IRC §7426(a) ACTIONS PERMITTED

7426(a)(1) WRONGFUL LEVY. --If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

 

7426(a)(2) SURPLUS PROCEEDS. --If property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property junior to that of the United States and to be legally entitled to the surplus proceeds of such sale may bring a civil action against the United States in a district court of the United States.

 

7426(a)(3) SUBSTITUTED SALE PROCEEDS. --If property has been sold pursuant to an agreement described in section 6325(b)(3) (relating to substitution of proceeds of sale), any person who claims to be legally entitled to all or any part of the amount held as a fund pursuant to such agreement may bring a civil action against the United States in a district court of the United States.

 

7426(a)(4) SUBSTITUTION OF VALUE. --If a certificate of discharge is issued to any person under section 6325(b)(4) with respect to any property, such person may, within 120 days after the day on which such certificate is issued, bring a civil action against the United States in a district court of the United States for a determination of whether the value of the interest of the United States (if any) in such property is less than the value determined by the Secretary. No other action may be brought by such person for such a determination.

 

7426(b) ADJUDICATION. --The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

 

7426(b)(1) INJUNCTION. --If a levy or sale would irreparably injure rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale.

 

7426(b)(2) RECOVERY OF PROPERTY. --If the court determines that such property has been wrongfully levied upon, the court may --

 

7426(b)(2)(A) order the return of specific property if the United States is in possession of such property;

 

7426(b)(2)(B) grant a judgment for the amount of money levied upon; or

 

7426(b)(2)(C) if such property was sold, grant a judgment for an amount not exceeding the greater of --

 

7426(b)(2)(C)(i) the amount received by the United States from the sale of such property, or

 

7426(b)(2)(C)(ii) the fair market value of such property immediately before the levy.

 

For the purposes of subparagraph (C), if the property was declared purchased by the United States at a sale pursuant to section 6335(e) (relating to manner and conditions of sale), the United States shall be treated as having received an amount equal to the minimum price determined pursuant to such section or (if larger) the amount received by the United States from the resale of such property.

 

7426(b)(3) SURPLUS PROCEEDS. --If the court determines that the interest or lien of any party to an action under this section was transferred to the proceeds of a sale of such property, the court may grant a judgment in an amount equal to all or any part of the amount of the surplus proceeds of such sale.

 

7426(b)(4) SUBSTITUTED SALE PROCEEDS. --If the court determines that a party has an interest in or lien on the amount held as a fund pursuant to an agreement described in section 6325(b)(3) (relating to substitution of proceeds of sale), the court may grant a judgment in an amount equal to all or any part of the amount of such fund.

 

7426(b)(5) SUBSTITUTION OF VALUE. --If the court determines that the Secretary's determination of the value of the interest of the United States in the property for purposes of section 6325(b)(4) exceeds the actual value of such interest, the court shall grant a judgment ordering a refund of the amount deposited, and a release of the bond, to the extent that the aggregate of the amounts thereof exceeds such value determined by the court.

 

7426(c) VALIDITY OF ASSESSMENT. --For purposes of an adjudication under this section, the assessment of tax upon which the interest or lien of the United States is based shall be conclusively presumed to be valid.

 

7426(d) LIMITATION OF RIGHTS OF ACTION. --No action may be maintained against any officer or employee of the United States (or former officer or employee) or his personal representative with respect to any acts for which an action could be maintained under this section.

 

7426(e) SUBSTITUTION OF UNITED STATES AS PARTY. --If an action, which could be brought against the United States under this section, is improperly brought against any officer or employee of the United States (or former officer or employee) or his personal representative, the court shall order, upon such terms as are just, that the pleadings be amended to substitute the United States as a party for such officer or employee as of the time such action was commenced upon proper service of process on the United States.

 

7426(f) PROVISION INAPPLICABLE. --The provisions of section 7422(a) (relating to prohibition of suit prior to filing claim for refund) shall not apply to actions under this section.

 

7426(g) INTEREST. --Interest shall be allowed at the overpayment rate established under section 6621 --

 

7426(g)(1) in the case of a judgment pursuant to subsection (b)(2)(B), from the date the Secretary receives the money wrongfully levied upon to the date of payment of such judgment;

 

7426(g)(2) in the case of a judgment pursuant to subsection (b)(2)(C), from the date of the sale of the property wrongfully levied upon to the date of payment of such judgment; and

 

7426(g)(3) in the case of a judgment pursuant to subsection (b)(5) which orders a refund of any amount, from the date the Secretary received such amount to the date of payment of such judgment.

 

7426(h) RECOVERY OF DAMAGES PERMITTED IN CERTAIN CASES. --

 

7426(h)(1) IN GENERAL. --Notwithstanding subsection (b), if, in any action brought under this section, there is a finding that any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregarded any provision of this title the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000 in the case of negligence) or the sum of --

 

7426(h)(1)(A) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent disregard of any provision of this title by the officer or employee (reduced by any amount of such damages awarded under subsection (b)); and

 

7426(h)(1)(B) the costs of the action.

