Dunn & Black Ps v. United States

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DUNN & BLACK, P.S., 
Plaintiff-Appellant,
and
FIDELITY DEPOSIT COMPANY OF
MARYLAND, a Maryland
corporation; AMERICAN GUARANTY
& LIABILITY INSURANCE COMPANY, a No. 05-35766
New York corporation,
Intervenors,  D.C. No.
CV-04-00229-LRS
v. OPINION
UNITED STATES OF AMERICA,
Defendant-Appellee,
and
ENVIRONMENTAL RECLAMATION INC.,
an Idaho corporation,
Defendant.

Appeal from the United States District Court
for the Eastern District of Washington
Lonny R. Suko, District Judge, Presiding
Argued and Submitted
March 6, 2007—Seattle, Washington
Filed July 11, 2007
Before: Diarmuid F. O’Scannlain, A. Wallace Tashima, and
Marsha S. Berzon, Circuit Judges.
Opinion by Judge O’Scannlain
8269
8272 DUNN & BLACK v. UNITED STATES
COUNSEL
Michael R. Tucker, Dunn & Black, P.S., Spokane, Washing-
ton, argued the cause for the plaintiff-appellant and filed a
brief; Richard D. Campbell, Robert A. Dunn, and Ryan D.
Yahne, Dunn & Black, P.S., Spokane, Washington, were on
the briefs.
Curtis C. Pett, Tax Division, U.S. Department of Justice,
Washington, DC, argued the cause for the defendant-appellee,
and filed briefs; James A. McDevitt, U.S. Attorney, Eileen J.
O’Connor, Assistant Attorney General, and Thomas J. Clark,
Tax Division, U.S. Department of Justice, were on the briefs.
OPINION
O’SCANNLAIN, Circuit Judge:
We must decide whether a law firm can bring an action
against the United States to recover attorney’s fees from
monies that its client was awarded as a result of a settlement
with the Federal Highway Administration, but never received
because the Internal Revenue Service requested that payment
be withheld to offset unpaid tax liabilities.
I
The United States, through the Western Federal Lands
Highway Division of the Federal Highway Administration
(“FHWA”), contracted with Environmental Reclamation, Inc.
(“ERI”) to work on the Warren Profile Gap Road Project
(“Project”) in south central Idaho. After the government ter-
DUNN & BLACK v. UNITED STATES 8273
minated the contract for default, ERI engaged the law firm
Dunn & Black, P.S. (“Dunn & Black”) to file an action in the
Court of Federal Claims to recover $1,724,296 in damages for
wrongful termination of the contract. The government
asserted a counterclaim for reprocurement costs in the amount
of $948,168.82.
Until November 20, 2002, Dunn & Black represented ERI
at an hourly rate on matters concerning the Project. At that
time, ERI owed Dunn & Black $137,682.33 for legal services
rendered on the Project and other legal matters. On November
20, Dunn & Black renegotiated its hourly fee agreement with
ERI, changing it to a contingency fee arrangement, which
provided that Dunn & Black “shall be entitled to the first
$137,682.33 of any recovery from any claims related to the
Project, . . . for [ERI’s] debt on this and other matters.” The
agreement further provided that Dunn & Black shall receive
compensation for “its future services regarding the claims
arising out of the Project” in the amount of 50% of any
remaining recovery. ERI remained responsible for all litiga-
tion costs.
On March 30, 2004, the FHWA, without admitting liability,
settled the dispute with ERI, stipulating to entry of judgment
in favor of ERI for $450,000. On April 5, 2004, the Court of
Federal Claims entered a judgment against the government in
the amount of $450,000. Upon learning of the judgment, the
Internal Revenue Service (“IRS”), requested that the Secre-
tary of the Treasury withhold payment of the judgment for
setoff against ERI’s unpaid tax liabilities. On May 5, 2004,
the government informed Dunn & Black that the IRS would
be making claims to the settlement funds as an intended offset
of the entire amount of the judgment based on an unrelated
tax debt purportedly owed by ERI. On the same day, Dunn &
Black served the government with a notice of attorney’s lien.
On May 7, 2004, ERI terminated its attorney-client relation-
ship with Dunn & Black without paying any fees owed.
