LAUREL M. ISICOFF, Bankruptcy Judge.
These cases present the latest entry in an ongoing debate — if a former debtor seeks damages or attorney fees and costs from the Internal Revenue Service (the "IRS") for violations of the discharge injunction, is the former debtor first required to exhaust administrative remedies before seeking recourse from the bankruptcy court? Having carefully considered the applicable statutes and case law, I have determined that the majority view is correct — in order for a former debtor to seek recovery of damages, fees, or costs from the IRS in connection with a discharge injunction violation, the former debtor must first comply with the requirements of 26 U.S.C. §§7430 and 7433
On February 12, 2009, Lucy Thal ("Ms. Thal") filed a voluntary petition for relief under chapter 13 of the United States Bankruptcy Code (ECF #1). Ms. Thal listed the IRS as one of her creditors. On April 29, 2009, the IRS filed a proof of claim (the "IRS Thal Claim") that listed a priority claim for $7,176.27 and an unsecured general claim for $60,515.87. On October 9, 2009, Ms. Thal filed her Third Amended Chapter 13 Plan (ECF #57) (the "Thal Plan"). In the Thal Plan, Ms. Thal proposed to pay the IRS $7,176.27 on account of its priority claim. The IRS did not object to the Thal Plan and the Court confirmed the Thal Plan on October 14, 2009 (ECF #59).
On November 4, 2015, Ms. Thal filed an objection to the IRS Thal Claim (the "Claim Objection") (ECF #149). In the Claim Objection, Ms. Thal stated that the IRS priority claim was paid in full through the Thal Plan and the IRS general unsecured claim should be stricken and disallowed. On December 7, 2015, the Court entered an order sustaining the Claim Objection (ECF #157).
The bankruptcy case was dismissed and reinstated several times,
On February 13, 2017, the IRS sent four Notices of Intent to Seize (levy) to Ms. Thal for tax years 2002, 2003, 2004, and 2005 for charges in the amount of $37,112.68. On June 5, 2017, the IRS sent Ms. Thal a Notice of Intent to Seize up to 15% of her Social Security benefits for taxes due for tax years 2002, 2003, 2004, and 2005 which taxes, according to the notice, totaled $17,263.75.
On August 10, 2017, Ms. Thal filed a Motion for Contempt for Violation of the Discharge Injunction against the IRS (ECF #202) (the "Thal Motion"). Ms. Thal argues that the IRS violated the discharge injunction set forth in 11 U.S.C. §524(a)(2)
On November 2, 2017, the IRS responded to the Thal Motion. First, the IRS states that it was not advised that a Notice of Intent to Seize was sent to Ms. Thal, and first learned of the notice only when the Thal Motion was filed. The IRS also stated that it was not until September 27, 2017, that Ms. Thal's counsel advised the United States Attorney's Office that the IRS had taken $227.85 from Ms. Thal. The IRS asserts that as soon as it learned it had taken the funds it placed a stop on all future collection actions against Ms. Thal for tax periods 2002, 2003, 2004, and 2005, and refunded the $227.85. So, the IRS argues, it would not be appropriate to issue a sanction for violating the discharge injunction.
Second, the IRS argues that Ms. Thal's request for attorney's fees and costs should be denied because Ms. Thal, before filing the Thal Motion, failed to exhaust her administrative remedies as required by subsection 7433(e) of the Internal Revenue Code.
On April 20, 2011, Robert Lee Slattery ("Mr. Slattery") filed a voluntary petition for relief under chapter 13 of the United States Bankruptcy Code (ECF #1). Mr. Slattery scheduled the IRS as one of his creditors. On April 27, 2011, the IRS filed a proof of claim (the "Slattery Claim") that listed an unsecured priority claim for $37,771.11 and a general unsecured claim for $6,889.41, for tax years 2006, 2008, 2009, and 2010.
On August 1, 2011, Mr. Slattery filed his Second Amended Chapter 13 Plan (the "Slattery Plan") (ECF #36). In the Slattery Plan, Mr. Slattery proposed to pay the IRS, over the life of the Slattery Plan, $37,771.11 on account of the IRS priority claim. In addition, the Slattery Plan proposed to pay all unsecured creditors their respective pro rata share of a $5.00 monthly dividend. The IRS did not object to the Slattery Plan and the Court confirmed the Slattery Plan on October 20, 2011 (ECF #53).
