6337 Annotations: Property Subject to Redemption- Levy

Redemption of Properly: Property Subject to Redemption

[98-2 USTC ¶50,491] Gerald E. Kane, Plaintiff-Appellant v. Capital Guardian Trust Company, Defendant-Appellee

(CA-10), U.S. Court of Appeals, 10th Circuit, 97-3030, 6/15/98 , 145 F3d 1218, 145 F3d 1218. Affirming an unreported District Court decision

[Code Secs. 6332 and 6337 ]

Administrative levy: Property or right to property: Individual retirement account: Mutual fund shares: Cash value: Redemption, right of: Conversion: Fiduciary duty, breach of.--A trust company that managed a delinquent taxpayer's individual retirement account (IRA) was not liable with respect to the taxpayer's state (Kansas) law claims of conversion and breach of fiduciary duty for its action in liquidating mutual fund shares held in the IRA and delivering cash to the IRS in response to an administrative levy. The trust company could not be held liable for complying with the levy because it had no applicable defense to it. The taxpayer's right to liquidate the IRA and receive cash clearly constituted a "right to property" that was subject to the IRS's administrative levy power. His argument that the trust company's actions unlawfully deprived him of his statutory right of redemption was rejected. Even though the trust company could have delivered the mutual fund shares to the IRS pursuant to the levy, it was not required to do so.

John C. King, John L. Brennan, 260 N. Rock Rd. , Wichita , Kan. , for plaintiff-appellant. Eric B. Metz, Triplett, Woolf & Garretson, Jeffrey C. Dahlgren, 151 N. Main, Wichita, Kan. 67202-1409, for defendant-appellee.

Before: ANDERSON, BALDOCK and MURPHY, Circuit Judges.

BALDOCK, Circuit Judge:

The issue in this case is whether a trust company becomes liable to the holder of an individual retirement account when the company responds to a federal tax levy against the account by liquidating the mutual fund shares in the account and remitting the cash proceeds to the Government. On the facts of this case, we hold that the trust company is not liable to the account holder.

I.

At the end of 1975, Plaintiff Gerald E. Kane (hereinafter "Kane"), then 51 years old, established an individual retirement account (hereinafter "IRA") under a trust agreement with Defendant Capital Guardian Trust Company (hereinafter "Capital Guardian"). Under the terms of the trust agreement, Kane had the right to withdraw funds from his IRA, but had no right to demand the issuance of share certificates representing his IRA's underlying investments. Rather, Capital Guardian retained sole discretion whether to issue share certificates for such investments.

In September 1993, Kane's IRA consisted of unissued shares in two open-end mutual funds--5,290.870 shares of the Investment Company of America and 286.202 shares of the Growth Fund of America--valued at more than $107,000. Shares in an open-end mutual fund are "redeemable securities" which means that the account holder upon presentation to the issuer "is entitled . . . to receive approximately his proportionate share of the issuer's current net assets, or the cash equivalent thereof." 15 U.S.C. §80a-2(a)(32). Therefore, while Kane's interest in the mutual funds represented a proportionate share of the two companies' current assets, he had no right to any actual share certificates.

Kane admits that due to financial difficulties, he failed to pay his 1989 federal income tax liability of more than $100,000. On August 5, 1993 , the Internal Revenue Service (hereinafter "IRS") issued a Notice of Levy to Capital Guardian under 26 U.S.C. §6331, specifically attaching the funds in Kane's IRA. Consistent with the IRS' instructions "to turn over to us this person's [Kane's] property and rights to property (such as money, credits and bank deposits) . . . which you are already obligated to pay this person," Capital Guardian responded to the levy by liquidating Kane's IRA, and remitting the cash proceeds of $107,706.25 to the IRS. Capital Guardian then submitted the appropriate 1993 IRS Form 1099-R, reporting a gross distribution from Kane's IRA in the same amount. Capital Guardian's cash distribution from Kane's IRA resulted in an additional tax liability to Kane in 1993 of $41,418.