8274 DUNN & BLACK v. UNITED STATES
On June 3, 2004, the United States filed a civil action in the
district court to reduce ERI’s federal tax assessments to judg-
ment. The government originally demanded $988,000 in
unpaid tax assessments, but amended the complaint to
demand only $567,304.85 for unpaid federal employment and
unemployment tax liabilities plus interest and certain penal-
ties. The district court entered judgment in the amount of
$609,079.96, upon the government’s motion for default judg-
ment against ERI.
On June 30, 2004, Dunn & Black commenced the instant
action by filing a complaint for declaratory judgment in dis-
trict court against the United States and ERI. Dunn & Black
requested that the district court declare that its fees in the
amount of $361,037.20 were reasonable for the legal services
rendered. Furthermore, Dunn & Black requested that the dis-
trict court declare its attorney’s lien superior to all subsequent
liens, claims, and interest in and to the judgment. Alterna-
tively, Dunn & Black requested that the district court declare
that the government’s setoff constituted unjust enrichment
without fairly compensating the firm for services in creating
the judgment fund. Lastly, Dunn & Black requested that the
district court declare that the government’s setoff was a viola-
tion of a property interest in the contingent fee and therefore
an unlawful property taking without compensation and a vio-
lation of due process. The government asserted in its answer
that ERI owed the IRS $987,839.84 as of April 30, 2004.
Dunn & Black filed a motion for summary judgment. The
district court entered an order and judgment in favor of the
government. See Dunn & Black, P.S. v. United States, 366 F.
Supp. 2d 1008 (E.D. Wash. 2005). The district court first held
that it had jurisdiction over Dunn & Black’s claim pursuant
to 28 U.S.C. § 1346(a)(1). Dunn & Black, 366 F. Supp. 2d at
1022-23. Furthermore, the district court denied Dunn &
Black’s motion for summary judgment and held that the gov-
ernment’s claim of setoff in the amount of $450,000 was
DUNN & BLACK v. UNITED STATES 8275
appropriate pursuant to 31 U.S.C. § 3728. Dunn & Black, 366
F. Supp. 2d at 1032-36.
Dunn & Black timely appealed.1
II
As a threshold matter, the government contends that the
district court lacked subject matter jurisdiction because Dunn
& Black’s claim is barred by the doctrine of sovereign immu-
nity, which, of course, “is an important limitation on the sub-
ject matter jurisdiction of federal courts.”2 Vacek v. U.S.
Postal Serv., 447 F.3d 1248, 1250 (9th Cir. 2006).
[1] “It is well settled that the United States is a sovereign,
and, as such, is immune from suit unless it has expressly
waived such immunity and consented to be sued. Such waiver
cannot be implied, but must be unequivocally expressed.
Where a suit has not been consented to by the United States,
dismissal of the action is required . . . . [because] the existence
of such consent is a prerequisite for jurisdiction.” Gilbert v.
DaGrossa, 756 F.2d 1455, 1458 (9th Cir. 1985) (internal quo-
tation marks and citations omitted). The Supreme Court has
“frequently held . . . that a waiver of sovereign immunity is
1
On September 16, 2004, the district court allowed Fidelity and Deposit
Company of Maryland, and American Guaranty & Liability Insurance
Company, ERI’s judgment creditors, to intervene. The intervenors filed a
motion for declaratory judgment and an alternative motion for a stay of
Dunn & Black’s motion for summary judgment under Fed. R. Civ. P.
56(f). The district court denied the motion for declaratory judgment and
dismissed the alternative motion for a stay of Dunn & Black’s motion as
moot. Dunn & Black, 366 F. Supp. 2d at 1035-36. Neither intervenor
appealed the district court’s order.
2
“Sovereign immunity and subject matter jurisdiction are distinct doc-
trines.” Wilkerson v. United States, 67 F.3d 112, 119 n.13 (5th Cir. 1995).
“In an action against the United States, in addition to statutory authority
granting subject matter jurisdiction, there must be a waiver of sovereign
immunity.” Arford v. United States, 934 F.2d 229, 231 (9th Cir. 1991).
8276 DUNN & BLACK v. UNITED STATES
to be strictly construed, in terms of its scope, in favor of the
sovereign.” Dep’t of the Army v. Blue Fox, Inc., 525 U.S. 255,
261 (1999).
Unless Dunn & Black satisfies the burden of establishing
that its action falls within an unequivocally expressed waiver
of sovereign immunity by Congress, it must be dismissed.
Cunningham v. United States, 786 F.2d 1445, 1446 (9th Cir.
