In June 2016, William Canada, Jr. took the Internal Revenue Service (IRS) to bankruptcy court and won. Mr. Canada successfully challenged the IRS’s claim for a $40 million penalty, pursuant to IRC §6707, for failing to report tax shelter transactions under IRC §6111. Per IRC §6707, the IRS imposes a penalty on anyone who fails to disclose to the IRS a “reportable transaction,” which is itself required by IRC §6111. At the time of Mr. Canada’s case with the IRS, IRC §6111 required a “tax shelter organization” to register a “tax shelter” when any investment met certain criteria. The bankruptcy court determined that Mr. Canada’s tax avoidance strategy was not a “shelter” and therefore the registration and penalty rules of IRC §6111 did not apply to him.
On May 8, 2017, the district court affirmed the bankruptcy court’s decision on the issue of the penalty and the IRS did not appeal. In September of that year, Mr. Canada filed an independent lawsuit in district court. Mr. Canada’s lawsuit pleaded a claim for damages against three individual IRS agents in their individual capacities for allegedly violating his Fifth Amendment right to procedural due process (citing Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971)). Mr. Canada claimed that the individual IRS agents had assessed a penalty against him that was so high that he could not seek judicial review. Mr. Canada’s lawsuit also sought attorneys’ fees from the IRS for his litigation regarding the penalty issue.
Taxpayers who are a “prevailing party” in an administrative or court proceeding with the IRS generally can recover their reasonable administrative and litigation costs, including attorneys’ fees, related to that proceeding. See IRC §7430(a); §7430(b). To qualify as a “prevailing party,” a taxpayer must submit an application for fees and costs to the court within 30 days of final judgment in the administrative or litigation action. See IRC §7430(c)(4)(A)(ii) and 28 USC §2412(d)(1)(B).
In some situations, deadlines to submit applications for fees and costs can be suspended. Per the Bankruptcy Code (11 USC §108(a)), when applicable non-bankruptcy law “fixes a period within which a debtor may commence an action, and such action has not expired before the date of the filing of the petition, the trustee [or debtor)] may commence such action only before the later of 1) the end of such period, including the suspension of such period occurring on or after the commencement of the case; or 2) two years after the order for relief.”
The district court dismissed Mr. Canada’s lawsuit because special factors counseled against extending Bivens action to this new context. The court also dismissed Mr. Canada’s application for attorneys’ fees because it was not timely, due to the fact that the period for filing his application was not suspended by 11 USC §108(a). The district court order did not become final until July 8, 2017 (since the IRS did not appeal the court’s May 8, 2017 order). Mr. Canada had until August 7, 2017 to file his application for attorneys’ fees under IRC §7430(c)(4)(A)(ii). Mr. Canada filed his application on September 14, 2017.
Mr. Canada argued on appeal that the district court erred in dismissing his application for fees because he filed his bankruptcy petition on September 15, 2015 and, therefore, his application on September 14, 2017 was within the two-year window allowed by 11 USC §108(a)(2). Mr. Canada argued that his application for attorneys’ fees was timely filed.
The Fifth Circuit Court of Appeals (Appeals Court) rejected Mr. Canada’s argument. According to the Appeals Court’s reasoning, IRC §7430 fixed the date for filing his petition for attorneys’ fees at 30 days following the final judgment denying the IRS’s claim (i.e., August 7, 2017). Since that period had not expired before Mr. Canada had filed his bankruptcy petition (on September 15, 2015), the two-year suspension provision of 11 USC §108(a) did not apply. By this reasoning, Mr. Canada filed his application late and therefore he did not qualify as a “prevailing party” under IRC §7430(c)(4)(A)(ii). According to the Appeals Court, the district court thus properly determined that Mr. Canada was not eligible for attorneys’ fees from the IRS because he filed his application for fees late.
Ultimately, the Appeals Court refrained from weighing in on the substantive issues in the case and, instead, focused on the procedural issues. Confirming yet again the importance of tracking the related deadlines in a case to ensure prompt and timely action.