Section 7403 Tax Enforcement Actions
The United States has the power to place a lien on a taxpayers’ property and rights to property when that taxpayer has unpaid federal taxes. The government is statutorily authorized to bring a civil action to enforce this lien under Internal Revenue Code (IRC) § 7403. While § 7403 generally provides that courts are to adjudicate lien enforcement actions on the merits, Federal Rules of Civil Procedure Rule 55 allows for parties seeking relief to obtain a default judgment against parties that fail to defend against the claims being brought against them. Thus, when the United States seeks enforcement of a tax lien against a taxpayer, and the taxpayer fails to respond to or defend against the enforcement action, the government can obtain a default judgment against the taxpayer for the unpaid tax.
A federal court recently applied these concepts in United States v. Lyons to grant a default judgment of $263,651.60 to the United States against the Estate of decedent Robert Lyons. Courts prefer to issue rulings on the merits, and therefore only resort to the “extreme measure” of default judgments in “unusual circumstances.” The Ninth Circuit considers the seven factors laid out in Eitel v. McCool in the court’s discretionary inquiry of whether default judgment is appropriate: (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.
Prejudice to the plaintiff results when the plaintiff would not otherwise be able to recover. As in cases like Lyons, when it is unlikely that the defendant will ever respond to the suit or participate in the litigation, then the plaintiff is likely prejudiced without a default judgment.
The next four factors evaluate the substance of the plaintiff’s claim as stated in the complaint. When the government asserts rights granted to it via statute—as it did in Lyons—then its complaint is likely sufficient. Taking the well-plead facts in the complaint as true, and considering supporting evidence, the court then weighs the merits of the plaintiff’s claim, as well as (1) whether the plaintiff has adequately plead facts entitling it to relief, (2) whether any material facts could be in dispute, and (3) whether it would be appropriate to award the plaintiff a large sum of money without litigation.
Many courts split is on just what conduct constitutes “excusable neglect” that would vitiate a default judgment. The Ninth Circuit maintains that excusable neglect does not exist when the “defendant is properly served with the complaint, the notice of entry of default, and the papers in support of the default judgment motion.” In Lyons, the decedent’s wife, who had notice of the suit and was most likely to intervene to defend the Estate, waived formal service and never appeared or litigated on behalf of the Estate. Such actions are not excusable neglect.
Although the court in Lyons recognized the strong policy against default judgment, the aforementioned facts, in addition to the length of the suit, weighed strongly in favor of granting default judgment, even though it was the taxpayer’s conduct before his death that gave rise to the tax liability.
I.R.C. § 7403 provides as follows:
In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability. For purposes of the preceding sentence, any acceleration of payment under section 6166(g) shall be treated as a neglect to pay tax.
All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.
The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States. If the property is sold to satisfy a first lien held by the United States, the United States may bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs.
In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.
 26 U.S.C.A. § 6321.
 26 U.S.C.A. § 7403.
 2020 WL 609291, at *3 (E.D. Wash. Feb. 7, 2020))
 Id. at *1.
 782 F.2d 1470, (9th Cir. 1986)
 United States v. Lyons, 2020 WL at *1 (citing Eitel v. McCool at 1471–72).
 See id.
 See id. at *2.
 See id.
 See id.
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