Eleven months after Capital Guardian liquidated his IRA, Kane responded by filing suit in Kansas state court against Capital Guardian for conversion and breach of fiduciary duty. Kane alleged that Capital Guardian had no authority to liquidate the mutual fund shares in his IRA and remit the cash proceeds to the IRS. Kane did not dispute the validity of the levy. He acknowledged that his interest in the IRA was a property interest to which a federal tax lien could attach and upon which the Government could levy. Instead, Kane claimed that Capital Guardian should have responded to the levy by issuing share certificates in the mutual funds to the IRS, and its failure to do so deprived him of his right to redeem the shares prior to a tax sale. See 26 U.S.C. §6337. Consequently, Kane demanded that Capital Guardian (1) restore his IRA to its pre-levy status, and (2) pay both his 1989 and 1993 federal tax liabilities.

Capital Guardian removed the suit to federal district court on the bases of federal question and diversity jurisdiction. ¹ On cross motions for summary judgment, see Fed. R Civ. P. 56, pursuant to stipulated facts, the district court ruled that Capital Guardian could not "be held liable for complying with the IRS' lawful demand to which it had no valid defense." Kane v. Capital Guardian Trust Co., 953 F. Supp. 1200, 1208 (D. Kan. 1997). Accordingly, the district court entered judgment for Capital Guardian, and Kane appealed. Our jurisdiction arises under 28 U.S.C. §1291. We review a grant of summary judgment de novo employing the same legal principles as the district court. See Lytle v. City of Haysville , 138 F.3d 857, 862 (10th Cir. 1998). Applying this standard, we affirm.

II.

Federal law places a tax lien in favor of the Government upon "all property and rights to property, whether real or personal, tangible or intangible" of a taxpayer who fails to pay taxes due and owing after assessment and demand. 26 C.F.R. §301.6321-1; accord 26 U.S.C. §§6321-22. The reach of a federal tax lien is broad. Congress intended the lien "to reach every interest in property that a taxpayer may have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985). A federal tax lien may reach a taxpayer's interest in "property or rights to property" to the extent that applicable state law recognizes the subject interest as property. Id. at 722. Federal law, however, defines the tax consequences which attach to a state-created property interest. Id.

Because a federal tax lien is not self-executing, the IRS must take affirmative measures to collect the delinquent taxes. Id. at 20. Federal law provides a provisional remedy to the IRS for the collection of delinquent taxes which requires no judicial intervention. See 26 U.S.C. §§6331-43. This remedy is known as an administrative levy, and is justified by "the need of the government promptly to secure its revenues." Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 720-21. Unlike the lien-foreclosure suit authorized by 26 U.S.C. §7403, an administrative levy does not determine priority disputes between the Government and other claimants, but instead protects the Government against diversion or loss while such disputes, if any, are resolved. See Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 721.

Ten days after notice and demand to the taxpayer, the IRS may levy "upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien . . . for the payment of such tax." 26 U.S.C. §6331(a). The IRS begins the levy process "by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy." 26 C.F.R. §301.6331-1(a)(1). The IRS effectuates a levy upon tangible property through (1) notice of levy, and (2) seizing, posting, or tagging the property. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338, 350 (1977). The IRS effectuates a levy upon intangible property, that is to say property which is not subject to physical seizure, posting, or tagging, such as mutual fund shares, see Baum v. Investors Diversified Serv., Inc., 409 F.2d 872, 875 (7th Cir. 1969) (redemption right in mutual fund shares constitutes intangible property interest), by the sole act of serving notice of levy upon the third party holding the property. See G.M. Leasing Corp. [77-1 USTC ¶9140], 429 U.S. at 350. Upon service of the notice of levy, the IRS "steps into the shoes of the taxpayer and acquires 'whatever' rights to the property the taxpayer possessed." United States v. Bell Credit Union [88-2 USTC ¶9564], 860 F.2d 365, 369 (10th Cir. 1988).

Under 26 U.S.C. §6332(a), only two defenses to a levy will excuse a third party's noncompliance. That section provides:

[A]ny person in possession of (or obligated with respect to) property or rights to property subject to levy upon which levy has been made shall, upon demand . . . surrender such property or rights (or discharge such obligation) . . . except such part of the property or rights, as is, at the time of such demand, subject to attachment or execution under any judicial process.

