United States v. Schiller ( 2023 )

22-1566-cv
United States v. Schiller
In the
United States Court of Appeals
For the Second Circuit
___________
August Term 2022
No. 22-1566-cv
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
WALTER SCHILLER AND DENISE SCHILLER,
Defendants-Appellants.
___________
ARGUED: JUNE 7, 2023
DECIDED: AUGUST 30, 2023
___________
Before: LIVINGSTON, Chief Judge, CHIN and KAHN, Circuit Judges.
________________
Defendants-Appellants appeal from the judgment of the United States
District Court for the Eastern District of New York (Vitaliano, J.) requiring them to
pay a tax assessment in the amount of $112,324.18, claiming that the enforcement
action was premature because the Internal Revenue Service referred the matter to
the Department of Justice before formally rejecting Defendant-Appellants’
proposed installment agreement, in violation of 26 U.S.C. § 6331 and the
corresponding Treasury Regulations. We reject this contention and, accordingly,
AFFIRM the judgment of the district court.
1
________________
LARRY KARS, Larry Kars P.C., New York, NY, for
Defendants-Appellants Walter Schiller and Denise
Schiller.
JULIE CIAMPORCERO AVETTA, Atty., Tax Division,
Dept. of Justice, Washington, D.C. (David A.
Hubbert, Deputy Asst. Atty. Gen., Joan I.
Oppenheimer, Atty., Tax Division, Dept. of Justice,
Washington, D.C., and Breon Peace, U.S. Atty.
E.D.N.Y, on the brief), for Plaintiff-Appellee United
States of America.
________________
MARIA ARAÚJO KAHN, Circuit Judge:
Defendants-Appellants, Walter and Denise Schiller, appeal from a judgment
of the United States District Court for the Eastern District of New York (Vitaliano,
J.) awarding the United States $112,324.18, plus statutory additions and interest,
in connection with an unpaid tax assessment from 2007. The district court granted
summary judgment in favor of the government, notwithstanding the fact that the
Internal Revenue Service (the “IRS”) referred the assessment to the Department of
Justice (the “DOJ”) before formally rejecting defendants’ proposed installment
agreement. Defendants contend that this referral violated the provisions of the
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Internal Revenue Code and the implementing Treasury Regulations that curb the
IRS’s collection activities while a proposed installment agreement remains on the
table. See 26 U.S.C. § 6331(i), (k); 26 C.F.R. § 301.6331-4(b)(2). For the reasons that
follow, we agree with the district court’s conclusion that the referral does not
invalidate and does not otherwise bar the government’s suit to collect the tax debt.
Accordingly, we affirm.
BACKGROUND
The relevant facts are undisputed. Defendants, a married couple, failed to
pay $91,945 in taxes as reported on their 2007 joint tax return. On November 3,
2008, the IRS jointly and severally assessed defendants $112,324.18 in taxes,
penalties, and interest. Defendants concede that these calculations are correct. As
noted by the district court, the debt remains unpaid and there is no record of
further activity on the assessment for nearly a decade.
On December 7, 2017, defendants proposed an installment agreement to the
IRS, see 26 U.S.C. § 6159, 1 offering to pay $361 per month toward their tax
1The Internal Revenue Code authorizes the Secretary of the Treasury to “enter into
written agreements with any taxpayer under which such taxpayer is allowed to make
payment on any tax in installment payments if the Secretary determines that such
agreement will facilitate full or partial collection of such liability.” 26 U.S.C. § 6159(a).
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liabilities. 2 An IRS agent visited defendants on August 7, 2018, to discuss the tax
debt. IRS internal records indicate that, by September 19, 2018, the IRS had
determined that the proposed installment agreement should be rejected.
