Summary
holding that administrative exhaustion was required prior to bringing suit under § 7426
Summary of this case from Munaco v. U.S.Opinion
Case No. 00-14163-CV-MOORE/LYNCH
February 26, 2002
THIS CAUSE having come to be heard upon an Order of Referral from the Honorable K. M. Moore of all pretrial matters, and this Court having reviewed the above motion and response filed after notice of the motion's pendency, recommends to the District Court as follows:
BACKGROUND
1. On May 17, 2001, the Plaintiff, Coutant, filed an amended two count complaint against the Defendant, IRS, seeking a refund of taxes allegedly assessed incorrectly against her share of former marital property and damages for the wrongful denial of this refund.
2. In anticipation of divorce, Coutant and her then husband entered into a Marital Settlement Agreement on August 23, 1991 for the sale of their Stuart, Fla. (Martin County) residence, from which proceeds Coutant would be entitled to $50,000.00. The Circuit Court of the 19th Judicial Circuit (Okeechobee County) entered an order of maintenance incorporating the agreement on October 11, 1991 and a Final Judgment of divorce on November 20, 1991. Coutant represents that the property settlement was recorded in Okeechobee County, Fla. on November 21, 1991.
3. On April 6, 1992, IRS assessed a penalty against the former husband, pursuant to 26 U.S.C. § 6672, in the amount of $28,056.17. On April 19, 1996, IRS filed a Notice of Federal Tax Lien against him, individual.
4. In December 1996, Coutant and her former husband sold the property, and Coutant permitted under protest one-third of the sale proceeds to be tendered to the IRS in order to obtain clear title. On December 18, 1996, IRS determined that the value of its interest in the property to be $6,713.33, and issued a Certificate of Discharge of Property from Federal Tax Lien in exchange for that amount.
5. By letter to IRS dated March 5, 1997, Coutant requested a refund of the $6,713.33.
6. On September 23, 1997, the Final Judgment of divorce was filed in the Official Records of Martin County, Fla., where the property is located.
7. As she worked her way through IRS' internal review process, Coutant corresponded with the IRS from March 5, 1997 through December 1999. On December 27, 1999, IRS issued its final denial of refund. Without citing legal authority, that letter informed Coutant that she could appeal the denial to the United States District Court within two years from the letter's mailing date.
8. Coutant filed her first complaint on June 7, 2000.
9. In addition to damages, she seeks a refund of either the full amount paid to discharge the lien ($6,713.33) or a partial refund, referred to as $1,684.23, $1,687.00, or $1,678.80 throughout Coutant's pleadings and response. IRS concedes "that Plaintiff is entitled to a partial refund of the $6,713.33, plus interest according to law," (Motion for Summary Judgment, p. 6), and that "Plaintiff is entitled to recover $1,678 plus interest according to law from December 13, 1996," (Motion for Summary Judgment, p. 14, 15).
DISCUSSION
10. Generally stated, a movant is entitled to summary judgment if there is no genuine issue of material fact, leaving final judgment to be decided as a matter of law. See Fed.R.Civ. p. 56, Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986), Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 578 (1986). The facts, and any reasonable inferences therefrom, are to be viewed in the light most favorable to the non-moving party, with any doubt resolved in favor of denying the motion. See, Edickes v. S.H. Kress Co., 398 U.S. 144 (1970). On rebuttal, however, the non-movant: must raise more than mere assertions to survive a motion for summary judgment. See Fed.R.Civ. p. 56(e),Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
11. As its first ground for summary judgment, IRS contends that Coutant's damages action is barred by the doctrine of sovereign immunity. Pursuant to 26 U.S.C. § 7426 (h)(1), a person other than a taxpayer may recover actual, direct economic damages, as well as court costs, sustained as a result of the reckless, intentional, or negligent disregard of any provision of Title 26. This waiver of sovereign immunity only applies to actions of IRS officers or employees taken after July 2, 1998, the date of the Act's enactment. See §§ 3102(d), 3106(c), Pub.L. 105-206 (this and other related amendments to Title 26 hereinafter referred to as the "Act"). IRS argues that "[b]ecause all of the actions complained of by Plaintiff occurred in 1996," sovereign immunity had not yet been waived for such claims, and thus, this Court has no jurisdiction to hear them. See Hercules Inc. v. United States, 516 U.S. 417, 422 (1997) (holding that the U.S. is immune from suit except where it consents to be sued, and the terms of its consent defines the court's jurisdiction to entertain the suit.)
