6331(i) no collection during refund suit

The government was enjoined from proceeding with a collection action against an individual during the pendency of the individual's refund proceeding and its request for a stay with repect to the refund proceedings was denied. The individual filed a refund action to recover trust fund recovery penalty taxes he had paid; subsequently, the government brought suit in a different district court to collect the unpaid portion of the trust fund recovery penalty from the individual and another responsible person. Code Sec. 6331(i)(4)(A) prohibits the government from filing a collection action against a refund claimant for any unpaid divisible tax while a refund suit is pending with respect to that individual and that tax. The government could not rely on the exception to Code Sec. 6331(i)(4)(A), which states that the statute does not apply to any "proceeding relating to" the refund proceeding. A collection action will always have some connection, relation and reference to a refund proceeding involving the same taxes and taxpayer; however, taking into consideration the language of the statute, its legislative history and subsequent decisions, the exception was not meant to apply in a collection action against the same taxpayer to recover the same tax at issue in the refund proceeding.

Jerry D. Nickell, Sr., Plainitff v. United States of America, Defendant..

U.S. District Court, East. Dist. Tex., Sherman Div.; 4:08CV319, June 5, 2009.

[ Code Secs. 6331 and 6672]






MEMORANDUM ADOPTING REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE


SCHELL, United States District Judge: Came on for consideration the report of the United States Magistrate Judge in this action, this matter having been heretofore referred to the United States Magistrate Judge pursuant to 28 U.S.C. § 636. On April 2, 2009, the report of the Magistrate Judge was entered containing proposed findings of fact and recommendations that Jerry D. Nickell, Sr.'s Motion to Enjoin Proceedings in Collection Case Filed by Defendant in Western District of Texas, Midland Division (Dkt. 22) should be GRANTED and the United States of America's Motion to Stay (Dkt. 18) should be DENIED as MOOT.

The court, having made a de novo review of the objections raised by the United States, is of the opinion that the findings and conclusions of the Magistrate Judge are correct, and the objections of the United States are without merit as to the ultimate conclusion and recommendation of the Magistrate Judge. Therefore, the court hereby adopts the findings and conclusions of the Magistrate Judge as the findings and conclusions of this court, and Jerry D. Nickell, Sr.'s Motion to Enjoin Proceedings in Collection Case Filed by Defendant in Western District of Texas, Midland Division (Dkt. 22) is GRANTED and the United States of America's Motion to Stay (Dkt. 18) is DENIED as MOOT.

IT IS SO ORDERED.

SIGNED this 5th day of June, 2009.


REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE


BUSH, United States Magistrate Judge: On March 30, 2009, the Court conducted a hearing on the United States of America's Motion to Stay (Dkt. 18) and Jerry D. Nickell, Sr.'s Motion to Enjoin Proceedings in Collection Case Filed by Defendant in Western District of Texas, Midland Division (Dkt. 22). As stated on the record at the hearing, the Court finds that the Motion to Enjoin (Dkt. 22) should be GRANTED and the Motion to Stay (Dkt. 18) should be DENIED as MOOT.


Background


Nickell commenced the above captioned suit (the "First Suit") on August 26, 2008. At issue in the First Suit are trust fund recovery penalty taxes ("TFRP") assessed against Nickell in accordance with 26 U.S.C. § 6672. On January 16, 2009, the United States filed suit against Nickell and another individual, Thomas Alvey, in the United States District Court for the Western District of Texas - Midland Division, Case No. MO-09-CV 005 (the "Second Suit"). In the Second Suit, the United States alleges Nickell and Alvey are responsible persons for the failure to pay withholding and employment taxes and seeks to collect from Nickell the unpaid portion of the same TFRP at issue in the First Suit.

On January 20, 2009, the government filed a motion to stay seeking to stay the proceedings in the First Suit to allow the Second Suit to continue. Shortly thereafter, Nickell filed a motion to enjoin the proceedings against him in the Second Suit.

Both parties agree that Nickell first filed a refund action to recover his TFRP payment in this District. The parties further agree that after Nickell filed suit here, the Government filed a separate action against Nickell and Alvey in the Western District of Texas to collect the unpaid portion of the TFRP.

In his motion to enjoin, Nickell asserts that the plain language of Section 6331(i)(4)(A) of the Internal Revenue Code prohibits the United States from bringing the Second Suit against him. The United States argues that the "related to" exception in Section 6331(i)(4)(A)(ii) permits it to pursue the Second Suit against Nickell because the Second Suit is "related to" the first and seeks a stay of these proceedings in the interests of judicial economy. As set forth below, the Court is not persuaded by the Government's argument.