Id. Thus, to avoid liability to the Government for failure to comply with a notice of levy, a third party must establish that (1) it is not in possession of the taxpayer's "property or rights to property," or (2) the taxpayer's "property or rights to property" was subject to prior judicial attachment or execution. Id. ; accord Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 721-22. In the absence of either defense, a party failing to honor a federal tax levy is liable for a sum equal to the value of the property plus interest and costs. 26 U.S.C. §6332(c)(1). If the failure to surrender the property is without reasonable cause, the third party may incur a 50% penalty as well. Id. §6332(c)(2).

III.

The district court concluded that because neither of the foregoing defenses were available to Capital Guardian, it had no choice but to honor the levy against Kane's IRA. To support its judgment in favor of Capital Guardian, the district court relied principally upon 26 U.S.C. §6332(e), concerning the effect of honoring a federal tax levy. Kane, 953 F. Supp. at 1206-08. That section provides:

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary . . . shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

18 U.S.C. §6332(e); accord 26 C.F.R. §301.6332-1(c).

Despite §6332(e)'s broad language, Kane contends that §6332(e) provides Capital Guardian with neither a defense nor immunity to his claims. See Smith v. Kitchen, No. 97-1237, 1997 WL 768297 at *3 (10th Cir., 1997) (unpublished) (recognizing disagreement between the circuits as to whether §6332(e) creates a defense or immunity). Kane reasons that §6332(e) does not apply in this case because Capital Guardian did not surrender his "property or rights to property" when it liquidated his IRA, but instead changed the fundamental character of his property and transferred a nonredeemable asset, namely cash, to the IRS. Kane complains that Capital Guardian effectively circumvented his statutory right under 26 U.S.C. §6337(a) to redeem the mutual fund shares in his IRA prior to their sale. Section 6337(a) provides:

Any person whose property has been levied upon shall have the right to pay the amount due, together with the expenses of the proceeding, if any, to the Secretary at any time prior to the sale thereof, and upon such payment the Secretary shall restore such property to him, and all further proceedings in connection with the levy on such property shall cease from the time of such payment.

Id. While Kane's argument is novel, we are not persuaded.

A.

By using the phrase "property and rights to property" in 26 U.S.C. §6331, Congress intended to reach "every interest in property that a taxpayer might have." Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 719-20 (emphasis added). To that end, courts have interpreted the phrase broadly. For example, in United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 56 (1958), superseded by 26 U.S.C. §6332(b) (expressly permitting the Government to levy against an insurance company for the cash surrender value of life insurance policies and endowment contracts), the Supreme Court held that the cash surrender value of a taxpayer's life insurance policy constituted "property or rights to property" to which a federal tax lien could attach. In Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 724 n.8, the Court concluded that "as a matter of federal law, the state-law right to withdraw money from a joint bank account is a 'right to property' adequate to justify the use of the provisional levy procedure of §6331." In Bell Credit Union [88-2 USTC ¶9564], 860 F.2d at 367-68, we held that the taxpayers' capital share accounts in a credit union were a "right to property" subject to federal tax levies, where "the taxpayers had an unrestricted right to withdraw the funds from the share accounts at the time of the levies." In United States v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th Cir. 1989), the Eleventh Circuit held that the unelected cash withdrawal value of a delinquent taxpayer's annuity contract was a "right to property" subject to levy. The court stated:

[U]nder state law the taxpayer had the right to withdraw the full value of the annuity. The issue is whether the right is sufficient to obligate the insurance company under section 6332(a) to surrender the funds subject to the withdrawal right to the IRS upon receipt of the notice of levy. We hold that it is.

Id. at 1500. See also United States v. Central Bank of Denver [88-1 USTC ¶9256], 843 F.2d 1300, 1305 (10th Cir. 1988) (depositor's claim against bank for deposited funds constituted a "right to property" subject to federal tax levy); United States v. Ruff [97-1 USTC ¶50,130], 99 F.3d 1559, 1566 (11th Cir. 1996) (broker's earned but unpaid commission constituted a "right to property" subject to federal tax levy).