On October 30, 2018, defendants received a letter from the IRS formally
rejecting their proposal on the grounds that they had “sufficient cash or equity in
assets to fully or partially pay the balance owed.” J. App’x 29. The letter explained
that “if [defendants] previously received a notice accepting [their] installment
agreement proposal, such acceptance was not authorized and any acceptance is
withdrawn” and that, to the extent accepted, the agreement was terminated. Id.Finally, the letter outlined the procedure defendants were to follow if they did not
agree with the decision to deny or terminate the installment agreement, which
included filing a request for an administrative appeal within 30 days.
Unbeknownst to defendants, by the time they received this letter, the IRS had
already referred the matter to the DOJ to initiate collection proceedings in court.
Defendants, who were not aware of the timing of the referral to the DOJ, did not
2 The record indicates that this proposal was, at least initially, marked as approved
by the IRS in its online system and that defendants had even made some payments
pursuant to it in 2018. The parties agree, however, that this designation was the result of
a clerical mistake.
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take any of the steps outlined in the letter or seek an appeal of the decision by the
November 29, 2018, deadline.
On November 30, 2018, following the expiration of the 30-day period for
administrative appeals from the IRS’s formal rejection or termination of the
installment agreement, the DOJ commenced this action seeking to reduce
defendants’ 2007 unpaid federal income taxes to a civil judgment. See 26 U.S.C.
§ 6331(k)(2)(B); 26 C.F.R. § 301.6331-4(a)(1). The parties filed cross motions for
summary judgment pursuant to Federal Rule of Civil Procedure 56(a). In their
motion, defendants argued that the IRS had violated both the applicable statutory
and regulatory provisions, see 26 U.S.C. § 6331 and 26 C.F.R. § 301.6331-4(b)(2), by
referring this case to the DOJ before formally rejecting their proposed installment
agreement. Although conceding that the referral was premature under the
applicable Treasury Regulation, the government contended that it was entitled to
judgment as a matter of law because it complied with the statutory requirement
by commencing this civil action 31 days after the formal rejection of defendants’
proposed installment agreement.
The district court granted the government’s motion for summary judgment
and denied defendants’ cross-motion on June 1, 2022. The court’s written opinion
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aptly described the narrow legal question before it as “whether the IRS’s
concededly premature referral serves to bar this suit and entitles defendants to
summary judgment, even though the Internal Revenue Code imposes no
restrictions on the IRS’s ability to refer cases to [the] DOJ while installment
agreements are pending or in effect.” United States v. Schiller, No. 18-CV-6840, Dkt.
No. 32 at 8 (E.D.N.Y. June 1, 2022). Noting the absence of case law on point, the
district court rejected defendants’ claim that the IRS’s referral violated the express
terms of 26 U.S.C. § 6331 because the plain text of that statute does not mention
referrals. Id. at 8–9. Rather, the district court held that the statute prohibits only
the commencement of proceedings in court during the pendency of an installment
agreement. Id. at 9–11.
With regard to the regulatory provision, although the district court
recognized that the IRS had facially violated 26 C.F.R. § 301.6331-4(b)(2), which
prohibits referrals so long as a taxpayer-proposed installment agreement remains
pending, it declined to read that regulation as “barring a collection action
exclusively because of a technical, non-prejudicial error on the part of the
government.” Id. As a result, the district court concluded that “[the fact that] the
IRS referred this case to [the] DOJ while defendants’ installment agreement
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request was pending does not, standing alone, bar this action.” Id. at 11.
Defendants now appeal to this court.
STANDARD OF REVIEW
“We review a district court’s grant of summary judgment de novo where . . .
the parties filed cross-motions for summary judgment and the district court
granted one motion but denied the other.” Roberts v. Genting N. Y. LLC, 68 F.4th
81, 88 (2d Cir. 2023) (quoting Atlas Air, Inc. v. Int’l Bhd. of Teamsters, 943 F.3d 568,
576–77 (2d Cir. 2019)); see also Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., 49 F.4th
105, 112 (2d Cir. 2022). Summary judgment is proper only if “there is no genuine
issue as to any material fact and . . . the moving party is entitled to a judgment as
a matter of law.” Atlas Air, Inc., 943 F.3d at 577; see also Capobianco v. City of New
York, 422 F.3d 47, 54–55 (2d Cir. 2005) (summary judgment is appropriate “only if
. . . on the record presented, considered in the light most favorable to [the non-
moving party], no reasonable [fact-finder] could find in [its] favor” (citing Shannon
v. N.Y.C. Transit Auth., 332 F.3d 95, 98–99, 103 (2d Cir. 2003))).