 

7426(h)(2) REQUIREMENT THAT ADMINISTRATIVE REMEDIES BE EXHAUSTED; MITIGATION; PERIOD. --The rules of section 7433(d) shall apply for purposes of this subsection.

 

7426(h)(3) PAYMENT AUTHORITY. --Claims pursuant to this section shall be payable out of funds appropriated under section 1304 of title 31, United States Code.

 

7426(i) CROSS REFERENCE. --

 

For period of limitation, see section 6532(c).

.01 Added by P.L. 89-719. Amended by P.L. 105-206, P.L. 99-514, P.L. 97-248, P.L. 94-455 (Deadwood Act) and P.L. 93-625. For details, see the Code Volumes.

§301.7426-1., Civil actions by persons other than taxpayers

(a) Actions permitted

 

(1) Wrongful levy

 

(i) In general. --If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) may bring a civil action against the United States in a district court of the United States based upon such person's claim --

 

(A) That such person has an interest in, or lien on, such property which is senior to the interest of the United States ; and

 

(B) That such property was wrongfully levied upon.

 

(ii) Debt owed by another Federal agency. --Section 7426 and this paragraph (a) apply when a levy is made by the Internal Revenue Service on a debt owed to a taxpayer by another Federal agency. By contrast, section 7426 and this paragraph (a) do not apply if the Internal Revenue Service requests payment from another Federal agency pursuant to a request for setoff.

 

(2) Surplus proceeds. --If property has been sold pursuant to levy, any person (other than the person against whom is assessed the tax out of which such levy arose) may bring a civil action against the United States in a district court of the United States based upon such person's claim that he --

 

(i) Has an interest in or lien on such property junior to that of the United States ; and

 

(ii) Is entitled to the surplus proceeds of such sale.

 

(3) Substituted sale proceeds. --Any person who claims to be legally entitled to all or any part of the amount which is held as a fund from the sale of property pursuant to an agreement described in section 6325(b)(3) may bring a civil action against the United States in a district court of the United States to obtain the relief provided by section 7426(b)(4). It is not necessary that the claimant be a party to the agreement which provides for the substitution of the sale proceeds for the property subject to the lien.

 

(b) Adjudication

 

(1) Wrongful levy. --If the court determines that property has been wrongfully levied upon, the court may --

 

(i) Grant an injunction to prohibit the enforcement of such levy or to prohibit a sale of such property if such sale would irreparably injure rights in the property which are superior to the rights of the United States in such property; or

 

(ii) Order the return of specific property if the United States is in possession of such property; or

 

(iii) Grant a judgment for the amount of money levied upon; or

 

(iv) Grant a judgment for an amount not exceeding the amount received by the United States from the sale of such property (which, in the case of property declared purchased by the United States at a sale, shall be the greater of the minimum amount determined pursuant to section 6335(e) or the amount received by the United States from the resale of such property). For purposes of this paragraph, a levy is wrongful against a person (other than the taxpayer against whom the assessment giving rise to the levy is made) if (a) the levy is upon property exempt from levy under section 6334, or (b ) the levy is upon property in which the taxpayer had no interest at the time the lien arose or thereafter, or (c) the levy is upon property with respect to which such person is a purchaser against whom the lien is invalid under section 6323 or 6324(a)(2) or (b), or (d ) the levy or sale pursuant to levy will or does effectively destroy or otherwise irreparably injure such person's interest in the property which is senior to the Federal tax lien. A levy may be wrongful against a holder of a senior lien upon the taxpayer's property under certain circumstances although legal rights to enforce his interest survive the levy procedure. For example, the levy may be wrongful against such a person if the property is an obligation which is collected pursuant to the levy rather than sold and nothing thereafter remains for the senior lienholder, or the property levied upon is of such a nature that when it is sold at a public sale the property subject to the senior lien is not available for the senior lienholder as a realistic source for the enforcement of his interest. Some of the factors which should be taken into account in determining whether property remains or will remain a realistic source from which the senior lienholder may realize collection are: (1) the nature of the property, (2 ) the number of purchasers, (3) the value of each unit sold or to be sold, (4 ) whether, as a direct result of the distraint sale, the costs of realizing collection from the security have been or will be so substantially increased as to render the security substantially valueless as a source of collection, and (5) whether the property subject to the distraint sale constitutes substantially all of the property available as security for the payment of the indebtedness to the senior lienholder.

