Kovacs v. USA
| Decision Date | 29 July 2010 |
| Docket Number | No. 09-3328.,09-3328. |
| Citation | 614 F.3d 666 |
| Parties | Nancy Ellen KOVACS, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
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Douglas H. Frazer, Attorney, Dewitt, Ross & Stevens, Brookfield, WI, for Plaintiff-Appellant.
Thomas J. Clark, Attorney, Anthony T. Sheehan, Attorney, Department of Justice, Hilarie E. Snyder, Attorney, Internal Revenue Service, Washington, DC, for Defendant-Appellee.
Before FLAUM and WOOD, Circuit Judges, and ST. EVE, District Judge. 1
Plaintiff-Appellant Nancy E. Kovacs (“Kovacs”) appeals from an order of the district court affirming the bankruptcy court's dismissal of Kovacs' claim for lack of jurisdiction. The judgment of the district court is affirmed in part and reversed and remanded in part for further proceedings consistent with this opinion.
Kovacs, a taxpayer, filed suit against Defendant-Appellee United States of America seeking to recover damages resulting from the Internal Revenue Service's (“IRS”) alleged violation of the discharge injunction provided by Section 524 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. Kovacs' suit arises from an Offer and Compromise (“OIC”) that she entered into with the IRS in 1996 to resolve her tax liabilities for tax years 1990 through 1995. The OIC required Kovacs to timely pay her taxes for the five years subsequent to the date that the IRS accepted the OIC. Due to health problems, Kovacs was unable to pay her 1999 taxes. As a result, the IRS informed Kovacs in a January 29, 2001 letter that it was terminating her OIC and reinstating her outstanding taxes.
On July 3, 2001, Kovacs filed for Chapter 7 bankruptcy. On October 10, 2001, Kovacs received a bankruptcy discharge which included her tax liabilities for tax years 1990 through 1995. Notwithstanding the discharge, the IRS informed Kovacs in a November 5, 2001 notice that it had applied her overpaid taxes for tax year 2000 to her taxes from tax year 1991. On March 5, 2002, Kovacs contacted the IRS and informed a service representative that she had filed for bankruptcy and obtained a discharge from tax years 1990 through 1995, including the 1991 tax year to which the IRS had applied her overpayment. The service representative informed Kovacs that she could continue to make payments for the non-discharged tax years because the IRS had not discharged all of Kovacs' tax liabilities. That same day, Kovacs sent a letter to the IRS asserting that the IRS had discharged her debts for 1991 through 1995.
After writing the letter to the IRS, Kovacs met with counsel. Kovacs provided copies of the bankruptcy discharge order to her attorneys, as well as the IRS's post-discharge notice. Kovacs' attorneys then contacted the IRS officer who wrote the OIC revocation letters sent to Kovacs. The IRS officer informed Kovacs' attorneys that the IRS likely could not reinstate the revoked OIC and that the most efficient way to resolve Kovacs' situation would be to file a new OIC. Kovacs' attorneys also discussed the discharge of Kovacs' taxes from 1990 through 1995 and concluded that the IRS had not discharged the taxes because the 1996 settlement had caused a “reassessment” of the 1990-1995 taxes. Because they believed that this “reassessment” occurred less than 240 days before Kovacs filed for bankruptcy, Kovacs' attorneys concluded that 11 U.S.C. §§ 507(a)(8) and 523(a)(8) resulted in the non-dischargeability of the taxes. They then determined that the best strategy to resolve Kovacs' issues would be to file a new OIC with the IRS. On April 2, 2002, Kovacs' attorneys submitted a new OIC to the IRS on behalf of Kovacs informing the IRS that Kovacs had filed for bankruptcy and received a discharge in 2001. After the IRS requested further information, Kovacs' attorneys submitted Kovacs' bankruptcy discharge papers to the IRS. The IRS responded that it would not consider the OIC while a bankruptcy was proceeding. Kovacs' attorneys again contacted the IRS and informed it that the bankruptcy proceeding was not open.
On July 8, 2002, the IRS sent Kovacs six notices of intent to levy for tax years 1990 through 1995, as well as 1999. Kovacs' attorneys continued to pursue the new OIC on behalf of Kovacs, but on January 30, 2003, the IRS rejected the OIC based on its determination that Kovacs had the ability to pay more than the offer amount. Kovacs appealed that decision on February 6, 2003. In pursuing that appeal, Kovacs' attorneys communicated with IRS Appeals Officer Teresa Mulcahy between July 11, 2003 and August 13, 2003. Kovacs' attorneys provided Mulcahy a history of Kovacs' case, including the IRS's determination that the discharge did not cover the 1990-1995 tax years. On August 13, 2003, Mulcahy informed Kovacs' attorneys by telephone that the IRS had made a mistake and that Kovacs' tax liabilities for 1990-1995 had been discharged in Kovacs' 2001 bankruptcy. The IRS confirmed this information in an August 14, 2003 letter to Kovacs.