DISCUSSION
We begin by outlining the applicable statutory and regulatory framework.
The United States has “a number of distinct enforcement tools available . . . for the
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collection of delinquent taxes.” United States v. Rodgers, 461 U.S. 677, 682 (1983);
see 26 U.S.C. § 6321 (permitting liens); 26 U.S.C. § 6331(a) (providing for
administrative levies). 3 One such tool allows the government to bring a civil action
in order to collect an unpaid tax assessment via a court judgment. See 26 U.S.C.
§§ 6502(a), 7401, and 7402(a); Rodgers, 461 U.S. at 682 (noting that these statutory
provisions permit the government to “simply sue for the unpaid amount, and, on
getting a judgment, exercise the usual rights of a judgment creditor”). Civil actions
of this nature may not be commenced “unless the Secretary authorizes or sanctions
the proceedings and the Attorney General or his delegate directs that the action be
commenced.” 26 U.S.C. § 7401. 4 The Internal Revenue Code thus requires two
distinct acts by two distinct actors in order to commence a civil action for the
3 The Internal Revenue Code defines a federal tax lien as arising from unpaid taxes.
26 U.S.C. § 6321 (“If any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount . . . shall be a lien in favor of the United States upon all property
and rights to property, whether real or personal, belonging to such person.”). “A federal
tax lien . . . is not self-executing, and the IRS must take affirmative action to enforce
collection of the unpaid taxes.” EC Term of Years Tr. v. United States, 550 U.S. 429, 430–31
(2007) (internal quotation marks, alterations, and citation omitted).
A levy, on the other hand, is defined as a “legally sanctioned seizure and sale of
property.” Id. at 431 (internal quotation marks and citations omitted); see also 26 U.S.C.
§ 6331(b) (defining levy as including “the power of distraint and seizure by any means”).
Unlike a lien-foreclosure action, a levy typically “does not require any judicial
intervention, and it is up to the taxpayer, if he so chooses to go to court if he claims that
the assessed amount was not legally owing.” Rodgers, 461 U.S. at 682–83.
4 As used in the Internal Revenue Code, “Secretary” refers to “the Secretary of the
Treasury or his delegate.” 26 U.S.C. § 7701(11).
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collection or recovery of taxes: (1) the authorization or sanction by the Secretary of
the Treasury to bring a suit, and (2) the direction by the Attorney General to
commence the action.
The Internal Revenue Code also imposes restrictions on the government’s
use of enforcement tools during the pendency of an installment agreement. To
begin, the applicable statutory provisions prohibit the IRS from levying (i.e.,
seizing) “the property or rights to property of any person with respect to any
unpaid tax” during: (1) the period that an offer for an installment agreement under
26 U.S.C. § 6159 for payment of such unpaid tax is pending with the IRS; (2) the 30
days following either a rejection or termination of an installment agreement; (3)
the period that an installment agreement is in effect; and (4) if an appeal from the
rejection or termination of an installment agreement is filed, the period that such
an appeal is pending. 26 U.S.C. § 6331(k)(2). Treasury Regulations also make clear
that “[a] proposed installment agreement becomes pending when it is accepted for
processing . . . [and] remains pending until the IRS accepts the proposal, the IRS
notifies the taxpayer that the proposal has been rejected, or the proposal is
withdrawn by the taxpayer.” 26 C.F.R. § 301.6331-4(a)(2). Two other, interrelated
provisions of the Internal Revenue Code combine to bar the government from
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instituting collection proceedings in court when an installment agreement is in the
picture. See id. § 6331(i)(4)(A), (k)(3)(A). 5 The parties agree that the combined
effect of these interrelated provisions is that “[n]o proceeding in court for the
collection of any unpaid tax . . . shall be begun by the Secretary,” id. § 6331(i)(4)(A),
while a proposed installment agreement remains pending, id. § 6331(k)(2)–(3).