Kane's right to liquidate his IRA and withdraw the funds therefrom (even if subject to some interest penalty) undoubtedly constituted a "right to property" subject to the IRS' administrative levy power under 26 U.S.C. §6331(a). Upon Capital Guardian's receipt of the notice of levy, the IRS stepped into Kane's shoes and acquired all his rights in the IRA, including his right to liquidate the mutual fund shares in his IRA and withdraw the cash proceeds. See Bell Credit Union [88-2 USTC ¶9564], 860 F.2d at 369; 15 U.S.C. §80a-2(a)(32). In the notice of levy, the IRS exercised Kane's right to receive the cash value of his mutual fund shares when it directed Capital Guardian to liquidate the IRA and send it the cash proceeds. Plainly, Capital Guardian surrendered a "right to property" belonging to Kane when it complied with the levy.

As the district court properly recognized, Kane incorrectly interprets the phrase "property and rights to property" as used in §6331(a) to mean only his IRA's mutual fund shares. This interpretation effectively reads out of the statute "rights to property" such as Kane's right to withdraw funds from his IRA, i.e. his right to receive the cash value of his IRA's mutual fund shares. Kane's interpretation of §6331(a) would limit an IRS levy to "property" actually in the possession of the third party served with a notice of levy. Kane's interpretation is also inconsistent with §6332(a) in that it would eliminate "obligations" from property subject to levy. Furthermore, it would render superfluous 26 C.F.R. §301.6331-1(a)(1)'s statement that obligations may be levied upon if they are "fixed and determinable," although the right to receive payment is deferred. See Ruff [97-1 USTC ¶50,130], 99 F.3d at 1567.

Perhaps Capital Guardian could have done as Kane suggests and issued mutual fund shares to the IRS (which the IRS simply would have presented to Capital Guardian for cash), in order to comply with the levy. Even so, Kane's right to withdraw funds from his IRA still constituted a "right to property" upon which the IRS could and did levy. Because under the terms of the trust agreement with Capital Guardian, Kane had no right to demand certification and issuance of the mutual fund shares in his IRA, neither did the IRS.

We reject Kane's argument that Capital Guardian unlawfully circumvented his right to redeem his mutual fund shares under 26 U.S.C. §6337. Section 6337 refers to the taxpayer's right to redeem "property" "at any time prior to the sale thereof." Notably missing from §6337(a) is the phrase "right to property." As we have explained, Kane's intangible "right to property" upon which the IRS levied was his right to convert the IRA to cash. Once Capital Guardian converted the IRA to cash in compliance with the levy, the IRS had nothing to sell, and Kane had nothing to redeem.

In Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 725-26, the Supreme Court explained that where a taxpayer has the right to withdraw funds from his account, "it is inconceivable that Congress intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor." (internal ellipses and quotations omitted). Nat'l Bank of Commerce makes clear that funds in possession of a third party subject to the taxpayer's withdrawal constitute a right to property in the custody of the third party. See Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d at 1501. In this case, the funds in Kane's IRA were "plainly accessible" to him; thus, those funds were also "plainly accessible" to the IRS upon notice of levy to Capital Guardian.

In any event, any complaint Kane has regarding the denial of his right of redemption under 26 U.S.C. §6337(a), lies against the IRS, not Capital Guardian. Where the IRS seizes a delinquent taxpayer's property from a third party via administrative levy, nothing in the Internal Revenue Code requires the third party to ensure the taxpayer's right of redemption. Rather that burden rests with the IRS. See 26 U.S.C. §6335(a), (b) (requiring the IRS to notify the taxpayer of seizure and sale). If Kane believes the IRS wrongfully deprived him of the right to redeem his property, he should petition the IRS under 26 U.S.C. §6343(b) for return of the property. See id. §6343(b) ("If the Secretary determines that property has been wrongfully levied upon, it shall be lawful for the Secretary to return . . . the specific property levied upon. . . .").

B.

