Mottahedeh v. U.S.: 2d Circuit Declines to Decide Whether Time to File Wrongful Levy Suit Is Subject to Equitable Tolling

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We welcome back frequent guest blogger Carl Smith for a discussion of a recent Second Circuit decision concerning equitable tolling.  Keith

I have blogged more than once this year; see, e.g., here; on this year’s Ninth Circuit opinion in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. Jan. 30, 2015), which held that the 9-month period in § 6532(c) in which to file a wrongful levy suit is not jurisdictional and is subject to equitable tolling on the appropriate facts.  I also noted at this post – when the DOJ unsuccessfully sought en banc reconsideration of Volpicelli by the Ninth Circuit – that Volpicelli conflicted with several older (probably outdated) opinions of other Circuits holding that either the 9-month period is jurisdictional (which means it can never be tolled) or that, even if the period is not jurisdictional, the Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), presumption in favor of equitable tolling of statutes of limitations involving the United States is rebutted with respect to the wrongful levy period.

I had noted that one of the Circuit opinions holding that the wrongful levy period was both jurisdictional and not subject to equitable tolling was Williams v. United States, 947 F.2d 37 (2d Cir. 1991) – an opinion that I said I felt was questionable when issued.  In an opinion issued by the Second Circuit on July 28, 2015, Mottahedeh v. United States, the Circuit affirmed a district court’s dismissal of a late-filed wrongful levy suit for lack of jurisdiction, but it did so without citing any recent case law from the Supreme Court on what time periods are jurisdictional, and without citing Williams.  Further, without citing Irwin or any of the other Circuit opinions concerning whether the wrongful levy time period can be equitably tolled, the Second Circuit declined to state whether that time period could theoretically be equitably tolled, since the court felt that the facts presented in Mottahedeh could in no way justify tolling.  The lack of citation to Williams suggests that the Second Circuit, in a factually-appropriate case, might now be open to an argument that the wrongful levy time period is subject to equitable tolling.

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Facts of Mottahedeh

In Mottahedeh, the plaintiff was the trustee of a trust set up by the trustee’s father for her benefit and the benefit of two brothers.  In 1990, the father acquired 19 shares of stock in Old Cedar Development Corp. (the Cedar stock).  In the mid-1990s, the Tax Court – in a case involving the 1978 year and a separate case involving the 1979 and 1980 years – found that the father owed tax deficiencies for those years.  In 1998, the father assigned the Cedar stock to the trust.

On February 11, 2009, the IRS served a levy on the trust for the Cedar stock.  The levy sought to pay only the father’s 1978 liability.  In response, the trustee (the plaintiff in the current suit) filed a timely district court wrongful levy suit, but she voluntarily dismissed the suit on September 16, 2009.

On October 15, 2009, the IRS served another levy on the trust for the Cedar stock – this time to pay the father’s liabilities for 1979 and 1980.  Soon thereafter, the IRS seized the stock.  The plaintiff did not, at first, bring a wrongful levy suit following this second levy.  Rather, on July 28, 2010, she paid off, from the trust’s other assets, her father’s entire tax liability for all three years (over $2 million).  Thereafter, the IRS returned the Cedar stock to the trust.  And on July 23, 2012 – just shy of two years after the payment and close to three years after the second levy – she filed a wrongful levy suit.

District Court Holdings

The DOJ moved to dismiss the suit for lack of jurisdiction.  In the district court, the plaintiff made four arguments:

First, she argued that the first wrongful levy suit put the IRS on notice that the trust owned the Cedar stock and contested any sale of the stock.  The district court rejected this argument, noting that she had dismissed the first suit voluntarily.  Mottahedeh v. United States, 33 F. Supp. 3d 210, 212 (E.D.N.Y. 2014).

Second, she argued that because the IRS never sold the stock, the 9-month period to bring a wrongful levy suit never started to run.  The court rejected this argument, citing case law holding that the 9-month period runs from the date the third party is served with the levy, regardless of when or whether the property is sold. Id. at 213.