Regulations promulgated by the Treasury Department go a step further,
combining the statutory requirements outlined above to delay even referrals so long
as a taxpayer’s offer for installment payments remains on the table. Specifically,
the regulation states, in relevant part, that “the IRS will not refer a case to the [DOJ]
for the commencement of a proceeding in court, against a person named in an
installment agreement or proposed installment agreement, if levy to collect the
liability is prohibited . . . .” Id. § 301.6331-4(b)(2) (emphasis added); see also 26
U.S.C. § 6331(k)(2)(A) (prohibiting levy while taxpayer offer of installment
5 The first provision, § 6331(i)(4)(A), provides that “[n]o proceeding in court for the
collection of any unpaid tax to which paragraph (1) applies”—referring to collection
actions concerning unpaid divisible taxes (not implicated here)—“shall be begun by the
Secretary during the pendency of a proceeding under such paragraph.” 26 U.S.C.
§ 6331(i)(4)(A). The other relevant provision, § 6331(k)(3)(A), specifically cross-references
and incorporates § 6331(i)(4)(A)’s prohibition on collection proceedings. See id.
§ 6331(k)(3)(A) (providing that “[r]ules similar to the rules of . . . [§ 6331(i)(4)] . . . shall
apply for purposes of this subsection”). As § 6331(k) pertains, in relevant part, to
installment agreements, this cross-reference operates to suspend the government’s power
to begin a collection proceeding while a proposed installment agreement is pending.
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payments remains pending). Although the precise date of the referral to the DOJ
in this case is unknown, the government concedes that the referral was made prior
to the formal rejection of defendants’ proposed installment agreement and, thus,
during a period that levy was prohibited.
The parties agree that defendants’ installment agreement was pending from
December 7, 2017, when it was processed by the IRS, until October 30, 2018, when
they received notice that their proposal was rejected. Under 26 U.S.C.
§ 6331(k)(2)(A), levy was prohibited during this 327-day period. If defendants had
appealed the IRS’s rejection of their proposed installment agreement within 30
days, the levy prohibition period would have extended during the appeal. See 26
U.S.C. § 6331(k)(2)(B). Defendants did not appeal, and the government
commenced this action on November 30, 2018, the day after the 30-day period to
appeal had expired.
The parties’ dispute presents a question of first impression for this court and
centers on the impact of the IRS’s referral to the DOJ prior to the formal rejection
of defendants’ proposed installment agreement. Defendants contend that the IRS
violated the applicable statutory provision, see 26 U.S.C. § 6331(k), and Treasury
Regulation, see 26 C.F.R. § 301.6331-4(b)(2), when it referred their unpaid
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assessment to the DOJ for the commencement of a civil action before formally
rejecting their proposed installment agreement. They argue that the referral is
therefore unlawful and that, as a result, the Attorney General lacked authority to
commence this action. Notwithstanding the premature referral under the
regulations, the government contends that this enforcement action is valid because
it was commenced 31 days after the rejection of the installment agreement.
We begin with defendants’ contention that referral of their unpaid
assessment to the DOJ prior to the formal rejection of their proposed installment
agreement violates the Internal Revenue Code, specifically 26 U.S.C. § 6331. As
stated previously, the statute at issue provides that “[n]o proceeding in court for
the collection of any unpaid tax . . . shall be begun by the Secretary” while a
taxpayer-proposed installment agreement remains pending. See 26 U.S.C.
§ 6331(i)(4)(A), (k)(2)–(3). Defendants argue that, because § 6331(i)(4)(A) refers to
a discrete act by the Secretary, the “proceeding” contemplated by the statute
begins immediately upon the Secretary’s referral of the assessment to the DOJ. We
disagree.