With all this in mind, we now turn to the fate of Kane's state law claims for conversion and breach of fiduciary duty against Capital Guardian. Like the district court, we conclude that 26 U.S.C. §6332(e) provides Capital Guardian with a "complete defense" to Kane's state law claims. Kitchen, 1997 WL 768297 at *3. No question exists in this case that (1) Kane's right to convert his IRA to cash was a "right to property subject to levy;" (2) the IRS acquired this "right to property" when it served notice of levy on Capital Guardian," and (3) upon demand of the IRS, Capital Guardian surrendered that "right to property," liquidated Kane's IRA, and submitted the cash proceeds to the IRS. By its plain language then, §6332(e) shields Capital Guardian from liability to Kane. See Moore v. General Motors Pension Plans [96-2 USTC ¶50,539], 91 F.3d 848, 851 (7th Cir. 1996); see also S. Rep. No. 89-1708 (1966), reprinted in 1966 U.S.C.C.A.N. 3722, 3740 ("[T]he effect of honoring the levy is the same as honoring a demand of the taxpayer."). Accordingly, Capital Guardian is "discharged from any obligation or liability to the delinquent taxpayer," namely Kane, for complying with the federal tax levy. See also Schulze v. Legg Mason Wood Walker, Inc., 865 F. Supp. 277, 285 (W.D. Pa. 1994) (§6332(e) provided "immunity" to investment banking firm that sold assets in taxpayer's stock account and sent proceeds to the IRS); United States v. Augspurger [79-2 USTC ¶9622], 477 F. Supp. 94, 96-97 (W.D.N.Y. 1979) (predecessor to §6332(e) would protect investment firm that redeemed taxpayer's mutual fund shares and transferred cash to the IRS).

AFFIRMED.

¹ Because the parties are diverse and the amount in controversy is sufficient, the district court undoubtedly had subject matter jurisdiction over Kane's complaint pursuant to 28 U.S.C. §1332. Accordingly, although Kane's complaint does not allege a federal cause of action, we need not inquire whether the well-pleaded complaint rule provides us with federal question jurisdiction under 28 U.S.C. §1331. See Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 13 (1983) ("Even though state law creates appellant's causes of action, its case might still 'arise under' the laws of the United States, if a well-pleaded complaint established that its right to relief under state law requires resolution of a substantial question of federal law in dispute between the parties.").

[98-2 USTC ¶50,579] John A. Seay, Jr. and Karen J. Seay, Plaintiffs v. United States of America , Eugene Marshall Campbell and Wanda Loyce Campbell, Defendants

U.S. District Court, West. Dist. Tex., Waco Div., CIV. W-98-CA-145, 7/6/98

[Code Sec. 6337 ]

Tax levies: Seizure of property: Redemption following tax sale: Real property interest: Contract for deed: Equitable real property interest.--Married taxpayers who entered into a contract for deed regarding the purchase of a residence had a sufficient interest in the property to entitle them to a right of redemption following the IRS's levy and tax sale of their contract rights. While the taxpayers' interest might not specifically qualify as a real property interest, they had "an equitable right" in the property under state ( Texas ) law; this equitable right constituted an interest in real estate sufficient to invoke redemption rights. The taxpayers had the right to the use and possession of the property, the obligation to pay taxes, and the right to convey their interest. Also, their interest was recorded in the county property deed records. Accordingly, the taxpayers were granted a redemption right under Code Sec. 6337 .

[Code Sec. 7433 ]

Tax levies: Seizure of property: Damages suit dismissed: Failure to state justiciable claim.--Married taxpayers' claim for damages against the IRS and its employees for improper collection practices in connection with an IRS levy against their contract for deed was dismissed for failure to state a justiciable claim.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SMITH, JR., District Judge:

Plaintiffs bring this action as a result of the seizure of their property by the Internal Revenue Service for non-payment of taxes. A temporary restraining order was granted, and the hearing on a preliminary injunction was consolidated with the trial on the merits. Having considered the argument of counsel, and having reviewed the parties' briefs and the applicable legal authority, the Court has determined that judgment should be entered for Plaintiffs on their claim under 26 U.S.C. §6337(b). Plaintiffs' claim for damages under 26 U.S.C. §7433 has no basis in fact or law and will be dismissed.

