Taxation

The process whereby charges are imposed on individuals or property by the legislative branch of the federal government and by many state governments to raise funds for public purposes.

EC Term of Years Trust v. United States

The U.S. Supreme Court on April 30, 2007 ruled that a statute of limitations contained in the Internal Revenue Code was the exclusive remedy for a trust that wanted to recover funds that had been seized from its account by the Internal Revenue Service. The taxpayers who brought the suit had argued that another limitations period should apply and allow the case to proceed. A unanimous Supreme Court disagreed, holding that the case was barred.

Under the Internal Revenue Code, where a person is liable to pay a tax neglects or refuses to do so, a lien may attach to all real and personal property that belongs to the taxpayer. This lien is not self-executing, meaning that the IRS must take affirmative steps in order to enforce the collection of unpaid taxes. One of the means by which the IRS can collect the tax is through a levy, which allows the government to seize and sell a taxpayer's property in order to satisfy the tax liability.

In 1966, Congress enacted the Federal Tax Lien Act, which provides that "[i]f a levy has been made on property … any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in … such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court." However, the same provision establishes that this type of action must be brought before the expiration of nine months after the date in which the IRS makes the levy against a taxpayer's property. I.R.C. §7426(a)(1). Congress intended for this period of time to be quite short. During the hearings that were held in 1966 when Congress considered the proposed law, an assistant secretary to the Treasury Department said that because an IRS district director is likely to suspend collection efforts after seizing property, "it is essential that he be advised promptly if he has seized property which does not belong to the taxpayer."

Under another federal statute, a taxpayer may bring a tax refund action when the government has assessed a tax erroneously or illegally. 28 U.S.C. §1346(a)(1). In order to bring this type of action, the taxpayer must bring an administrative claim with the Service. The taxpayer must file the refund claim with the service within two years of the date that the tax was paid or within three years that the tax return was filed, whichever is later. If the IRS denies the taxpayer's refund claim, then the taxpayer has two years to bring a judicial action.

Elmer W. and Dorothy Culler allegedly took unwarranted income tax deductions during the 1980s. Before the IRS attempted to collect these taxes, the couple in 1991 established a the EC Term of Years Trust. The IRS assumed that the couple had transferred funds to the trust so that they could evade taxes. In August 1999, the IRS filed a tax lien against the trust. Although the trust denied liability, it deposited funds into a bank account. The government in October 1999 levied on the account.

Nearly a year after the government seized its funds, the trust brought an action under §7426(a)(1) in the U.S. District Court for the Western District of Texas, claiming that the government's had wrongfully levied on the account. The trust brought the suit after the expiration of the nine-month period that followed the action. The district court held that the claim was barred because the nine-month period had expired. Moreover, the court held that the provisions of 28 U.S.C. §1346(a)(1) did not apply to the trust because §7426(a)(1) "affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person's tax liability." BSC Term of Years Trust v. United States, 2000 WL 33155870 (W.D. Tex. 2000).

The trust later filed a second action, seeking a refund under §1346. The district court again held that §7426 of the Internal Revenue Code was the exclusive remedy for a wrongful levy claim. EC Term of Years Trust v. United States, No. EP03-CA-363KC, 2004 WL 5264837 (W.D. Tex. 2004). The trust appealed the decision to the Fifth Circuit Court of Appeals, which affirmed the district court's decision. EC Term of Years Trust v. United States, 434 F.3d 807 (5th Cir. 2006).

The application of these federal statutes has caused a conflict among the federal courts. The Ninth Circuit Court of Appeals has held that §7426(a)(1) is not the exclusive remedy for a wrongful levy claim, meaning that a taxpayer under that circuit's prior rulings could seek a refund under §1346(a)(1). WWSM Investors v. United States, 64 F.3d 456 (9th Cir. 1995). Because of this conflict, the Supreme Court in 2006 granted certiorari to consider the case.

A unanimous Supreme Court affirmed the decisions of the lower courts. In an opinion by Justice David Souter, the Court said that Congress had "specifically tailored" §7426(a)(1) to third-party wrongful levy claims, and if a party had the option of filing a general tax refund claim, the party could easily avoid the nine-month limitations period in §7426. The Court also said that the trust tried to read its prior cases too broadly, noting that previous Supreme Court cases have considered the application of §1346 in the context of a lien but not in the context of a levy.