1986). Dunn & Black invokes 28 U.S.C. § 1346(a)(1) and 28
U.S.C. § 2410 as the basis of waiver of sovereign immunity
in this case.3 The district court concluded that jurisdiction was
proper pursuant to § 1346(a)(1), and proceeded to the merits.
Dunn & Black, 366 F. Supp. 2d at 1023. We consider each
provision in turn.
3
Dunn & Black also cites 28 U.S.C. §§ 1331 & 1367 for jurisdiction in
this case. Those sections are grants of general jurisdiction and “cannot be
construed as authorizing suits of this character against the United States,
else the exemption of sovereign immunity would become meaningless.”
Geurkink Farms, Inc. v. United States, 452 F.2d 643, 644 (7th Cir. 1971).
Section 1331 “merely provides that the district court shall have original
jurisdiction in all civil actions arising under the Constitution, laws or trea-
ties of the United States” and “cannot by itself be construed as constituting
a waiver of the government’s defense of sovereign immunity.” Gilbert,
756 F.2d at 1458-59. Similarly, § 1367 merely grants federal courts sup-
plemental jurisdiction over state claims related to certain federal claims in
any civil action of which the district court has original jurisdiction, 28
U.S.C. § 1367(a), and that section cannot “operate as a waiver of the
United States sovereign immunity,” Wilkerson, 67 F.3d at 119 n.13.
The parties agree that 26 U.S.C. § 7426(a)(1) does not serve as a basis
for waiver of sovereign immunity in this case because the government
never levied property held by Dunn & Black. See Treas. Reg. § 301.7426-
1(a)(1)(ii) (2007) (“Section 7462 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.”); see also EC
Term of Years Trust v. United States, 127 S. Ct. 1763, 1767-68 (2007)
(holding that § 7426(a)(1) is the exclusive remedy for third parties chal-
lenging a wrongful levy).
DUNN & BLACK v. UNITED STATES 8277
A
1
[2] Dunn & Black first relies on 28 U.S.C. § 1346(a)(1) as
the basis for waiver of sovereign immunity in this case. That
section waives the government’s sovereign immunity by
authorizing federal district courts to hear “[a]ny civil action
against the United States for the recovery of any internal-
revenue tax alleged to have been erroneously or illegally
assessed or collected, or any penalty claimed to have been
collected without authority or any sum alleged to have been
excessive or in any manner wrongfully collected under the
internal-revenue laws.” 28 U.S.C. § 1346(a)(1); United States
v. Williams, 514 U.S. 527, 531-32 (1995); see also Imperial
Plan, Inc. v. United States, 95 F.3d 25, 26 (9th Cir. 1996)
(“Title 28 U.S.C. § 1346(a)(1) waives the sovereign immunity
of the United States to permit suit in the United States District
Courts for the recovery of taxes which have been erroneously
collected.”). However, “[d]espite its spacious terms,
§ 1346(a)(1) must be read in conformity with other statutory
provisions which qualify a taxpayer’s right to bring a refund
suit upon compliance with certain conditions.” United States
v. Dalm, 494 U.S. 596, 601 (1990).
[3] One express condition of Congress’s waiver of sover-
eign immunity is 26 U.S.C. § 7422(a), which, tracking the
language of § 1346(a)(1), provides that
[n]o suit or proceeding shall be maintained in any
court for the recovery of any internal revenue tax
alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to
have been collected without authority, or of any sum
alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or
credit has been duly filed with the Secretary, accord-
ing to the provisions of law in that regard, and the
8278 DUNN & BLACK v. UNITED STATES
regulations of the Secretary established in pursuance
thereof.
26 U.S.C. § 7422(a); see also Dalm, 494 U.S. at 601.
[4] If a person neglects to file an administrative claim as
required by § 7422(a), that person has failed to satisfy a nec-
essary condition of the waiver of sovereign immunity under
§ 1346(a)(1), and, as we have repeatedly held, the district
court is necessarily divested of jurisdiction over the action.4
Other circuits have reached the same conclusion.5
4
See, e.g., Omohundro v. United States, 300 F.3d 1065, 1066-67 (9th
Cir. 2002) (per curiam) (“To bring an action for credit or refund of over-
paid taxes, a taxpayer must first file an administrative claim with the IRS.
. . . A taxpayer’s failure to file an administrative claim within the time
periods imposed by statute divests the district court of jurisdiction over an
action for a refund or credit.”); Imperial Plan, 95 F.3d at 26 (“ ‘A timely
claim is a jurisdictional prerequisite to an action for recovery of taxes
paid.’ ” (quoting Miller v. United States, 38 F.3d 473, 474 (9th Cir.
