Although the bankruptcy court has power to compel the Internal Revenue Service to refund money taken in violation of the discharge injunction, a debtor-taxpayer must exhaust administrative remedies before obtaining damages from the IRS for violation of the injunction, according to Chief Bankruptcy Judge Laurel M. Isicoff of Miami.
The IRS filed priority and general unsecured claims in the debtors’ chapter 13 cases. Under the plans, the debtors paid the priority claims in full and a portion of the unsecured claims. After the debtors completed their plan payments and received discharges, the IRS served notices of intent to levy and seized a portion of the debtors’ Social Security benefits.
The debtors responded by reopening their cases to seek the recovery of their benefits along with compensatory and punitive damages. In meticulous detail, Judge Isicoff explained the statutory bases for the relief she could and could not grant.
Because the IRS received notices of the debtors’ discharges, Judge Isicoff quickly concluded in her May 8 opinion that intercepting federal benefits was an intentional violation of the injunction, even if it was not a deliberate decision to violate the injunction.
Judge Isicoff also explained how chapter 13 confers a so-called supercharged discharge that eradicates tax debt without payment of postpetition penalties and interest on both priority and unsecured claims and prepetition interest on unsecured claims.
On the issue of damages, Judge Isicoff explained that the government waived sovereign immunity in Section 106(a)(1), including claims under Section 524 for violating the discharge injunction.
However, Section 106(a)(3) precludes claims for punitive damages. Therefore, Judge Isicoff ruled that the debtors were not entitled to punitive damages.
Next, Judge Isicoff analyzed her power to order the return of funds taken in violation of the discharge.
Since the claim for the return of improperly confiscated funds is not a claim for damages, Judge Isicoff said there is no issue regarding the requirement to exhaust administrative remedies. She therefore said she has power to direct the IRS to return money taken in violation of discharge and to cease further collection efforts.
With regard to damages, Judge Isicoff parsed a mind-numbingly complex string of statutes and amended statutes.
To unravel the statutory puzzle, read Judge Isicoff’s opinion in full text. Ultimately, she followed what she described as the majority view and concluded that debtors must first exhaust administrative remedies before returning to the bankruptcy court for damages.
Judge Isicoff rejected cases holding to the contrary, saying that “those cases ignore the plain meaning of the statute.”