Cheung Inc v. United States ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
STEVEN N.S. CHEUNG, INC.,  No. 07-35161
Plaintiff-Appellee,
v.  D.C. No.
CV-04-02050-RSM
UNITED STATES OF AMERICA,
OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the Western District of Washington
Ricardo S. Martinez, District Judge, Presiding
Argued and Submitted
July 10, 2008—Seattle, Washington
Filed September 23, 2008
Before: Richard R. Clifton and N. Randy Smith,
Circuit Judges, and Brian E. Sandoval,* District Judge.
Opinion by Judge Sandoval
*The Honorable Brian E. Sandoval, United States District Judge for the
District of Nevada, sitting by designation.
13457
CHEUNG v. UNITED STATES 13459
COUNSEL
Eileen J. O’Connor, Assistant Attorney General, Teresa E.
McLaughlin, Department of Justice, Kenneth W. Rosenberg,
Department of Justice, for the defendant-appellant.
13460 CHEUNG v. UNITED STATES
David J. Lenci and Michael K. Ryan of Kirkpatrick & Lock-
hart Preston Gates Ellis LLP of Seattle, Washington, for the
plaintiff-appellee.
OPINION
SANDOVAL, District Judge:
This appeal requires the interpretation of the statutory pro-
visions providing for the recovery of interest on a wrongful
levy judgment. Steven N.S. Cheung, Inc. (the “Company”)
filed an action against the government pursuant to 26 U.S.C.
§ 7426(a)(1)1 alleging that its property had been wrongfully
levied. The district court entered judgment in the Company’s
favor and ordered that the government pay the Company
$1,434,573.76, plus interest. Pursuant to § 7426(g), the dis-
trict court awarded interest at the overpayment rate estab-
lished by § 6621, except that it did not give effect to the flush
language of § 6621(a)(1). The flush language of § 6621(a)(1)
provides for a one and a half point reduction in the overpay-
ment rate “[t]o the extent that an overpayment of tax by a cor-
poration . . . exceeds $10,000.” The government appeals the
district court’s award of interest, arguing that the district court
erred in failing to reduce the overpayment rate to the extent
the wrongful levy judgment exceeded $10,000. We reverse
and hold that the flush language of § 6621(a)(1) applies to
wrongful levy judgments and therefore the district court
should have given effect to the rate reduction described
therein.
I. FACTUAL AND PROCEDURAL BACKGROUND
Dr. Steven Cheung, an economics professor and consultant,
formed the Company on July 5, 1977, as a Washington State
1
Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (26 U.S.C.).
CHEUNG v. UNITED STATES 13461
corporation. Originally, the Company issued 100 shares of
stock, all of which were owned by Cheung. On July 1, 1994,
Cheung transferred 49 of his shares to Linda Su, Ronald
Cheung, and Cecile Cheung as joint tenants with the right of
survivorship. On August 1, 1995, Cheung transferred another
49 shares to the same parties.
On February 5, 2003, pursuant to § 6861(a),2 the Internal
Revenue Service (“IRS”) issued a jeopardy assessment
against Cheung for income tax liability for the year 1993. The
assessment identified Cheung’s tax liability as $396,861, plus
a penalty in the amount of $293,327 and statutory interest in
the amount of $776,730, totaling $1,466,918. The same day,
the IRS, believing the Company was a nominee of Cheung,
issued and served a notice of jeopardy levy on the Company
pursuant to § 6331(a).3 Pursuant to the levy, the IRS collected
$353,575.93 from a corporate checking account. On February
27, 2003, a second notice of jeopardy levy was served on the
2
Section 6861(a) provides:
If the Secretary believes that the assessment or collection of a
deficiency, as defined in section 6211, will be jeopardized by
delay, he shall, notwithstanding the provisions of section 6213(a),
immediately assess such deficiency (together with all interest,
additional amounts, and additions to the tax provided by law),
and notice and demand shall be made by the Secretary for the
payment thereof.
3
Section 6331(a) provides:
If any person liable to pay any tax neglects or refuses to pay the
same within 10 days after notice and demand, it shall be lawful
for the Secretary to collect such tax (and such further sum as shall
be sufficient to cover the expenses of the levy) by 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 provided in this chapter for the payment of such tax . . . .
If the Secretary makes a finding that the collection of such tax is
in jeopardy, notice and demand for immediate payment of such
tax may be made by the Secretary and, upon failure or refusal to
pay such tax, collection thereof by levy shall be lawful without
regard to the 10-day period provided in this section.