1994))); Yuen v. United States, 825 F.2d 244, 245 (9th Cir. 1987) (“Unless
a taxpayer has duly filed a claim for refund of federal taxes with the IRS,
a district court is without jurisdiction to entertain a suit for refund, and a
claim is not duly filed unless it is timely.” (citations omitted)); Boyd v.
United States, 762 F.2d 1369, 1371 (9th Cir. 1985) (“The regulations pro-
mulgated under section 7422(a) state, ‘The claim must set forth in detail
each ground upon which a credit or refund is claimed and facts sufficient
to apprise the Commissioner of the exact basis thereof.’ If the refund
claim does not meet the requirements of the Code and the regulations, the
suit must be dismissed, because filing pursuant to the rules is a jurisdic-
tional prerequisite.” (citations omitted)); Thomas v. United States, 755
F.2d 728, 729 (9th Cir. 1985) (“Ordinarily, there is no jurisdiction in the
district courts over suits for the refund of penalty amounts paid until the
taxpayer has paid the full amount of the contested penalty assessment, and
has filed a claim for refund which the IRS has either rejected or not acted
upon in six months.” (citations and emphasis omitted) (citing § 7422(a)).
5
See, e.g., Young v. United States, 332 F.3d 893, 895 (6th Cir. 2003)
(“[T]he government’s waiver of sovereign immunity is explicitly limited
by the requirement that a taxpayer must first pursue administrative reme-
dies . . . .” (citing § 7422(a))); Compagnoni v. United States, 173 F.3d
1369, 1372 (11th Cir. 1999) (“A key element of a section 1346 claim . . .
is exhaustion of administrative remedies.” (citing § 7422)); Oropallo v.
United States, 994 F.2d 25, 26 (1st Cir. 1993) (“[T]he jurisdictional grant
in section 1346(a)(1) must be read to incorporate the requirements of 26
U.S.C. §§ 7422(a) and 6511(a).”).
DUNN & BLACK v. UNITED STATES 8279
[5] Dunn & Black does not assert, and the record does not
suggest, that it satisfied § 7422(a)’s statutory requirements by
filing an administrative claim with the IRS. Accordingly, even
if Dunn & Black otherwise would have standing to maintain
an action under § 1346(a)(1), Dunn & Black is barred from
relying on that section as a basis of waiver of sovereign
immunity in this case.
2
Dunn & Black makes the curious argument that § 7422(a)
does not apply in this case because that section “establishes
a condition precedent to an action to recover taxes paid that
the taxpayer duly file a claim for refund or a credit with the
IRS and that the claim be disallowed,” but, here, “Dunn &
Black is clearly not the taxpayer.” (emphasis in original.) As
indicated above, § 7422(a)(1)’s language virtually mirrors that
of § 1346(a)(1).6 Yet Dunn & Black argues that § 1346(a)(1)
applies to non-taxpayers, but § 7422(a)(1) applies only to tax-
payers. If we were to accept Dunn & Black’s argument here,
we would find ourselves pointed in diametrically opposite
directions with respect to nearly identical statutory language.
Such an interpretation of § 7422(a)(1) would, of course, fly in
the face of the familiar canon of interpretation that courts
6
Compare 26 U.S.C. § 7422(a) (“No suit or proceeding shall be main-
tained in any court for the recovery of any internal revenue tax alleged to
have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Secretary, according
to the provisions of law in that regard, and the regulations of the Secretary
established in pursuance thereof.”), with 28 U.S.C. § 1346(a)(1) (“The dis-
trict courts shall have original jurisdiction, concurrent with the United
States Court of Federal Claims, of . . . [a]ny civil action against the United
States for the recovery of any internal-revenue tax alleged to have been
erroneously or illegally assessed or collected, or any penalty claimed to
have been collected without authority or any sum alleged to have been
excessive or in any manner wrongfully collected under the internal-
revenue laws[.]”).
8280 DUNN & BLACK v. UNITED STATES
should “interpret similar language in different statutes in a
like manner when the two statutes address a similar subject
matter.” United States v. Novak, 476 F.3d 1041, 1051 (9th
Cir. 2007). Because Dunn & Black offers no reason for such
contradictory interpretation of nearly identical statutory lan-
guage involving the same subject matter, we reject this argu-
ment as unpersuasive.
