Rodriguez v. United States

• Decision Date: 19 February 1986
• Docket Number: No. 82 C 5064.,82 C 5064.
• Citation: 629 F. Supp. 333
• Parties: Alfred RODRIGUEZ and Marguerite Rodriguez, Plaintiffs, v. The UNITED STATES of America and James S. Straughn, Defendants.
• Court: U.S. District Court — Northern District of Illinois

629 F. Supp. 333

Alfred RODRIGUEZ and Marguerite Rodriguez, Plaintiffs, v. The UNITED STATES of America and James S. Straughn, Defendants.

No. 82 C 5064.

United States District Court, N.D. Illinois, E.D.

February 19, 1986.

COPYRIGHT MATERIAL OMITTED

Abraham N. Goldman, Abraham N. Goldman & Associates, Ltd., Chicago, Ill., for plaintiffs.

William Clabault, Asst. U.S. Atty., Chicago, Ill., and Angelynn C. Hall, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendants.

MEMORANDUM AND ORDER

MORAN, District Judge.

This case presents the issue of whether the Internal Revenue Service may, without warning, levy on a taxpayer's bank account when the only reason the taxpayer has an underpayment is that an IRS computer, without any request from the taxpayer, erroneously generated a refund check. This court holds that it cannot and orders that the levy be lifted.

FACTS

The facts in this case are few and not seriously disputed. On May 19, 1978, the IRS made an assessment which determined that plaintiffs owed $19,276.12 in taxes and $5,333.72 in penalties and interest for the tax years 1968, 1970 and 1972. When this amount went unpaid after notice and demand, the IRS levied on real estate owned by plaintiffs and scheduled it for sale. However, on the last day before the sale, October 22, 1981, plaintiffs redeemed their property by tendering three checks totalling $25,150 (including interest which had accrued) to Revenue Officer James Straughn. He accepted the checks and the IRS negotiated them. Then on December 25, 1981, perhaps in a fit of seasonal generosity, the IRS issued a refund check to plaintiffs for $2,822.46, which they promptly negotiated. Their next contact with the IRS on this matter came when they discovered that Straughn had levied on their account at the Belmont National Bank on July 28, 1982. The IRS considered plaintiffs to be $2,750 in arrears. It had sent no additional notice of deficiency, demand for payment or notice of levy.

The IRS explains this state of affairs as follows. Plaintiffs did not supply three checks drawn to the amounts of the three separate liabilities for each of the three tax years in question but rather only checks which, taken together, covered the total liability for all three years. When the checks reached the Service's computer, the correct amount to meet the existing liability was entered only for 1972. The computer applied $16,180.24 to tax year 1970, for which only $13,425.70 was owed. Conversely, it applied only $1,584.99 to 1968, for which $4,334.99 was owed. Thus the IRS issued a refund for the 1970 overpayment plus $67.92 in interest, while maintaining a $2,750 balance due for 1968. According to the IRS the check was clearly marked "1970 taxes". Its position, therefore, is that the refund check was not in error since 1970 had in fact been overpaid. The 1968 liability, however, had never been fully paid. It therefore issued no new notice of deficiency or notice of assessment and demand for taxes since in its opinion none was necessary. The levy was grounded on the notice and demand of May 19, 1978.

Plaintiffs bring this action in two counts: one against the United States (Department of the Treasury, Internal Revenue Service), alleging that the levy is void for failure to follow the procedures for levy set out in the Internal Revenue Code, which seeks injunctive relief; and one against Revenue Officer Straughn for violation of their due process rights under the Fifth Amendment, causing emotional distress, which seeks damages.¹ They contend that since they had paid the full amount the IRS demanded, Straughn could not simply levy on their bank account without notice. While they may ultimately owe the $2,750, they maintain that the IRS could only recover it either through a suit for an erroneous refund or through a new procedure including a new assessment, notice and demand. They move for summary judgment on count I.

The United States and Straughn move to dismiss for failure to state a claim on which relief can be granted or, in the alternative, for summary judgment. They argue that this court has no jurisdiction to hear the claim, that sovereign immunity bars any relief against either the United States or Agent Straughn, and that the relief plaintiffs seek is unavailable because of both 26 U.S.C. § 7421, which prohibits a "suit for the purpose of restraining the assessment or collection of any tax," and 28 U.S.C. § 2201, which expressly disallows a declaratory judgment on tax liabilities. They have, however, failed to respond directly to the arguments presented in support of plaintiffs' motion.