Analysis


All parties agree that 26 U.S.C. § 6331(i)(1) is applicable to this case and that the unpaid taxes at issue are divisible. Under Section 6331(i):

(i) No levy during pendency of proceedings for refund of divisible tax. --
(1) In general. --No levy may be made under subsection (a) on the property or rights to property of any person with respect to any unpaid divisible tax during the pendency of any proceeding brought by such person in a proper Federal trial court for the recovery of any portion of such divisible tax which was paid by such person if-

(A) the decision in such proceeding would be res judicata with respect to such unpaid tax; or

(B) such person would be collaterally estopped from contesting such unpaid tax by reason of such proceeding.... .

Further, Section 6331(i)(4) states:

(4) Limitation on collection activity; authority to enjoin collection. --
(A) Limitation on collection. --No proceeding in court for the collection of any unpaid tax to which paragraph (1) applies shall be begun by the Secretary during the pendency of a proceeding under such paragraph. This subparagraph shall not apply to --

(i) any counterclaim in a proceeding under such paragraph; or

(ii) any proceeding relating to a proceeding under such paragraph.

(B) Authority to enjoin. --Notwithstanding section 7421(a), a levy or collection proceeding prohibited by this subsection may be enjoined (during the period such prohibition is in force) by the court in which the proceeding under paragraph (1) is brought.

As part of the Taxpayer Bill of Rights 3, Congress added I.R.C. § 6331(i). As noted above, in accordance with that provision, the Secretary of the Treasury may not file a collection action against a taxpayer for any unpaid divisible tax during the pendency of a taxpayer refund proceeding for the recovery of any portion of such divisible tax if the decision in the collection action would be res judicata or the taxpayer would be collaterally estopped from contesting such unpaid tax by reason of the collection action. See 26 U.S.C. § 6331(i)(4)(A).

The United States contends that the Western District collection action is not prohibited under Section 6331(i)(4)(A) because the case falls within the exception outlined in the statute that states that Section § 6331(i)(4)(A) does not apply to any "proceeding relating to" the refund proceeding. The United States argues that the refund action relates to Nickell's refund proceeding because both proceedings involve the same legal issues arising out of the same set of facts. The United States further argues that it cannot bring its claims against Alvey as counterclaims here because this Court has no personal jurisdiction over Alvey, a Texas resident who apparently resides in the Western, not Eastern, District of Texas. The United States has not provided the Court with any statutory authority in support of its personal jurisdiction argument.

Not only is the Court presently unconvinced by the Government's jurisdictional arguments as to Alvey, the Court finds that the statute - as it is currently written - specifically prohibits the case from proceeding in the Western District as to the claims against Nickell. As this Court has recently found in another case pending before it, Congress did not define "proceeding related to" in the body of the statute, and it is therefore ambiguous. The United States seeks to define "proceeding related to" as any proceeding that has a connection, relation, or reference to the refund proceeding. As argued by the United States, any collection action that has a connection, relation, or reference to the refund proceeding is exempt from the rule.

The Court agrees with Nickell that, using the United States' definition of related proceedings, the exception would swallow the rule. A subsequent collection action will always have some connection, relation, and reference to the preceding refund proceeding involving the same taxes and taxpayer. It is a basic rule of statutory construction that courts "should act under the assumption that Congress intended its enactment to have meaningful effect and must, accordingly, construe [the enactment] so as to give it such effect." Sutton v. United States, 819 F.2d 1289, 1295 (5th Cir. 1987). Accordingly, the Court rejects the United States' definition and finds that the exception set out in Section § 6331(i)(4)(A)(ii) does not apply to a collection action against the same taxpayer to recover the same tax at issue in the refund proceeding.

This conclusion is consistent with the statute's congressional history and interpretation by other courts. See, e.g., Enax v. United States, 243 Fed. Appx. 449, 451 (11th Cir. 2007) (finding that 26 U.S.C. § 6331(i)(4)(B) "grants a district court overseeing a taxpayer's claim for recovery of a portion of taxes already paid the authority to enjoin a collection proceeding on the unpaid portion of those taxes until the taxpayer's recovery suit is resolved."); Rineer v. United States, 79 Fed. Cl. 765 (2007) (finding that 26 U.S.C. § 6331(i)(4) prevents the government from filling a collection action against a refund claimant while the refund suit is still pending, even at the cost of judicial economy); Swinford v. United States, No. 5:05-cv-234, 2007 WL 496376 (W.D. Ky. Feb. 9, 2007), vacated as moot, No. 5:05-cv-234, 2008 WL 4682273 (W.D. Ky. Jun. 20, 2008) (holding that "an exception that would allow the Government to bring a collection action against the plaintiffs in a properly filed tax refund suit for the same unpaid taxes at issue in the refund suit...would be inconsistent with Congress's intent and contrary to the principle's of statutory construction."). Indeed, in the legislative history of the statute, the Committee notes that the change in the law was based on the belief that "taxpayers who are litigating a refund action over divisible taxes should be protected from collection of the full assessed amount, because the court considering the refund suit may ultimately determine that the taxpayer is not liable." S. Rep. No. 105-174, at 80 (1998). The Court finds that Nickell, in filing his refund action first, has sought and is entitled to such protection here.

