Canada v. United States

• Decision Date: 20 February 2020
• Docket Number: No. 18-11398,18-11398
• Parties: William R. CANADA, Jr., Plaintiff – Appellant v. UNITED STATES of America (Internal Revenue Service); Michael Halpert, Individually and not in his official capacity; Robert Meyer, Individually and not in his official capacity; Denise McCaskill, Individually and not in her official capacity, Defendants – Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

950 F.3d 299

William R. CANADA, Jr., Plaintiff – Appellant

v.UNITED STATES of America (Internal Revenue Service); Michael Halpert, Individually and not in his official capacity; Robert Meyer, Individually and not in his official capacity; Denise McCaskill, Individually and not in her official capacity, Defendants – Appellees

No. 18-11398

United States Court of Appeals, Fifth Circuit.

FILED February 20, 2020

John Paul Lewis, Jr., Esq., Dallas, TX, for Plaintiff-Appellant.

Geoffrey Klimas, Teresa Ellen McLaughlin, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, Thomas M. Herrin, U.S. Department of Justice, Tax Division, Dallas, TX, for Defendant-Appellee.

Before HAYNES and OLDHAM, Circuit Judges, and HANEN,^* District Judge.

ANDREW S. HANEN, District Judge:

Appellant, William Canada, Jr., successfully challenged in bankruptcy court a tax penalty assessed against him by the Internal Revenue Service (the "IRS") that exceeded $40 million. A few months after a district court affirmed the bankruptcy court’s decision on the tax liability issue, Canada filed an independent lawsuit against the IRS and three IRS agents in their individual capacities (the "Individual Defendants") (collectively, the "Defendants").¹ Canada pleaded a claim for damages against the Individual Defendants under Bivens v. Six Unknown Fed. Narcotics Agents , 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971), for allegedly violating his Fifth Amendment right to procedural due process, and further sought from the IRS the attorney’s fees he incurred litigating the penalty issue in his Chapter 11 bankruptcy case under 26 U.S.C. § 7430 and the Equal Access to Justice Act, 28 U.S.C. § 2412.

The district court below granted the Defendants’ Rule 12(b)(6) motion and dismissed the lawsuit with prejudice because: (1) special factors counselled against extending a Bivens action to this new context; (2) the Individual Defendants were protected by qualified immunity; and (3) Canada’s request for attorney’s fees under the Internal Revenue Code was untimely. Canada timely appealed those rulings to this court.

We affirm.

I. Background

Canada is a lawyer who primarily worked as a commercial litigator from 1979 through 1995. At that point, he joined the Heritage Organization, LLC ("Heritage"), which specialized in personal finance and estate planning strategies for high-net-worth individuals. Canada was Heritage’s President from 1995 to 2002 and Chief Operating Officer between 1995 and 2000.

In 1998, an outside law firm informed Heritage of a new strategy designed to reduce capital gains taxes for Heritage’s clients. Although the strategy varied depending on the specific situation, generally Heritage would advise a client to open an individual brokerage account, short-sell Treasury securities through that account, and reinvest the short-sale proceeds in reverse repurchase agreements.² The client would then contribute the brokerage account (including the obligation to repurchase the Treasury securities) to a newly-formed pass-through entity. This strategy allowed Heritage’s clients to reduce large capital gains by generating artificial losses, and thus reduce the taxpayer’s overall capital gains tax.

Heritage successfully suggested the artificial loss strategy (the "Transactions") to multiple clients between 1998 and 2002. Canada left Heritage in 2002 because of a compensation dispute. Two years later, he won a large arbitration award against the company, which apparently compelled it to file for bankruptcy. In 2007, during Heritage’s bankruptcy case, Canada received notice letters informing him of an IRS investigation regarding possible penalties under 26 U.S.C. §§ 6707 and 6108 for failing to report tax shelter transactions as required by 26 U.S.C. § 6111.³ In April 2015, the IRS notified Canada of its intention to impose penalties as high as $49,108,452 against him under 26 U.S.C. § 6707.⁴ According to Canada, the IRS ignored his protests on the merits of the penalties and would only discuss his ability to actually pay them. Additionally, one of the Individual Defendants allegedly told Canada’s attorney that "all of the IRS’s proposed promoter penalties like the penalties to be assessed against Canada had been sustained by the IRS Appeals division 100% of the time." After reviewing Canada’s financial situation, the IRS proposed he pay it $5 million, a sum which he claims was substantially in excess of his net worth. Feeling like he had no other option, on September 15, 2015, Canada filed a voluntary Chapter 11 bankruptcy petition.

