whose property was encumbered by a federal tax lien. Dahn, 127 F.3d at 1253.
The Service agrees with and will follow the holding in Dahn that Williams should be limited to the unique facts of that case and did not overturn the established principle that section 7426 is the exclusive remedy in the case of a wrongful levy. The rationale in Williams is inapplicable to wrongful levy suits because Congress created an exclusive remedy under section 7426 for third persons claiming an interest in property levied upon by the Service. Moreover, because Congress has now provided a judicial remedy for third persons seeking to challenge the value of a federal tax lien encumbering their property, Williams would appear to have limited applicability. See City of Richmond v. United States, 348 F. Supp. 2d 807, 813-18 (E.D. Ky. 2004) (citing section 6325(b)(4) (third person may request a certificate of discharge in exchange for a deposit or bond) and section 7426(a)(4) (cause of action for third persons requesting certificate of discharge under section 6325(b)(4))); see also IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3106, 112 Stat. 685 (1998) (enacting section 6325(b)(4) and 7426(a)(4)).
Y’s only judicial remedy is to file a wrongful levy suit under section 7426(a). Because Y failed to file a wrongful levy suit within nine months from the date of the levy, the court lacks jurisdiction over Y’s suit.
The principal author of this revenue ruling is Glenn Thomas of the Office of Associate Chief Counsel, Procedure and Administration (Collection, Bankruptcy & Summonses Division). For further information regarding this revenue ruling, contact Branch 1 of the Collection, Bankruptcy and Summonses Division at (202) 622-3610 (not a toll-free call).
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