3
[6] We also reject Dunn & Black’s suggestion at oral argu-
ment that the government waived the statutorily-required
exhaustion of administrative remedies argument by not rais-
ing it below. It is well established that the federal government
cannot waive sovereign immunity by failing to raise it before
the district court.7 Only Congress enjoys the power to waive
the United States’ sovereign immunity. Army & Air Force
Exch. Serv. v. Sheehan, 456 U.S. 728, 734 (1982).
As discussed above, § 7422(a)’s requirement that a person
first file an administrative claim before commencing an action
against the United States in district court is a statutory limita-
tion on Congress’s express waiver of sovereign immunity pur-
7
See, e.g., United States v. U.S. Fidelity & Guar. Co., 309 U.S. 506, 513
(1940) (“But, it is said, that there was a waiver of immunity by a failure
to object to the jurisdiction of the Missouri District Court over the cross-
claim. It is a corollary to immunity from suit on the part of the United
States and the Indian Nations in tutelage that this immunity cannot be
waived by officials. If the contrary were true, it would subject the govern-
ment to suit in any court in the discretion of its responsible officers. This
is not permissible.”); Commodity Futures Trading Comm’n v. Frankwell
Bullion Ltd., 99 F.3d 299, 306 n.5 (9th Cir. 1996)(“[The plaintiff] also
argues that the [federal government] waived its sovereign immunity argu-
ment by not raising it before the district court. This argument lacks merit;
an official cannot waive sovereign immunity by failing to object to a
court’s jurisdiction.”); Danning v. United States, 259 F.2d 305, 310 (9th
Cir. 1958) (concluding that the federal “government cannot lose its immu-
nity by any act or omission of its agents, and that consent to be sued can-
not be implied from the action or inaction of its officers”).
DUNN & BLACK v. UNITED STATES 8281
suant to § 1346(a)(1). As such, a government officer cannot
waive the statutorily-provided exhaustion requirement by fail-
ing to raise it below. See Quarty v. United States, 170 F.3d
961, 972-73 & n.7 (9th Cir. 1999).
[7] Contrary to Dunn & Black’s assertion, we have never
held otherwise. Section 7422(a) requires that any taxpayer
seeking a refund must first file an administrative claim with
the Secretary of the Treasury before filing suit in federal court
(the “exhaustion requirement”). 26 U.S.C. § 7422(a). Trea-
sury Regulation § 301.6402-2(b)(1), in turn, provides that the
administrative claim “must set forth in detail each ground
upon which a credit or refund is claimed and facts sufficient
to apprise the Commissioner of the exact basis thereof” (the
“specificity requirement”). While we have held that the Trea-
sury may waive the regulatory specificity requirement in lim-
ited circumstances,8 the Treasury has no power to waive the
statutorily-imposed exhaustion requirement, which is an
inseverable condition on Congress’s waiver of sovereign
immunity under § 1346(a)(1). See Quarty, 170 F.3d at 973;
Gallo Cattle Co. v. U.S. Dep’t of Agric., 159 F.3d 1194, 1197
(9th Cir. 1998); see also Kikalos, 479 F.3d at 525 (“The
Supreme Court has held that while the Treasury may not
waive the congressionally mandated requirement that a claim
8
As we have explained before, “[t]he government may waive compli-
ance with the specificity requirements of Treasury Regulation § 301.6402-
2(b)(1) if it has investigated the merits of a claim and taken an action.”
Quarty, 170 F.3d at 973. “To establish that the government has waived
compliance with the regulations’ specificity requirement,” however,
“ ‘[t]he showing should be unmistakable that the Commissioner has in fact
seen fit to dispense with his formal requirements and to examine the mer-
its of the claim. It is not enough that in some roundabout way the facts
supporting the claim may have reached him.’ ” Id. (alteration in original)
(quoting Angelus Milling Co. v. Comm’r, 325 U.S. 293, 297 (1945)); see
also Kikalos v. United States, 479 F.3d 522, 525 (7th Cir. 2007) (“The
Commissioner may waive the IRS’s specificity requirements if 1) the IRS
has sufficient knowledge of the claim, and 2) makes a determination on
the merits or leads the taxpayer to believe that the IRS treated the claim
as formally sufficient.”).
8282 DUNN & BLACK v. UNITED STATES
be filed, the Treasury can waive its own formal require-
ments.” (citing Angelus Milling Co., 325 U.S. at 296).