Hinck v. United States

In 2007, the U.S. Supreme Court reviewed a case that involved the application of a Tax Code provision that applies to the abatement of interest collected by the federal government on unpaid taxes. The section in question was enacted as part of the Taxpayers Bill of Rights in 1996. Under this section, Congress gave the U.S. Tax Court authority to review cases involving decisions about whether such interest should be abated. A unanimous Supreme Court determined that the Tax Court had exclusive jurisdiction to review these claims.

When a taxpayer fails to pay taxes when they become due, interest accrues on the amount of the unpaid taxes. The Internal Revenue Service may take a significant period of time to decide whether the taxpayer indeed owed the tax, and during the period of time, interest may continue to accrue. Under §6404 of the Internal Revenue Code, the Secretary of the Treasury may decide to abate, or forgive, any tax or related liability. In 1986, Congress enacted §6404(e)(1), which provides that "[i]n the case of any assessment of interest on … any deficiency attributable in whole or in part to any error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial act … the Secretary may abate the assessment of all or any part of such interest for any period."

Following the passage of this section, several parties attempted to challenge decisions by the Secretary not to abate interest on taxes that were owed. The federal courts that considered these claims uniformly held that these decisions were not subject to judicial review. According to these courts, this decision was within the discretion of the Secretary alone, and so the decision was insulated from judicial review.

As part of the Taxpayer Bill of Rights approved in 1996, Congress allowed taxpayers to review cases in which the Secretary refused to abate interest. Under §6404(h), Congress gave the U.S. Tax Court jurisdiction over any action brought by a taxpayer who bring suit to "determine whether the Secretary's failure to abate interest … was an abuse of discretion …." Moreover, the section allows the Tax Court to order an abatement, so long as the suit is brought within 180 days of the date in which the Secretary mails the final determination not to abate the interest.

John Hinck was a limited partner in a company called Agri-Cal Venture Associates (ACVA). In 1986, he and his wife filed a joint tax return, reporting losses that resulted from the partnership. The IRS reviewed Hinck's return and decided that deductions for several years needed to be adjusted, and in 1990, notified the partnership that the Service would disallow tens of millions of dollars in deductions. Hinks and his wife paid $93,890 to the IRS in 1996 to cover any personal deficiencies that would result from the adjustment of the deductions. After the IRS settled with ACVA in 1999 with respect to adjustments that would affect Hinck's return, the Service imposed additional liability against Hinck in both tax and interest.

The Hincks requested that the IRS abate the interest due to errors and delays that allegedly occurred between 1989 and 1993. After the IRS denied this request, the Hincks brought suit in the U.S. Court of Federal Claims, asking the court to review the denial of the abatement request. Judge Francis Allegra granted the government's motion to dismiss, holding that §6404(e)(1) did not provide a basis to allow the court to exercise jurisdiction over the claim. Hinck v. United States 64 Fed. Cl. 71 (Fed. Cl. 2005). The Hincks then appealed the decision to the Federal Circuit Court of Appeals, which affirmed the lower court's decision. Hinck v. United States, 446 F.3d 1307 (Fed. Cir. 2006).

In 2003, the Fifth Circuit Court of Appeals determined that §6404(e)(1) granted concurrent jurisdiction to the Tax Court as well as federal district courts and the U.S. Court of Federal Claims. Beall v. United States, 336 F.3d 419 (5th Cir. 2003). Federal district courts also reached different results on the issue. To resolve the split among the lower courts, the Supreme Court granted certiorari to review the case.

A unanimous Court affirmed the lower court's decision. Hinck v. United States, No. 06-376, 2007 WL 1641153 (May 21, 2007). In an opinion by Chief Justice John Roberts, the Court emphasized that "a precisely drawn, detailed statute pre-empts more general remedies." The Court also noted the principle that "when Congress enacts a specific remedy when no remedy was previously recognized, or when previous remedies were 'problematic,' the remedy provided is generally regarded as exclusive."

According to Roberts' opinion, both of these principles apply to §6404(h). Even though Congress did not expressly state that the Tax Court's jurisdiction under this section, Congress addressed a specific need by enacting the statute; that is, Congress allowed a taxpayer to challenge an abatement decision made by the Secretary by giving jurisdiction to the Tax Court. The Hincks argued that Congress had removed impediments to review by district courts, and so Congress had only given concurrent jurisdiction to the various federal courts. The Court rejected this and other arguments, noting that Congress "set out a carefully circumscribed, time-limited, plaintiff-specific provision, which also precisely defined the appropriate forum."

