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 for the Fifth Circuit
February 20, 2020
Before HAYNES and OLDHAM, Circuit Judges, and 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
Canada pleaded a claim for damages against the Individual Defendants under Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388 (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
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
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
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
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, 137 S. Ct. 1843 (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
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 (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. “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 (1979); and then citing Carlson v. Green, 446 U.S. 14 (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 (2009)).
Ziglar also dictates, “with an exacting description[,]” the two-part analysis for implying Bivens claims. Hernandez v. Mesa, 885 F.3d 811, 816 (5th Cir. 2018) (en banc), cert. granted, 139 S. Ct. 2636 (No. 17–1678).8 First, the court must decide if the case before it involves a “new context” that is distinct from Bivens, Davis, and Carlson. Ziglar, 137 S. Ct. at 1859; see also, e.g., Cantú, 933 F.3d at 422. If so, the court must then assess whether there are “special factors” counselling hesitation to extending a Bivens claim to this context. Ziglar, 137 S. Ct. at 1857; see also, e.g., Maria S. v. Garza, 912 F.3d 778, 784 (5th Cir. 2019), cert. denied, 140 S. Ct. 81 (2019).
Canada‘s Bivens claims are based on his allegations that the Individual Defendants’ actions in assessing and calculating a tax penalty against him were malicious and effectively deprived him of a means of judicial review. To fully understand this accusation, a brief summary of the tax adjudication system is necessary.
Generally, a taxpayer has several options to challenge an IRS tax or penalty assessment. First, after a tax liability is assessed, the taxpayer can appeal to the IRS Appeals Office; this administrative review does not require the taxpayer to first pay the assessed amount. See
The Internal Revenue Code also provides an opportunity to be heard after a tax or penalty is assessed but before a tax levy is imposed by the IRS Appeals Office (“Collection Due Process hearings“), at which time a taxpayer can challenge, among other things, “the existence or amount of the underlying tax liability” if he or she “did not otherwise have an opportunity to dispute such tax liability.”
The desirability of the tax court and the ability to sue “without paying a cent[]” first is apparent. Flora II, 362 U.S. at 176. Congress, however, “has generally declined to authorize [tax court] jurisdiction over assessed penalties, such as the [26 U.S.C.] § 6707 penalties at issue here.” Diversified Grp., 841 F.3d at 981 n.3 (citations omitted); accord Keller Tank Servs. II v. Comm‘r, 854 F.3d 1178, 1117 (10th Cir. 2017). Thus, typically the “only judicial recourse [for penalties imposed under
1. New Context
“The proper test for determining whether a case presents a new Bivens context is” whether it is “different in a meaningful way from previous Bivens cases decided by” the Supreme Court. Ziglar, 137 S. Ct. at 1859. A meaningful difference may include the Constitutional right at issue, the statutory or other legal mandate under which the officer was operating, or the presence of potential special factors that previous Bivens cases did not consider. Id. at 1860. “[E]ven a modest extension is still an extension.” Id. at 1864.
Canada contends that the Supreme Court recognized a Bivens claim for Fifth Amendment Due Process violations in Davis, and thus his claims do not present a new Constitutional context. His reliance on Davis is misplaced. The Supreme Court has made clear that claims for violations of Fifth Amendment rights can still be brought in a new context. See, e.g., Ziglar, 137 S. Ct. at 1860; Iqbal, 556 U.S. at 675 (“For while we have allowed a Bivens action to redress a violation of the equal protection component of the Due Process Clause of the Fifth Amendment . . . we have not found an implied damages remedy under the Free Exercise Clause.“) (citation omitted); Wilkie v. Robbins, 551 U.S. 537, 547–48 (2007); FDIC v. Meyer, 510 U.S. 471, 473–74 (1994). To be sure,
[n]o one thinks Davis—which permitted a congressional employee to sue for unlawful termination in violation of the Due Process Clause—means the entirety of the Fifth Amendment‘s Due Process Clause is fair game in a Bivens action.
Instead, the proper test is whether the case differs in a meaningful way from Bivens, Davis, or Carlson. Ziglar, 137 S. Ct. at 1859; see also Loumiet v. United States, __ F.3d __, No. 18-5020, 2020 U.S. App. LEXIS 2681, 2020 WL 424919, at *4 (D.C. Cir. Jan. 28, 2020). Canada‘s claims that IRS agents intentionally manipulated a penalty assessment to ensure he could not pay the amount and sue for a refund “bear little resemblance to the three Bivens claims the Court has approved in the past.” Id. at 1860 (citations omitted). Thus, contrary to Canada‘s argument, the facts of this case clearly present a new context for a Bivens remedy.