Dunn & Black relies on Bear Valley Mutual Water Co. v.
R.A. Riddell, 493 F.2d 948 (9th Cir. 1974), for the proposition
that the statutory exhaustion requirement is waivable. But in
that case, we recognized the very distinction emphasized
above: “The long-established interpretation of these provi-
sions is that the filing of a claim with the Internal Revenue
Service is a jurisdictional prerequisite to a suit for refund, and,
in the absence of a waiver by the government, the taxpayer
cannot recover in its suit for refund on a different ground than
that set forth in the claim for refund.” Id. at 951 (emphasis
added) (footnotes omitted).
B
1
Dunn & Black alternatively contends that 28 U.S.C. § 2410
provides an express waiver of sovereign immunity in this
case. The government responds that § 2410 does not apply
because the government claims an ownership interest, not a
mortgage or lien interest, in the judgment.
[8] Section 2410 states, in relevant part, that the “United
States may be named a party in any civil action or suit in any
district court . . . to quiet title to, [or] . . . to foreclose a mort-
gage or other lien upon . . . real or personal property on which
the United States has or claims a mortgage or other lien.” 28
U.S.C. § 2410(a) (emphasis added). We have held that this
section operates as an express waiver of sovereign immunity.
Arford, 934 F.2d at 234. At the same time, however, we “have
strictly limited the reach and application of this statute.”
Hughes v. United States, 953 F.2d 531, 538 (9th Cir. 1991).
[9] Congress expressly limited waiver of sovereign immu-
nity under § 2410 to actions where the United States “has or
DUNN & BLACK v. UNITED STATES 8283
claims a mortgage or other lien.” And we have repeatedly
held that “Congress in § 2410 did not consent to suits against
the United States where the United States claims a title inter-
est as distinguished from a lien interest,” Bertie’s Apple Val-
ley Farms v. United States, 476 F.2d 291, 292 (9th Cir. 1973)
(per curiam), or where the monies “have already come into
the hands of the IRS,” Farr v. United States, 990 F.2d 451,
453 (9th Cir. 1993).9
[10] In this case, at the time Dunn & Black commenced this
action the government never claimed a lien or mortgage inter-
est in the $450,000 judgment.10 Rather, the government exer-
9
See also Huff v. United States, 10 F.3d 1440, 1444 n.3 (9th Cir. 1993)
(concluding that a plaintiff “cannot seek relief for monies or property
already in the hands of the IRS in a § 2410 quiet title action”); Hughes,
953 F.2d at 538 (“[W]hile a taxpayer may contest the procedural validity
of a tax lien under § 2410, he may do so only if, at the time the action is
commenced, the government still claims a lien or mortgage on the prop-
erty. If the government has sold the property prior to the filing of the suit,
and no longer claims any interest in the property, § 2410 does not apply.
Similarly, such an action is jurisdictionally barred if, at the time it is com-
menced, the government claims a title interest rather than a lien interest.”
(citations omitted)).
10
Where a taxpayer owes the government for unpaid tax liabilities, the
lien-levy process is one mechanism for the government to collect that
debt. A lien, generally, is “[a] legal right or interest that a creditor has in
another’s property, lasting usu[ally] until a debt or duty that it secures is
satisfied.” Black’s Law Dictionary 941 (8th ed. 2004). “If any person lia-
ble to pay any tax neglects or refuses to pay the same after demand,” a
federal tax lien arises in the amount “in favor of the United States upon
all property and rights to property, whether real or personal, belonging to
such person.” 26 U.S.C. § 6321. However, because a tax lien is not self-
executing, the government must take affirmative action to collect the
underlying tax debt. EC Term of Years Trust, 127 S. Ct. at 1764. The
“principal tool[ ] is a levy, which is a legally sanctioned seizure and sale
of property” within the scope of that tax lien. Id. (internal quotations
marks and citation omitted).
But where, as here, the taxpayer owes the government for unpaid tax
liabilities and the government also owes the taxpayer for a tax overpay-
ment or an unrelated debt, the government generally may exercise its right
8284 DUNN & BLACK v. UNITED STATES
cised its right of setoff against that judgment and therefore
claimed title in the proceeds that had come to rest in the hands
of the IRS at the time Dunn & Black filed this action. Accord-
ingly, § 2410 does not waive sovereign immunity in this case.