In no way can an IRS referral—that is, a request that the DOJ begin
litigation—be considered tantamount to beginning a collection proceeding in
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court. Indeed, the language of the very regulation on which defendants rely
recognizes the distinction between referring and beginning a case, as it states that
“the IRS will not refer a case to the [DOJ] for the commencement of a proceeding in
court against a person named in an installment agreement or proposed installment
agreement, if levy to collect the liability is prohibited by paragraph (a)(1) of this
section.” 26 C.F.R. § 301.6331-4(b)(2) (emphases added). As their plain terms
indicate, the suspension provisions of § 6331(i) and (k) prohibit the
commencement of a collection action in court during specified periods, not the
IRS’s antecedent request that the DOJ file such an action. In short, the Internal
Revenue Code is silent on when the IRS may refer an action to the DOJ, and a
Treasury Regulation that limits the IRS’s referral power cannot read into the
statute something that is not there. See Koshland v. Helvering, 298 U.S. 441, 447
(1936) (“[W]here . . . the provisions of [an] act are unambiguous, and its directions
specific, there is no power to amend it by regulation.”).
This conclusion is not altered because authorization from the Treasury
Secretary is a prerequisite to commencing an in-court proceeding. See 26 U.S.C. §
7401. An additional step beyond referral is required to begin a collection
proceeding in court, that is, the Attorney General (or his delegate) must direct the
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commencement of an action in the district court. Id. Adopting defendants’
construction of the pertinent statutory language would conflate the Attorney
General’s independent discretion to direct the commencement of in-court
proceedings with the Treasury Secretary’s separate power to refer a tax assessment
for a collection action. In other words, if we were to understand the in-court
proceeding referenced in § 6331 as initiated solely by the Secretary’s referral to the
DOJ, we would effectively excise the second step of the two-step process outlined
in § 7401.
The fact that other provisions of the same statutory subsection use the term
“proceeding” in conjunction with language such as “commence” and “final order
or judgment” provides further support for our conclusion that the statute
contemplates formal litigation when referring to a proceeding. See, e.g., 26 U.S.C.
§ 6331(i)(6) (“For purposes of [subsection (i)], a proceeding is pending beginning
on the date such proceeding commences and ending on the date that a final order
or judgment from which an appeal may be taken is entered in such proceeding.”).
The decision to repeat the term “proceeding” in § 6331(i)(4)(A) suggests that an
equivalent meaning was intended. See Prus v. Holder, 660 F.3d 144, 147 (2d Cir.
2011) (“It is the normal rule of statutory construction that identical words used in
14
different parts of the same act are intended to have the same meaning.” (internal
quotation marks omitted)). This reading of what constitutes beginning a
proceeding in court also has the virtue of being consistent with Rule 3 of the
Federal Rules of Civil Procedure, which provides that “[a] civil action is
commenced by filing a complaint with the court.” Fed. R. Civ. P. 3. Because that
complaint was filed 31 days after the formal rejection of defendants’ proposed
installment agreement, the district court was correct to conclude that § 6331 had
not been violated. 6
6 The two out-of-circuit, unreported district court cases defendants rely upon do
not suggest a contrary conclusion, as neither concerns IRS referrals of collection actions.
First, State Auto Casualty Ins. Co. v. Burnett, 16-CV-73 (DMB), 2017 WL 4355826 (N.D. Miss.
Sept. 29, 2017), was an interpleader action filed by an insurance company seeking to
distribute insurance proceeds among competing claimants under a commercial building
insurance policy. Because the case involved an IRS action to enforce a tax lien pursuant
to 26 U.S.C § 6321, rather than a levy under 26 U.S.C § 6331 or a civil action brought under
26 U.S.C. § 6502, id. at *9–10, it lends no support to defendants’ primary contention that
an untimely IRS referral bars the DOJ from initiating a collection action clear of an
installment agreement.