Limtiaco v. Camacho

Being a U.S. territory, the island of Guam has appellate rights through the United States' judicial system. Originally, appeals were channeled through the U.S. Circuit Court of Appeals for the Ninth Circuit. However, in 2004, Congress amended 48 USC §1424-2 to now provide that the U.S. Supreme Court, and not the Ninth Circuit, has certiorari (review) jurisdiction over decisions of the Guam Supreme Court.

The long-running dispute which became the subject matter of Limtiaco, Attorney General of Guam v. Camacho, Governor of Guam, No. 06-116, 549 U.S. ____(2007) (originally captioned as Moylan v. Camacho, referring to the prior attorney general), began in 2003, when Guam had insufficient revenues to pay its obligations. To remedy the situation, the legislature of Guam authorized Guam's Governor Camacho to issue bonds worth approximately $400 million. The governor signed the law and prepared to issue the bonds.

Under Guam's law, the attorney general must review and approve all government contracts prior to their execution. Section 11 of the Organic Act of Guam provided in relevant part that the government of Guam could issue "bonds and other obligations" as needed "to anticipate taxes and revenues." However, within the same Section 11 (48 USC §1423a), Congress limited Guam's debt to "… 10 per centum of the aggregate tax valuation of the property in Guam." The attorney general concluded that issuing bonds in the requested amount ($400 million) would raise Guam's debt above the permitted level, and he refused to approve the bond contracts.

The governor then sought a declaration from the Guam Supreme Court that issuance of the bonds would not raise Guam's debt above the limitation. In order to make that determination, the court needed to ascertain the meaning of the term "aggregate tax valuation" as used in Section 11 of the Organic Act. The attorney general interpreted this to mean 10 percent of the assessed valuation, while the governor argued that it meant 10 percent of the appraised valuation. The Guam Supreme Court agreed with the governor and concluded that 48 USC §1423a prohibited debt greater than 10 percent of the appraised valuation of property in Guam.

The attorney general sought review in the Ninth Circuit. While the appeal was pending, Congress amended §1424-2, removing language that vested appellate jurisdiction for Guam controversies in the Ninth Circuit. The Ninth Circuit, citing one of its earlier cases addressing the effect of the amendment on its jurisdiction, dismissed the attorney general's appeal on March 6, 2006. The attorney general then filed a petition for certiorari to the U.S. Supreme Court.

As the case came to it, the Supreme Court now had two issues before it: the substantive issue relating to the definition of "aggregate tax valuation" and a new issue of whether the time for filing petition for certiorari had expired, rendering the substantive arguments moot.

Justice Thomas delivered the opinion of the Court. The jurisdictional issue needed to be addressed first. Under 21 USC §2101(c), petitions for certiorari must be filed within 90 days after the entry of a lower court's "genuinely final judgment." There are some circumstances that serve to "suspend" the finality of judgments by "rais[ing] the question whether the court will modify the judgment and alter the parties' rights." (Hibbs v. Winn, 542 U.S. 88).) The Supreme Court held that the Ninth Circuit, by granting the petition for certiorari, raised the possibility that "the court will modify the judgment and alter the parties' rights." Therefore, until it issued its order dismissing the case for lack of jurisdiction, the appeal remained "pending," and the "finality" of the judgment remained suspended. Limiting its holding to the unique procedural circumstances presented in this case only, the Court found the petition timely filed and moved on to the merits.

The Court resolved the meaning of "aggregate tax valuation" by noting that it most naturally and meaningfully correlated with the value to which the tax rate is applied. Tax rates are generally applied to properties according to their assessed values, not their appraised values (which simply reflect market value ). Further, the Guam Supreme Court had reasoned that, because the debt-limitation provision contained in the Virgin Islands' law explicitly referred to "assessed value," Congress must have intended, by absence of similar language, to base Guam's limitation on some other value. The Court rejected this reasoning. By not including the word "assessed," Congress also chose not to insert the words "actual" or "appraised," so one meaning cannot be imputed more than another. But, said the Court, interpreting it to mean "assessed value" comported with most states' practice of holding debt limitations of municipalities to assessed valuation. The U.S. Supreme Court accordingly reversed the decision of the Guam Supreme Court and remanded the case.