2
Our prior decision in Arford v. United States, 934 F.2d 229,
is not to the contrary. There, the IRS sent a notice of levy on
the taxpayer’s retirement benefits to the Retirement Pay Divi-
sion of the Air Force, another government agency that dis-
bursed those retirement benefits. Id. at 231. The taxpayer sued
the United States, alleging that Congress waived sovereign
immunity by § 7426 as to the request for recovery of the
amount levied on past retirement payments, and by § 2410 as
to the request to quiet title on the levy against continuing
retirement payments. Id. We held that § 7426 does not serve
as a waiver of sovereign immunity as to the requested recov-
ery because that section only applies where the person is not
the one “ ‘against whom is assessed the tax.’ ” Id. at 232
(quoting § 7426(a)(1)). We also held that § 2410 serves as a
of setoff to enforce collection of that tax debt rather than relying upon the
lien-levy mechanism. A setoff simply refers to a debtor’s right to reduce
the amount owed a creditor by any sum that creditor owes the debtor.
Black’s Law Dictionary at 1404. “The right of setoff (also called ‘offset’)
allows parties that owe each other money to apply their mutual debts
against each other thereby avoiding ‘the absurdity of making A pay B
when B owes A.’ ” Citizens Bank v. Strumpf, 516 U.S. 16, 18 (1995)
(quoting Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528 (1913)). The
Supreme Court has recognized the government’s common law right of set-
off. See United States v. Munsey Trust Co., 332 U.S. 234, 239 (1947)
(“The government has the same right ‘which belongs to every creditor, to
apply the unappropriated moneys of his debtor, in his hands, in extinguish-
ment of the debts due to him.’ ” (citation omitted)). Congress has also cre-
ated a statutory right of setoff for the government. See 31 U.S.C. § 3728(a)
(“The Secretary of the Treasury shall withhold paying that part of a judg-
ment against the United States Government presented to the Secretary that
is equal to a debt the plaintiff owes the Government.”).
DUNN & BLACK v. UNITED STATES 8285
waiver of sovereign immunity with respect to the request to
quiet title on the continuing retirement payments, because the
taxpayer challenged procedural aspects of the lien. Id. at 234.
We rejected the government’s attempt to avoid the waiver of
sovereign immunity under § 2410 by asserting that the trans-
fer of money from the other agency to the IRS was a setoff
not subject to the procedural requirements governing transfers
by lien and levy, even though the transfer occurred pursuant
to a formal notice of levy. Id.
Arford does not disturb the well-established rule that a per-
son cannot invoke § 2410 where the government asserts a title
interest in the disputed property or where the monies have
already come to rest in the hands of the IRS. Rather, Arford
stands for the simple proposition that the government cannot
avoid the waiver of sovereign immunity under § 2410 by
attempting to mask a transfer occurring pursuant to a formal
notice of levy as a setoff beyond the procedural requirements
for liens and levies.11 But here, the government never filed a
notice of levy, but simply withheld those funds pursuant to its
statutory right of setoff.
Second, as our subsequent precedents make clear, Arford
also stands for the limited proposition that a person “can only
use § 2410 to challenge the continued collection of taxes
through the garnishment of . . . wages” or retirement pay.
11
We note that Treas. Reg. § 301.7426-1(a)(1) was subsequently
amended to follow Arford in this respect. Compare Treas. Reg.
§ 301.7426-1(a)(1)(ii) (2007) (“Section 7462 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 pay-
ment from another federal agency pursuant to a request for setoff.”), with
Treas. Reg. § 301.7426-1(a)(1) (1986) (“No action is permitted under sec-
tion 7426(a)(1) unless there has been a levy upon the property claimed.
For example, no cause of action arises under this section where the United
States sets-off an amount due to the taxpayer against taxes owed by him
since no levy has been made.”).
8286 DUNN & BLACK v. UNITED STATES
Hughes, 953 F.2d at 538 (emphasis added). Dunn & Black,
however, does not challenge the continued collection of
unpaid tax liabilities. For these reasons, Arford does not com-
pel a contrary conclusion with respect to § 2410 in this case.
III
[11] Neither § 1346(a)(1) nor § 2410 operates to waive sov-
ereign immunity in this case. Accordingly, the district court
lacked jurisdiction over Dunn & Black’s action against the
United States. We vacate the district court’s summary judg-
ment and remand with instructions to dismiss the case for lack
of subject matter jurisdiction.
The parties shall bear their own costs on appeal.
VACATED AND REMANDED.