Third, she cited United States v. Williams, 514 U.S. 527 (1995), where the Supreme Court held that in the then (but since remedied) absence of a way to contest a situation where a third party pays off a lien, the third party could file a refund lawsuit under 28 U.S.C. § 1346(a)(1).  She asked that she be allowed to amend her complaint to allege jurisdiction as a tax refund lawsuit.  Unfortunately, in EC Term of Years Trust v. United States, 550 U.S. 429 (2007), the Supreme Court distinguished Williams and held that where a levy was served which the third party paid off, the third party only had the right to a wrongful levy suit and the 9-month wrongful levy time period applied to bringing such suit.

Finally, she argued that the court should equitably toll the 9-month period because of the confusing and seemingly conflicting amounts set forth in the levy notices and in an IRS notice proposing to sell the Cedar stock.  The entire discussion of the district court on this last issue is as follows:

The pivotal question the Court must answer is whether § 6532(c) authorizes equitable tolling. See United States v. Brockamp, 519 U.S. 347, 348-49 (1977) (holding that equitable reason would permit tolling “if, but only if, § 6511 contains an implied ‘equitable tolling’ exception” and that § 6511 contains no such implied exception).4/ Plaintiff does not cite any authority demonstrating that § 6532(c) contains an implied equitable tolling provision, nor is the Court aware of any case in this circuit where the court equitably tolled the nine month statute of limitations applicable to§ 7426 claims. Furthermore, as noted in EC Term of Years, the nine month statute of limitations is applied strictly for good reason. 550 U.S. at 431-32 (“the demand for greater haste when a third party contests a levy is no accident . . ., ‘[s]ince after seizure of property for nonpayment of taxes [an IRS] district director is likely to suspend further collection activities against the taxpayer, it is essential that he be advised promptly if he has seized property which does not belong  [11] to the taxpayer'”) (internal citation and quotation marks omitted). As a result, the Court denies plaintiff’s request that the statute of limitations be equitably tolled.

__________________

4. Brockamp, cited by the defendant, relies on the general proposition that “[t]ax law, after all, is not normally characterized by case-specific exceptions reflecting individualized equities.” 519 U.S.347 at 352.

[33 F. Supp. 3d at 214-215]

It is odd that the district court did not here mention Williams v. United States, 947 F.2d 37 (2d Cir. 1991) – not to be confused with the Supreme Court’s later Williams case described above.

Second Circuit Williams Opinion 

In the Second Circuit Williams case, the IRS had levied on property, and the plaintiff filed an administrative claim for wrongful levy far more than 9 months later.  Under § 6532(c), there is an exception to the usual 9-month period to file a wrongful levy suit where an administrative claim is filed.  The exception allows suit to be brought up to one year after the claim is filed or 6 months from when the claim is disallowed, whichever period is shorter.  When the IRS sent a notice of disallowance of the claim, it erroneously sent a letter used for disallowing tax refund claims – i.e., a letter telling the taxpayer that he or she has 2 years to bring suit.  The plaintiff brought suit more than a year after the claim was filed and more than 6 months after it was disallowed, but within the incorrect 2-year period mentioned in the letter.  The district court dismissed the suit for lack of jurisdiction.

In Williams, the Second Circuit affirmed the district court, writing:

When an action is brought against the United States government, compliance with the conditions under which the government has agreed to waive sovereign immunity is necessary for subject matter jurisdiction to exist. Accordingly, the statute of limitations may operate in suits against the United States not only as an affirmative defense, see Fed. R. Civ. P. 8(c), but also may deprive a court of subject matter jurisdiction over an action that is not timely filed. [5] . . .

Williams argues that, by issuing to him a Notice of Disallowance which provided that a taxpayer has two years to file a civil suit challenging the disallowance of a refund, the IRS “deceived an unwary taxpayer.” However, the mistaken  [9]  advisement by the IRS does not require that Williams’ action be allowed to proceed, since subject matter jurisdiction may not be created by estoppel or consent of the parties. [940 F.2d at 39-40 (citations omitted)]

Oddly, the court did not cite to the Supreme Court’s opinion in Irwin, which, only a year earlier, had held that statutes of limitations running against the United States were subject to an unstated exception from the normal strict rules concerning waving sovereign immunity – which exception consisted of a rebuttable presumption in favor of equitable tolling in factually-appropriate cases. For lack of a discussion of Irwin alone, therefore, Williams was questionable when issued.