13462 CHEUNG v. UNITED STATES
company, under which the IRS collected $708,985 from a
corporate investment account. On May 8, 2003, the Company,
in lieu of a forced liquidation of its real property assets, issued
a check in the amount of $372,012.83, satisfying Cheung’s
remaining tax liability. In total, the IRS’s levy efforts resulted
in the collection of $1,434,573.76 from the Company.
On October 31, 2003, the Company filed an administrative
claim for the return of funds improperly levied pursuant to
§ 6343(b).4 The claim was denied. Thereafter, on September
29, 2004, the Company filed a complaint for recovery of
wrongful levy pursuant to § 7426(a)(1).5 A bench trial then
commenced. At the conclusion of the government’s case, the
Company moved for a judgment on partial findings pursuant
to Federal Rule of Civil Procedure 52(c). The court granted
the motion, finding that the Company’s property had been
wrongfully levied. The court then entered judgment in favor
of the Company and ordered that the government pay the
Company $1,434,573.76, “plus interest as provided by law.”
4
Section 6343(b) states in pertinent part:
If the Secretary determines that property has been wrongfully
levied upon, it shall be lawful for the Secretary to return—
(1) the specific property levied upon,
(2) an amount of money equal to the amount of money levied
upon, or
(3) an amount of money equal to the amount of money
received by the United States from the sale of such property.
5
Section 7426(a)(1) states:
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 prop-
erty 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.
CHEUNG v. UNITED STATES 13463
A hearing was set to determine the appropriate amount of
interest owed to the Company.
Section 7426(g) provides for the recovery of interest on a
judgment of wrongful levy “at the overpayment rate estab-
lished under section 6621.” In the case of a corporation,
§ 6621(a)(1) provides that the overpayment rate is the sum of
the “Federal short-term rate . . . plus . . . 2 percentage points.”
(Internal parenthesis omitted). The flush language of
§ 6621(a)(1) provides, however, for a one and a half point
reduction in the overpayment rate “[t]o the extent that an
overpayment of tax by a corporation for any taxable period
. . . exceeds $10,000.”
At the hearing, the parties disputed the applicability of the
rate reduction described in the flush language. The Company
argued that the plain meaning of the statute did not support a
reduction in the overpayment rate because a wrongful levy is
not an “overpayment of tax” as the term is understood under
the Internal Revenue Code (the “Code”). The government dis-
agreed, arguing that by applying the overpayment rate from
§ 6621 to interest recoverable on a wrongful levy judgment,
Congress treated a wrongful levy as overpayment of tax for
purposes of calculating the overpayment rate.
On January 5, 2007, the district court ruled in favor of the
Company, holding that a wrongful levy is not an overpayment
of tax within the meaning of § 6621(a)(1) and therefore that
the overpayment rate on a wrongful levy judgment is calcu-
lated without reference to § 6621(a)(1)’s flush language. The
court then awarded the Company $314,278.80 in interest
through October 24, 2006, the date of entry of judgment. The
court further ordered that the government pay additional inter-
est at a per diem rate of $383.31 from October 24, 2006
onward, subject to change based upon the Federal short-term
rate. On January 17, 2007, the district court awarded the
Company attorney’s fees and costs pursuant to § 7430,6 but it
6
Section 7430 provides for the recovery by the “prevailing party” of
“reasonable litigation costs,” including attorney’s fees, “[i]n any . . . court
13464 CHEUNG v. UNITED STATES
denied the Company’s request for statutory damages made
available by § 7426(h).7 Following entry of final judgment,
the government timely appealed the district court’s interpreta-
tion of § 6621(a)(1).8
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over final judgments of the district
courts pursuant to 28 U.S.C. § 1291. We review issues of stat-
utory construction de novo. DIRECTV, Inc. v. Hoa Huynh,
503 F.3d 847, 852 (9th Cir. 2007) (citing SEC v. Gemstar TV
Guide Int’l, Inc., 367 F.3d 1087, 1091 (9th Cir. 2004)).
III. ANALYSIS
[1] Whether the flush language of § 6621(a)(1) applies in
the case of a wrongful levy judgment is a question of first
impression. Because resolution of the issue turns on the inter-
pretation of the statute, we begin with the language of the stat-
ute itself. Ordlock v. C.I.R., 533 F.3d 1136, 1140 (9th Cir.