On Canada’s Schedule B (disclosure of personal property), he listed $1 million for contingent and unliquidated "[c]laims against the IRS and individual IRS Agents," among others.⁵ The IRS filed a proof of claim for $40,346,167.87, all but approximately $58,000 of that amount represented the 26 U.S.C. § 6707 penalties. Canada timely objected to the claim. The bankruptcy court held a two-day trial and ultimately sustained Canada’s objections and disallowed the IRS’s claim for the penalties because: (1) the Transactions were not "tax shelters" under 26 U.S.C. § 6111(c) ; and (2) even if they were, Canada had "reasonable cause" for not registering them. In re Canada , No. 15-33757-BJH, 2016 WL 3349165, 2016 Bankr. LEXIS 2234 (Bankr. N.D. Tex. June 7, 2016).

On May 8, 2017, the initial district court affirmed the bankruptcy court on both points.⁶ See In re Canada , 574 B.R. at 641. The IRS did not appeal that district court’s decision. It is now a final order and not at issue in this case. In the meantime, the bankruptcy court confirmed Canada’s Chapter 11 plan of reorganization in March 2017. Canada also fully administered his plan, received a discharge, and his bankruptcy case was closed on May 9, 2017.

II. Procedural History

Canada filed the underlying lawsuit against the Defendants on September 14, 2017. His Amended Complaint seeks damages under Bivens against the Individual Defendants for abridging his rights under the Due Process Clause of the Fifth Amendment when they knowingly and intentionally subjected him to a baseless penalty pegged at an amount so high that he could not seek judicial review. Canada also pleaded for recovery of the attorney’s fees he incurred in the bankruptcy litigation pursuant to either the Equal Access for Justice Act or 26 U.S.C. § 7430. The Defendants moved to dismiss Canada’s Amended Complaint.

The case was referred to a Magistrate Judge, who recommended that Defendants’ motion be granted, and that Canada’s case be dismissed with prejudice. Specifically, the Magistrate Judge found that an action under Bivens cannot be brought in this case since: (1) Canada’s claims are a new Bivens context under Ziglar v. Abbasi , ––– U.S. ––––, 137 S. Ct. 1843, 198 L.Ed.2d 290 (2017), and as such are discouraged; and (2) special factors counsel hesitation to imply a claim for damages against the Individual Defendants. Moreover, the Magistrate Judge determined that the Individual Defendants were protected by qualified immunity. Lastly, the recommendation suggested Canada’s claim for attorney’s fees be dismissed. In particular, the recommendation noted that 26 U.S.C. § 7430 precludes Canada’s recovery of fees under the Equal Access to Justice Act. See 28 U.S.C. § 2412(e) ; Info. Res., Inc. v. United States , 996 F.2d 780, 785 n.5 (5th Cir. 1993). The Magistrate Judge also agreed with the Defendants that Plaintiff’s application for fees under 26 U.S.C. § 7430 was untimely and not tolled by 11 U.S.C. § 108(a).

The district court below adopted the Magistrate Judge’s findings, conclusions, and recommendation over Canada’s objections and dismissed the case with prejudice. Canada timely appealed.⁷

III. Standard of Review

The court reviews dismissals under Rule 12(b)(6) de novo . Causey v. Sewell Cadillac-Chevrolet, Inc. , 394 F.3d 285, 288 (5th Cir. 2004). "[A] complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation and internal quotation marks omitted).

The court also reviews the grant of qualified immunity de novo . Brown v. Miller , 519 F.3d 231, 236 (5th Cir. 2008). "Our jurisdiction over qualified immunity appeals extends to ‘elements of the asserted cause of action’ that are ‘directly implicated by the defense of qualified immunity[,]’ including whether to recognize new Bivens claims." De La Paz v. Coy , 786 F.3d 367, 371 (5th Cir. 2015) (internal citation and quotation omitted).

IV. Discussion

A. Extending Bivens Under the Ziglar Test

In Bivens , the Supreme Court recognized an implied cause of action for damages against federal officers for violating the Fourth Amendment’s prohibition against unreasonable searches and seizures. See 403 U.S. at 397, 91 S.Ct. 1999. "In the next nine years, the Court recognized two more implied causes of action under Bivens : a Fifth Amendment equal protection claim for employment discrimination by a congressman ... and an Eighth Amendment claim for inadequate medical care by federal jailers ...." Cantú v. Moody , 933 F.3d 414, 421 (5th Cir. 2019) (first citing Davis v. Passman , 442 U.S. 228, 99 S.Ct. 2264, 60 L.Ed.2d 846 (1979) ; and then citing Carlson v. Green , 446 U.S. 14, 100 S.Ct. 1468, 64 L.Ed.2d 15 (1980) ).

In the 40 years since Carlson , the Supreme Court has not approved of any other implied damages remedy under the Constitution. See Ziglar , 137 S. Ct. at 1855 ; see also id. at 1857 (collecting cases). Indeed, the Supreme Court acknowledged that its analysis in Bivens , Davis , and Carlson "might be different if they were decided today." Id. at 1856. Although those three cases remain "good law," the Supreme Court "has made clear that expanding the Bivens remedy is now a ‘disfavored’ judicial activity." Id. at 1856–57 (quoting Ashcroft v. Iqbal , 556 U.S. 662, 675, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).

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