I. FINDINGS OF FACT

The facts are undisputed and have been stipulated by the parties as follows:

1. The Plaintiffs, John and Karen Seay (the "Plaintiffs"), owe the United States for federal income taxes for the 1987 period in the principal amount of $60,719.29 (which amount is prior to the application of the subject sales proceeds discussed below).

2. In 1993, the Plaintiffs entered into a contract for deed with Defendants Eugene Marshall Campbell and Wanda Loyce Campbell (the " Campbells ") regarding the purchase of a homestead in Glen Rose, Texas .

3. The contract for deed covers the realty known as 4823 County Road 108, Glen Rose, Texas 76043. The contract for deed was executed January 14, 1993 .

4. The Plaintiffs were current on their contract for deed payments with the Campbells .

5. The United States took collection actions against the Plaintiffs in 1997 in an attempt to extinguish the income tax liability.

6. The United States ' Notice of Seizure described the subject property levied upon as:

All right title and interest of John A. Seay and wife, Karen Jo Seay buyers of contract for deed dated January 14, 1993 executed by seller Eugene Marshall Campbell and wife, Wanda Loyce Campbell, recorded in Volume 24, Page 583 of the Deed Records of Somerville County.

This same Deed describes 101.497 acres of land as part of the Galveston County School Land Survey, Abstract 37, Somerville County , Texas .

Physical description for property listed on contract for deed known as 4823 County Road 108, Glen Rose Texas 76043.

7. The Internal Revenue Service ("IRS") seizure took place December 11, 1997 .

8. The IRS estimated the Plaintiffs' interest in the seized property at $52,305.25.

9. The IRS set the contract for deed for public auction February 12, 1998 .

10. The Plaintiffs' interest in the seized property was purchased at the IRS sale by the Campbells for $23,000.00.

11. The Plaintiffs were properly and timely given an opportunity to bid at the public auction on the contract for deed.

12. The IRS issued a Certificate of Sale of Seized Property on February 12, 1998 . Eugene Campbell is set forth as the purchaser.

13. The IRS treated the sale of the contract for deed as a sale of personal property, therefore, a Certificate of Sale was immediately issued on the receipt of payment from the purchasers, the Campbells.

14. The IRS did not treat the sale of the contract for deed as a transaction in realty so that the delivery of title to the purchasers would be delayed by 180 days so that the Plaintiffs would be afforded redemption rights under 26 U.S.C. §6337(b).

15. After the sale, the purchasers of the contract for deed, the Campbells , instituted a forcible detainer action against the Plaintiffs to eject the Plaintiffs from the Glen Rose home. The Campbells relied on the IRS Certificate or Sale to assert that the Plaintiffs have no redemption rights.

16. The Campbells obtained a "writ of possession" regarding the Glen Rose home on March 24, 1998 from a Justice Court requiring the Plaintiffs to vacate the home by April 25, 1998 .

17. The Plaintiffs inquired about their quarterly contract for deed payment to the Campbells on or about April 10, 1998 ; the Campbells informed the Plaintiffs that no further payments on the contract for deed would be accepted since the Campbells purchased the Plaintiffs' interest in the contract for deed from the IRS sale.

18. Due to the refusal described in paragraphs 18 above, the Plaintiffs assert that the Campbells will refuse to accept a redemption of the property (the sales price plus twenty percent) if such were made.

19. The Campbells assert that no right of redemption exists since the IRS issued a Certificate of Sale on the contract for deed.

20. If given a right to redeem, and if the Plaintiffs redeem, the Plaintiffs acknowledge that the IRS can only give or pass on title to what was actually seized and sold.

21. Prior to the IRS sale scheduled for January 20, 1998 , a collection appeal was filed by the Plaintiffs challenging the denial of the 180-day redemption period provided in §6337(b). The sale was delayed pending the appeal. The appeals officer determined on February 5, 1998 that the property could be sold without redemption rights, after which the IRS reset the auction sale and the property was sold to the Campbells, the highest bidders.