Therefore, having reviewed the language of the statute, the legislative history, and the authorities relying on it, the Court finds that the Western District collection action is not a "proceeding relating to" the refund proceeding, and that Section 6331(i)(4)(A) prohibited the Government from filing the Western District action against Nickell.

Moreover, the Court finds that enjoining the Western District case is warranted. The I.R.C. provides that if the United States initiates a prohibited collection action, the collection action may be enjoined by the court in which the refund proceeding is pending. See 26 U.S.C. § 6331(i)(4)(B). Because the United States filed a counterclaim in this action requesting the same relief against Nickell as in the Western District proceeding, this Court will ultimately determine the underlying issue in the Western District proceeding - whether Nickell is liable for the unpaid taxes. Accordingly, in the interest of judicial economy and to promote respect for the law, the Court finds that the Secretary of the Treasury should be enjoined from continuing to prosecute the Western District action against Nickell during the pendency of the refund proceeding.


Recommendation


For the reasons previously stated, the Court recommends that Jerry D. Nickell, Sr.'s Motion to Enjoin Proceedings in Collection Case Filed by Defendant in Western District of Texas, Midland Division (Dkt. 22) be GRANTED and the Secretary of the Treasury be enjoined from continuing to prosecute the Western District action against Nickell during the pendency of the refund proceeding. Further, the Court recommends that the United States of America's Motion to Stay (Dkt. 18) be DENIED as MOOT.

Within ten (10) days after service of the magistrates judge's report, any party may serve and file written objections to the findings and recommendations of the magistrate judge. 28 U.S.C. § 636(b)(1)(c). Failure to file written objections to the proposed findings and recommendations contained in this report within ten days after service shall bar an aggrieved party from de novo review by the district court of the proposed findings and recommendations and from appellate review of factual findings accepted or adopted by the district court except on grounds of plain error or manifest injustice. Thomas v. Arn, 474 U.S. 140, 148 (1985); Rodriguez v. Bowen, 857 F.2d 275, 276-77 (5th Cir. 1988).

SIGNED this 2nd day of April, 2009.

Levy and Distraint: Levy prohibited during pendency of divisible tax refund suit

The IRS may not assess a tax deficiency or take any collection action if the taxpayer has filed a timely petition with the Tax Court with respect to the deficiency ( Code Sec. 6213(a)). This rule is necessary because a taxpayer does not need to pay the deficiency in order to obtain Tax Court jurisdiction.

The Tax Court generally has no jurisdiction over "divisible taxes" such as employment taxes and the trust fund penalty tax ( Code Sec. 6672). Although a taxpayer is generally required to pay the full amount of a deficiency in order to obtain Federal District Court or Claims Court jurisdiction in a refund suit, an exception applies in the case of a divisible tax. Under the exception, these courts have jurisdiction if a taxpayer pays only a portion of the divisible tax (usually the tax due for a single payment period). For example, in the case of trust fund penalty tax, an employer will commonly pay the amount of tax due for one employee for one period and then file a refund claim with a request for abatement of the remaining penalty. Although IRS Policy 5-16, which has been in effect since March 1, 1984, prohibits collection activities during the pendency of a divisible tax refund suit, the IRS occasionally disregarded this policy. The IRS Restructuring and Reform Act of 1998 ( P.L. 105-206), however, codified the policy by prohibiting the IRS from levying on the property or property rights of a taxpayer for the payment of an unpaid divisible tax during the pendency of a Federal trial court proceeding for the refund of a portion of the divisible tax which has been paid ( Code Sec. 6331(i)). The provision applies to unpaid tax attributable to tax periods beginning after December 31, 1998 (Act Sec. 3433(b) of P.L. 105-206).

The prohibition against levy actions applies only if a decision in the proceeding will be res judicata (i.e., binding) with respect to the unpaid tax, or will collaterally estop the taxpayer from contesting the unpaid tax ( Code Sec. 6331(i)(1)).

Pending suit defined. The IRS is prohibited from collecting by levy any unpaid divisible tax while a refund proceeding in a proper federal trial court for the paid portion of such tax is pending. A proceeding is considered pending until a final judgment or order from which an appeal may be taken is entered ( Code Sec. 6331(i)(6)).

