Internal Revenue Code § 7433(e) Is The Exclusive Taxpayer Remedy For IRS' Willful Violation Of A Discharge Injunction
KOVACS v. UNITED STATES OF AMERICA (July 29, 2010)
Nancy Kovacs accumulated some federal income tax liability in the early 1990s. She entered into an agreement with the IRS in 1996 to resolve those liabilities. The agreement required her to pay her tax liabilities on time for the ensuing five years. She was unable to do so. The IRS terminated the agreement and reinstated the tax liability in 2001. Several months later, Kovacs filed for bankruptcy. In late 2001, she received a bankruptcy discharge. The discharge included her tax liabilities. Notwithstanding the discharge, the IRS continued to demand payment. It even applied some overpaid taxes to the obligation. Kovacs' attorney originally misunderstood the impact of the discharge, thought she still owed taxes, and attempted to reach another agreement with the IRS. The IRS continued to demand payment until August of 2003, when it informed Kovacs’ attorneys that the tax liability had indeed been discharged. Remarkably, the IRS sent two more letters -- in September of 2003 -- indicating that the taxes were still owed. Kovacs brought an adversary complaint in bankruptcy seeking damages for the attorneys’ fees she incurred. The bankruptcy court denied the IRS' motion to dismiss on jurisdictional grounds and the case was tried. The bankruptcy court awarded $25,000 in damages. The district court remanded for a determination of the timeliness of the suit under § 7433 of the Internal Revenue Code, which has a two year statute of limitations. It did not address the bankruptcy court's alternative holding that it had authority under §§ 105 and 106 of the bankruptcy code, which has no limitations period. On remand, the bankruptcy court concluded that the cause of action accrued in July 2002 and dismissed her claim for failure to bring it within the two year statute of limitations. Judge Stadtmueller (E.D. Wis.) affirmed. Kovacs appeals.
In their opinion, Circuit Judges Flaum and Wood and District Judge St. Eve affirmed in part and reversed in part. The Court conceded that § 105 of the Bankruptcy Code has no statute of limitations and grants broad power to a bankruptcy court, including the power to issue any order necessary to carry out the provisions of the code. Nevertheless, § 7433 of the Internal Revenue Code provides that "notwithstanding [§ 105]", it "shall be the exclusive remedy for recovering damages" resulting from the IRS' willful violation of a discharge injunction. The Court concluded that the language of § 7433 was "exceedingly clear" and was thus the only section under which Kovacs could proceed. The Court therefore applied to the section's two year statute of limitations to Kovacs' claims. Her claims accrued when she had a reasonable opportunity to discover the elements of her claim. The Court agreed with the bankruptcy court that Kovacs had that opportunity when she received six notices of intent to levy in July of 2002. The result does not change because of the mistake of her counsel. The Court therefore affirmed the dismissal of the claims based on the July communications. There were two other communications, however, that did occur within the limitations period. The Court found that each of the September letters was a discreet violation of the discharge injunction. They both stated that Kovacs still owed the full amount of her discharged tax liabilities. The Court rejected Kovacs' continuing violation theory because the September letters were not part of a series of acts that resulted in an injury -- they were discrete acts themselves. Kovacs' claims based on those two September letters are not time barred.