Canada also asserts that this court in Rutherford v. United States, 702 F.2d 580 (5th Cir. 1983), recognized the possibility of a taxpayer‘s Bivens claims against IRS agents on very similar facts. In that case, the plaintiffs accused two IRS agents of inventing additional gross income, intentionally assessing duplicative penalties, making repeated demands for useless documentation, charging the plaintiffs with
This court reversed because it read the plaintiffs’ complaint as alleging a deprivation of a liberty interest, not a property interest as the district court had held. Id. While discussing remand, the court noted that the “district court may wish to consider in this connection the several suggestions, albiet in dicta, that abuse in tax collection might lay the foundation for a Bivens action.” Id. at 585.
While Rutherford initially appears to help Canada because its dicta suggests that a Bivens claim against IRS agents might be cognizable, upon in-depth consideration it proves to be less helpful than one might think. First and foremost, this court did not actually recognize a Bivens claim. See Rutherford, 702 F.2d at 584–85. Indeed, the sentence quoted above is merely a suggested point of consideration for the district court on remand. To say that this sentence recognized a Bivens claim is too broad of an interpretation.
Even if Rutherford implied a Bivens remedy for abusive tax collection practices, that fact is immaterial under the Ziglar test. The “new context” analysis focuses on whether the case differs in a meaningful way from previous Bivens cases decided by the Supreme Court, not a three-judge court of appeals panel. Ziglar, 137 S. Ct. at 1859; see also Cantú, 933 F.3d at 422 (“[D]o [the] claims fall into one of the three existing Bivens actions?“); Loumiet, 2020 WL 424919, at *4 (explaining that opinions where the D.C. Circuit has recognized a Bivens claim have been “overtaken” by Ziglar‘s “holding that the new-context analysis may consider only Supreme Court decisions approving Bivens actions.“) (citation omitted).
Moreover, even assuming arguendo that Rutherford “recognized” a Bivens remedy and that such a holding was material under the Ziglar test, Canada‘s case is still a “modest extension” of that case. See Ziglar, 137 S. Ct. at 1864. Rutherford involved a violation of the plaintiffs’ liberty interests in being free from harassing tax collection practices. See 702 F.2d at 584–85. Canada‘s claims allege abusive assessment of penalties that result in the deprivation of procedural due process. There are enough distinguishing factors and circumstances between the two cases to qualify Canada‘s case as a modest extension of Rutherford.
Most importantly, Rutherford was decided during the “ancien regime” when implying a cause of action for Constitutional violations was not explicitly a “disfavored” judicial activity. See Ziglar, 137 S. Ct. at 1855, 1857. It also preceded substantial changes to the tax adjudication process, such as the codification of the IRS Appeals Office review and Collection Due Process hearings. See Internal Revenue Service Restructuring and Reform Act of 1988, Pub. L. 105–206, 112 Stat. 746 (1988) (codified as
All of these reasons confirm that the district court below properly concluded that this case is a new Bivens context under Ziglar.10
“[A] Bivens remedy will not be available if there are ‘special factors counselling hesitation in the absence of affirmative action by Congress.‘” Ziglar, 137 S. Ct. 1857 (quoting Carlson, 446 U.S. at 18). A special factor is a sound reason to think Congress might doubt the efficacy or necessity of a damages remedy as part of the system for enforcing the law and correcting a wrong.11 Id. at 1858. The court‘s focus is on maintaining the separation of powers: “separation-of-powers principles are or should be center to the analysis.” Hernandez, 885 F.3d at 818 (quoting Ziglar, 137 S. Ct. at 1857). The only relevant threshold—that a factor “counsels hesitation“—is remarkably low. See id. at 822. If any special factors do exist, then “‘courts must refrain from creating‘” an implied cause of action in that case. Maria S., 912 F.3d at 784 (quoting Ziglar, 137 S. Ct. at 1858).
i. Procedural Points of Error
Canada identifies several alleged procedural points of error in the district court below‘s finding of special factors. First, he complains that the
district court below impermissibly shifted the burden to establish the special factors. Canada believes the burden should lie with the Individual Defendants based on the Supreme Court‘s opinion in Carlson. See 446 U.S at 18 (“[A Bivens] cause of action may be defeated in a particular case, however, in two situations. The first is when defendants demonstrate special factors counselling hesitation in the absence of affirmative action by Congress.“) (emphasis added) (internal citations and quotations omitted). Defendants disagree and argue that the existence of special factors are determined in “quasi-jurisdictional terms” (i.e., without regard to the burden of proof). Appellees’ Br. at 32. Although recent cases like Ziglar and Hernandez support Defendants’ position, it is unnecessary for this court to decide that issue because the Defendants raised the three special factors that the district court below addressed.12
Additionally, Canada argues that the district court below erred by not performing its special factors analysis at a “high level of specificity” rather than an “abstract
Therefore, assuming the Ninth Circuit‘s high level of specificity requirement applied to the district court below, it still complied.
