Argument Preview: EC Term of Years Trust v. United States on 2/26

The following argument preview is by Erik Zimmerman of the Stanford Supreme Court Litigation Clinic.

On Monday, the Court will consider the interplay between two distinct methods for recouping taxes collected by the Internal Revenue Service. The question presented in EC Term of Years Trust v. United States (No. 05-1541) is whether a party entitled to challenge an IRS levy under one provision of the tax code may, after the time to challenge the levy has expired, seek a refund of the levied taxes under a different section the code, which provides a general cause of action for recovering wrongfully paid taxes and has a much longer statute of limitations.

Francis S. Ainsa, Jr. of El Paso, Texas will argue on behalf of the petitioner, EC Term of Years Trust. Deanne E. Maynard, Assistant to the Solicitor General, will argue on behalf of the respondent, the United States.

When the IRS levies on property as payment for taxes, 26 U.S.C. § 7426 allows a third party who claims an interest in that property to challenge the levy in federal district court. Under the statute, the third party’s challenge must be brought within ninety days of the date of the levy. 28 U.S.C. § 1346 provides a more general procedure for seeking tax refunds in federal court. A taxpayer must commence a suit for a refund under § 1346 within two years of the date that the tax was paid (or possibly longer, depending on certain conditions).

The IRS in 1999 filed a tax lien against the EC Term of Years Trust, seeking to collect taxes allegedly owed by the creators of the Trust, Elmer and Dorothy Cullers. The Trust disputed that the Cullers owed those taxes, but it cooperated by creating a bank account and allowing the IRS to levy on that account to collect the disputed amount. About a year later, the Trust challenged the IRS levy under § 7426 in district court, but the court dismissed the challenge because the statute of limitations had run. After another year, the Trust sought a refund under § 1346 in the same district court. The district court dismissed that claim as well, finding that § 7426 was the exclusive remedy for a third party, like the Trust, seeking to recover a tax levy. The Fifth Circuit affirmed, noting that it had consistently held that § 7426 was the exclusive remedy whenever that section applied, and that several other circuits (but not the Ninth) had held the same.

The Trust argues that the Court should reverse the Fifth Circuit because nothing in the language, structure, or legislative history of § 7426 reveals any Congressional intent to make that section an exclusive remedy. The Trust contends that Congress enacted § 7426 to clarify the right of third parties to sue the federal government directly to challenge levies on their property, a right that had been somewhat uncertain in the mid-20th century due to questions of sovereign immunity. The Trust also argues that the Court’s decision in United States v. Williams directly suggests that the Trust may recover under § 1346. In Williams, a third party sought a refund under § 1346 after she had paid taxes under protest to remove a tax lien the IRS placed against her property on account of a tax debt owed by someone else. The Court held that Williams could utilize § 1346 to seek a refund despite the fact that she was a third party, rather than the person against whom the taxes had been assessed. The Trust argues that its position cannot be distinguished from that of the taxpayer in Williams and that it should therefore be able to rely on § 1346 to seek a refund.

The United States responds that Congress carefully tailored § 7426 as a remedy for parties in precisely the Trust’s situation, which suggests that Congress intended § 7426 to replace the more general refund provisions for such parties. The government points to the shorter statute of limitations of § 7426 as further evidence of Congress’s intent to make that section an exclusive remedy. In the government’s view, the nine month statutory deadline reveals Congress’s desire to resolve quickly tax challenges brought by third parties, and the government argues that allowing alternative remedies with longer statutory periods would undermine that legislative intent. The United States also rejects the Trust’s reading of United States v. Williams. In Williams, as the government argues, the Court noted that the taxpayer had no remedy under § 7426 (because she was challenging a tax lien rather than a levy) and, in fact, had no alternative remedy at all. The United States therefore contends that Williams does not imply that third parties who do have a remedy under § 7426 may also pursue a refund under § 1346.

It appears likely that the Court will find the position of the United States to be more persuasive. The Trust’s arguments about § 7426’s language, structure, and legislative history are somewhat conclusory, and the government convincingly distinguishes the Court’s holding in Williams from this case. The larger question, therefore, might be why the Court chose to grant certiorari in EC Term of Years. In the end, the Court may be seeking indirectly to reign in the Ninth Circuit, as that is the only court on what appears to be the wrong side of the circuit split on this question.