First American v. United States ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FIRST AMERICAN TITLE INSURANCE 
COMPANY; COMMONWEALTH LAND
TITLE INSURANCE COMPANY;
No. 05-35520
CHICAGO TITLE INSURANCE
COMPANY,
Plaintiffs-Appellants,
 D.C. No.
CV-04-00429-JLR
v. OPINION
UNITED STATES OF AMERICA,
Defendant-Appellee.

Appeal from the United States District Court
for the Western District of Washington
James L. Robart, District Judge, Presiding
Argued and Submitted
September 12, 20061—Seattle, Washington
Filed March 27, 2008
Before: Mary M. Schroeder, Andrew J. Kleinfeld and
Carlos T. Bea, Circuit Judges.
Opinion by Judge Kleinfeld
1
We withdrew this case from submission because the Supreme Court
granted certiorari in EC Term of Years v. United States, 549 U.S. ___
(October 27, 2006). After the decision came down in that case, we
requested letter briefs speaking to the effect of EC Term of Years, and then
resubmitted this case.
3141
FIRST AMERICAN TITLE v. UNITED STATES 3143
COUNSEL
Robert J. Henry, Lasher, Holzapfel, Sperry & Ebberson,
PLLC, Seattle, Washington, for the appellants.
John A. Dudeck, Jr., Tax Division, U.S. Department of Jus-
tice, Washington, DC, for the appellee.
3144 FIRST AMERICAN TITLE v. UNITED STATES
OPINION
KLEINFELD, Circuit Judge:
This is a tax collection case about a third party challenge
to a tax assessment and lien on an earlier owner’s property.
FACTS
In 1991, Penny Jensen’s mother, Roberta Smith, died, and
Jensen was named the personal representative of her mother’s
estate. The estate consisted of three houses and the stock of
a corporation that owned a hamburger drive-in (Frisko Freeze,
Inc.).
The estate filed its federal estate tax return in 1992. The
return valued the estate at $1,302,129, calculated taxes at
$144,323, and elected to pay the $144,323 with about $45,000
down and the rest on an installment plan.2 Jensen then con-
veyed the three houses to herself and her husband.
Over the next two years, Jensen sold the houses to three
different purchasers. All were bona fide purchasers for value,
and all obtained title insurance from the three plaintiffs in this
case. Despite their title searches, all three title insurance com-
panies did not discover that the houses were encumbered by
tax liens because the taxes on the estate were largely unpaid.
Subsequently the IRS audited the estate and concluded that
the hamburger drive-in was worth more than the $762,275
valuation the estate had put on it. Eventually, in 1994 (after
the three houses had been sold) the IRS and Jensen, as per-
sonal representative of the estate, compromised on a value of
$911,987, increasing the estate taxes by $49,416. Jensen, as
2
26 U.S.C. § 6166 provides for installment plans for payment of estate
taxes where much of the estate’s value is an interest in a closely held busi-
ness.
FIRST AMERICAN TITLE v. UNITED STATES 3145
personal representative, signed an IRS Form 890 waiving
restrictions on assessment and collection and agreeing that
“by signing this waiver, a petition in the United States Tax
Court may not be made.”
The problem that generated this case arose when, not long
after agreeing to the higher assessment, Ms. Jensen quit pay-
ing the estate taxes.3 She and Frisko Freeze, Inc. eventually
filed for bankruptcy. The estate left the IRS short by a
claimed $189,372. Since by now the supposedly undervalued
Frisko Freeze, Inc. hamburger drive-in had failed and Jensen
was not paying the tax debt, the IRS went after the three
houses. The homeowners made claims on their title insurers,
and the title insurers paid off the tax liens under protest and
brought this case. On the merits, which we cannot reach, this
case challenges the IRS’s high valuation of the hamburger
drive-in.
The title companies sued under 28 U.S.C. § 1346 to recover
“federal estate tax . . . erroneously or illegally assessed and
collected.” The district court concluded that the court lacked
jurisdiction to decide the title insurers’s claims under § 1346,
and denied leave to amend to join Ms. Jensen as a plaintiff
because amendment would make no difference. The title
insurers appeal, and we affirm.
ANALYSIS
[1] Sovereign immunity protects the government from suit
except to the extent of its consent. 28 U.S.C. § 1346 is the
general statute providing jurisdiction in the district courts for
taxpayer suits against the IRS. 26 U.S.C. § 7426 is the statute
providing jurisdiction for suits by persons other than taxpay-
ers. The problem for the title insurers is that § 7426(c) does
not let them challenge the assessment of how much Frisko
3
The estate made one additional payment ($15,898 in July of 1994), but
nothing more.
