Wrongful Levy Judgment Treated as Overpayment of Tax

The Ninth Circuit held that for purposes of calculating the overpayment interest rate on a wrongful levy judgment, the judgment should be treated as an overpayment of tax.

Background

Dr. Steven Cheung, an economics professor and consultant, formed Steven N. S. Cheung, Inc. (the company) in 1977. On February 5, 2003, under Sec. 6861(a), the IRS issued a jeopardy assessment against Cheung for income tax liability for the year 1993. The same day, the IRS, believing the company was a nominee of Cheung, issued and served a notice of jeopardy levy on the company under Sec. 6331(a). Under the levy, the IRS collected almost $1.5 million in tax from the company.

In October 2003, the company filed an administrative claim for the return of the funds, claiming that they had been improperly levied under Sec. 6343(b). The IRS denied the claim, and the company took its complaint to federal district court. The court held that the Service had wrongfully levied the company’s property and entered judgment in favor of the company for the full amount it had paid plus interest per Sec. 7426(g).

Sec. 7426(g) states that interest on a wrongful levy judgment is allowed at “the overpayment rate established under section 6621.” Sec. 6621 states:

1. General rule.
   1. Overpayment rate. —
      The overpayment rate established under this section shall be the sum of—
      1. the Federal short-term rate determined under subsection (b), plus
      2. 3 percentage points (2 percentage points in the case of a corporation). To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting “overpayment” for “underpayment”) exceeds $10,000, subparagraph (B) shall be applied by substituting “0.5 percentage point” for “2 percentage points.”

A hearing was set to determine how much interest the government owed the company. The company argued that a wrongful levy judgment was not an overpayment of tax referred to in the flush language of Sec. 6621(a)(1) and that therefore the interest rate that should be applied to the entire judgment was the full overpayment rate specifi ed in Secs. 6221(a)(1)(A) and (B). The IRS argued that the judgment was an overpayment of tax and that therefore, per the flush language, the interest rate applied to the judgment was subject to a one-and-ahalf point reduction to the extent that it exceeded $10,000.

The court held that a wrongful levy judgment was not an overpayment of tax and that the overpayment rate on it was not subject to reduction under the flush language of Sec. 6221(a)(1). Accordingly, it ordered that the company be paid interest on the entire wrongful levy judgment at the full overpayment rate. The IRS appealed the court’s decision to the Ninth Circuit.

The Ninth Circuit’s Decision

The Ninth Circuit reversed the district court and held that a wrongful levy judgment should be treated as an overpayment of tax for purposes of determining the overpayment interest rate. According to the Ninth Circuit, the lower court erred in treating the issue as whether a wrongful levy judgment was an overpayment of tax. Instead, the court found, it should have treated the issue as whether a wrongful levy judgment should be treated as an overpayment of tax for purposes of Sec. 6221(a)(1), regardless of whether the wrongful levy judgment actually was an overpayment of tax.

The Ninth Circuit based its holding on what it believed was the plain meaning of Sec. 7426(g), which states that the recovery of interest on a wrongful levy judgment will be “at the overpayment rate described in section 6621.” The court found that the plain meaning of this phrase was that all of Sec. 6621(a)(1), including the rate reduction in the subsection’s flush language, should be given effect. According to the court, if Congress had intended that the fl ush language not be given effect, it would have said so directly, as it did when referring to Sec. 6621(a)(1) in 30 U.S.C. Section 1721(h), which deals with the interest rate on overpayments of royalties on oil and gas leases.

Alternatively, the company had argued that, based on Ninth Circuit precedent, wrongful levy judgments should not be treated like overpayments of tax because wrongfully levied taxpayers have been victimized by an IRS mistake and are therefore in a different situation from taxpayers who overpaid their tax. The company also argued that the legislative history showed that it was Congress’s intent that wrongful levy judgments should not be treated as overpayments of tax. The Ninth Circuit rejected both arguments, holding that because the statute’s plain language required that wrongful levy judgments be treated as overpayments of tax, it could not treat them otherwise based on equitable concerns or the contents of the legislative history.

Reflections

The Ninth Circuit wisely avoided the opportunity to make law here by reading more into the statute than is there. A good argument can be made that because a taxpayer whose property is wrongfully levied is a victim of an IRS mistake, a wrongful levy judgment should not be subject to a lower rate of overpayment interest because of its size. However, as the court held, a plain reading of the law as written does not yield this result. If this is a problem that needs to be addressed, it should be addressed legislatively, not judicially.

Steven N. S. Cheung, Inc., No. 07-35161 (9th Cir. 2008)

The reports of cases, rulings, etc., herein, except for the Reflections, are edited versions of the relevant court opinion, published ruling, etc.