22. In valuing the Plaintiffs' interest in the contract for deed, the IRS used the fair market value of the real estate.

23. Prior to the public auction, the IRS advised the Campbells that the Plaintiffs would not have redemption rights stemming from the sale of the contract for deed.

24. The IRS obtained District Director approval regarding the seizure and sale of the contract for deed, through a signed Levy, Form 668-B(CG). Director level approval is required only when a taxpayer's principal residence is being seized to ensure the action is warranted. The IRS Collection Division sought this extra level of review regarding the Revenue Officer's seizure action given the current climate of public opinion surrounding IRS collection actions.

25. The contract for deed was recorded in the Somerville County land records office on February 16, 1993 .

26. The Campbells have not been served and have not appeared in this suit. Plaintiffs claims against the Campbells are based upon state law.

27. Any finding of fact which should more properly be considered a conclusion of law is hereby deemed as such.

II. CONCLUSIONS OF LAW

A. Jurisdiction. The Government has moved to dismiss Plaintiffs' claims. The Court agrees that Plaintiff has failed to state a claim for damages under 26 U.S.C. §7433, but finds that there is subject matter jurisdiction to pursue a claim for a violation of 26 U.S.C. §6337(b).

1. "Title 26 U.S.C. §7433 was enacted to allow a taxpayer to sue the United States if the IRS intentionally or recklessly disregards a statute or regulation in connection with collection of federal taxes." Shaw v. United States [94-1 USTC ¶50,254], 20 F.3d 182, 183 (5th Cir. 1994).

2. To prove a claim for improper collection practices, "the taxpayer must demonstrate that the IRS did not follow the prescribed methods of acquiring assets." Id. at 184.

3. Plaintiffs have failed to identify any I.R.S. employee who intentionally or recklessly disregarded any statute or regulation in connection with the collection of taxes.

4. As Plaintiffs are asserting that the determination that they were not entitled to the 180-day redemption period was in error, subject matter jurisdiction exists under 28 U.S.C. §2410.

5. Section 2410 provides, in pertinent part: "[T]he United States may be named a party in any civil action or suit in any district court . . . (1) to quiet title to . . . real or personal property on which the United States has or claims a mortgage or other lien."

6. Section 2410, therefore, waives the sovereign immunity of the United States in cases such as this in which the taxpayer challenges procedural violations arising from assessment, levy, or seizure. Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 735 (10th Cir. 1992). See also Reece v. Scoggins [75-1 USTC ¶9202], 506 F.2d 967 (5th Cir. 1975); Freedom Mission Church v. Green Bay Packaging, Inc. [93-1 USTC ¶50,148], 816 F.Supp. 513 (E.D. Ar., W.D. 1993).

7. Accordingly, the Court possesses subject matter jurisdiction over Plaintiffs' claims, although Plaintiffs have failed to establish a cause of action under 26 U.S.C. §7433. As a result, the Motion to Dismiss filed by the United States is partially GRANTED only as to Plaintiffs' claims under §7433.

B. Right to Redemption. The Government argues that Plaintiffs' interest in the contract for deed is personal property rather than an interest in real property and that Plaintiffs do not have a right of redemption under 26 U.S.C. §6337.

1. Section 6337(b)(1) provides as follows:

The owners of any real property sold as provided in section 6335, their heirs, executors, or administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the property sold, or any particular tract of such property, at any time within 180 days after the sale thereof.

2. Those statutes "permitting the sale at public auction of a taxpayer's [property] to satisfy a tax deficiency must be strictly construed." Reece v. Scoggins [75-1 USTC ¶9202], 506 F.2d at 970-971.

3. The concept of a citizen's right, absent unusual circumstances, to the unobstructed control of his own land, free from arbitrary governmental interference, has long been a fundamental principle in our country's jurisprudence. As Mr. Chief Justice Marshall noted in 1821, that no individual or public officer can sell, and convey a good title to, the land of another, unless authorized so to do by express law, is one of those self-evident propositions to which the mind assents, without hesitation; and that the person invested with such a power must pursue with the precision the course prescribed by law, or his act is invalid, is a principle which has been repeatedly recognized in this court. Id. at 971.

