Right to Jury Trial Does Not Extend to Certain Federal Tax Collection Suits

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Dombrowski v US, a recent case out of a federal district court in Michigan, highlights how the right to a jury trial differs in certain collection suits as compared to refund suits.

Dombrowski lives with Ronald Matheson, who owes money to the IRS. In 2013, Dombrowski purchased the house she and Matheson live in with funds transferred to her from Matheson. IRS filed a tax lien that reached the house Dombrowski purchased, claiming that Matheson had an ownership interest in the house. Dombrowski claimed that the funds she used to purchase the house stemmed from a prior debt that Matheson owed to her and her brother. To resolve the issue, she filed an action to quiet title to the property, and the government counterclaimed seeking to enforce the tax lien. Dombrowski’s complaint included a jury demand; the government moved to strike that demand.

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The right to a jury trial is found in the Seventh Amendment to the constitution and is incorporated in Fed Rule of Civil Procedure 38, which provides that a party may demand the right to a jury if it is required under the constitution or otherwise statutorily created.

The quiet title action was brought pursuant to 28 USC 2401(a)(1). The government’s suit to enforce the lien was brought pursuant to 26 USC 7403(a). Neither provides for a statutory right to a jury trial. This is in contrast with 28 USC 2402 which specifically authorizes jury trials in tax refund suits brought in federal district courts.

The opinion concludes that in the absence of statutory language that explicitly gives an individual the right to a jury, the Seventh Amendment guarantees the right to a trial by jury only as it existed at common law.  The opinion then traces the historical roots of quiet title and lien enforcement actions. Both actions are equitable in nature:

“Like actions for quiet title, courts have consistently held that actions brought by the government to impose federal tax liens are closely related to historical suits in equity used in the enforcement of debt collection; similarly, discharging a lien is an equitable remedy.” 

The opinion goes on to explain that in any event the Seventh Amendment does not apply to actions against the sovereign, even those that have their roots in the common law.

I had not thought about this issue, and while I have some passing familiarity with the history of both causes of action, the opinion nicely explores the intersection of the Seventh Amendment, tax collection litigation and the separate statutory right to a jury trial that is embodied in refund litigation brought in federal district courts.  

This case now proceeds to the merits, with the judge having sole responsibility to determine whether and to what Dombrowski’s house is an asset that the government can reach to satisfy Matheson’s tax debt. The merits include a state law inquiry into whether money she used purchase the property was fraudulently transferred in violation of the Michigan Uniform Voidable Transfers Act. 

One other consideration here is Dombrowski’s decision to bring the quiet title action.  In a situation like this the IRS would file a nominee lien in order to reach the property.  In a prior post we described the nominee lien as the lis pendens of the tax world.  The nominee lien would encumber the property and should cause the IRS to bring the lien foreclosure case itself but would not necessarily trigger a quick filing of a suit on the property.  By bringing the quiet title, Dombrowski triggered the certain response of a lien foreclosure request.  If the IRS has filed a nominee lien, be sure you are ready for the counterclaim when you bring a suit against it.  If you have significant concerns about the transaction, you may want to sit tight and wait for the IRS to make the first move.  The lien does not present much of a problem if you are not planning to sell or encumber the property.  The nominee lien is specific to the property and does not extend to other property that the alleged nominee owns.

Update: To reflect the learned comment of Jack Townsend I have modified the post to make clear that the lack of a right to a jury trial depends on the type of collection suit. I have not chased down the issues Jack ably raises.

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. John A Townsend says

    Les,

    Thanks for the posting. This raises several questions

    1. First a counterfactual. If the Government had brought this suit as a standard collection suit to reduce the tax lien to judgment, the taxpayer would have been entitled to a jury trial. That has been my understanding but have not researched it recently. The Dombrowski court denies the jury because a suit to foreclose a lien is equitable rather than legal. The Dombrowski opinion, however, cites (Slip Op. 8) United States v. Miedema, Case No. 01-305, 2003 WL 21152988, at *1 (W.D. Mich. Feb. 27, 2003) (“While actions to obtain a judgment of taxes owing are legal in nature, actions to foreclose tax liens on property are equitable in nature.”) As to the collection suit, that seems consistent with my understanding. For example, in a partial payment TFRP refund suit (divisible tax) and the Government counterclaims for the balance, the parties are entitled to a jury trial on both the refund suit and the counterclaim.

    2. So, the Court’s holding does not apply to all collection or collection-type suits—just those where the Government is seeking to enforce a right it already has via an equitable remedy such as lien enforcement.

    3. I would have thought (but do not know) why the Government would bring a suit to enforce a lien without coupling that with a request for judgment on the tax lien which would be a standard collection suit. I suppose that, since the fact of the tax liability must be in issue in the lien suit, even if not presented as a formal collection suit it has the effect of a collection suit, although, I also suppose, a formal judgment on the tax liability is not rendered so that there no judgment lien. (I am inferring that from the Dombrowski court’s distinction between a collection suit and a lien enforcement suit.

    4. There are some interesting issues where there is a suit by the taxpayer or the Government and a counterclaim where one of the actions (suit or counterclaim) permits a jury trial but the other does not permit a jury trial For example, in a partial payment FBAR penalty refund suit where the Government counterclaims (a collection suit), the taxpayer-plaintiff is not entitled to a jury trial on the refund claim (FBAR penalty is not a tax in this respect) but is entitled to a jury trial on the counterclaim because it is legal action for which a jury is permitted. I have thrashed around on this issue in Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18), link below. One musing in that blog posting is: “For example, if the refund suit with counterclaim goes to trial, does the judge decide the refund suit with findings of fact and conclusions of law required by FRCP Rule 52(a) and the jury decide the counterclaim?”

    http://federaltaxcrimes.blogspot.com/2018/11/outstanding-powerpoint-presentation-on.html#more

    5. Moving beyond the immediate issue of jury trial, another issue on such counterclaims is where the burdens of proof may be different (i.e., on the tax refund suit, the Lewis v. Reynolds burden on the taxpayer applies but on the collection suit the Helvering v. Taylor burden (lesser) applies. And, if variance could apply to the refund claim, can the taxpayer still win on the collection claim?

    6. I could thrash around some more but will cease and desist (for now).

  2. Dombrowski better file a third-party complaint against Matheson.
    SPK

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