ii. Substantive Points of Error
Turning to the substance of the special factors analysis, the district court below discussed three special factors raised by the Defendants: (1) the risk of disruptive intrusion by the courts into the executive tax collection efforts; (2) the alternative remedies available; and (3) Congress’ repeated failure to enact a damages remedy. While it did not expressly accept or reject the first two factors, on the third factor the district court below found “there are sound reasons to think Congress might doubt the efficacy or necessity of a damages remedy” for the Constitutional violation alleged. This court will address these factors in reverse order.
First, the district court below is undoubtedly correct that Congress chose to omit a damages remedy as to tax penalties assessed and to limit judicial review to post-payment and bankruptcy review. This is significant considering Congress has enacted statutes that provide taxpayers a damage remedy for other actions taken by IRS agents. See
Congress’ failure to include a damages remedy for malicious assessment of penalties, despite enacting statutes that provide for damages when IRS agents commit other tortious actions, counsels hesitation in extending a Bivens remedy for that conduct. Indeed, Congress’ decision to consistently preclude a recovery for damages for taxpayers in Canada‘s position strongly suggests Congress doubts the efficacy or necessity of such a remedy.13 See Ziglar, 137 S. Ct. at 1858.
In addition, as discussed above, Congress has enacted a complex statutory system for taxpayers to challenge penalties assessed against them and to recover certain costs and fees. Similar statutory systems have been held to be an adequate alternative remedy in lieu of a Bivens claim. See Schweiker v. Chilicky, 487 U.S. 425–26 (1988); Bush, 462 U.S. at 386–88. In those cases, the Supreme Court rejected arguments (similar to Canada‘s) that less than “complete relief” is not a Congressional failure to provide meaningful safeguards and remedies. See Bush, 462 U.S. at 388; Schweiker, 487 U.S. at 425; cf. Baddour, 802 F.2d at 808–09 (stating neither “the Constitution nor the Internal Revenue Code requires more relief than” refunding erroneously collected taxes with interest and
The complex statutory system also supports the Defendants’ position that courts implying a cause of action would risk disrupting the IRS‘s agency decisions and collection efforts. Indeed, creating a non-legislative avenue of relief that would impose personal liability on IRS agents would hamper the ability of IRS agents to perform the difficult and vital task of determining and collecting taxes. See Baddour, 802 F.2d at 808. Put differently, “Congress has given taxpayers all sorts of rights against an overzealous officialdom, . . . and it would make the collection of taxes chaotic if a taxpayer could bypass the remedies provided by Congress simply by bringing” a Bivens action against IRS employees. Id. (quoting Cameron v. Internal Revenue Serv., 733 F.2d 126, 129 (7th Cir. 1985)).
Therefore, all three of the special factors suggested by Defendants are sound reasons that counsel the court‘s hesitation to extend a Bivens claim in this case.14 Canada‘s arguments to the contrary are not persuasive. He asserts
there is no reason to believe that Congress’ failure to provide a damages remedy for the “constitutional torts inflicted on [him]” are more than a “mere oversight“, and its silence more than “inadvertent.” To support that contention, he points to the 1987 IRS Commissioner‘s testimony before a Senate Subcommittee in April 1987. The Commissioner was testifying about, in relevant part, a proposed cause of action against IRS employees for “the deprivation of any rights, privileges, or immunities secured by the Constitution.” See Taxpayers’ Bill of Rights Act, S. 579, 100th Cong. (1987). He said:
A right of action against [IRS] employees currently exists. The Supreme Court recognized a cause of action directly under the Constitution in [Bivens.] Bivens suits are an available remedy for those whose Constitutional rights have been violated by Federal employees acting under the color of Federal law. In fact, more than 1,000 Bivens suits were filed against [IRS] employees during the fiscal years 1980 through 1986. It should be noted, however, that none of these suits has been ultimately successful.”