4. The purpose behind the strict scrutiny of such statutes is based upon the fact that governmental seizure and sale of land "is one of the most potent weapons in the government's tax collection arsenal." Id.

The consequences of such seizure and sale are often staggering and irreversible; this action not only deprives a taxpayer of a sometimes significant capital investment but also denies him a source of additional income. Seizure and sale are therefore generally available only as a last resort. In recognition of the Damoclean nature of this ultimate weapon, Congress has imposed precise strictures on the seizure and sale of property to satisfy legitimate tax deficiencies. Id.

5. Conversely, "[c]ourts have traditionally looked with favor upon redemption and have given liberal construction to redemption statutes." DiFoggio v. United States [79-2 USTC ¶9448], 484 F.Supp. 233, 236 (N.D. Ill. 1979), citing Corbett v. Nutt, 10 Wall. 464, 77 U.S. 464, 19 L.Ed. 976 (1870); Bennett v. Hunter, 9 Wall. 326, 76 U.S. 326, 19 L.Ed. 672 (1869); United States v. Lowe [67-2 USTC ¶9650], 268 F.Supp. 190 (N.D. Ga. 1966), aff'd. sub nom., Lowe v. Monk [67-2 USTC ¶9654], 379 F.2d 555 (5th Cir. 1967), cert. denied, 389 U.S. 1039 (1968). This right of redemption has, from earliest times, been clearly recognized and jealously guarded by the courts. United States v. Lowe [67-2 USTC ¶9650], 268 F.Supp. at 192. "Leniency to the owner in the exercise of this right has always been the rule of thumb." Babb v. Frank [97-1 USTC ¶50,139], 947 F.Supp. 405 (W.D. Wis. 1996). "Courts give the benefit of the doubt to owners with respect to redemption rights because of the harsh consequences of losing one's property to the government." Id.

6. Generally, the determination of what qualifies as "property" under the tax code is based upon state law. See United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U.S. 522 (1960); Geiselman v. United States [92-1 USTC ¶50,200], 961 F.2d 1 (1st Cir.), cert. denied, 506 U.S. 891 (1992). However, courts have recognized an "interest" that would entitle an owner to a right to redeem even though that interest might not specifically qualify as an "interest" in real estate under state law. DiFoggio v. United States [79-2 USTC ¶9448], 484 F.Supp. 233 (N.D. Ill. 1979). See also Samet v. United States [65-2 USTC ¶9520], 242 F.Supp. 214 (M.D.N.C. 1965).

7. Analyzing the redemption statute in the light most favorable to Plaintiffs, it is clear that they possess a sufficient "interest" to entitle them to the right of redemption under §6337.

8. The interest owned by Plaintiffs is undistinguishable from the beneficial interest owned by the plaintiffs in DiFoggio. Plaintiffs have the right to the use and enjoyment of the Glen Rose property, the obligation to pay taxes, and the right to convey their interest in the property. Additionally, their interest in the property is recorded in the property deed records of Somerville County .

9. Even if state law were consulted, Texas cases identify Plaintiffs' interest as "an equitable right" in the property. Atkins v. Carson, 467 S.W.2d 495 (Tex.Civ.App.--San Antonio 1971, writ ref'd n.r.e.). The Government presents nothing to persuade the Court that this "equitable right" is insufficient to constitute an "interest" in real estate sufficient to invoke the redemption rights of §6337. In fact, the Government valued Plaintiffs' interest as the fair market value of the land, not the amount Plaintiffs had paid on their contract.

10. As a result of the foregoing, Plaintiffs are entitled to 180 days from entry of this Order within which to attempt to redeem their interest in the Glen Rose property by paying to the Campbells $23,000, plus 20% interest. This payment should be in the form of cash or money order. Should Plaintiffs fail to redeem their property, their interest shall pass to the Campbells .

11. The Court declines to exercise jurisdiction over Plaintiff's state-law claims against the Campbells . Those claims are dismissed from this action without prejudice.

12. Any conclusion of law which should more properly be considered a finding of fact is hereby deemed as such.

In light of the foregoing, it is ORDERED that any motions not previously ruled upon by the Court are DENIED.