In Canada v. United States, 125 AFTR2d 2020-960 (5th Cir. 2020) the taxpayer brought a Bivens suit seeking damages against the revenue agents because the agents caused the IRS to assess against him a tax shelter penalty under IRC 6707 in an amount so high payment of the penalty was a practical impossibility. If this story sounds similar, remember the case of Larson v. United States, 2018 U.S. App. LEXIS 10418 (2nd Cir. 2018) discussed here and here. Larson is not the only other case to reveal this problem. Other cases with this same problem include Diversified Group Inc. v. United States, 841 F.3d 975 (Fed. Cir. 2016), which tried unsuccessfully to argue that the penalty was divisible, and the three circuit cases litigated by Lavar Taylor seeking unsuccessfully to get a foot in the door using the merit litigation provisions of Collection Due Process discussed here. The ability of the IRS to assess a non-divisible penalty under IRC 6707 in a staggering amount puts taxpayers back in the boat they were in prior to the creation of the Tax Court. It also reminds us that 100 years ago Senators pushed for the creation of the Tax Court in order to prevent individuals from seeking bankruptcy as a refuge from taxes they could not contest judicially without full payment.
In Canada, bankruptcy is exactly where he went so that he could litigate the merits of his tax liability under B.C. 505(a) since he did not have enough money to meet the Flora rule. The taxpayer won the merits of his case in bankruptcy beating back the incredibly high penalty amount assessed by the IRS. United States v. Canada (In re Canada), 574 B.R. 620, 623 [119 AFTR 2d 2017-1752] (N.D. Tex. 2017). After succeeding in essentially eliminating the liability through the bankruptcy proceeding, he turned and argued that the agents who caused the assessment of this penalty knew that he had no prepayment forum where he could litigate the liability and knew they were wrongfully forcing him into bankruptcy. He brought this Bivens suit seeking to recover damages and attorney’s fees from the individuals he blamed for being forced into bankruptcy. The Fifth Circuit, affirming the lower courts’ dismissal of the case, carefully analyzed the factors necessary for a Bivens action, before pointing out that precedent in recent decades disfavors expansion of the original decision and two cases decided shortly thereafter. The court also points out that if successful, his suit would provide an end run around the Flora rule of full payment.
Because I think the Flora rule should not apply to non-deficiency cases, I am not too saddened by an end run around Flora. I also applaud the ingenuity of the argument here; however, the Supreme Court has made it clear in the decades following Bivens that it does not want to expand the grounds for obtaining recovery from government agents. The result here comes as no particular surprise. I found heartening the success of Mr. Canada in removing the penalty at the bankruptcy level.
For anyone not familiar with Bivens cases and the IRS we have discussed them previously here and here. Government agents at all agencies need protection from personal suits brought concerning actions taken in the scope of their employment. Interpreting that scope broadly makes sense as we don’t want to chill the government employees from doing their job. At the same time if government employees do something so egregious and outside the scope of their employment, it also makes sense that at some point the immunity that protects them from personal liability goes away. Bivens brings out facts where the immunity goes away, but the Supreme Court wants and needs to carefully control the circumstances where that exists. The Fifth Circuit in Canada looks at the history of the case law after Bivens in concluding that the actions of the revenue agents in assessing the 6707 penalty against Mr. Canada did not rise to the level of action that could give rise to a personal liability against them.
Canada argues that the district court below improperly considered the special factors by applying a “sound reason” standard rather than a “convincing reason” one. Canada asserts the latter is what Ziglar requires.
The Fifth Circuit finds that Canada cannot fit himself into one of the narrow paths for application of Bivens. It points out that if what he seeks is some form of compensation for his efforts to rid himself of the 6707 assessment, he had other paths available:
It is unclear why Canada did not simply file an application for fees in the bankruptcy court or in the initial district court. Canada states the IRS’s appeal to the district court deprived the bankruptcy court of jurisdiction to consider his fee request. Canada also contends that the appeal forecloses the IRS’s untimeliness argument or is a compelling reason to extend the 26 U.S.C. § 7430‘s 30-day period. These arguments make little sense. He could have filed a motion for the recovery of fees at any time during the pendency of the case in the bankruptcy court. Canada also had the option of moving to reopen the bankruptcy case once the initial district court’s ruling on appeal became unappealable. See 11 U.S.C. § 350(b) (“A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.”). Similarly, Canada had the ability to ask the initial district court to award him fees anytime between the start of the appeal and 30-days after the IRS could no longer appeal the district court’s order. There is no convincing reason why Canada could not have filed an application for fees under 26 U.S.C. § 7430 in one of those two courts before August 2017 because of an appeal that ended on May 8, 2017. Nevertheless, assuming arguendo that his proposition is accurate, he still could have filed this lawsuit before the 30-day time period lapsed.
While I am sympathetic with Mr. Canada because the current interpretation of the Flora rule essentially forced him into bankruptcy, the Fifth Circuit’s opinion makes sense to me. Bivens does not seem like the right place to go for the wrong he has suffered. Bringing an application for fees seems more appropriate even though I understand this might not adequately compensate him for the trouble he has endured. The real answer lies in removing the Flora rules as a barrier to litigating the correctness of certain penalty assessments. Until that problem goes away, others will use their creative energies similar to the way Mr. Canada has done. The problem is not the agents. The problem lies with the current interpretation of Flora which prevents, as a practical matter, taxpayers from contesting certain assessable penalties. It also lies with Congress which has created the assessable penalties leaving taxpayers no alternative but bankruptcy should they seek to contest the liability. Congress knew better than this a century ago when it created the predecessor to the Tax Court.