Despite this communication from the IRS, on September 8, 2003, the IRS sent Kovacs a statement of adjustment indicating that the IRS was transferring credit for her 2001 tax refund to her 1990 tax year liabilities. The notice also indicated a balance due for Kovacs' 1990 tax liabilities. By letter dated September 18, 2003, the IRS rejected Kovacs' most recent OIC for the 1990-1995 and 1999 taxes. The September 18, 2003 letter stated that Kovacs' tax liabilities for those years were legally due and collectible and further requested Kovacs to pay her account in full. Ultimately, the only actual collection by the IRS regarding Kovacs' 1990-1995 taxes was to apply tax refunds to those years. The IRS, however, subsequently credited those amounts to Kovacs' other outstanding tax liabilities when the IRS realized its error.
After the IRS declined to respond to Kovacs' January 19, 2005 administrative claim to recover damages for the IRS's violation of 11 U.S.C. § 524, Kovacs initiated the present lawsuit by filing an adversary complaint in the bankruptcy court. Kovacs sought damages in the amount of $11,822.94 consisting of the attorneys' fees and costs she incurred in resolving her tax liabilities. The IRS moved to dismiss Kovacs' claim on jurisdictional grounds, but the bankruptcy court denied the motion on the basis that it had jurisdiction to grant relief to Kovacs pursuant to 11 U.S.C. §§ 105(a) and 106 and 26 U.S.C. § 7433. After the bankruptcy court ruled against the IRS on its statute of limitations argument again at summary judgment, the parties proceeded to trial. At trial, the IRS admitted that it willfully violated 11 U.S.C. § 524(a), and Kovacs admitted that her only damages were attorneys' fees and costs. Kovacs also reduced the damages she sought from $11,822.94 to $8,622 to reflect that she could not recover for the portion of her attorneys' fees and costs that related to her non-discharged 1999 tax liability. Kovacs also sought $106,198 for her costs in litigating the bankruptcy adversary proceeding, bringing her total request to $114,820.
After trial, the bankruptcy court issued an opinion awarding Kovacs $25,000 in fees and costs. To reach this figure, the bankruptcy court first reduced the amount of damages Kovacs sought to $65,451.37 due to statutory billing rates and a review of Kovacs' attorneys' time records. In determining what portion of that fee amount the IRS had to pay, the bankruptcy court analyzed a series of factors under 26 U.S.C. §§ 7430 and 7433 including that Kovacs was the prevailing party and that the IRS's actions were negligent and a proximate cause of Kovacs' injury. The court also held, however, that both parties were responsible for the case being over-staffed, over-lawyered and over-pleaded and that Kovacs had a substantial role in protracting the litigation. Ultimately, the court reduced Kovacs' award to $25,000.
Kovacs appealed the bankruptcy court's ruling on costs, and the IRS cross-appealed the bankruptcy court's finding that it had jurisdiction to hear Kovacs' claim. The district court noted that the bankruptcy court had determined that the procedural requirements of 26 U.S.C. § 7433 did not govern Kovacs' claim. The district court, however, determined that because 11 U.S.C. § 524 allows for monetary recovery from the United States and therefore implicates the government's sovereign immunity, the limitations in 26 U.S.C. §§ 7430 and 7433 would deprive the court of jurisdiction if not met. Despite the parties' briefing on the issue, the district court did not address the bankruptcy court's power to grant relief pursuant to 11 U.S.C. §§ 105(a) and 106. Instead, the district court premised its ruling on 26 U.S.C. § 7433, which contains a two-year statute of limitations. The district court vacated the bankruptcy court's judgment and remanded with instructions to determine whether Kovacs' suit was timely filed. The district court also engaged in an analysis of whether the bankruptcy court abused its discretion in reducing Kovacs' damage award to $25,000 in the event that the bankruptcy court held that it did have jurisdiction to hear Kovacs' claim. The district court found that the bankruptcy court made comprehensive and sound findings regarding damages under 26 U.S.C. § 7430.
On remand, the bankruptcy court held that, pursuant to 26 U.S.C. § 7433(e) and 26 C.F.R. § 301.7433-1(g)(2), Kovacs' cause of action accrued when she had a reasonable opportunity to discover all of the essential elements of her claim. The bankruptcy court determined that Kovacs' cause of action accrued on July 8, 2002 when she received the six notices of intent to levy from the IRS. The bankruptcy court noted that Kovacs was aware of her bankruptcy discharge and was represented by counsel familiar with bankruptcy and tax law. The bankruptcy court accordingly...
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