2008) (“The ‘starting point in every case involving the con-
struction of a statute is the language itself.’ ”) (quoting Grey-
hound Corp. v. Mt. Hood Stages, Inc., 437 U.S. 322, 330
(1978)). “ ‘In ascertaining the plain meaning of a statute, the
proceeding which is brought by or against the United States in a connec-
tion with the determination, collection, or refund of any tax, interest, or
penalty under [the Internal Revenue Code].”
7
Section 7426(h) provides for statutory damages in an action brought
pursuant to § 7426 “if . . . 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 [the Internal Revenue Code].”
8
The government does not appeal the district court’s factual findings
and conclusions of law as to whether the Company’s property was wrong-
fully levied. Nor does it appeal the district court’s award of attorney’s fees
and costs. For its part, the Company seeks its attorney’s fees and costs
associated with the instant appeal if it prevails. Because we hold in favor
of the government, we need not reach this issue.
CHEUNG v. UNITED STATES 13465
court must look to the particular statutory language at issue,
as well as the language and design of the statute as a whole.’ ”
Id. (quoting McCarthy v. Bronson, 500 U.S. 136, 139 (1991)).
“ ‘Where the statutory language is clear and consistent with
the statutory scheme at issue, the plain language of the statute
is conclusive and the judicial inquiry is at an end.’ ” Molski
v. M.J. Cable, Inc., 481 F.3d 724, 732 (9th Cir. 2007) (quot-
ing Botosan v. Paul McNally Realty, 216 F.3d 827, 831 (9th
Cir. 2000)). Where, on the other hand, “the words of a statute
are not conclusive as to congressional intent, they should be
placed in their proper context by resort to legislative history.”
Ordlock, 533 F.3d at 1140.
Section 7426(g) provides for the recovery of interest on a
wrongful levy judgment “at the overpayment rate established
under section 6621.” Section 6621 states in pertinent part:
§6621. Determination of rate of interest
(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 corpo-
ration for any taxable period (as defined in subsec-
tion (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”.
Substituting “overpayment” for “underpayment” in
§ 6621(c)(3)(A), that provision reads, “The term ‘large corpo-
13466 CHEUNG v. UNITED STATES
rate [overpayment]’ means any [overpayment] of a tax by a
C corporation for any taxable period if the amount of such
[overpayment] for such period exceeds $100,000.”
According to the Company, the flush language of
§ 6621(a)(1) does not apply to wrongful levy judgments
because a wrongful levy is not an “overpayment of tax.”
Thus, the Company states in its brief that it “did not pay, let
alone overpay, any ‘tax’ when the IRS wrongfully and negli-
gently seized its property.” The government asserts, however,
that whether an overpayment of tax occurred is irrelevant. It
is the government’s position that Congress, in applying the
overpayment rate from § 6621 to wrongful levy judgments,
expressed its intent to treat such judgments as if they were
overpayments of tax for purposes of calculating the overpay-
ment rate regardless of their true nature. We are persuaded by
the government’s position.9
[2] The principal question before us is not whether a
wrongful levy is an overpayment of tax. Rather, the issue is
whether, in calculating the overpayment rate in connection
with a wrongful levy judgement, a rate reduction applies to
the extent that the wrongful levy exceeds $10,000. To be sure,
9
In advancing its interpretation of the relevant statutory provisions, the
government urges us to strictly construe the statutory language at issue
because in its view it represents a waiver of sovereign immunity from an
award of interest. There is no dispute that § 7426(g) constitutes a waiver
of sovereign immunity from an award of interest. See Library of Congress
v. Shaw, 478 U.S. 310, 319 n.6 (1986) (listing § 7426(g) as a waiver of
immunity as to an award of interest), superseded in part by statute, Civil
Rights Act of 1991, Pub. L. No. 102-166, 105 Stat. 1071. However, inso-
far as § 6621(a)(1) is concerned, that provision is not a waiver of immu-
nity from an award of interest. Rather, it governs the manner in which the
interest available on, among other things, a wrongful levy judgment is cal-
culated. We therefore decline to strictly construe § 6621(a)(1). See J.F.
Shea Co. v. United States, 754 F.2d 338, 340 (Fed. Cir. 1985) (holding
that the assertion of sovereign immunity is “irrelevant . . . where the dis-
pute concerns not whether interest runs against the United States but how
the interest is to be calculated.”).