12. IRS does not detail what actions in 1996 to which it refers; presumably, IRS refers to the assessment, tax lien, sale, and discharge, all of which occurred in that year. However, IRS does not provide argument or cite to legal authority interpreting the scope of the "disregard any provision of this title" clause of § 7426 and what sort of actions it covers.
13. Coutant argues that her claim for damages arises from the IRS' failure to refund her money. Because Coutant pursued her request for a refund from March 1997 through December 1999, she contends that it is possible that the alleged negligent action warranting an award of damages, i.e. refusal to refund, did occur after passage of the Act in July 1998. Thus, the issue here is whether the negligent processing of a refund request constitutes an action in "disregard of any provision of this title" under 26 U.S.C. § 7426 (h).
14. As an additional requirement to bringing a damages action under 26 U.S.C. § 7426 (h) § 7426(h)(2) refers to 26 U.S.C. § 7433 (d). In narrower terms than § 7426(h), § 7433(a) limits civil damages to reckless or negligent actions in connection with any collection of Federal tax. In interpreting the term "collection," courts have construed § 7433 not to include suits for damages resulting from the improper assessment of tax liability. See U.S. v. Engels, 2001 WL 1078380, *7 (N.D. Iowa 2001). A refusal to refund likewise not a "collections" activity covered by § 7433. See Gonsalves v. IRS, 975 F.2d 13 (1st Cir. 1992), Arnett v. U.S., 889 F. Supp. 1424 (D. Kansas 1995).
15. However, § 7426(h)(2) does not refer to § 7433 generally; rather it specifically refers to § 7433(d), which requires that administrative remedies be exhausted, damages be mitigated, and that the action be brought within two years of the right of action accruing. This leaves open the possibility that a claim for damages under § 7426(h)(1) is not restricted to wrongful collection activities only.
16. Citing 26 U.S.C. § 6325(b)(4) and 7426(a)(4), IRS explains that "if the Service continues to resist her claim that she is entitled to a refund, she can bring an action in district court within 120 days after the certificate [of discharge] is issued." See Motion for Summary Judgment, p. 8. On their face, 26 U.S.C. § 7426 (a)(4) and (b)(5) do allow a person other than the taxpayer to bring a civil action against the IRS within 120 days after the issuance of a certificate of discharge for a judicial determination of the value of the IRS' interest in the property, and if the IRS erred, to award a refund.
17. As amplified, § 7426(h)(1) states that notwithstanding subsection (b) (the adjudication of relief, including a judicially awarded refund), if, in any action brought under this section (e.g. § 7426(a)(4)), there is a finding that any IRS officer or employee negligently disregarded any provision of this title, the IRS shall be liable for economic damages and costs. The plain language of this provision indicates that a party must bring suit under § 7426(a) in order to generate the findings to support a claim for damages.
18. The facts of Coutant's case fall under the scope of 26 U.S.C. § 7426 (a)(4) and (b)(5) for refunds from incorrect assessments of substitution of value. These subsections relate back to 26 U.S.C. § 6325 (b), which was also passed in 1998 in response to the seminal case of United States v. Williams, 514 U.S. 527 (1995), see e.g., S. Rep. 105-174, *54. In that case, the Supreme Court held that a third party, in similar circumstances as Coutant, who paid an ex-husband's tax under protest could bring a refund suit. under 28 U.S.C. § 1346 (a)(1) because of a lack of an adequate administrative or statutory remedy. See Williams, 514 U.S. at: 536. Section 1346(a)(1) permits a judicially awarded refund of tax money erroneously "assessed or collected."
