by A debtor seeking recovery of damages, fees, or costs from the IRS in connection with a discharge injunction violation must first exhaust administrative remedies as required by the Internal Revenue Code. In re Thal, No. 09-12434, In re Slattery, No. 11-20554, 2018 Bankr. LEXIS 1308 (Bankr. S.D. Fla. May 8, 2018).
The chapter 13 debtors, Lucy Thal and Robert Slattery, filed plans in their separate bankruptcy cases under which they paid priority IRS tax debts in full and treated their remaining tax liability as general unsecured debt. Both debtors completed their plans and obtained discharges. Nonetheless, after discharge, the IRS sent both debtors levy notices. It also intercepted a portion of Ms. Thal’s social security benefits, which it later returned, and Mr. Slattery’s tax refunds, which it did not return. In both cases, the debtors filed motions for contempt for violation of the discharge injunction.
The IRS maintained that it should not be held in contempt because it was not aware that its post-discharge collection activity violated the discharge injunction. The court disagreed. The IRS knew of the debtors’ bankruptcies and their discharges and the collection efforts were intentional even if the discharge injunction violation itself was not likewise intentional. The court further rejected the IRS’s contention that Mr. Slattery’s discharge did not fully discharge the debt, citing the reach of the “superdischarge” applicable to tax debts in chapter 13, which permits a debtor to pay off only the priority portion and discharge the remaining tax debt. In both cases, therefore, the court found that the IRS violated the discharge injunction.
The court turned to the issue of the compensation to which the debtors were entitled. Ms. Thal sought punitive damages and attorney’s fees. Mr. Slattery sought return of his intercepted funds, damages, and attorney’s fees.
The court denied Ms. Thal’s claim for punitive damages because, while section 106(a)(3) of the Code waives sovereign immunity as to governmental units, it specifically excludes punitive damages. As to Mr. Slattery’s claim for return of his intercepted tax refund, the court found that because that relief was not “damages” within the meaning of the relevant Internal Revenue Code provisions, it could, and did, order that relief.
The remaining issue was whether, in order for Mr. Slattery to collect additional damages, and for both debtors to collect attorney’s fees and costs from the IRS, the debtors were required to exhaust their administrative remedies under section 7433 of the Internal Revenue Code.
Section 7433(a) authorizes suit against the United States in connection with reckless or negligent collection of income tax. Section 7433(b) permits collection of damages against the United States for such violation. Section 7433(d) provides that before a litigant can collect damages, he or she must exhaust administrative remedies. Section 7433(e)(1), enacted in 1988, permits a bankruptcy debtor to “petition the bankruptcy court to recover damages against the United States,” if the offending collection activity violates the automatic stay or the discharge injunction. Section 7433(e)(2)(A) provides that, with the exception of actions under 362(k), the bankruptcy court’s authority is not based on its powers under section 105(b) but arises out of, and is limited to, the authority granted by the IRC.
In arguing that the bankruptcy court had the power to award damages, Ms. Thal and Mr. Slattery cited In re Jove Engineering, 92 F. 3d 1539 (11th Cir. 1996), for the proposition that a debtor could seek damages against the IRS under 11 U.S.C. §105 so long as such award was consistent with section 2412(d)(2)(A) of title 28 (the general fee-shifting provision) and non-bankruptcy law. The court found that the applicability of Jove’s holding to the issue of exhaustion of administrative remedies was unclear but held that, to the extent Jove supported the debtors’ argument, it was superseded by section 7433(e) which was enacted two years later.
The court also considered and rejected the contrary view set forth in In re Jha, 461 B.R. 611 (Bankr. N.D. Cal. 2011), in which that court found that debtors need not exhaust administrative remedies. The court found that the Jha court ignored the plain meaning of various provisions in section 7433.
Therefore, the court found that “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).”