DISCUSSION

Plaintiffs' claim takes this court into the maze of statutes which govern the assessment and collection of taxes, tax liens, tax levies, refunds and so on, statutes which have erected a system described by one federal court as "unworkable" and "so complicated that even the IRS admits it cannot completely understand it." White v. Commissioner of Internal Revenue, 537 F.Supp. 679, 689 (D.Colo.1982). This court, however, believes it has threaded a route through the maze. When an action challenges only the procedural validity of a tax levy, not the merits of the alleged tax liability, a federal district court has jurisdiction and can grant injunctive and declaratory relief. Congress has determined the procedure to which a taxpayer is entitled in the statutes which govern determination of deficiency, assessment and collection. Under those statutes, as construed by the courts, when plaintiffs redeemed their property in October 1981 they extinguished both the levy and the underlying deficiency. The later refund check created at most a new underpayment which the IRS could collect only by initiating new procedures.

I. Ability to Hear and Grant Relief

The IRS contends that these plaintiffs simply have no recourse in this court. Jurisdiction is absent, it maintains, and various statutes block relief. However, its grounds for this position have all been heard and rejected rather consistently by other federal courts in recent years.

The general grant of jurisdiction over federal tax matters to district courts, 28 U.S.C. § 1340, is indeed riddled by express limitations on jurisdiction and remedies in other statutes, including those the IRS cites. Ordinarily, for example, a federal district court has jurisdiction of a dispute over taxes only if the plaintiff has first paid the amount he contests and then sues for a refund. 26 U.S.C. § 7422(a). The "pay now, argue later" principle is of long standing. See Flora v. United States, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960).

Plaintiffs' challenge to the IRS levy, however, is not blocked by any of those limitations, nor could it be. One example will suffice to explain why. Congress has expressly provided an alternative to taxpayers who seek to retain control of their money or other property while litigating IRS determinations, by establishing the Tax Court and procedures to protect it. A taxpayer must first be notified that the IRS has determined a deficiency (§ 6212 notice). The taxpayer then has 90 days during which the IRS may neither assess that deficiency nor levy on the taxpayer's property, unless the delay puts eventual collection in jeopardy. If he files in the Tax Court the IRS is further prohibited from assessment or levy while awaiting the results of that litigation. 26 U.S.C. §§ 6211, 6212, 6213. See generally Clark v. Campbell, 501 F.2d 108, 111-112, 122 (5th Cir.1974); Rambo v. United States, 492 F.2d 1060, 1062, 1064 (6th Cir.1974) (history and purpose of Tax Court; appropriate procedures). Only after that period may the IRS assess an actual tax liability and issue a notice and demand for tax (§ 6303 notice and demand), and only after the notice and demand may the IRS levy on the taxpayer's property. 26 U.S.C. §§ 6201, 6203, 6303, 6331. See also 26 C.F.R. § 301.6331-1. Again there are provisions for swifter action if collection appears in jeopardy, but even jeopardy assessments and levies are subject to judicial review. 26 U.S.C. § 7429.

The step-by-step procedural safeguards make sense. The jurisdiction of the Tax Court is explicitly based on the issuance to the taxpayer of a § 6212 notice of determination of deficiency. 26 U.S.C. § 6214; Clark, 501 F.2d at 112; Rambo, 492 F.2d at 1062. In popular parlance, this § 6212 notice, the "90-day letter," is the "ticket to the Tax Court," and no taxpayer is admitted without a "ticket." Corbett v. Frank, 293 F.2d 501, 503 (9th Cir.1961). If the IRS could simply seize property without notice, while the district court remained unable to hear tax complaints until the disputed sum was paid, the IRS would have the power to make the Tax Court alternative effectively meaningless. See Aqua Bar & Lounge, Inc. v. United States, 539 F.2d 935, 939 (3d Cir.1976); Viva, Ltd. v. United States, 490 F.Supp. 1002, 1007 (D.Colo.1980). A careful reading of the statutes shows that Congress left district courts the ability to hear a complaint that the Service has not followed the congressionally-mandated procedure, and to grant relief.

A. Jurisdictional Grant

Assuming that the immunity, injunction and declaratory judgment problems can be hurdled, this court has jurisdiction of count I pursuant to 28 U.S.C. § 1340, a grant over "any civil action arising under any Act of Congress providing for internal revenue." A suit which seeks a determination that an Internal Revenue Service levy is void for failure to follow statutory procedure arises under the statutes which govern assessment and levy, e.g., 26 U.S.C. §§ 6201, 6212, 6213, 6303, and 6331. Construction of these acts is necessary to determine if the IRS has complied with the necessary procedure and they are acts "providing for internal revenue." See Aqua, 539 F.2d at 937; Popp v. Eberlein, 409 F.2d 309, 312 (7th Cir.), cert. denied, 396 U.S. 909, 90 S.Ct. 222, 24 L.Ed.2d 185 (1969); United States v. Coson, 286...