CHEUNG v. UNITED STATES 13467
a levy can be understood as the imposition of a tax. See 26
U.S.C. § 6331(a) (“If any person liable to pay any tax neglects
or refuses to pay the same within 10 days after notice and
demand, it shall be lawful for the Secretary to collect such tax
. . . by levy . . . . If the Secretary makes a finding that the col-
lection of such tax is in jeopardy . . . collection thereof by
levy shall be lawful without regard to the 10-day period pro-
vided in this section.”); Black’s Law Dictionary 919 (8th ed.
2007) (defining levy as “[t]he imposition of a fine or tax; the
fine or tax so imposed.”); 26 U.S.C. § 6331(b) (The term
“levy” “includes the power of distraint and seizure by any
means.”). Thus, one who has been wrongfully levied can be
thought of as having been subject to an improper exaction.
See 26 C.F.R. § 301.7426-1(b) (“A levy is wrongful against
a person (other than the taxpayer against whom the assess-
ment giving rise to the levy is made), if . . . the levy is upon
property in which the taxpayer had no interest at the time the
lien arose or thereafter.”) However, the satisfaction of a levy
occurs upon the execution of the levy. See 26 U.S.C.
§ 6331(d) (outlining the procedural prerequisites for the impo-
sition of a levy generally). It is not the consequence of the
voluntary act of payment, which more aptly describes an
overpayment of tax.
That notwithstanding, in determining the appropriate
method of calculating the overpayment rate as it applies to a
wrongful levy judgment, it is not necessary to reach a conclu-
sion as to whether a wrongful levy is or is not an overpayment
of tax. Instead, we need only determine how Congress
intended to treat wrongful levy judgments when it subjected
them to the overpayment rate in § 6621(a)(1). As to this issue,
we conclude that the plain meaning of the statute controls.
[3] Section 7426(g) provides for the recovery of interest on
a wrongful levy judgment “at the overpayment rate described
in section 6621.” Section 6621 provides a straightforward
method for calculating the overpayment rate: in the case of a
corporation, the overpayment rate equals the federal short-
13468 CHEUNG v. UNITED STATES
term rate plus two percent, except “to the extent that an over-
payment of tax exceeds $10,000” the overpayment rate is the
federal short-term rate plus one half of one percent. 26 U.S.C.
§ 6621(a)(1). By subjecting wrongful levy judgments to the
overpayment rate as described in § 6621, Congress expressed
its intent to give effect to the whole of § 6621(a)(1) in calcu-
lating the overpayment rate, including the rate reduction artic-
ulated in § 6621(a)(1)’s flush language. That reduction can
only be given effect if a wrongful levy judgment is treated as
an overpayment of tax for purposes of calculating the over-
payment rate. Thus, in providing for the consideration of the
whole of § 6621 in determining the overpayment rate applica-
ble in the case of a wrongful levy judgment, Congress indi-
cated its intent to apply a one and a half point reduction in the
overpayment rate to the extent that a wrongful levy judgment
exceeds $10,000.
This conclusion is consistent with Congress’s application
of the overpayment rate in other contexts. 30 U.S.C. § 1721governs the terms and conditions of oil and gas leases, includ-
ing the rate of interest owed on overpayments of royalties.
More specifically, § 1721(h) provides for the payment of
interest “on any overpayment . . . at the rate obtained by
applying the provisions of subparagraphs (A) and (B) of sec-
tion 6621(a)(1) of Title 26, but determined without regard to
the sentence following subparagraph (B) of section
6621(a)(1),” i.e., without regard to the flush language.
(emphasis added).
[4] In eliminating the application of § 6621(a)(1)’s flush
language, Congress expressed its intent to apply the overpay-
ment rate without regard to the reduction described there.
Congress thus elected not to treat overpayments of royalties
as overpayments of tax for purposes of calculating the over-
payment rate. Had Congress wanted to avoid the application
of § 6621(a)(1)’s flush language to wrongful levy judgments,
it could have employed similar language.
CHEUNG v. UNITED STATES 13469
The Company argues that any reliance on § 1721(h) as pro-
bative of Congress’s intent in this case is misplaced. Accord-
ing to the Company, because both § 1721(h) and § 6621 apply
to “overpayments,” it was necessary for Congress to explicitly
preclude the application of the flush language’s rate reduction
insofar as it intended to do so. Otherwise, the Company says,
§ 6621(a)(1)’s flush language would have triggered a reduc-
tion in the overpayment rate not because Congress elected to
treat overpayments of royalties like overpayments of tax by
subjecting overpayments of royalties to the overpayment rate,
but because an overpayment of royalty falls within the defini-
tion of an overpayment of tax.10 We disagree.