Taxpayers’ Bill of Rights, Part 1: Hearings on S. 579 and S. 604 Before the Subcomm. on Private Retirement Plans and Oversight of the IRS, 100th Cong. 243 (1987). A year and a half later, Congress passed the Technical and Miscellaneous Revenue Act of 1988, which enacted certain causes of actions for taxpayers to collect damages against the IRS but omitted a claim for Constitutional violations. See Pub. L. No. 101–647, 102 Stat. 3747
Canada believes that the proposed cause of action was ultimately omitted because of the Commissioner‘s testimony and, thus, Congress acted “with the explicit understanding that taxpayers already enjoyed a remedy for such injuries under Bivens[,]” not because “Congress’ intent [was] that taxpayers be denied any remedy for those violations or injuries.” Based upon these premises, Canada suggests this court must interpret Congress’ decision to “enact a statutory remedy which it views as fully adequate only in combination with the Bivens remedy.” Carlson, 446 U.S. at 19 n.5.
To the extent legislative history is even relevant, Canada‘s legislative history argument completely ignores the testimony that none of the over 1,000 Bivens suits filed between 1980 and 1986 resulted in a money judgment for the taxpayer. Moreover, Canada would have the court believe that at least the majority of Congress chose to eliminate a statutory cause of action for Constitutional violations because of one executive employee‘s conclusory opinion as to the application of Bivens.
Finally, Canada‘s reliance on the 1987 testimony overlooks the fact that Congress has enacted statutes that provide taxpayers with a claim for damages concerning the actions of IRS agents in the intervening 33 years. See
Simply put, Congress has passed several statutes concerning the system for adjudicating tax disputes and damage remedies for taxpayers. Absent from this system, however, is a claim for damages for taxpayers who, like Canada, accuse IRS agents of intentionally imposing a tax penalty too high to pay before seeking judicial review. Congress’ silence strongly suggests this is more than a mere oversight. In any event, this court cannot recognize an implied Bivens claim without violating the separation-of-powers principles that are at the core of the special factors analysis. See Hernandez, 885 F.3d at 818 (quoting Ziglar, 137 S. Ct. at 1857); cf. Schweiker, 487 U.S. at 429 (“Whether or not we believe that its response was the best response, Congress is the body charged with making the inevitable compromises required in the design of a massive and complex welfare benefits program . . . .“) (citation omitted).
The district court below properly found that Canada‘s claims against the Individual Defendants alleged a new Bivens context and that special factors exist under Ziglar. We therefore affirm the dismissal of those claims.15
B. Canada‘s Claim for Attorney‘s Fees Under 26 U.S.C. § 7430
Canada‘s Amended Complaint also sought to recover attorney‘s fees from
2017” and “$2,256.59 for actual disbursements and expenses incurred in representing Debtor in” the bankruptcy case. See Case No. 15–33757–bjh11, Doc. No. 204 at 6; see also id. at 1 (showing the time period as September 15, 2015 through April 3, 2017).16
Title 26, Section 7430 provides:
In any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under [the Internal Revenue Code], the prevailing party may be awarded a judgment or settlement for—
(1) reasonable administrative costs incurred in connection with such administrative proceeding within the [IRS], and
(2) reasonable litigation costs incurred in connection with such court proceeding.
There is no question that Canada prevailed on the tax penalty issue; however, to qualify as a “prevailing party,” Canada had to submit an application for fees and other expenses to the court within thirty days of final judgment in the action. See id. § 7430(c)(4)(A)(ii) (“The term ‘prevailing party’ means any party in any proceeding . . . which meets the requirements of the 1st sentence of”
In this case, the bankruptcy court sustained Canada‘s claim objection and disallowed the IRS‘s penalties in June 2016. The initial district court affirmed that order on May 8, 2017. It is undisputed that the IRS‘s deadline to appeal to this court was July 7, 2017. See FED. R. APP. P. 4(a)(1)(B). Since the IRS declined to initiate such an appeal, the initial district court‘s order became final (at the latest) on July 8, 2017. Accordingly, viewed most favorably to him, Canada had until August 7, 2017 to file an application for fees under
If applicable nonbankrutpcy law . . . fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee [or debtor-in-possession] may commence such action only before the later of—
(1) the end of such period, including such suspension of such period occurring on or after the commencement of the case; or
(2) two years after the order for relief.
Canada‘s “order for relief” (i.e., the date he filed his bankruptcy petition) was September 15, 2015. See id. § 301(b). He thus contends that his September 14, 2017 filing of this case falls within
The court notes that all of the fees Canada seeks to recover were incurred during the pendency of the bankruptcy and they became recoverable when he prevailed in the bankruptcy court and was thereafter affirmed by the initial district court. The tolling provision (
Critically, here, Canada‘s claim for fees is based upon
Canada‘s
V. Conclusion
For the foregoing reasons, the ruling of the district court below is AFFIRMED.