Divisible taxes. Divisible taxes are employment taxes imposed by subtitle C of the Internal Revenue Code and the penalty imposed by Code Sec. 6672 with respect to any such employment tax for failure to collect and pay over tax or attempt to evade or defeat tax ( Code Sec. 6331(i)(2)).

Exceptions to levy. The prohibition against IRS collection by levy does not apply if the taxpayer files a written waiver with the IRS (for example, because the taxpayer wants to stop the running of interest or penalties) or the IRS finds that collection of the unpaid tax is in jeopardy. This prohibition also does not apply to a levy that carries out an offset under Code Sec. 6402 or to a levy made before the proceeding began ( Code Sec. 6331(i)(3)).

IRS prohibited from beginning collection proceedings in court during pendency of refund suit. The IRS may not begin a court proceeding to collect any unpaid divisible tax while a refund proceeding for the paid portion of such tax is pending. If the IRS does begin such a collection proceeding, the anti-injunction provisions of Code Sec. 7421 do not apply and the court with jurisdiction over the refund proceeding may enjoin the collection proceeding.

This prohibition does not apply to a proceeding that is a counterclaim or to a proceeding related to the refund proceeding ( Code Sec. 6331(i)(4)). The Conference Report to P.L. 105-206 (see ¶38,185.0172) states that a proceeding related to a refund proceeding includes, but is not limited to, civil actions brought by the United States or another person with respect to the same type of tax (or related taxes or penalties) for the same (or overlapping) tax periods. Thus, the IRS may counterclaim against the taxpayer for the balance of the unpaid tax or may initiate an action against other persons assessed for trust fund recovery penalties for the same employment taxes.

Further, the levy prohibition only applies to tax periods that are the subject of the tax refund suit. In Unico Services, Inc., FedCl, 2006-1 USTC ¶50,321, at ¶38,187.221, a corporation was not entitled to an injunction to prevent collection for tax periods that were not the subject of the refund claim. The tax periods for which the corporation claimed a refund were different from the tax periods for which the IRS issued a notice of intent to levy. Since the tax liabilities of the non-suit tax periods were not the subject of the corporation's refund claim, the IRS was not prohibited under Code Sec. 6331(i)(1) from collecting by levy the corporation's unpaid employment tax liabilities for those periods.

Statute of limitations on collections suspended. The 10-year period of limitations on collection of delinquent taxes after assessment ( Code Sec. 6502) is suspended during the pendency of a refund proceeding during which the IRS is prohibited from collecting by levy ( Code Sec. 6331(i)(5)).

Notice of Federal Tax Lien. Code Sec. 6331(i) does not prevent the IRS from filing a Notice of Federal Tax Lien, according to the Conference Committee Report to P.L. 105-206 (see ¶38,185.017

Stay of collection. --Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Stay of collection

An individual's appeal of the stay of his refund claim was properly suspended pending the resolution of a later-filed action by the government. Although the taxpayer properly invoked the refund jurisdiction of the U.S. Court of Federal Claims, the court exercised its discretion to suspend the case in the interest of efficient case management because the later-filed action would resolve the entire matter for all parties. Furthermore, the taxpayer's motion to enjoin the IRS from its administrative collection proceeding was dismissed because he had failed to post a bond. Also, the exception to the Anti-Injunction Act that restricts IRS collection procedures did not apply.

R. Klein, CA-FC (unpublished opinion), 95-2 USTC ¶50,376.

The bond and sureties requirements of Reg. §301.7101-1 will apply to stay the collection of unpaid employment and excise taxes and relief is available from the 100% penalty if such a bond is furnished within 30 days after the date of notice and demand for payment of the penalty.

Rev. Rul. 79-170, 1979-1 CB 437.

An individual's motion for a stay on a levy imposed by the IRS on his wages to collect outstanding trust fund recovery penalties was prohibited by the Anti-Injunction Act. He either failed to invoke any of the statutory exceptions to the Act or the exceptions did not cover the penalties at issue. Moreover, the IRS was not prohibited from imposing a levy to collect the penalties because the individual had not paid any amount and did not post any bond within thirty days of receiving the notice that penalties were assessed against him.

Q. Bullard, DC Md., 2007-1 USTC ¶50,245, 486 FSupp2d 512.

An individual's action seeking refund of money paid in partial satisfaction of a trust fund recovery penalty was not suspended pending completion of a collection action subsequently filed by the government in the U.S. district court against the individual and another responsible person. The government's request to suspend the refund proceedings on the grounds of judicial efficiency was rejected in light of the individual's theory of non-liability and her right to choose the forum in which to litigate the refund claim. The nature of the individual's claim was such that if she succeeded, she would have demonstrated that the failure to pay the withheld taxes was not willful and arose at the firm level.

J.A. Rineer, FedCl, 2008-1 USTC ¶50,119.