Wrongful levy judgment treated as overpayment of tax.

• Author: Beavers, James

The Ninth Circuit held that for purposes of calculating the overpayment interest rate on a wrongful levy judgment, the judgment should be treated as an overpayment of tax.

Background

Dr. Steven Cheung, an economics professor and consultant, formed Steven N. S. Cheung, Inc. (the company) in 1977. On February 5, 2003, under Sec. 6861(a), the IRS issued a jeopardy assessment against Cheung for income tax liability for the year 1993. The same day, the IRS, believing the company was a nominee of Cheung, issued and served a notice of jeopardy levy on the company under Sec. 6331(a). Under the levy, the IRS collected almost $1.5 million in tax from the company.

In October 2003, the company filed an administrative claim for the return of the funds, claiming that they had been improperly levied under Sec. 6343(b). The IRS denied the claim, and the company took its complaint to federal district court. The court held that the Service had wrongfully levied the company's property and entered judgment in favor of the company for the full amount it had paid plus interest per Sec. 7426(g).

Sec. 7426(g) states that interest on a wrongful levy judgment is allowed at "the overpayment rate established under section 6621." Sec. 6621 states:

(a) General rule.

(1) Overpayment rate.--The overpayment rate established under this section shall be the sum of--

(A) the Federal short-term rate determined under subsection (b), plus

(B) 3 percentage points (2 percentage points in the case of a corporation).

To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting "overpayment" for "underpayment") exceeds $10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points." A hearing was set to determine how much interest the government owed the company. The company argued that a wrongful levy judgment was not an overpayment of tax referred to in the flush language of Sec. 6621(a)(1) and that therefore the interest rate that should be applied to the entire judgment was the full overpayment rate specified in Secs. 6221(a)(1)(A) and (B). The IRS argued that the judgment was an overpayment of tax and that therefore, per the flush language, the interest rate applied to the judgment was subject to a one-and-a-half point reduction to the extent that it exceeded $10,000.

The court held that a wrongful levy judgment was not an overpayment of tax and that the...