19. In order to assist persons in Coutant's situation, Congress amended 26 U.S.C. § 7426 and 6325. Under the Act, a co-tenant of property against which a tax lien has been filed can obtain a certificate of discharge as a matter of right from the IRS by providing a cash deposit or bond sufficient to protect the IRS' lien interest in the property. Although the IRS determines the amount necessary to protect the lien interest, it has no discretion to refuse to issue a properly applied for certificate of discharge. The provision authorizes the refund of all or part of the amount deposited, plus overpayment interest, if the IRS later determines that it does not have a lien interest or has a lesser lien interest than initially determined. The provision also provides an opportunity for expedited judicial review for third parties to challenge the lea, to be filed within 120 days after the issuance of the certificate of discharge. See S. Rep. 105-174, *54.
20. The procedures set forth in 26 U.S.C. § 6325 basically require a third party to discharge a lien (in order to clear title to the subject property), and then administratively challenge the lien afterwards in order to collect a refund. Section § 7426(a)(4) then provides a judicial remedy if the third party is dissatisfied with the result, i.e. the IRS' determination of the lien value. By starting the 120-day time period for filinq upon the issuance of the certificate of discharge, 26 U.S.C. § 7426 (a)(4) requires the party to challenge, in effect, those actions up to and including the discharge, e.g. assessment and collection. Because a § 7426(h)(1) claim for damages is dependent upon a § 7426(a) action and because there appears to be no authority suggesting that § 7426(a)(4) covers post-discharge administrative actions found under $6325, this Court finds that Coutant cannot sue for damages resulting from an allege negligent refusal to refund under the Act. This Court finds further that because those assessment and collection activities over which the Act does provide a cause of action occurred prior to the Act's enactment in 1998, sovereign immunity had not yet been waived. Therefore, this Court recommends that IRS' notion for summary judgment be granted with respect to the § 7426(a)(4) claim for damages.
21. This Court notes that 26 U.S.C. § 7426 (a)(4) does not provide for the opportunity to pursue the administrative remedies provided in 26 U.S.C. § 6325, e.q. refund, despite that fact that exhaustion of administrative remedies is required to maintain a claim for damages, see e.g. 26 U.S.C. § 7426 (h)(2). This Court also notes that the above readinq of 26 U.S.C. § 6325 and 7426 does not follow the IRS' explanation that a third party could pursue a § 7426(a)(4) action within 120 days of IRS' denial of a refund. Indeed, IRS' letter of denial informed Coutant that she had two years in which to seek judicial relief. See Plaintiff's Response to Motion for Summary Judgment, letter dated 12/27/99. Because this Court finds that the administrative actions in response to a request for a refund are not "actions" falling under § 7426(a) or § 7426(h)(1). this Court does not address whether § 7426(h)(2) [exhaustion of administrative remedies] tolls the time limitation found in § 7426(a)(4).
22. Coutant is likewise barred from maintaining a 26 U.S.C. § 7426 (a)(4) action with respect to the assessment, collection, and discharge of the lien because those actions all occurred prior to the Act's enactment. Thus, the 120-day time limitation found in § 7426(a)(4) is not applicable to Coutant's case. However, this does not bar judicial review of substitution of value and entitlement to refund under another cause of action.
23. IRS does not dispute that Coutant's claims for refund pursuant to 26 U.S.C. § 7422 and 28 U.S.C. § 1346 (a)(1) are properly before this Court, which unlike 26 U.S.C. § 6325 operate independent of 26 U.S.C. § 7426. IRS also concedes that Coutant is entitled to a partial refund, although its exact amount remains uncertain at this time,see Para. 9, supra.
24. To the extent the Court has jurisdiction, IRS raises as its second ground for summary judgment the argument that the tax lien has priority over Coutant's claim to $50,000 of the property's sale proceeds. Therefore, Coutant should not be entitled to a full refund as a mutter of law.
25. IRS, on behalf of the Federal Government, may levy a lien against a taxpayer's property and rights to property, whether real or personal, for the amount of that person's tax liability. See 26 U.S.C. § 6321. The tax lien becomes effective upon assessment without any need for public notice. See 26 U.S.C. § 6322, Rice Investments Co. v. U.S., 625 F.2d 565 (5th Cir. 1980).