Interestingly, the district court in Mottahedeh, while not citing Williams in its equitable tolling discussion, did cite Williams (indirectly through another citation) as grounds for dismissing the case for lack of jurisdiction, rather than failure to state a claim on which relief could be granted.  The district court wrote:

Although defendant asserts that both 12(b)(1) and 12(b)(6) are grounds for dismissal, the appropriate ground is 12(b)(1), for “[w]hen a plaintiff who sues the United States fails to comply with the relevant statute of limitations, the court is deprived of subject matter jurisdiction.” Meminger v. United States Internal Revenue Service, 1993 U.S. Dist. LEXIS 458 (S.D.N.Y. Jan 21, 1993) (citing Williams v. United States, 947 F.2d 37, 39 (2d Cir. 1991).  [33 F. Supp. 3d at 211 n.1.]

Second Circuit Mottahedeh Opinion 

DOJ attorney Joan Oppenheimer, who did the Volpicelli oral argument and co-wrote the briefs in both Volpicelli and Mottahedeh submitted a brief to the Second Circuit that largely tracked the Volpicelli brief in that, relying on recent Supreme Court case law, it argued that the time period in § 6532(c) is jurisdictional, and that, even if that time period is not jurisdictional, the Irwin presumption in favor of equitable tolling is rebutted as to that time period.  She cited Brockamp for the proposition that tax periods of limitations are not tollable.  She pointed to the Second Circuit’s Williams opinion and opinions of several other Circuits (all opinions, except a 2000 Third Circuit opinion, predating Brockamp) holding the § 6532(c) period jurisdictional and, in the Third Circuit opinion, also not subject to equitable tolling.  She also noted the contrary opinion of the Ninth Circuit in Volpicelli that had been issued a couple of weeks before the DOJ filed its brief in this case. Volpicelli had rejected all of the DOJ arguments by a thorough analysis of recent Supreme Court opinions and a rejection of the argument that Brockamp prohibited the tolling of all Internal Revenue Code time periods.

The plaintiff in Mottahedeh did not file a reply brief, so there was no brief rebutting the DOJ arguments or explaining why the Ninth Circuit had rejected the various DOJ arguments in Volpicelli.  But, I suspect that the Second Circuit panel spent some time reading its Williams opinion, Volpicelli, and recent Supreme Court case law and concluded that Williams was probably no longer good law and that any discussion of recent Supreme Court case law on jurisdiction and equitable tolling would be problematic.  Perhaps the panel worried that to overrule Williams, it would have to write an opinion for en banc consideration – i.e., that the panel could not merely state that Supreme Court  case law since Williams so sapped it of its vitality that no en banc reconsideration was necessary.

In any event, without exampling why § 6532(c) was jurisdictional under current Supreme Court case law, and without citing Williams or any other of the many Circuit court opinions on that time period cited in the DOJ brief, the Second Circuit affirmed the dismissal for lack of jurisdiction because of an untimely-filed suit.

In its opinion, the Second Circuit also rejected the first three arguments made by the plaintiff – for reasons identical to those stated by the district court and discussed above in this post.

But, when it came time to discuss equitable tolling, the Second Circuit departed from the district court’s holding that § 6532(c)’s time period may never be tolled.  Instead, the court – again neither citing Williams, recent Supreme Court case law, or other Circuit opinions addressing the issue of the tollability of § 6532(c)’s time period – simply declined to decide that issue, as unnecessary.  The Second Circuit held that, even if the time period could be tolled, the plaintiff’s arguments that she was confused by amounts in IRS notices was not a sufficient factual ground for equitable tolling.  The court said it was clear that the first levy notice sought 1978 taxes, while the second sought 1979 and 1980 taxes.  “Appellant has neither alleged that anything prevented her from commencing a timely suit in response to the October 2009 Notice of Levy, nor that she pursued her remedies diligently.” Slip op. at 11.