 

(2) Example. --The provisions of subparagraph (1) of this paragraph may be illustrated by the following example:

 

Example. On April 10, 1972, A makes a $10,000 loan to B which is partially secured by a $5,000 obligation owed to B by C. Under local law, A's security interest in the obligation owed to B by C is protected against a subsequent judgment lien arising out of an unsecured obligation. Thus, under section 6323(h)(1), A's security interest exists as of April 10, 1972, for purposes of determining priorities against a tax lien under section 6323. On April 17, 1972, an assessment of $6,000 is made against B with respect to his delinquent Federal tax liability. Thereafter, notice of lien is filed pursuant to section 6323(f) with respect to B's delinquent tax liability. On July 10, 1972, a notice of levy is served upon C to reach the amount owed by him to B. C pays over the $5,000 obligation in satisfaction of the levy and, under local law, the obligation is discharged as to A. Because the levy effectively destroyed A's senior security interest in the obligation owed to B by C, the levy is wrongful as to A for purposes of section 7426. Under these circumstances, the levy is wrongful with respect to A even if, under local law, A may have a cause of action in contract against B for the $10,000 loan or may have a cause of action in tort against C for the amount of the $5,000 payment which defeated A's security interest in the obligation owed by C to B.

 

(3) Surplus proceeds. --If the court determines that the interest or lien of any party to an action under section 7426 was transferred to the proceeds of a sale of the property, the court may grant a judgment in an amount equal to all or any part of the amount of the surplus proceeds of such sale. The term "surplus proceeds" means those proceeds realized on a sale of property remaining after application of the provisions of section 6342(a).

 

(4) Substituted sale proceeds. --If the court determines that a party has an interest in or lien on the amount held as a fund pursuant to an agreement described in section 6325(b)(3), the court may grant a judgment in an amount equal to all or any part of the amount of such fund.

 

(c) Effective date. --Paragraph (a)(1) of this section is effective as of December 23, 1993. [Reg. §301.7426-1.]

.01 Historical Comment: Proposed 8/28/71. Adopted 3/14/74 by T.D. 7305. Amended 5/20/94 by T.D. 8541. [Reg. §301.7426-1 does not reflect P.L. 97-248 (1982) and P.L. 105-206 (1998).

§301.7426-2,. Recovery of damages in certain cases

(a) In general. --In addition to remedies related to wrongful levy set forth in §301.7426-1(b), if a district court of the United States finds in any action brought under section 7426 that any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregarded any provision of this title, the United States shall be liable to the plaintiff for damages. The plaintiff has a duty to mitigate damages. The total amount of damages recoverable under this section is the lesser of $1,000,000 ($100,000 in the case of negligence), or the sum of --

 

(1) Actual, direct economic damages as defined in §301.7433-1(b) sustained as a proximate result of the reckless, intentional, or negligent actions of the officer or employee, reduced by the amount of any damages awarded under §301.7426-1(b); and

 

(2) Costs of the action as defined in §301.7433-1(c).

 

(b) Administrative remedies must be exhausted. --The court may not award a judgment for damages under paragraph (a) of this section unless the court determines that the plaintiff has filed an administrative claim pursuant to paragraph (d) of this section, and has satisfied the requirements of paragraph (c) of this section.

 

(c) No request for damages in a district court of the United States prior to filing an administrative claim

 

(1) Except as provided in paragraph (c)(2) of this section, no request for damages under paragraph (a) of this section shall be maintained in any district court of the United States before the earlier of the following dates --

 

(i) The date the decision is rendered on a claim filed in accordance with paragraph (d) of this section; or

 

(ii) The date that is six months after the date an administrative claim is filed in accordance with paragraph (d) of this section.

 

(2) If an administrative claim is filed in accordance with paragraph (d) of this section during the last six months of the period of limitations described in paragraph (f) of this section, the claimant may file an action in a district court of the United States any time after the administrative claim is filed and before the expiration of the period of limitations.

 

(d) Procedures for an administrative claim

 

(1) Manner. --An administrative claim for the lesser of $1,000,000 ($100,000 in the case of negligence) or actual, direct economic damages as defined in §301.7433-1(b) shall be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer currently resides.

 

(2) Form. --The administrative claim shall include --

 

(i) The name, taxpayer identification number, current address and current home and work telephone numbers (indicating any convenient times to be contacted) of the person making the claim;

 

(ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service);

 

(iii) A description of the damages incurred by the claimant filing the claim (include copies of any available substantiating documentation or evidence);

 

(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and

 

(v) The signature of the claimant or duly authorized representative.

 

(3) Duly authorized representative. --For purposes of this paragraph (d), a duly authorized representative is any attorney, certified public accountant, enrolled actuary, or any other person permitted to represent the claimant before the Internal Revenue Service who is not disbarred or suspended from practice before the Internal Revenue Service and who has a written power of attorney executed to the claimant.

 

(e) No liability for damages for any sum in excess of the dollar amount sought in the administrative claim. --See §301.7433-1(f).

 

(f) Period of limitations

 

(1) Time for filing. --A civil action under paragraph (a) of this section must be brought in a district court of the United States within two years after the date the cause of action accrues.

 

(2) Right of action accrues. --A cause of action under paragraph (a) of this section accrues when the plaintiff has had a reasonable opportunity to discover all essential elements of a possible cause of action.

 

(g) Recovery of costs under section 7430. --See §301.7433-1(h).

 

(h) Effective date. --This section is applicable March 25, 2003. [Reg. §301.7426-2.]

.01 Historical Comment: Proposed 3/5/2002. Adopted 3/24/2003 by T.D. 9050.