TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Taxpayers often find dealing with the IRS so stressful a root canal without anesthetic is preferable.  One couple may be able to recover emotional distress damages for the way they were treated by the IRS.  The taxpayers in Hunsaker v. United States, Dkt. No. 16-35991 (9^th Cir. Aug. 30, 2018), here, filed a bankruptcy petition under chapter 13.  After the petition was filed, the IRS sent them routine collection notices.  The taxpayers responded by filing an adversary proceeding for violation of the automatic stay, seeking injunctive relief and emotional distress damages.  The Government conceded the violation of the bankruptcy automatic stay and argued that sovereign immunity barred emotional distress damages against the Government.  The Bankruptcy Court rejected the argument and awarded $4,000 in damages for emotional distress.  The district court reversed on the ground of sovereign immunity.  The taxpayers appealed to the Ninth Circuit, which reversed.

The Ninth Circuit framed the issue as one involving the interplay between Bankruptcy Code §§106(a) and 362(k).  Sec. 106(a) waives sovereign immunity “to the extent set forth in this section” including for monetary damages, but not punitive damages.  After a bankruptcy petition is filed Bankruptcy Code §362 imposes an automatic stay on various types of activities to collect a debt.  Sec. 362(k) allows a debtor injured by violation of an automatic stay to collect actual damages, including costs and attorney’s fees.

The Ninth Circuit reasoned that §106(a)’s waiver encompasses a money recovery for damages other than punitive damages.  Since damages for emotional distress are a form of monetary relief and are not punitive damages, they are covered by §106(a)’s waiver.  The Court had previously ruled that emotional distress damages are actual damages recoverable under §362(k).

The Court rejected the Government’s argument that “money recovery” is limited to restoring to the estate money unlawfully in the possession of the United States, finding this interpretation contrary to the statute’s plain text, which excludes only punitive damages.  The Court rejected the contrary holding of United States v. Rivera-Torres, 432 F. 2d 20 (1^st Cir. 2005), believing that case misconstrued the effect of the 1994 amendment to §106(a).  In the Ninth Circuit’s view the “plain language of the statute is dispositive.”

The Court concluded “In sum, sovereign immunity does not preclude an award of emotional distress damages against the United States for willful violation of the Bankruptcy Code’s automatic stay.”  It remanded the case to the district court to consider the Government’s challenge to the merits of the taxpayer’s claim.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.