Final Observation

The government decided not to seek certiorari in Volpicelli to resolve the Circuit split.  I assume that the government abandoned the idea of seeking Supreme Court review because it concluded that, after the recent Supreme Court opinion in United States v. Wong, 135 S. Ct. 1625(Apr. 22, 2015), discussed at my post here, the government would lose in the Supreme Court.

I don’t think the Mottahedeh case would make a good vehicle for resolving that Circuit split for two reasons:  The Second Circuit there expressed no opinion either way on the Circuit split.  And the court found no factual basis for equitable tolling.  I don’t think that, even if the plaintiff filed a petition for certiorari in Mottahedeh, such petition would be granted.

But, I do think that a plaintiff with better facts for equitable tolling in a wrongful levy case now stands a good chance in the Second Circuit for winning such a suit.  I don’t think it was an accident that the panel in Mottahedeh both ran away from deciding whether tolling the wrongful levy time period is ever possible and refused to cite the existing Circuit precedent holding against tolling in Williams.

About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.

Comments

  1. Jack Schiffman says

    Enough already on the equitable tolling issue. Hopefully you’ll find something new and informative to blog about.

    • Jason T. says

      To the contrary, I found Carl’s equitable tolling post both new and informative.

      Initially, I was skeptical of Carl’s equitable tolling argument. Subsequently, I have come to see that Carl’s argument has substantial merit; indeed, he has proved it with his Volpicelli win. I presume Jack supports arguments that could help our clients prevail. I encourage Carl to post any new equitable tolling information.

      With this comment, Jack got told….because one day he may need his client’s misstep tolled.

  2. Carl Smith says

    Jack, I hear you (though I don’t only do equitable tolling posts). I limit my blog posts to cases on which Les, Keith, Stephen, or another expert guest poster are not planning to do a post and where I think I know the area pretty well. This makes me look like I have more tunnel vision than I do.

    I really don’t expect to do another post on jurisdiction or equitable tolling for a long time. There are very few equitable tolling tax cases that get up to the courts of appeals. Prior to Volpicelli and Mottahedeh (which I didn’t even know was being litigated), the last court of appeals opinion about equitable tolling of the 6532(c) period was a Third Circuit opinion from 2000 — 15 years ago. I am kind of shocked to see two court of appeals opinions within the same year on possible equitable tolling of the 6532(c) period..

    A lot of what I have been trying to do by my posts on both jurisdiction and equitable tolling is to educate tax lawyers to what is going on outside the tax area that actually could benefit our clients. A lot of older cases in the tax area about time limits are outdated and due for a rethink. Just like APA issues and case law that is recently impacting on the tax world (where I leave the posts to the brilliant Pat Smith or others more expert than me to do), I think we need to look sometimes outside the tax area to see what arguments we need to be thinking about for our clients.

    Oddly, equitable tolling — which almost never comes up in tax — is such a big issue that it is the subject of one of the 70 Supreme Court cases almost each Term, lately. In 2010, it was Holland v. Florida. In 2011, it was Henderson v. Shinseki. In 2013, it was Sebelius v. Auburn Regional Med. Ctnr. In 2015, it was Wong v. U.S. This fall, it will be review of Menominee Indian Tribe v. U.S., 764 F.3d 51 (D.C. Cir. 2014), where cert. was recently granted solely on this issue: “Whether the D. C. Circuit misapplied this Court’s Holland decision when it ruled that the Tribe was not entitled to equitable tolling of the statute of limitations for filing of Indian Self-Determination Act claims under the Contract Disputes Act?”, 2015 U.S. LEXIS 4481 (June 30, 2015). In that case, everyone agrees that the time period can be tolled on the right facts. The issue is whether plaintiff lawyer errors can give rise to tolling. I don’t expect the Menominee opinion to have much effect on tax, so don’t expect me to do a blog post on it — unless I am surprised by SCOTUS language that is broader than I would expect.

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