3146 FIRST AMERICAN TITLE v. UNITED STATES
Freeze was worth, and the assessment is what they claim
makes the taxes they paid too high.
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.4
To avoid the irrebuttable presumption of the validity of the
assessment on the hamburger stand, the title insurers seek to
sue under § 1346, which does not have that presumption,
instead of § 7426, which does.
The title insurers had a good argument (though we need not
reach the question whether it was correct) under the Supreme
Court’s decision in United States v. Williams5 (though that
decision expressly did not decide whether a third party could
challenge an assessment under section 1346)6 and our deci-
sion in the same case.7 But the Court’s recent decision in EC
Term of Years Trust v. United States8 narrows the permissible
interpretation of Williams and there can no longer be a good
argument for allowing a third-party challenge to an assess-
ment, barred by § 7426, to be made under § 1346.
[2] EC Term of Years involved a third party trying to avoid
the statute of limitations in § 7426 by suing under § 1346.9
The Court granted certiorari in EC Term of Years “[b]ecause
the Ninth Circuit, [disagreeing with the Fifth], has held that
4
26 U.S.C. § 7426(c).
5
514 U.S. 527 (1995).
6
Id. at 540 n.10.
7
24 F.3d 1143, 1145 (9th Cir. 1994).
8
550 U.S. ___ (April 30, 2007).
9
Id. at *4.
 FIRST AMERICAN TITLE v. UNITED STATES 3147
§ 7426(a)(1) is not the exclusive remedy for third parties chal-
lenging a levy.”10 The Court held that the third party could not
sue under § 1346 because that would be irreconcilable with
the general principle that a “detailed statute pre-empts more
general remedies.”11 Because § 7426 was the more detailed
statute for third party challenges to a levy, the § 7426 statute
of limitations applied.12
[3] The case before us involves a challenge to an assess-
ment (of the value of the Frisko Freeze, Inc. stock), not a levy,
but this is a distinction without a difference. We conclude that
§ 7426 is the sole remedy here, for the same reason that it was
in EC Term of Years. Unlike § 1346, § 7426 applies specifi-
cally to third party actions, and § 7426 limits the third party
to an action for a determination that the value of the govern-
ment’s interest in the property is less than the value deter-
mined by the Secretary.13 The assessment cannot be
challenged in a § 7426 action.14 In this case, the title insurers
challenge the assessment the IRS made of the value of Frisko
Freeze, Inc., and that, under § 7426(c), they cannot do. By
analogy to the reasoning in EC Term of Years, the general
remedy of § 1346 cannot be made available to challenge the
assessment, because § 7426, which gives district courts juris-
diction over third party challenges, is more specific and pro-
hibits the challenge.
[4] In district court, the plaintiffs sought to cure the § 7426
bar to third-party challenges to the assessment by amending
their complaint to include as a plaintiff Ms. Jensen, the per-
sonal representative of the estate. The district court denied
leave to amend because the amendment would have been
10
Id.
11
Id.
12
Id. at *7.
13
26 U.S.C. § 7426(a)(4).
14
26 U.S.C. § 7426(c).
3148 FIRST AMERICAN TITLE v. UNITED STATES
futile. That was correct. Under 26 U.S.C. § 6402(a), a refund
may only be made to “the person who made the overpay-
ment,” and Ms. Jensen did not make the overpayment, assum-
ing there was one, so she could not sue for a refund.15 Also,
she had agreed to the assessment.
The title insurers argue that they should still fall under Wil-
liams, not EC Term of Years, because EC Term of Years
involved a levy, while Williams, like this case, involved a
lien. There is a difference between a lien, which is an encum-
brance on property, and a levy, which is a seizure of the prop-
erty. This distinction, though, does not justify treating all lien
cases, whatever the case may be, under Williams (§ 1346) as
opposed to EC Term of Years (§ 7426). The insuperable
obstacle to doing so is that it would evade the specific limita-
tion in § 7426 on challenges to the assessment.
[5] Justice does not require that § 1346 be embraced to
avoid the § 7426 limitation on challenges to assessments. Had
Jensen paid the estate taxes when due, or paid the installments
and not gone bankrupt, she could not have challenged the
assessment, because she had agreed to it. There is no good
reason why her failure to pay the estate’s taxes should reopen
the valuation of Frisko Freeze, Inc. True, the homeowners and
the title insurers that stepped into their shoes did not have a
chance to challenge the assessment. But the assessment was
not really their problem. Their problem was that the real
estate chain of title included an estate that had not paid its
taxes. A third party that pays a tax to eliminate a tax lien on
the third party’s property is, under § 7426(c), bound by the
assessment on the property.
AFFIRMED.
15
See Bruce v. United States, 759 F.2d 755, 758-59 (9th Cir. 1985).