Defendants’ other cited authority, United States v. Margolis, 07-CV-4313 (SRC), 2008
WL 4823599 (D.N.J. Nov. 5, 2008), primarily addresses a question not pertinent here:
whether the government can lawfully file a collection action notwithstanding a live
dispute as to whether the IRS wrongfully terminated an effective installment agreement.
Margolis does not speak to the effect a premature IRS referral has on a subsequently filed
collection action. And, to the extent the opinion contains language discussing the timing
of referrals, this discussion was based on 26 C.F.R. § 301.6331-4(b)(2), rather than the text
of the 26 U.S.C. § 6331 itself. See id. at *4.
15
We turn next to defendants’ claim that the IRS’s violation of the applicable
Treasury Regulation should result in the invalidation of the referral and bar this
collection action. As noted previously, the relevant regulation prohibits the IRS
from referring a case to the DOJ so long as levy is prohibited. See 26 C.F.R.
§ 301.6331-4(b)(2). The government acknowledges that defendants’ offer of
installment payments remained pending and that, as a result, levy was prohibited
at the time of the Secretary’s referral in this case. See 26 U.S.C. § 6331(k)(2)(A)
accord 26 C.F.R. § 301.6331-4(a)(1). The government, in effect, concedes that it
violated its regulations when it referred the matter prior to the formal rejection of
the proposed installment agreement. This concession does not, however, end the
inquiry.
Although an agency’s failure to follow its own regulations or procedures
can require its action to be invalidated, see United States ex. rel. Accardi v.
Shaughnessy, 347 U.S. 260, 267 (1954), our precedent requires a showing of
prejudice to the rights protected where the subject regulation “does not affect
fundamental rights derived from the Constitution or a federal statute,” Waldron v.
I.N.S., 17 F.3d 511, 518 (2d Cir. 1993). 7 In this case, defendants have not claimed a
7 Where fundamental rights derived from the Constitution or federal statutes are
implicated, by contrast, a showing of prejudice is generally not required. See Montilla v.
16
violation of their constitutional rights and, for the reasons stated previously, the
regulatory limits on IRS referrals of collection actions are not statutorily derived.
As a result, defendants must demonstrate prejudice for the government’s
regulatory violation to invalidate the instant collection action. See, e.g., United
States v. Caceres, 440 U.S. 741, 753 (1979); Am. Farm Lines v. Black Ball Freight Serv.,
397 U.S. 532, 539 (1970). Defendants have failed to do so.
Defendants have neither advanced any particular theory of prejudice nor
established that they suffered any harm from the IRS’s premature referral of this
collection action. They do not cite any evidence suggesting that the premature
referral improperly curtailed the agency’s consideration of their proposed
installment agreement, which had been pending before the IRS for nearly a year
by the time it was formally rejected. In fact, defendants do not assert they were
even aware of the referral at the time they learned the IRS had rejected their
proposed installment agreement. To the contrary, the record reflects that the IRS
subjected their proposed installment agreement to multiple levels of internal
review, furnished notice of the rejection, provided an explanation for why the
I.N.S., 926 F.2d 162, 169 (2d Cir. 1991); see also United States v. Caceres, 440 U.S. 741, 749
(1979) (“A court’s duty to enforce an agency regulation is most evident when compliance
with the regulation is mandated by the Constitution or federal law.”).
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proposal was rejected, and afforded defendants an opportunity to appeal, which
they declined to pursue. See Schiller, No. 18-CV-6840, Dkt. No. 22, Ex. 2, 3.
On the basis of the record before us, we agree with the district court’s
assessment that the government’s breach of 26 C.F.R. § 301.6331-4(b)(2) in this
particular case constituted nothing more than “a technical, non-prejudicial error
on the part of the government.” Schiller, No. 18-CV-6840, Dkt. No. 32 at 9. As a
result, defendants’ claim that the premature referral in violation of the agency’s
regulation bars this collection action fails.
CONCLUSION
For the reasons set forth above, we AFFIRM the judgment of the district
court.
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