The Court's plurality opinion included Chief Justice Roberts, as well as Justices Scalia, Kennedy, and Breyer. Justice Souter concurred in part and dissented in part, in which Justices Stevens, Ginsburg, and Alito joined. The dissent agreed with the Court's finding of timeliness of the petition for writ of certiorari. However, the dissent disagreed that the phrase "tax valuation" in the Organic Act of Guam referred unambiguously to assessed value. Since statutory text and sources gave no dispositive finality to the meaning, the dissent opined that congressional purpose may have indicated that appraised, rather than assessed value was the intended meaning of the term.

Permanent Mission of India v. City of New York

The Permanent Mission of India to the United Nations (the Mission) is the diplomatic delegation of India to the United Nations. It owned real property (a 26-floor building) in New York City, which housed not only its diplomatic offices but also residential units (filling about 20 floors) for its lower-level employees and their families. Similarly, the Ministry for Foreign Affairs of the People's Republic of Mongolia was housed in a six-story building in New York City owned by the Mongolian government. Like the Mission, the Ministry Building also used much of its floor space to house lower-level employees and their families.

Under New York law, real property owned by foreign governments is exempt from taxation when used exclusively for diplomatic offices or residential quarters for ambassadors or ministers to the United Nations.

For years, New York City levied property taxes on the Mission and the Ministry for that portion of their real property that was used to house lower levels of employees and their families. The Mission and the Ministry refused to pay. By operation of law, the unpaid taxes converted to tax liens against the property. By 2003, the taxes in arrears reached over $16 million for the Mission and $2 million for the Ministry.

In April 2003, the City of New York filed complaints in state court to establish the validity of the tax liens. The Mission and Ministry, defendants, removed the cases to federal court, then petitioned for dismissal based on sover-eign immunity. In Permanent Mission of India to the United Nations v. City of New York, No. 06-134, 551 U.S. ??? (2007), the U.S. Supreme Court was ultimately asked to determine whether the Foreign Sovereign Immunities Act of 1976 (FSIA), 28 USC §1602 et seq., provided immunity from a lawsuit to declare the validity of tax liens on property held by the sovereigns to house their employees. The Court concluded that the FSIA did not provide immunity from such a suit.

At the district court level, the court denied dismissal based on immunity, citing an exception contained within the FSIA expressly providing that a foreign state shall not be immune from jurisdiction in any case in which "rights in immovable property situated in the United States are in issue" (§1605(a)(4)). The Second Circuit Court of Appeals affirmed, holding that the above exception did apply to the present case.

The Supreme Court affirmed the decision and agreed that the FSIA's exception applied to the Mission and the Ministry, and that they were not immune from a suit of this nature. Starting with the text of the FSIA, the Court determined the scope of the "immovable property" exception. The defendants had argued that the exception only applied to cases in which the specific right at issue involved title, ownership, or possession. The Court rejected this narrow application, finding that the plain language refers generally to "rights in" immovable property, and did not enumerate any specific rights. Next, looking to liens, the Court noted that liens are interests in property that run with the land. Therefore, a suit to establish validity of a tax lien necessarily implicates "rights in immovable property."

Moreover, looking to the stated purposes of the FSIA, the Court noted that Congress intended the FSIA to adopt a restrictive theory of sovereign immunity as one that recognized immunity "with regard to sovereign or public acts … of a state, but not … private acts" Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682). Property ownership is not an inherently sovereign function, said the Court. There is no foreign sovereign immunity to attach, it concluded. The Second Circuit's decision was affirmed and the case remanded.

Justice Breyer joined Justice Stevens in dissent. They felt that tax actions fell outside the purview of the FSIA. They also expressed concern for the possibility of increased incidence of pierced immunity, since New York City also applies liens to compel landowners to pay for pest control, emergency repairs, and sidewalk upkeep.

As a footnote, New York City had conceded that even if a court of competent jurisdiction found the tax liens valid, the Mission and the Ministry would be immune (as sovereigns) from foreclosure proceedings. However, valid tax liens often cause foreign sovereigns to concede and pay. If they still refuse to pay in the face of a valid court judgment, the sovereign's foreign aid may be reduced by the United States by as much as 110 percent of the outstanding debt. Third, the liens would "run with the land" and be enforceable as against subsequent purchasers.