Mr. Slattery completed his plan payments on August 31, 2016 (ECF #73) and received his discharge on October 13, 2016 (ECF #77). The IRS does not dispute that it received a total of $38,031.36 from Mr. Slattery's plan payments. The amount of $37,771.11 was applied to the priority claim, and $260.25 was applied to the general unsecured claim.
On December 5, 2016, Mr. Slattery received two Notices of Intent to Levy for tax years 2008 and 2009 for charges in the total amount of $1,449.00.
On August 25, 2017, Mr. Slattery filed Debtor's Motion to Reopen Case and Motion for Contempt Against the Internal Revenue Service for Violation of the Discharge Injunction Pursuant to Section 524(a)(2) and Motion to Compel Return of Funds (ECF #88) (the "Slattery Motion") arguing that the IRS' collection actions violated the discharge injunction. Mr. Slattery has asked the Court to hold the IRS in contempt for violation of the discharge injunction, compel the return of garnished funds, and order the IRS to pay attorney fees and costs for the filing of the Slattery Motion.
On November 2, 2017, the IRS responded to the Slattery Motion. First, the IRS argues that the taxes at issue were excepted from discharge and therefore its actions to collect any balance do not violate the discharge injunction. Mr. Slattery does not dispute that the priority taxes are not dischargeable, but argues that they were paid in full in accordance with the confirmed Slattery Plan and therefore the IRS cannot collect on account of those tax years.
Second, the IRS argues that Mr. Slattery's request for attorney's fees and costs should be denied because Mr. Slattery, before filing the Slattery Motion, failed to exhaust his administrative remedies under subsection 7433(e) of the Internal Revenue Code.
The IRS acknowledges that it intercepted Ms. Thal's funds but argues that since the IRS acted without knowing that the act was a violation of the discharge injunction, the IRS argues it should not be penalized. However, not knowing that the interception was a violation does not excuse the IRS's intentional violation of the discharge injunction. See Hardy v. U.S., 97 F.3d 1384, 1390 (11th Cir. 1996) (willful violation of the discharge injunction requires knowledge of the discharge combined with the intent to commit the acts that violate the discharge injunction.); accord In re Jove Engineering, 92 F.3d 1539 (11
The IRS also argues that it did not violate the discharge injunction when it intercepted Mr. Slattery's tax refund because the priority taxes are non-dischargeable. The argument that the taxes were non-dischargeable is not relevant, because the IRS Slattery Claim was discharged by payment in full under the Slattery Plan. As the bankruptcy court explained in Holway v. U.S., 237 B.R. 217, 219 (Bankr. M.D. Fla. 1999)
Therefore, the IRS' collection efforts did violate the discharge injunction. See also U.S. v. Ellen E. Monahan 497 B.R. 642 (B.A.P. 1st Cir. 2013).
Because I find that with respect to both Ms. Thal and Mr. Slattery the IRS violated the discharge injunction, I will now turn to the damages requested by each debtor with respect to the violation.
Ms. Thal requests this Court award punitive damages and attorney fees arising from the violation of the discharge injunction. Mr. Slattery seeks a finding of contempt, return of his funds, and attorney fees. I can grant some relief, some I cannot, and some I cannot without the Debtors exhausting the administrative remedies established by applicable IRS regulations.
The United States has waived its sovereign immunity with respect to certain provisions of the Bankruptcy Code, including claims arising under section 524. 11 U.S.C. §106(a)(1). Thus, the bankruptcy court is authorized to enter "an order or judgment awarding a money recovery" for violation of the discharge injunction. 11 U.S.C. §106(a)(3). However, section 106 carves out from that authority any award of punitive damages. Consequently, Ms. Thal may not bring a claim for punitive damages.