[5] There is no question that the overpayment of a royalty
is the result of an erroneous voluntary payment, whereas a
wrongful levy is executed by the government. Nonetheless, a
royalty payment represents the government’s share of the
profits from a lease, not a tax. See 30 U.S.C. § 1702(14)
(defining “royalty” as “any payment based on the value or
volume of production which is due to the United States . . .
on production of oil or gas from the Outer Continental Shelf,
Federal, or Indian lands, or any minimum royalty owed to the
United States . . . under any provision of a lease.”). Thus, the
overpayment of a royalty is no more an overpayment of tax
than a wrongful levy. As such, the flush language of
§ 6621(a)(1) would only apply to reduce the overpayment rate
insofar as Congress expressed its intent to treat an overpay-
ment of royalties like an overpayment of tax for purposes of
calculating the overpayment rate. Accordingly, we cannot
conclude that Congress’s motivation in explicitly precluding
10
The Company also asserts that the government is barred from citing
Congress’s reference to § 6621 in § 1721(h) in support of its argument on
appeal because it did not do so in the district court. However, as the gov-
ernment points out, “[w]here, as here, the question presented is one of law,
we consider it in light of ‘all relevant authority,’ regardless of whether
such authority was properly presented in the district court.” Ballaris v.
Wacker Siltronic, Corp., 370 F.3d 901, 908 (9th Cir. 2004) (quoting Elder
v. Holloway, 510 U.S. 510, 516 (1994)).
13470 CHEUNG v. UNITED STATES
the application of § 6621(a)(1)’s flush language in § 1721(h)
arose out of the fact that the flush language otherwise would
have applied, because an overpayment of royalty falls within
the plain meaning of “overpayment of tax.” Instead, it is more
likely that Congress explicitly precluded the application of
§ 6621’s flush language in § 1721(h) in order to avoid signal-
ing its intent to treat overpayments of royalties like overpay-
ments of tax.
The Company asserts that our decision in Flores v. United
States, 551 F.2d 1169 (9th Cir. 1977), counsels against
today’s holding. In Flores, we addressed the issue of which
party bears the burden of persuasion under § 7426 as to
whether a levy is wrongful. Id. at 1173-75. In the course of
holding that the government bears the burden, we noted that
“particular sections of the Internal Revenue Code, as they
apply to persons who are differently situated, serve different
purposes.” Id. at 1173. According to the Company, Flores
demands that we treat victims of wrongful levies differently
than those who overpay their taxes. The Company asserts that
those whose property is wrongfully levied are differently situ-
ated from those who overpay their taxes in that those that are
wrongfully levied have been victimized by a mistake of the
IRS and thus are entitled to interest at a higher rate.
We are mindful of our decision in Flores. And we agree
that in applying the Code we must take into account the fact
that different provisions serve different purposes insofar as
they are applied to differently situated persons. However, in
this case, Congress has clearly expressed its intent to treat
those whose property has been wrongfully levied similarly to
those who have overpaid their taxes, regardless of whatever
distinctions the Company may perceive as between the two.
Accordingly, we are bound to apply the statute as written. See
Texaco, Inc. v. United States, 528 F.3d 703, 710 (9th Cir.
2008) (“Once Congress has spoken, the court cannot revise a
statue to promote a more equitable consequence.”).
CHEUNG v. UNITED STATES 13471
Finally, the Company argues that the legislative history of
both § 7426 and § 6621 militates against our decision. We
need not reach the issue, however, because we conclude that
the plain meaning is dispositive. See Molski, 481 F.3d at 732(“ ‘Where the statutory language is clear and consistent with
the statutory scheme at issue, the plain language of the statute
is conclusive and the judicial inquiry is at an end.’ ”) (quoting
Botosan, 216 F.3d at 831).
IV. CONCLUSION
[6] The district court’s calculation of the overpayment rate
was erroneous. The plain meaning of § 7426 and § 6621 com-
pel the conclusion that Congress intended to treat wrongful
levy judgments like overpayments of tax for purposes of cal-
culating the overpayment rate. Therefore, we reverse and
remand for proceedings consistent with this opinion.