26. However, a tax lien cannot extend beyond the property interests held by the delinquent taxpayer, and the government may not collect more than the value of the property interests that are actually liable for that debt. See U.S. v. Rodgers, 461 U.S. 677, 691 (1983). Likewise, a tax lien cannot attach to any property interest that was transferred before the assessment. See Gardner v. U.S., 814 F. Supp. 982, 985 (D. Kansas 1993).
27. The scope of a taxpayer's property interest is defined by state law; once the party's property interest is established, the priority or validity of a federal tax lien attaching to those interests is a matter of federal law. See Rodgers, 461 U.S. at 683. In Florida, tenants by the entireties become tenants in common by operation of law upon divorce. Moreover, one party can be awarded a special equity interest in the property interest of the other, upon creation of the tenancy in common, as lump sum alimony. See Wilson v. Wilson, 279 So.2d 893, 894 (Fla. 4th DCA 1973).
28. Similarly, whether an interest was perfected prior to an assessment of a tax liability is, initially, a question of state law. Whether a state-created lien has acquired sufficient substance and has become so perfected as to defeat a later-arising tax lien is a matter of federal law. See Rice, 625 F.2d at 568. A contest between a federally created tax lien and a competing local interest will be resolved generally by the "first in time, first in right" rule. See id.
29. "The state lien only enjoys priority over the federal tax lien if it. becomes a choate lien against the property prior to the perfection of the federal tax lien." Fisher v. Bentz, 7. B.R. 490, 494-95 (W.D. Penn 1980). To be choate, the lien must attach to a specified property and the amount of the lien and the identity of the lienor must be established with certainty, leaving nothing more to be done. See id., Penetryn Intern., Inc. v. U.S., 391 F. Supp. 729 (D.C.N.J. 1975), Rice, 625 F. Supp. at 568. Therefore, this Court must first determine whether Coutant perfected her interest in the subject property prior to the lien assessment under state law in order for that interest to take priority under federal law.
30. Upon divorce on November 20, 1991, a tenancy in common (i.e. a fee) was created between Coutant and the taxpayer. In a joint tenancy, the individual interest of one joint tenant is subject to levy and sale upon execution against him. See McDowell v. Trailer Ranch, Inc., 421 So.3d 751 (Fla. 4th DCA 1982). Coutant also received the additional right to $50,000.00 upon sale of the property (i.e. a lien). Florida law requires that any interest in real property be recorded so as to place subsequent purchasers and creditors on proper notice. See § 695.01, Fla. Stat. (1991). In the instant cash, Coutant did not record her interest in the property in the county in which the property is located until September 23, 1997. Therefore Coutant did not perfect her private lien under state law until after the tax liability was assessed (April 6, 1992) as well as after the tax lien was noticed (April 19, 1996).
31. A tax lien is subordinated in priority only to pledgees, mortgagees, judgment creditors, and purchasers who perfect their interest between the date of assessment and the date when the notice of lien is filed. See 26 U.S.C. § 6323. Because she did not record her interest until after the date the notice of lien was filed, the special priority afforded thereunder does not apply, regardless of whether Coutant can be regarded as a judgment creditor or purchaser.
32. This Court finds as a matter of law that Coutant had no choate interest in the subject property with priority over the tax lien, and therefore recommends that IRS' motion for summary judgment as to this ground should also be granted.
ACCORDINGLY, this Court recommends to the District Court that there is no dispute of material fact and that as a matter of law, the Defendant's Motion for Summary Judgment should be GRANTED as to both Plaintiff's 26 U.S.C. § 7426 (h)(1) claim for damages and as to Plaintiff's claim for a full refund. The Court further recommends that the Plaintiff's claim for a partial refund for a yet to be confirmed amount of $1,678.00 be GRANTED on summary judgment, as agreed to by the Defendant.
The parties shall have ten (10) days from the date of this Report and Recommendation within which to file objections, if any, with the Honorable K. M. Moore, United States District Judge assigned to this case.