Mr. Slattery demands return of the money that the IRS improperly took in payment of the discharged taxes. This Court has authority to consider and grant such relief without the need to pursue administrative remedies through IRS regulations. See In re Moore, 2013 WL 4017936, at 4 (Bankr. M.D. Ga. 2013) (26 U.S.C. §7433(e) only applies to a claim for damages. A debtor's request that the court find the IRS violated the discharge injunction and enter an order compelling the IRS to cease collection activities is not a claim for damages and does not require the exhaustion of administrative remedies before the bankruptcy court may grant relief.) Consequently, nothing in 26 U.S.C. §7430 or §7433 impacts my ability to determine whether the IRS must return the funds to Mr. Slattery
Resolution of the administrative remedies issue revolves around the interplay of 26 U.S.C. §§7430 and 7433 with 11 U.S.C. §§105, 106 and 524.
In 1982 Congress enacted 26 U.S.C. §7430 titled "Awarding of Costs and Certain Fees", as part of the Tax Equity and Fiscal Responsibility Act of 1982. Section 7430
In 1988, Congress enacted 26 U.S.C. §7433 titled "Civil Damages for Certain Unauthorized Collection Actions." Section 7433
In 1998 Congress added 26 U.S.C. §7433(e). That subsection provides that, should the IRS violate either 11 U.S.C. §362 or 11 U.S.C. §524, "such taxpayer may petition the bankruptcy court to recover damages against the United States." 26 U.S.C. §7433(e)(1). However, except with respect to an action under section 362(h),
The Debtors argue that they are not required to exhaust administrative remedies prior to claiming damages and attorney fees, relying on the Eleventh Circuit opinion of In re Jove Engineering, 92 F.3d 1539 as well as In re Jha, 461 B.R. 611 (Bankr. N.D. Cal. 2011). I will turn first to Jove Engineering.
The Eleventh Circuit's holding that "the court has discretion to award attorney fees under §105(a), but such awards must be consistent with 28 U.S.C. §2412 and 26 U.S.C. §7430" is unclear. Id. at 1559. Arguably it could mean that the district court to whom the case was remanded should require the debtor to pursue administrative remedies first. However, since the Eleventh Circuit never discussed exhaustion of administrative remedies, presumably the court was referring to the definition of "reasonable litigation costs" as defined in 26 U.S.C. §7430(a)(2).
As already noted, subsection 7433(e) makes very clear that section 7433 applies to any claim for damages for violation of the discharge injunction. Thus, except in the case of a claim under 11 U.S.C. §362(k), a plaintiff must make any claim to the bankruptcy court, not the district court, and the claim can only be made after exhaustion of administrative remedies.
There are some cases, including In re Jha, upon which the Debtors rely, that hold to the contrary. However, I find that those cases ignore the plain meaning of the statute. In Jha, the court stated that "[t]here is no mention in 26 U.S.C. §7433(e), the section devoted exclusively to bankruptcy violations, of the need to exhaust administrative remedies." Jha, 461 B.R. 625. Therefore, the Jha court held, the debtor need not exhaust administrative remedies before seeking relief in bankruptcy court. Id. However, the Jha court disregarded the clear cross-references in 26 U.S.C. §7433. Subsection 7433(b) — damages limitations, explicitly applies to petitions brought under subsection 7433(e); in turn subsection 7433(d)(1) applies to all awards for damages under subsection 7433(b). Thus, the statute is clear that the exhaustion of administrative remedies requirement of subsection 7433(d) applies to petitions that are brought under subsection 7433(e). This interpretation follows the well-settled rule that "all parts of a statute, if possible, are to be given effect." See Am. Textile Mfrs. Inst., Inc. v. Donovan, 452 U.S. 490, 513 (1981).
Thus, in summary, I find that the Internal Revenue Service violated the discharge injunction both in the case of Ms. Thal and in the case of Mr. Slattery. I further find that I have no authority to enter punitive damages against the Internal Revenue Service even if I found the level of its violation warranted punitive damages, which I do not. Additionally, I find that I have the authority to direct, and do direct, the Internal Revenue Service to return the money that it has taken from Mr. Slattery and seize any further collection efforts with respect to the paid taxes. Finally, I find that, while the Debtors may be entitled to seek attorney fees and costs, they may not do so until such time as any that they have exhausted the administrative remedies provided by the applicable IRS regulations.
The attorney for the Debtors is directed to submit orders in the respective bankruptcy cases consistent with this Memorandum Opinion.
ORDERED.