Drawing a clear line between the right to sue to challenge an erroneous federal tax levy, and the right to claim a tax refund, the Supreme Court declared unanimously on Monday that the two have separate filing deadlines for valid reasons, and must be treated independently. The ruling came in EC Term of Years Trust v. IRS (05-1541).
If a taxpayer is notified of an Internal Revenue Service levy, but the taxpayer insists that someone else actually owes the taxes due, the lawsuit challenging that wrongful levy must be filed within nine months, under federal tax law. That is the only remedy for that kind of mistake by IRS, and the taxpayer who fails to meet the nine-month deadline cannot later try to get a refund by a separate claim, Justice David H. Souter wrote (in an opinion orally announced for him by Chief Justice John Gl Roberts, Jr.)
Congress specifically tailored the tax law provision for third-party claims of wrongful levy, and to allow them to pursue a refund would permit them to “effortlessly evade the levy statute’s 9-month limitations period thought essential to the government’s tax collection.” A tax refund claim can be made for up to two years administratively, and up to two more by lawsuit, the Court noted.
The shorter span for pursuing a claim of wrongful levy was necessary, as Congress saw it, to allow the quick resolution of such controversies so the government can then go after the property of the taxpayer who actually owns the property to correct its mistake, the Court said. “The demand for greater haste when a third party congtests a levy is no accident,” Souter’s opinion said. “We simply cannot reconcile the 9-month limitations period for a wrongful levy clailm…with the notion that the same challenge would be open…for up to four years,” it added.
The ruling was a defeat for a Texas couple, Elmer and Dorothy Cullers, who set up a trust — EC Terms of Years Trust. In 1991, IRS assessed the trust for improper income tax deductions during the 1980s. That was based on an assumption that the couple had transferred assets to the trust to evade taxes. It filed a lien, but the trust denied any obligation. Still, it put $3 million in a bank account to cover any liability. IRS issued a notice of levy for the funds.
A year later, the trust and other trusts created by the couple sued, claiming that the levy was wrong. But they had waited almost a year after the levy to sue, and their claim was thrown out for missing the nine-month deadline. The trust then sought administratively and in court to get a refund, but that, too, was rejected. District Court and the Fifth Circuit ruled that the shorter time period applied, because that was the only method of recovery the trust could pursue for the erroneous levy.
The Ninth Circuit, by contrast, had ruled that the remedy for third parties was not the sole method of challenging a levy.
Monday’s ruling settled the conflict by ruling as the Fifth Circuit had.
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